Coleman v Lambie Assets Limited
[2013] NZHC 244
•19 February 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-297 [2013] NZHC 244
BETWEEN LYNETTE MARY COLEMAN AND BRUCE IAN SANGSTER
First Plaintiffs
ANDGARRY KENNETH ROBINSON AND ALISON MARGARET ROBINSON Second Plaintiffs
ANDALAN GRAHAM YULE AND CHERIE JOY YULE
Third Plaintiffs
ANDBRYAN MAURICE HODGES AND JENNIFER MARGARET HODGES AND BPA TRUSTEES 2009 LTD
Fourth Plaintiffs
ANDRICHARD ALLAN PIERCE, DEBORAH ANN PIERCE, DARYL RODERICK PIERCE AND PATRICK ADRIAN HOULIHAN
Fifth Plaintiffs
ANDKENNETH CHARLES DICKIE AND JESSIE LYNETTE DICKIE
Sixth Plaintiffs
ANDRODNEY KEITH HARRIS AND HEATHER JOY HARRIS
Seventh Plaintiffs
ANDLAMBIE ASSETS LIMITED First Defendant
ANDMURRAY REX ALCOCK AND ALLISTER RONALD KNIGHT Second Defendants
ANDSPI CAPITAL LTD Third Defendant
ANDSPI SECURITIES LTD Fourth Defendant
COLEMAN AND SANGSTER V LAMBIE ASSETS LIMITED HC AK CIV-2013-404-297 [19 February 2013]
ANDCRESSIDA CAPITAL ONE LTD Fifth Defendant
Hearing: 11 February 2013
Counsel: TJG Allan and A L Credin for Plaintiffs
D E Smyth for Defendants
Judgment: 19 February 2013
In accordance with r 11.5 I direct that the delivery time of this judgment is 9.30am on the 19th day of February 2013.
RESERVED JUDGMENT OF MACKENZIE J
[1] In this proceeding, the plaintiffs, who are shareholders in the first defendant, Lambie Assets Limited, (“LAL”) seek relief related to the way in which the affairs of LAL are being conducted. The application presently before the Court is an interlocutory application for appointment of receivers to LAL.
[2] The shares in LAL are of two classes:
(a) Investment shares which carry the right to receive distributions but carry only very limited voting rights.
(b)Management shares which carry no right to receive distributions but carry all voting rights other than the very limited rights attaching to the investment shares.
[3] There are 3,500,000 investment shares. Each of the seven plaintiffs holds
500,000 shares. There are five management shares, all held by the third defendant
(SPI Capital).
[4] LAL was incorporated in December 2008 as the vehicle for an investment scheme proposed by SPI Capital. The terms were set out in an investment
memorandum dated December 2008 which was described as an offer to private persons and not an offer to the public under the Securities Act 2004. Briefly stated, the proposal was to purchase by mortgagee sale a partly developed area of industrial land in Manukau, South Auckland, to complete the construction of some partly built industrial units on the land, and either to build further units on, or to sell, the remaining land. SPI Capital was to be the manager of the project.
[5] The individuals who were the driving force behind the investment proposal are the second defendants, Messrs Alcock and Knight. They are the directors of LAL, and the directors and (indirectly) the shareholders of SPI Capital.
[6] Matters have reached the point where the investors have lost confidence in Messrs Alcock and Knight. They have issued these proceedings alleging, inter alia, that the affairs of LAL have been conducted in a manner that is unjustly detrimental to the plaintiffs, and seeking relief under s 174 of the Companies Act 1993 (the Act). Included among the relief sought under s 174 is the appointment of a receiver under s 174(2)(e). The application before me is an interlocutory application for orders appointing receivers to LAL pending the hearing of the substantive proceeding.
[7] The plaintiffs assert that the conduct of the defendants has placed the company and their investment at risk and is unfairly prejudicial. Mr Allan summarises the plaintiffs’ case in his submissions in these terms:
The plaintiffs say that the evidence overwhelmingly shows there are very serious issues to be tried in that affairs of LAL have been, are being, and are likely to be, conducted in a manner unfairly prejudicial to them within the meaning of s 174 of the Companies Act 1993 (“the Act”) and there is sufficient risk of jeopardy to the assets of LAL to justify the appointment of a receiver immediately until the substantive issues, as set out in the Statement of Claim, can be determined by this Court because there is no other means by which they can be protected.
In summary, the allegations of unfair prejudice are:-
(a) LAL’s assets have been improperly disposed of by the second and/or
third defendants.
(b) There remains a real risk of LAL’s other assets being dissipated by
second and/or third defendants.
(c) No steps being taken by second and/or third defendants to retrieve the disposed assets.
(d) Various breaches of the Companies Act.
(e) The mortgagee refuses to engage with the investors. If a Receiver is appointed they are ready, willing and able to take steps to protect LAL for any steps by the mortgagee.
[8] This application for interim relief falls to be considered under the traditional two-stage test of whether there is a serious question to be tried and where the balance of convenience lies. In applying those tests, the observations in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd must be borne in mind.[1]
[1] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
[9] Consideration of the first limb of that two-stage test requires consideration of the strength of the plaintiffs’ claim for relief under s 174 of the Act. Section 174(1) provides:
A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
[10] The plaintiffs must show past, present, or likely future conduct in relation to the affairs of the company which is oppressive, unfairly discriminatory, or unfairly prejudicial to them in their capacity as shareholders. The conduct must be of a kind that is in breach of a claiming shareholder’s legal rights or of recognised equitable
principles restraining the exercise of majority powers.[2] They must demonstrate, to
the level of establishing that there is a serious question to be tried, the likelihood of such conduct.
[2] M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 at [54].
[11] Mr Allan submits that in considering whether the matters alleged are oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholders in that capacity, it is relevant that all of the shareholders with a financial interest in the fortunes of the company are of one mind, in that all of them are plaintiffs. He submits that the burden on the plaintiffs to establish prejudicial conduct is accordingly less than that in the more usual case under s 174 where the party seeking
relief is a minority shareholder.
[12] I do not consider that is an important factor. The company has been structured so as to separate the management of the company from the financial returns. The legal structure, which the plaintiffs have accepted by their subscription for the investment shares, is such that control of the company and participation in the financial fortunes of the company are separated. The interests to be considered under s 174 are not confined to those of the holders of the investment shares, but extend also to the holders of the management shares.
[13] The plaintiffs assert that, in investing in that structure, which separates control and financial return, they were misled by a false representation that the separation was necessary to achieve a particular tax outcome. Any claim which the plaintiffs may have for relief based on that allegation cannot be in issue on this application. The reasons which may have prompted the plaintiffs to accept the separated structure are of limited relevance to whether the affairs of LAL have been conducted in a manner prejudicial to them.
[14] The respects in which the plaintiffs allege the affairs have been conducted prejudicially to them are summarised by Mr Allan in his submissions in these terms:
The plaintiffs submit that they have been severely prejudiced as the direct result of the conduct of the second and third defendants. The evidence shows that they have:
(a) Failed to consult the plaintiffs in crucial management decisions of
LAL contrary to representations made by the second defendants.
(b) Entered into irregular transactions by way of unsecured loans that are detrimental to LAL.
(c) Failed to comply with their obligations under the Act and LAL’s constitution, including failure to provide financial information and hold annual general meetings – as a result the plaintiffs are unable to ascertain the financial position of LAL.
(d) LAL had to sell units at a loss as a consequence of the second and/or
third defendants’ action.
(e) Failed to prudently manage the affairs of LAL.
(f) Managed the financial affairs of LAL in a way that the plaintiffs are significantly prejudiced.
[15] It will not be sufficient, to found a claim for relief under s 174, for the plaintiffs to demonstrate a lack of confidence in the management. Nor will it be sufficient for the plaintiffs to assert that the way in which the company is being managed may expose the company, as distinct from the shareholders, to risk or loss. Relief under s 174 is dependent on the conduct being oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholders, not on its being detrimental to the company. As the decision of the Court of Appeal in Latimer Holdings Ltd v SEA Holdings NZ Ltd makes clear, errors of judgment by management, inefficiencies and poor business management without distinct elements
of bad faith or self-interest, cannot amount to oppression.[3]
[3] Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [70].
[16] With the possible exception of the matter relied on in relation to the plaintiffs’ submissions as set out at [14](b) above (which I address under the second limb of the test) all of the matters fall within the category of business judgment and management. So far as the successful invocation of the s 174 jurisdiction depends upon the existence of elements of bad faith or self interest, the seriousness of such allegations means that cogent evidence would be necessary to support them. For these reasons, I do not consider that there is, on this application, a strong case for the grant of relief under s 174. However, on this interlocutory application, it is best that I do not venture further than is necessary into questions which will need to be resolved on the substantive application. I therefore do not address further the first limb of the interim injunction test. I turn to consider the second limb, the balance of convenience.
[17] On that limb, there are considerations which weigh in the balance against the grant of interim relief. First, the remedy sought, the appointment of receivers, is invasive and will potentially have serious consequences for LAL. The appointment of a receiver is likely to affect the commercial reputation of LAL and may have other consequences. For example, there is a mortgage over LAL’s assets. There is no evidence before me as to whether or not the appointment of a receiver would constitute a default under the mortgage.
[18] A second factor weighing against the appointment of receivers on an interim basis is that this would substantially alter the status quo. In applying the balance of convenience test, the Court will usually favour maintaining the status quo.[4] Here, the relief sought involves a substantial alteration of the position which has applied at all times prior to the application. That makes it incumbent on the plaintiffs to show that the balance of convenience is not finely balanced, but weighs heavily in their favour.
[4] American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 408.
[19] In considering whether the plaintiffs have demonstrated that, there is to be weighed any likely adverse consequence of the conduct of LAL’s affairs between now and when the substantive claim could be heard, a period likely to be at least several months. The most significant factor relied upon by the plaintiffs in this regard is a loan shown in the accounts of LAL to SPI Assets Ltd of some $480,000. The plaintiffs submit that advancing this amount, unsecured, was not acting in good faith or in the best interests of LAL. They submit that the interest payable on the loan by SPI Assets Ltd is less than the amount being paid on the first mortgage and that this is contrary to the interests of the plaintiffs as investors.
[20] I am not satisfied that this factor should bear significant weight in the balance on the present application. The existence of a loan to SPI Assets Ltd has been revealed in the company’s accounts for at least two years. The evidence does not indicate any recent material change of circumstances in relation to that loan which might justify a conclusion that the urgent appointment of a receiver on an interim basis, to take steps in relation to that loan, is necessary. That weighs against urgent relief at this stage.
[21] A significant factor in the plaintiffs’ concerns, contributing to their loss of confidence in Messrs Alcock and Knight, is evidence concerning the activities of the defendants in other ventures. Mr Jones, a chartered accountant, engaged by the plaintiffs, has reviewed the financial statements of other syndicates promoted by the defendants. His evidence is that there are significant related party loans in all of those investments. He expressed the opinion that SPI Assets Ltd is unlikely to be
able to repay the loan from LAL. Mr Jones also gives evidence of 15 companies associated with Messrs Alcock and Knight which have been put into liquidation.
[22] Messrs Alcock and Knight are involved in the management of LAL in two ways: through their involvement with the SPI companies, and as directors of LAL. I do not consider that the appointment of receivers is necessary to address any issues which there may be concerning SPI’s management of LAL. The plaintiffs have available to them a self-help remedy in respect of that. As I have mentioned, the plaintiffs do have some limited voting rights in respect of LAL. Under cl 25.1 of the constitution of LAL, 70 per cent of the holders of the investment shares have the ability to dismiss SPI Capital as the manager.
[23] If SPI Capital were dismissed as the manager, then responsibility for management of the project would fall upon LAL itself, through its directors. The directors owe duties to the company, which can be enforced by the shareholders. Section 174 is not a usual mechanism for dealing with a breach of duty by directors. I do not consider that the evidence justifies the de facto removal of the directors, by the appointment of receivers, on an interim basis.
[24] For these reasons, I consider that the balance of convenience does not favour the interim appointment of receivers. The application for interim relief is dismissed.
[25] Costs on this application are reserved. The parties may submit memoranda.
Solicitors: Grove Darlow & Partners, Auckland, for Plaintiffs
Ewart & Ewart, Auckland, for Defendants
“A D MacKenzie J”