Carter v Canterbury Design and Development Limited

[2023] NZHC 529

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2022-409-411

[2023] NZHC 529

IN THE MATTER

of specific performance of agreements to issue shares

BETWEEN

SIMON LAIDLAW CARTER

First Plaintiff

CHRISTOPHER JOHN SWANN
Second Plaintiff

AND

CANTERBURY DESIGN AND DEVELOPMENT LIMITED

First Defendant

AARON JOHN HOOPER and CARL JAMES FORDYCE

Second Defendants

Hearing:

10 March 2023

Appearances:

M G Kirkland for Plaintiffs

D K Quirk for First Defendant (later excused from appearing) G D Jones for Second Defendant (A J Hooper)

M K Prendergast for Second Defendant (C J Fordyce)

Judgment:

16 March 2023

JUDGMENT OF ASSOCIATE JUDGE LESTER

(interlocutory application to set aside appearance)

CARTER v CANTERBURY DESIGN AND DEVELOPMENT LIMITED [2023] NZHC 529 [16 March 2023]

[1]    Mr  Christopher   Swann   was   the   sole   shareholder   of   First   Design   & Build Limited which operated the David Reid Homes franchise in Canterbury.   Mr Swann wished to sell the business, or at least two-thirds of the business, to  Aaron Hooper and Carl Fordyce.

[2]    Canterbury Design and Development Limited (Canterbury Design) was incorporated to hold the business. As I will note below, a shareholders agreement recorded that Messrs Swann, Hooper and Fordyce were to each hold 500 shares in Canterbury Design.1

[3]    By an Agreement for Sale and Purchase of a Business on the ADLS Fourth Edition form, First Design & Build Ltd sold its business to Canterbury Design.

[4]    In these proceedings, Mr Swann complains that the defendants have not issued to him the 500 shares contemplated by the original agreements, which also means he (or his nominee, Mr Carter) is unable to obtain a directorship of Canterbury Design, again, as contemplated by the agreements. The defendants responded by filing an objection to the Court’s jurisdiction, relying on an arbitration clause in a shareholders agreement between the parties. Mr Swann had applied to have the appearance under protest set aside.

The November 2020 agreements

[5]    First Design & Build Ltd contracted to sell its business to Canterbury Design by a contract dated 4 November 2020 (the business agreement).

[6]    Further term of sale cl 21.0 is headed “Pre-Completion Obligations” and provides:

Prior to and as a condition of Settlement the shareholders of the Purchaser will enter into a Shareholder’s Agreement that is in all respects satisfactory to all current and proposed shareholders of the Purchaser.

1      Mr Swann’s shares were to be held on his behalf by Mr Simon Carter as bare trustee.   As      Mr Carter’s role is purely that of bare trustee, I will refer only to Mr Swann, as he is in substance the contracting party.

[7]    At the time of the business agreement, the shareholders of Canterbury Design were Messrs Hooper and Mr Fordyce with Mr Swann being the proposed shareholder.

[8]    The shareholders agreement was entered into on 12 November 2020. In its ‘Background’ section it records upon the parties entering into the business agreement, the shareholding in Canterbury Design would be 500 shares held each by Messrs Swann, Hooper, and Fordyce.

[9]    The ‘Background’ section also recorded the parties agreed that the initial balance sheet of Canterbury Design would be as per Schedule 2 to the shareholders agreement which is headed “Deal Structure”.

[10]   Schedule 2 to the shareholders agreement is also annexed to the business agreement. Clause 32.3 of the business agreement provides: “It is anticipated that at the Settlement Date, the balance sheet of [Canterbury Design] will be as per the below.”

[11]   As I have said, the initial balance sheet is the same under both agreements and shows in respect of each shareholder’s current account, working capital introduced of

$50,000. Neither the business agreement nor the shareholders agreement expressly creates an obligation on the parties to advance the $50,000. The common ground is that with the parties agreeing the initial balance sheet of Canterbury Design will be as per the attachment, each shareholder was obliged to introduce working capital of

$50,000.

[12]   It is Mr Swann’s contribution which is at the heart of this proceeding and application.

[13]   The business agreement settled at the end of November 2020, but it seems  Mr Swann’s payment of $50,000 did not occur, or at least it was not discussed until the beginning of 2022. At that time, Mr Swann had not received his shares in Canterbury Design nor had Mr Carter, as his nominee, been appointed a director.

Has Mr Swann paid his $50,000 working capital?

[14]   At the start of 2022, Mr Swann was in a position to pay his $50,000 contribution. Why that had not been paid earlier is not explained. It is clear there are, or have been, a number of business dealings between the parties and entities associated with them. I do not detail those here, but there was apparently a debt owed by another company of Mr Swann’s, DRH4 Investments Limited (DRH4), as far as I can tell, arising from a development at Bishop Street in which the parties were involved. The Bishop Street development was not undertaken through Canterbury Design.

[15]   On 20 January 2022 at 10:41am, Mr Fordyce emailed Mr Swann in respect of funds required for the Bishop Street development, with his emailing concluding:   “… can you use the $50K you said had for CDD start up?”. CDD being Canterbury Design.

[16]   Mr Swann replied to the queries about the Bishop Street units, his closing sentence being: “Yep can put CDD 50K in”. The $50,000 payment was then made by Mr Swann’s solicitor, Mr Carter, and encoded with the description “working cap”.

[17]   In short, Mr Swann says this payment met his obligation to pay $50,000 working capital required by the schedules to the business agreement and the shareholders agreement. Mr Fordyce maintains it was agreed that the $50,000 paid by Mr Swann  was  in  payment  of   an   invoice   owed   by   DRH4   in   respect   of the Bishop Street development.

[18]   In an email exchange between Messrs Fordyce and Swann, when the above issue arose soon after payment of the $50,000, Mr Fordyce referred to a discussion at a restaurant on 12 January 2022 when he says Mr Swann agreed that the $50,000 would be redirected. Mr Fordyce confirms this discussion in his evidence.

[19]   It would seem Mr Swann believed he was making his payment of $50,000 to Canterbury Design but he agreed Canterbury Design could make those funds available to the Bishop Street development, whereas Mr Fordyce saw the $50,000 as being paid directly to the Bishop Street development, leaving Mr Swann still to make his working capital contribution to Canterbury Design.

Mr Swann’s proceedings

[20]   In this proceeding, Mr Swann seeks specific performance, albeit it is not clear exactly what agreement he seeks to be enforced. The statement of claim refers to the “Deal Structure”/Initial balance sheet attached to the business agreement which records the equal share ownership of Messrs Swann, Fordyce and Mr Hooper. The statement of claim pleads: “The Table provides that on settlement [Mr Swann] would own 33% of the shares in [CDD].” The source of the agreement, that is the deal said to be recorded in the “Deal Structure”, is not pleaded.

[21]   It is clear the parties agreed Mr Swann would be issued with a third of the shares in Canterbury Design, such is not in dispute, but the details of that agreement are not pleaded. As I have noted, the business agreement says it was anticipated at settlement the balance sheet would be as per the “Deal Structure”.

[22]   The statement of claim then refers to the shareholders agreement which creates each shareholder’s entitlement to appoint a director.

The arbitration clause

[23]   The shareholders agreement contains a dispute resolution and arbitration clause which requires the parties to try and resolve disputes in good faith through direct discussion, then by mediation and if that is not successful, then by arbitration. The clause applies to: “…any dispute between the parties … concerning this Agreement…”. Hence the need to determine if what Mr Swann is seeking to enforce is a right he enjoys under, or concerns, the shareholders agreement. If it is not, then the arbitration clause cannot apply. If the plaintiffs are trying to enforce a right concerning  the shareholders agreement,  then the issue is  whether there  is  in  fact  a dispute that should go to arbitration.

[24]   The appearance protesting jurisdiction relies on r 5.49 of the High Court Rules 2016 (the Rules) which provides:

5.49     Appearance and objection to jurisdiction

(1)A defendant who objects to the jurisdiction of the court to hear and determine the proceeding may, within the time allowed for filing

a statement of defence and instead of so doing, file and serve an appearance stating the defendant’s objection and the grounds for it.

(2)The  filing  and  serving  of  an  appearance  does  not  operate  as     a submission to the jurisdiction of the court.

(3)A defendant who has filed an appearance may apply to the court to dismiss the proceeding on the ground that the court has no jurisdiction to hear and determine it.

(4)[Revoked]

(5)At any time after an appearance has been filed, the plaintiff may apply to the court by interlocutory application to set aside the appearance.

(6)The court hearing an application under subclause (3) or (5) must,—

(a)if it is satisfied that it has no jurisdiction to hear and determine the proceeding, dismiss the proceeding; and

(b)if it does not dismiss the proceeding under paragraph (a), set aside the appearance.

(7)       …

(7A)     …

(8)The court, in exercising its powers under this rule, may do so on any terms and conditions the court thinks just and, in particular, on setting aside the appearance it may extend the time within which the defendant may file and serve a statement of defence and may give any directions that appear necessary regarding any further steps in the proceeding.

(9)If the appearance set aside has been filed in relation to a proceeding in which the plaintiff has applied for judgment under rule 12.2 or 12.3, the court—

(a)must fix the time within which the defendant may file and serve—

(i)a notice of opposition; and

(ii)an affidavit by or on behalf of the defendant in answer to the affidavit by or on behalf of the plaintiff; and

(b)may, under subclause (8), give any other directions that appear necessary regarding any further steps in the proceeding.

The source of the plaintiffs right to be issued shares in Canterbury Design

[25]   Mr Swann, in his affidavit in support of his application for summary judgment, says:

It was intended and provided expressly in the Business Agreement, that in consideration of the sale of the business by the Vendor (guaranteed by myself)

… that I would own 33% … in [CDD].

[26]   Mr Fordyce, in his affidavit in opposition to the application to set aside the notice of appearance under protest, refers to Mr Swann’s affidavit, but does not take issue with the above paragraph.

[27]Mr Fordyce says that:

[Mr Swann] in  breach  of  [his]  obligation  to  pay  $50,000  into  CDD  as  a shareholder advance and so we are not required to issue shares to Mr Carter.

[28]   There is an element of circularity in this. The effect of this proposition is that it was a pre-condition to the issue of shares to Mr Swann that he first introduces

$50,000 as a shareholder advance.

[29]   The $50,000 requested of each shareholder is not the purchase price for the shares. The payment is expressly the introduction of working capital which would be a debt owed by Canterbury Design to each shareholder under their current accounts. To  have  an  obligation  to  introduce  a  shareholder  advance,   first   one  must  be  a shareholder.

[30]   The shareholders agreement is called just that. Under the heading “Background”, it records:

Upon the parties entering into the Sale and Purchase Agreement the shareholding in the company will be as follows.

(emphasis added)

[31]   The shareholders agreement then provides for Messrs Swann, Fordyce, and Hooper to each hold 500 shares. As I have already noted, the shareholders agreement is  dated  12 November 2020,   the   parties   entered   the   business   agreement  on 4 November 2020. Accordingly, the shareholders agreement records that Mr Swann

was already a shareholder by the time the shareholders agreement was signed. The shareholders agreement does not create Mr Swann’s entitlement to be a shareholder, it records that he was already a shareholder.

[32]   I conclude therefore that to the extent the present proceedings seek orders that the defendants transfer to Mr Swann the shares that the shareholders agreement records he already holds, that such is not a dispute concerning the shareholders agreement. The shareholders agreement records Mr Swann’s existing status as shareholder, it does not create the right sued on in this proceeding. The appearance under protest is set aside in respect of the statement of claim, to the extent that it concerns that issue.

[33]   If this conclusion is incorrect, for the reasons set out below, I would also have held there was no dispute in relation to Mr Swann’s proceeding in respect of his shareholding.

The right to appoint a director

[34]   A shareholder’s right to appoint a director is created by the shareholders agreement. However, cl 2 of the shareholders agreement records that as at the date of the shareholders agreement the directors will be Mr Fordyce and Mr Hooper. The agreement provides: “Any shareholder is entitled to appoint a Director and remove that Director they have appointed.”

[35]   However, cl 2.3 of the shareholders agreement provides: “The composition of the Board and the procedures of the Board are as set out in Schedule 1.” Schedule 1 under the heading “Board Composition” provides that: “As at the date of this Agreement the Board shall  consist  of  [Messrs  Fordyce,  Hooper  and  Carter].”  Mr Carter being Mr Swann’s nominee.

[36]   Accordingly, Mr Carter’s right to be appointed a director is not qualified or conditional in any way by the shareholders agreement which records as at the date of the agreement that he shall be a member of the Board.

[37]   What then is the dispute as to Mr Carter’s right to be a director, given that the parties have agreed in writing that as at 12 November 2020 he shall be one?

[38]   Rule 5.49 of the Rules does not apply where there is not in fact any dispute between the parties  with regards to  the issue before  the Court.2   The  onus  is  on    a defendant to establish the Court does not have jurisdiction. Accordingly, here Messrs Fordyce and Hooper must show that the claim Mr Swann wants to advance is a claim concerning the shareholders agreement and it is a claim to which they have an arguable defence, that is, there is a dispute caught by the arbitration clause.

[39]McGechan provides:3

… in determining whether there is in fact a valid dispute, the Court will grant a stay unless it is immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute.

[40]   In my view, the dispute the defendants raise here amounts to them seeking to graft onto Mr Carter’s right to be a director, a condition that Mr Swann must have first paid his working capital, albeit Mr Jones (counsel for Mr Hooper), denied the defendants were asserting such a condition. It is correct, the draft balance sheet contemplates the working capital will be paid. As already noted, the ‘Background’ section in the shareholders agreement records the initial balance sheet of Canterbury Design shows each shareholder having made their working capital contribution. However, when the working capital was to be paid is not specified. While the parties have agreed what the initial balance sheet will be, the agreement does not say that it will be the position at settlement. That can be compared with Schedule 1 of the shareholder agreement which records that as at the date of the shareholders agreement, the Board shall consist of Messrs Fordyce, Hooper and Carter. The business agreement says: “It is anticipated that at the Settlement Date, the balance sheet of the Company …”, will be as per the Deal Structure; this “anticipation” arguably does not create an obligation on the parties to have met that expectation as at the Settlement Date.

2      Robert Osborne (ed) McGechan on Procedure (online ed, Thomson Reuters) at [HR5.49.06(a)]. This is consistent with Art 8, Sch 1 of the Arbitration Act 1996 referred to below.

3      At [HR.5.49.06(a)].

[41]   Mr Fordyce, in his evidence, does not  claim  there was an  agreement that  Mr Carter being a director was conditional on Mr Swann paying his working capital, nor does Mr Fordyce say the working capital was agreed to be contributed at any particular time, albeit the parties have agreed what the initial balance sheet should look like. I have already noted that the disputed $50,000 was not paid until January 2022 and there is nothing in the evidence to show it had been called for earlier or that Messrs Hooper and Fordyce had considered Mr Swann to be in default in that regard. The tenor of the emails I have referred to above does not hint at the issue being        a contentious one.

[42]   Mr Fordyce suggests they are not required to appoint Mr Carter a director because he does not have “clean hands”. That being a reference to a possible defence in relation to Mr Swann’s claim for specific performance. Schedule 1 to the shareholders agreement records the make-up of the Board as at 12 November 2020. That Messrs Carter, Fordyce and Hooper were to be directors cannot be disputed, given the clear and unambiguous statement in Schedule 1. Is that agreed position as at 12 November 2020 undone by the dispute over the payment of the $50,000?

The Clean Hands submission in more detail

[43]   Mr Jones presented the legal submissions on behalf of the defendants with  Mr Prendergast addressing the evidence. Mr Kirkland, counsel for the plaintiffs, did not take issue with Mr Jones’ explanation of the legal principles.

[44]   The leading authority is Zurich Australian Insurance Ltd v Cognition Education Ltd.4 Article 8, Schedule 1 of the Arbitration Act 1996 provides that Messrs Hooper and Fordyce are entitled to a stay of this proceeding if it raises disputes that are within the arbitration clause in the shareholders agreement.

[45]   Article 8 does not apply: “… [if] there is not in fact any dispute between the parties with regard to the matters to be referred.” Zurich explains the approach to art 8 in two passages relied on by Mr Jones. Paragraphs [10] and [52] of Zurich provides:

4      Zurich  Australian  Insurance  Ltd  v  Cognition  Education   Ltd   [2014] NZSC 188, [2015] 1 NZLR 383.

[10]   The question is whether the words “unless it finds … that there is not in fact any dispute between the parties with regard to the matters agreed to be referred” in art 8(1) mean that the court should grant a stay only where it is satisfied:

(a)that the defendant has a sufficient case to withstand a summary judgment application, that is, it has an arguable defence, or alternatively,

(b)that it is not immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute.

…

[52] In the result, then, we accept the appellant’s contention that the narrow meaning should be given to the added words. Under art 8(1), a stay must be granted unless the court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or it is immediately demonstrable either that the defendant is  not acting bona fide in asserting that there is      a dispute or that there is, in reality, no dispute. It follows from this that an application for summary judgment and an application for a stay to permit an arbitration to take place are not different sides of the same coin. In principle, the stay application should be determined first and only if that is rejected should the application for summary judgment be considered.

[46]Mr Jones’ submission can be broken down as follows:

(i)Mr Swann is seeking specific performance of rights created by the shareholders agreement.

(ii)A party seeking specific performance must have “clean hands”.

(iii)Mr Swann is arguably in breach of his obligation to pay $50,000 and therefore arguably he does not have clean hands.

(iv)As Mr Swann arguably does not have clean hands, there is a dispute in relation to Mr Swann’s entitlement to relief in this proceeding.

(v)That dispute concerns Mr Swann’s entitlements and obligations under the shareholders agreement, therefore art 8 applies.

[47]   I  do  not  accept this analysis.     The starting point is to examine whether Messrs Hooper and Fordyce have a defence to Mr Swann’s claim to have shares

transferred to him and his nominee appointed a director. If Messrs Hooper and Fordyce do not have a defence to Mr Swann’s claim that would prevent summary judgment being entered, then there is no dispute for the purposes of para [10](a) of Zurich¸ set out at [45] above.

[48]   So the question is, what right do Messrs Hooper and Fordyce assert to have not issued to  Mr Swann  the  shares  they  unequivocally  accepted  he  is  entitled  to?  If Messrs Hooper and Fordyce do not have a reasonably arguable basis for refusing to transfer the shares to Mr Swann and have his nominee appointed director confirmed, then Mr Swann is entitled to judgment.

[49]   This issue was the subject of robust debate in the hearing. I asked Mr Jones to identify the legal right relied on by Messrs Hooper and Fordyce to delay the issue of shares to Mr Swann. Again, Mr Jones did not submit Mr Swann’s rights asserted in this proceeding were conditional upon payment of the working capital. Mr Jones referred to s 84(5) of the Companies Act 1993. Section 84 is headed “Transfer of Shares” with s 84(5) providing:

Subject to the constitution of a company, the board may refuse or delay the registration of a transfer of shares if the holder of the shares has failed to pay to the company an amount due in respect of those shares, whether by way of consideration for the issue of the shares or in respect of sums payable by the holder of the shares in accordance with the constitution.

[50]   It is clear, however, the above section does not apply. The $50,000 payable as working capital to be recorded in the shareholders current accounts is not “consideration for the issue of the shares” within s 84(5), nor a sum payable “in accordance with the constitution”. The payment of the working capital is contemplated by the draft balance sheet annexed to both the business agreement and the shareholders agreement, but neither of those obligations are caught by s 84(5).

[51]   Mr Jones then submitted that Messrs Hooper and Fordyce had a right “akin” to that in s 84(5) of the Companies Act 1993. However, Mr Jones was not able to identify the source of any such right.

[52]   Accordingly, Messrs Hooper and Fordyce’s position amounts to this. They have refused without a legal right to transfer to Mr Swann the shares to which

they have unequivocally acknowledged Mr Swann is entitled to. However, they say that when Mr Swann seeks to enforce his right, to which they do not have a defence, Messrs Hooper and Fordyce nonetheless have a defence by saying Mr Swann does not come to equity with clean hands because of the dispute over the $50,000.

[53]   If anything, it is Messrs Hooper and Fordyce who do not have clean hands. They are denying Mr Swann his rights without any legal justification. Mr Swann seeks to have his shareholding confirmed by the Court, there being no legal right asserted by his co-shareholders entitling them to not transfer  the  shares.  But  Messrs Hooper and Fordyce having created the need for Mr Swann to come to Court, say that Mr Swann does not come with clean hands because of a dispute unrelated to his entitlement to the shares and to have his nominee be appointed a director.

[54]   I am satisfied that on the material before me the defendants would not have an arguable defence to the summary judgment application. There is no dispute for the purposes of art 8.  For  the clean  hands  defence to  apply,  the alleged  wrong  of  Mr Swann must be directly related to the equitable claim against the defendants.5

[55]   With respect to Mr Jones, the flaw in his analysis is that it starts with the fact Mr Swan has had to come to Court to seek to enforce his rights rather from whether the defendants have a defence to those rights. The only way in which Messrs Hooper and Fordyce assert a link between Mr Swann’s entitlements and his alleged non-payment of the $50,000 is by forcing him to come to court to seek specific performance.

[56]   Messrs Hooper and Fordyce are in effect relying on their own wrong as they do not have a legal basis to refuse to comply with the obligations to issue shares to Mr Swann or to appoint his nominee to the Board, based on the dispute around the

$50,000. But for the defendants’ original failure to meet their obligations, no issue of clean hands would arise.

5      Charles Rickett Laws of New Zealand Equity (online ed) at [284], citing Moody v Cox and Hatt

[1917] 2 Ch 71 (CA) at 87-88 per Smith LJ.

The dispute over the $50,000

[57]   At the hearing, Mr Kirkland accepted that to the extent this proceeding seeks to clarify the status of the $50,000, that issue has to be resolved through the disputes resolution process. There is no issue as to Mr Swann’s obligation to pay his $50,000 working capital, whether he has done so will turn on whether there was an agreement in January 2022 that the $50,000 Mr Swann in fact paid was not to be his contribution.

The bigger picture

[58]   On the defendants’ case, the only thing standing in the way of Mr Swann being issued shares and having Mr Carter appointed as his nominated director, is clarification of the status of the $50,000 payment. That is a confined and focused issue. It could be resolved by an arbitrator following a relatively short hearing, likely at less cost than a summary judgment hearing and likely sooner than the Court can allocate a summary judgment hearing.

[59]   If Mr Swann is successful in his summary judgment hearing, he will still have to deal with the disputed $50,000 issue. Accordingly, it would seem more sensible for the parties to resolve the issue of the $50,000 first as, if Mr Swann is right, then the defence falls away.

Costs

[60]   Costs are reserved. For the benefit of the parties, my preliminary view is that Mr Swann has been substantially successful and would be entitled to costs on a 2B basis plus disbursements as fixed by the Registrar. The parties are free to file memoranda in respect of costs within five working days of the date of this Judgment. If a party files submissions, the opposite party shall have five working days to respond. In both cases, costs submissions should not be more than five pages. If no costs submissions are filed, then the order of the Court is that Mr Swann is entitled to  costs on a 2B basis plus disbursements as fixed by the Registrar in respect of this application.

Timetabling

[61]   Counsel are to confer on an agreed timetable for the filing of a notice of opposition and any further affidavits in support of the notice of opposition. That memorandum is to be filed within 10 working days of the date of this Judgment.

[62]   The summary judgment fixture  is  set  down  for  a  half  day  on  Monday  22 May 2023 at 10:00am.

Associate Judge Lester

Solicitors:

Carter Law + Advisory Limited, Dunedin (for Plaintiffs)

Lane Neave, Christchurch (for Second Defendant, Mr Hooper) Mitchell Newman, Christchurch (for Second Defendant, Mr Fordyce)

Copy to counsel:

M G Kirkland, Barrister, Dunedin (for Plaintiffs)

G D Jones, Barrister, Christchurch (for Second Defendant, Mr Hooper)

M K Prendergast, Barrister, Christchurch (for Second Defendant, Mr Fordyce)