Che v Nutri-Health Holdings Group New Zealand Limited

[2017] NZHC 2400

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-1170 [2017] NZHC 2400

IN THE MATTER

of the Companies Act 1993

UNDER

Section 174 or Section 241(4)(d) of the
Companies Act 1993

BETWEEN

EVA CHE

SING HEE PANG DAVID CHE

Plaintiffs

AND

NUTRI-HEALTH HOLDINGS GROUP NEW ZEALAND LIMITED

First Defendant

NEW ZEALAND NATURELAND LIMITED

Second Defendant

Hearing:	30 August 2017
Appearances:	J MacDonald and M Cherrington for the Plaintiffs No appearance by or for the Respondent
Judgment:	9 October 2017

JUDGMENT OF VAN BOHEMEN J

This judgment was delivered by me on Monday 9 October 2017 at 3.30 pm Pursuant to Rule 11.5 of the High court Rules.

Registrar/Deputy Registrar  Date:…………………………

CHE v NUTRI-HEALTH HOLDINGS GROUP NEW ZEALAND LTD [2017] NZHC 2400 [9 October 2017]

Introduction

[1]      This case concerns an application by the plaintiffs for the liquidation of the company Nutri-Health Holdings Group Ltd (Nutri-Health), the first defendant, in which they are all shareholders. Two alternative bases are advanced for the proposed liquidation:

(a)      That the affairs of Nutri-Health have been conducted in a manner that has been unfairly prejudicial to the interests of the plaintiffs so that an order putting the company into  liquidation  should  be made under s 174 of the Companies Act 1993 (Act); or

(b)That it is just and equitable that Nutri-Health be put into liquidation under s 241 of the Act.

[2]      Neither  Nutri-Health  nor  New  Zealand  Natureland  Ltd  (Natureland),  the second defendant, has taken any steps with respect to the proceeding.

[3]      The application was set down for a formal proof hearing and was heard by me on 30 August 2017.   At the hearing, Mr McDonald, counsel for the plaintiffs made submissions in support of the application.  No appearances were entered by the defendants.

Backgound

[4]      According to the affidavits sworn by one of the plaintiffs, Ms Eva Che, on

8 June  2017  and  29  August  2017,  Ms  Che  was  the  driving  force  behind  the establishment of Nutri-Health which was intended as the vehicle by which she and the other plaintiffs would conduct an export business to China with the financial assistance of Natureland, a company also established by Ms Che to represent the interests of Chinese investors, Mr Shui Xiong Lin and Mr Lin’s nephew, Chunlin Chen.   Mr Lin was the chairman of the company Vigor Industrial Developments Investments Holdings Co Ltd (VIDICO), which would appear to be a company registered in Shanghai, China.

[5]      In  June 2012,  Ms Che  incorporated  Nutri-Health  using templates  on  the website of the Companies Office for this purpose.   She used the same process to incorporate Natureland at the same time.   No legal advice was sought and no constitution or shareholders agreement was drawn up for either company.

[6]      The initial shareholding for Nutri-Health was: (a)       80 per cent to Natureland;

(b)      16 per cent to Ms Che; and

(c)       4 per cent to Mr See Hing Pang, also a plaintiff in this proceeding.

This apparently reflected the wish of Mr Lin to have an 80:20 ratio in the shareholding between the New Zealand and Chinese parts of the operation.

[7]      The initial shareholding of Natureland was held entirely by Mr Chen.

[8]      In July 2013, Natureland transferred 10 per cent of the shares in Nutri-Health to  Mr David  Che,  the  third  plaintiff  and  Ms  Che’s  brother.    Accordingly,  the shareholding of Nutri-Health became:

(a)       70 per cent to Natureland

(b)      16 per cent to Ms Che

(c)       10 per cent Mr David Che, (d)  4 per cent to Mr Pang.

The adjusted arrangement still left Natureland’s interests in control of Nutri-Health.

[9]      The  initial  directors  of  Nutri-Health  were  the  three  plaintiffs:  Ms  Che, Mr Che, and Mr Pang. Ms Che was also an employee of Nutri-Health and effectively ran its operations.

[10]     Despite this corporate structure, Ms Che states in her affidavit of 8 June

2017:

13.      The  relationship  between  the  plaintiffs  on  the  one  hand  and Natureland on the other was very much intended to be one of partnership. The plaintiffs would operate the business, Natureland would provide the financial back-up and support and we would share the long-term profits and liabilities and value of the business as it grew.  It was I believe a relationship which was one of underlying trust and confidence in each other and just as Natureland would provide benefits to the company and the plaintiff [sic] so also I believe the plaintiffs and particularly me and David because we had a longstanding history of this type of business development as well as the contacts and customers and a good understanding of business management. We always had each other’s interests in mind.

[11]     Ms Che’s affidavit goes on to explain the efforts that she and her brother made to set up the business and the arrangements by which she reported back to the Chief Financial Officer of VIDICO, Mr Xin Zhong Xi and to Mr Lin.

[12]     According to Ms Che’s account, the company began promisingly: it was trading well, there was money in the bank and bills were being paid – although Ms Che herself drew no salary between February and November 2012 in order to get the first shipment of goods to China.

[13]     According to Ms Che’s account, the problems started in mid 2014 when the China-based interests in the venture sent Mr Yi Que to New Zealand to represent Natureland’s interests.   On 1 July 2014, Mr Que became the New Zealand based director  of  Natureland,  the  other  director  being  Mr Chen  resident  in  Shanghai. Ms Che asserts Mr Que had no experience in the food business or in exports.  Be that as it may, in July 2014, Mr Que used his powers as majority shareholder in Natureland to remove all three plaintiffs as directors of Nutri-Health and appoint himself as a director of Nutri-Health.  He also terminated Ms Che’s employment by that company.  Ms Che asserts she is owed unpaid wages of $6,200 but has provided no documentary evidence to support that claim.

[14]     In September 2014, Nutri-Health, Natureland and Sino-New Zealand Food (Shanghai) Co Ltd brought a proceeding against the plaintiffs in this proceeding alleging breach of statutory duties.  Ms Che asserts the purpose of the proceeding was “to take over” the plaintiffs’ shares.   She resisted the proceeding which was

stayed on 10 June 2016. Attached to Ms Che’s second affidavit of 29 August 2017 is the  Minute  of Associate  Judge  Doogue  granting  the  stay  on  the  basis  that  the solicitors for the plaintiffs in that proceeding had withdrawn and the plaintiffs had taken no steps to progress the proceeding. The Associate Judge’s Minute notes:

[3]      Further, I am in doubt the proceeding is going to progress further.

[15]     Also attached to Ms Che’s affidavit of 29 August 2017 is what she calls a schedule of 12 claims brought by China Railway Materials Xiamen Steel Co Ltd, which Ms Che says  is  a state-owned  company in China, brought in the Fujian Xiamen Intermediate Peoples’ Court between April and July 2017 against Mr Lin and various other defendants. According to that document, VIDICO is also a defendant in 10 of those cases. The total claims, including default penalties, come to over 680,400,000 Renminbi or approximately NZ$142,446,000.

[16]     Ms Che suggests in her affidavits that this litigation and the commercial transactions  that  gave  rise  to  the  litigation  are  the  reason  Nutri-Health  and Natureland abandoned the breach of statutory duty proceeding and have effectively disengaged from New Zealand.

[17]     Ms Che says she had little to do with Nutri-Health since her directorship ceased in July 2014 – although she retained her company car, an Audi Q7, apparently on the basis of her belief that it was in the company’s interests that she retained the only company asset available to her.  Ms Che says the car has been in storage for some time and that she has paid the costs of insurance, licensing, warrant of fitness and storage of over $20,000 since 2015.

[18]     In April 2016, Ms Che became aware that the company may have been experiencing difficulties when she received a call from the ANZ Bank which had been unable to contact Nutri-Health’s directors.   She was told there had been no money in the company’s accounts since April 2016 and the Bank was looking for instructions to close the accounts.

[19]     The  inquiry  from  the  ANZ  Bank  concerned  Ms  Che  because  to  her recollection Nutri-Health had had a balance of $125,000 in its business account when her directorship ceased in July 2014.

[20]     As a result of further inquiries she initiated, Ms Che learned that Nutri- Health, in its tax returns, had carried forward losses of $161,094.30 for the year ended  31  March  2016  and  owed  income  tax  of  $17,855.73.    It  also  owed  the Accident Compensation Commission $1,703.99.

[21]     Between 9 September 2016 and 24 March 2017, solicitors acting for the plaintiffs sent a series of letters and emails to B Lo Consulting Ltd (B Lo), the company preparing the financial statements for Nutri-Health, and to Mr Que seeking information on Nutri-Health’s financial circumstances.  Some of the communications stated that the plaintiffs were concerned Nutri-Health was being operated in a way that  was  disadvantageous  to  the  minority shareholders  and  that  the  information requested would assist in understanding what was happening.  No substantive reply was  received  to  this  correspondence.     Mr  Que  in  particular  made  no  reply whatsoever.  It would appear he is no longer resident in New Zealand.

[22]     The current proceeding was then instituted. Annexed to Ms Che’s affidavit of

29 June 2017 are two affidavits attesting to the steps taken to serve the notice of this proceeding on the defendants in accordance with the High Court Rules.  A further affidavit of service of Aine Catriona Denny dated 30 August 2017 describes the additional steps taken to serve the proceeding on Natureland.  As already noted, the defendants have taken no steps in the proceeding.

Discussion

[23]     I am satisfied the defendants have effectively abandoned their New Zealand enterprise, at least as regards Nutri-Health and Natureland. I reach that view on the basis of the information provided in Ms Che’s affidavits as well as by the abandonment of the proceeding the defendants brought in September 2014 (against the plaintiffs for breach of statutory duty) and the defendants’ lack of engagement with the current proceeding. As Mr McDonald, counsel for the plaintiffs, put it in his written submission:

20.At the outset this matter is proceeding by way of formal proof in that the proceeding has been served but no steps have been taken by the defendants.  Accordingly, none of the allegations by the plaintiffs in the affidavit of Ms Che have [sic] been challenged. There are also two important matters that can be taken from that, namely that the company is no longer trading or is no value to the majority shareholder and secondly that the controllers of the majority are no longer based in New Zealand and may be unlikely to return.

[24]     For these reasons I consider it would be just and equitable to order the liquidation of Nutri-Health.  The company is now just a shell and it is appropriate that its affairs are wound up and accounts settled, including with former employees and the minority shareholders.   While ordering the liquidation of a company is sometimes called a measure of last resort, in the current circumstances it is the only practical measure for resolving matters between the company and the minority shareholders.

[25]     I am not persuaded of the case for an order under s 174 of the Act based on unfair prejudice to the minority shareholders.   One difficulty is the sparseness of information provided in the application.  While Ms Che’s affidavit is uncontested, it does not provide a secure platform from which to conclude that the majority shareholder has acted in a manner unfairly prejudicial to Ms Che and the other minority shareholders.

[26]     Ms Che has outlined the nature of the arrangements as she understood them to be between the New Zealand and China based interests and has described in broad terms the contributions she made to getting Nutri-Health underway and financially secure.   She has provided no documentary information, however, to show that the China based interests had a similar understanding of the arrangements.  Nor has she disclosed, other than in  very general  terms,  what  contributions  the China-based interests (represented by Natureland) made to Nutri-Health’s establishment and operations.

[27]     It is also curious that no information is provided as to whether or why there was a falling-out between the plaintiffs and the principals in China – Mr Lin, Mr Xi and Mr Chen.   Under Ms Che’s account, the problems all relate to the arrival of Mr Que.  But if the relationship was truly one of partnership as asserted by Ms Che, I

would have expected there to have been some form of communication between Ms Che and either Mr Lin, Mr Xi or Mr Chen before, at the time of, and after Mr Que’s  appointment  and  the  termination  of  the  plaintiffs’  directorships  and Ms Che’s employment.

[28]     In her affidavit of 8 June 2017, when explaining her reasons for opposing the proceeding Nutri-Health brought against the plaintiffs for breach of statutory duty, Ms Che states:

I had throughout been completely open with Lin and Xi and they had approved all business matters including leases and employment contracts, invoices,  receipts,  bank  reconciliations  and  accounts.  I  also  had  the company’s accounts audited and all in my view were completely above- board and regular.

[29]     That might be so, but it was curious that there was nothing before this Court to  substantiate  those  propositions  other  than  Ms  Che’s  unchallenged  assertions. Mr McDonald assured me ample documentary evidence to that effect had been filed in defence to the breach of statutory duty proceeding.  Be that as it may, in this case requiring formal proof, and notwithstanding the non-involvement of the defendants, more probative evidence than unchallenged assertions should be provided if such is available, particularly where the Court is being asked to find unfair prejudice to minority shareholders.

[30]     For the above reasons, I decline to make an order under s 174 of Act based on unfair prejudice to the plaintiffs as minority shareholders.

[31]     However, as already indicated, given that Nutri-Health has ceased operating and its directors and majority shareholder have apparently abandoned their interests in New Zealand, I consider it is just and equitable that Nutri-Health be put into liquidation in accordance with s 241 of the Act.

[32]     As  noted  in  the  leading  authority  on  the  “just  and  equitable”  ground,

Ebrahimi  v  Westbourne  Galleries  Ltd,  the  circumstances  in  which  “just  and

equitable” considerations cannot easily be defined.1    As Lord Wilberforce put it in the principal judgment in that decision:2

It would be impossible, and wholly undesirable, to define the circumstances in which these considerations arise.

[33]     Most  cases  arise  in  situations  where  an  aggrieved  party  is  seeking  the liquidation of a company in the face of opposition from the majority shareholder and the analysis of the courts focuses on whether, in the face of a breakdown of or deadlock in the relationship between shareholders, there are alternative remedies to the  last  resort  remedy  of  liquidation.3      In  this  case,  however,  the  majority has effectively abandoned the company and the whole enterprise for which the company was established in the first place.   It has also has taken no part in the proceeding seeking the liquidation; that is, there is no opposition to liquidation.

[34]     Moreover, given the situation in which the company has been left by the majority shareholder, there is a need for an investigation into and a resolution of Nutri-Health’s affairs that only the appointment of a liquidator can bring.   In that respect an observation of Associate Judge Gendall in Strachan v Denbigh Property Ltd is most apposite:4

[64]     Lastly, an important factor in this case … and which supports the appointment of an independent liquidator, is the real need as I see it for a thorough and independent investigation of the Company’s affairs to be undertaken.

Orders

[35]     I  order,  pursuant  to  s 241  of  the  Act,  that  Nutri-Health  be  placed  into liquidation.

[36]     I further order that Craig Andrew Young, Director of Restructuring Services

Ltd, is appointed Liquidator.

1      Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL).

2      At 378.

3      See for example, Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC); and Strachan v Denbigh

Property Ltd (2011) 10 NZCLC 264 (HC).

4      Strachan v Denbigh Property Ltd, above n 3.

[37]     I approve the rates of remuneration of the liquidator in accordance with Mr

Young’s Notice of Liquidators Consent and Certificate in Relation to Remuneration, dated 29 August 2017.

van Bohemen J