Commercial Factors Limited v Scenic Hotel Group Limited
[2020] NZHC 1868
•30 July 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2016-409-001141
[2020] NZHC 1868
BETWEEN COMMERCIAL FACTORS LIMITED
Plaintiff
AND
SCENIC HOTEL GROUP LIMITED
First Defendant
AND
SCENIC HOTELS LIMITED
Second Defendant
Hearing: 1–5 and 8–10 April 2019, resumed 23 July 2020 Appearances:
P J Dale QC and A J Steel for Plaintiff
J B M Smith QC and J L W Wass for Defendants
Judgment:
30 July 2020
JUDGMENT OF OSBORNE J
[Supplementary]
This judgment was delivered by me on 30 July 2020 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
COMMERCIAL FACTORS LIMITED v SCENIC HOTEL GROUP LIMITED [2020] NZHC 1868 [30 July 2020]
Introduction
[1] Commercial Factors Ltd (CFL) and Scenic Hotel Group Ltd (Scenic) were together involved from 2011 with a Tongan hotel. Through respective subsidiaries, they established an equally-owned company, Pacific Hotels Ltd (PHL), intended for the operation of the hotel. The shareholding subsidiaries were (for CFL) Haydon 2 Ltd (H2) and (for Scenic) Scenic Hotels (International) Ltd (SHIL).
[2] Litigation came about between CFL and Scenic in 2016. CFL sued Scenic on the basis that CFL and Scenic were estopped from denying they were joint venturers. Alternatively, CFL asserted they were parties to a contractual joint venture agreement or were partners. Declarations were sought as to those matters and as to the date of dissolution of the relationship. CFL also sought an order for the taking of accounts.
[3] In a judgment delivered on 19 September 2019 (the original judgment), I found the parties did not have the relationships pleaded, and that no estoppel arose, but a pre- contractual joint venture had come into existence between them.1 I made a declaration and an order.2
(a)It is declared that a pre-contractual joint venture between the plaintiff and the first defendant was terminated with effect from 26 March 2015.
(b)The plaintiff and first defendant are to procure the taking of accounts of Pacific Hotels Ltd, as their pre-contractual joint venture vehicle, for the period from incorporation to 26 March 2015, upon the basis that all receipts from any insurance policy in relation to the hotel (whether received before or after 26 March 2015) shall be brought into account.
[4] Scenic promptly applied for an order recalling the direction for the taking of accounts. Alternatively, it sought clarification in relation to the correct interpretation of the direction.
[5] Upon hearing counsel, I recalled the original judgment. I did so upon the basis Scenic had not been put on notice that an order in the nature of the direction for accounts might be made, therefore denying Scenic (and CFL for that matter) the
1 Commercial Factors Ltd v Scenic Hotel Group Ltd [2019] NZHC 2370.
2 At [265(a) and (b)].
opportunity to make submissions in relation to such relief.3 At the same time, I adjourned the proceeding to a further hearing for supplementary evidence and final submissions on the question of relief.
[6] The hearing, originally to have taken place in April 2020, had to be adjourned following the COVID-19 lockdown.
[7] In the meantime, Scenic has filed an appeal against the making of the declaration of a pre-contractual joint venture. That appeal has yet to be heard. The determination of the present issue in relation to relief is made on the basis that the declaration is in force.
Evidence
[8] The parties filed supplementary evidence in relation to the issue of any appropriate relief.
[9] The evidence for the plaintiff focused on alleged damage at the hotel when Scenic withdrew from involvement with the hotel itself. As it transpired, counsel did not place any weight on that evidence in the context of the submissions I heard. Deponents for the defendant also filed some evidence in response to the evidence as to damage, which I can ignore for the same reason.
[10] In addition to that, Scenic filed an affidavit of Lianna-Merie (Lani) Hagaman (a director of Scenic). Mrs Hagaman deposed it is Scenic’s intention to have liquidators appointed to PHL. She exhibited demands which Scenic and its subsidiary, SHIL (the 50 per cent shareholder in PHL) have made on PHL. She acknowledged that there may be a difference of view between the parties as to the assets and liabilities of PHL as at 26 March 2015, but referred to a statement of financial position (which was to be produced by Scenic’s Group Finance Manager, Peter Rhodes).
[11] Mrs Hagaman then gave history and detail of the insurance arrangements which Scenic had put in place from 1 July 2017 in the name of “Pacific Hotels Limited
3 Commercial Factors Ltd v Scenic Circle Hotels Ltd [2019] NZHC 3243.
t/a Scenic Hotel Tonga”. She stated Mr Haydon, CFL and CFL’s subsidiary H2 (the other 50 per cent shareholder in PHL) had no involvement in the insurance process from that time. She referred to the insurance entitlements that thereafter arose through damage inflicted by Cyclone Gita on 11 February 2018. An interim insurance payment of approximately NZ$1m is now held on trust in Tonga. Mrs Hagaman caused the negotiations for the balance of the settlement of the insurance to be suspended while this litigation is resolved.
[12] Mrs Hagaman recorded that during the period before 26 March 2015 (the date which the Court has declared to represent the termination of the pre-contractual joint venture), CFL was not paid rent and Scenic Kaikoura Ltd (Scenic’s hotel management vehicle) did not charge management fees.
[13] Peter Rhodes produced a statement of financial position for PHL as at 26 March 2015. It represents PHL as then having negative equity of $2,862,339. The major components making up PHL’s indebtedness were similar levels of shareholder advances, over $1.4m (each) from SHIL and H2, together with cash advances made to PHL and expenses paid on behalf of PHL by Scenic (over $400,000). In short, it appears from Mr Rhodes’ statement of financial position that PHL was in late-March 2015 insolvent by a substantial margin.
[14] SHIL’s demand upon PHL is for its shareholder advances ($1,486,165.40). Additionally, Scenic has made demand of PHL for $2,430,000 which it states represent advances made interest free to PHL in the period from December 2014 to the closure of the hotel in May 2019.
[15] In an affidavit filed on behalf of CFL, Mr Haydon recorded his understanding that insurance proceeds have been retained by the insurer pending resolution of issues between the parties and that Scenic’s position appears to be it is entitled to the whole of the insurance proceeds. Mr Haydon noted, from March 2015 CFL had been content to allow Scenic to continue to operate the hotel, choosing not to demand any rent or lease payments, and believing issues of that kind would be captured by findings in this proceeding.
[16] Mr Haydon deposed that CFL wishes to canvas all these issues in the course of the directed taking of accounts and, if necessary, to seek further relief from the Court at the end of that process.
Submissions for CFL
[17] Mr Dale QC, for CFL, referred to authorities (including Chirnside v Fay) which consider the need for accounting between parties to frustrated joint ventures.4 He referred also to the more recent judgment of this Court in Pure Elite Holdings Ltd v Bodco Ltd.5 In that case, Wylie J discussed “failure of basis claims” and the principles which apply to them, concluding that similar principles apply to frustrated joint ventures.6 His Honour referred to the majority decision in Chirnside v Fay, with its recognition of some analogy with the steps necessary when a formal partnership is dissolved. Wylie J noted in particular the observation that, in the absence of contractual regulation, equitable principles will “supply the solution”.7
[18] Mr Dale, while accepting that CFL had not sought equitable relief or referred to equitable principles in closing argument, nevertheless submitted that it was within the Court’s jurisdiction to have granted equitable relief.
[19] In particular, Mr Dale noted the wide powers under r 5.31 High Court Rules 2016 which provides:
5.31 Specifying relief sought
(1)The relief claimed must be stated specifically, either by itself or in the alternative.
(2)… the court may, if it thinks just, grant any other relief to which the plaintiff is entitled, even though that relief has not been specifically claimed and there is no claim for general or other relief.
[20] Similarly, Mr Dale noted that r 16.2 High Court Rules permits the Court to order an account, whether pleaded or not, in these terms:
4 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433.
5 Pure Elite Holdings Ltd v Bodco Ltd [2019] NZHC 2191.
6 At [188]–[191].
7 At [191]. Citing Chirnside v Fay, above n 4, at [93].
16.2 Orders for accounts and inquiries
The court may, on the application of any party, before, at, or after the trial of a proceeding, order an account or an inquiry, whether or not it has been claimed in that party’s pleading.
[21] Mr Dale then embarked on a discussion of reasonably old English authority which (under RSC Ord 18, r 7) precluded the pleading of matters other than material facts.8
[22] Mr Dale recognised, what he categorised as, a slight pull back in New Zealand from the broad approach identified in the English authorities and concluded by submitting that much will depend on how complicated a case is in fact and law. Mr Dale submitted the circumstances of the case called for an order for the taking of accounts, of the nature ordered in the original judgment. He submitted there were also considerable practical advantages in my remaining involved as much as possible in the final wash-up, having regard to my knowledge of the facts and my findings already made.
[23] Mr Dale drew support for CFL’s preference for a taking of accounts rather than having a liquidator now appointed from passages in the original judgment in which he submitted I had made findings which explain why a liquidation of PHL is not appropriate, with a taking of accounts as the only alternative.9
[24] In the circumstances, Mr Dale submitted I should make an order reconfirming the conclusion that the taking of accounts is required.
Submissions for defendant
[25] Mr Smith QC identified Scenic’s primary position as being that no further relief is necessary and appropriate. This was because the financial position of PHL and the situation as between the two shareholders meant that PHL will need to be liquidated in any event. The liquidator will then have the ability to resolve all matters outstanding between the parties.
8 For instance, Vandervell’s Trusts (No 2) [1974] CH 269, [1974] 3 All ER 205.
9 Referring to Commercial Factors Ltd v Scenic Hotel Group Ltd, above n 1, at [254]–[256].
[26] Alternatively, in the event the Court were to order an account be taken of the joint venture, then in Mr Smith’s submission the account must necessarily exclude the proceeds of insurance taken out in 2018. That is because, in that period, CFL had withdrawn from a pre-contractual joint venture (as I found to have existed, but now the subject of Scenic’s appeal).
[27] Mr Smith emphasised CFL had specifically pleaded three causes of action, being estoppel, contractual joint venture and partnership. He further emphasised the Court had determined that such relationship as had existed had been terminated on 26 March 2015. CFL had sought no relief in respect of post 26 March 2015 developments.
[28] Mr Smith referred to my interlocutory judgment in this proceeding, not long before trial.10 At that time, CFL proposed to add a fourth cause of action to the statement of claim, seeking an order that PHL be placed into liquidation (and joining H2 and SHIL for that purpose). The express bases of CFL’s interlocutory application was that PHL was insolvent and that it was just and equitable that the company be put into liquidation (a clear reference to the jurisdiction which the Court assumes in relation to deadlock situations). Scenic opposed the application on the substance because, as it recorded, SHIL as the 50 per cent shareholder in PHL was prepared to vote in favour of a special resolution under s 241(2)(a) Companies Act 1993 to place PHL in liquidation. I declined CFL’s interlocutory application.
[29] Mr Smith then addressed submissions as to whether the Court should order that an account be taken of the pre-contractual joint venture.
[30] His primary submission was that in circumstances where CFL itself had not pleaded a pre-contractual joint venture or sought any relief in respect of such an arrangement, it would not be appropriate to order further relief in this proceeding. He referred to the need in any event for a liquidation. He submitted that to have an account taken, which would address only part of the relevant time period, would generate unnecessary complexity.
10 Commercial Factors Ltd v Scenic Circle Hotels Ltd [2019] NZHC 568.
[31] Mr Smith submitted that contrary to Mr Dale’s submission, the original judgment did not contain a finding that liquidation of PHL would be inappropriate. Mr Smith submitted such a proposition mischaracterises the findings made by the Court, in which I recognised the failure of the shareholders to put PHL into liquidation was “understandable” given that the liquidation would destroy any tax losses (in relation to which the parties had previously had negotiations).
[32] Mr Smith noted matters had moved on since that point. Scenic and SHIL had both given notices calling up their loans and Mrs Hagaman has confirmed Scenic intends to have PHL put into liquidation. That is a course that is open to the shareholders together on a voluntary basis (as offered by Scenic during the interlocutory hearing before trial). It is also possible through a creditor’s application, based on debt owed to Scenic and/or SHIL or by SHIL applying as a shareholder on the just and equitable grounds (as intended by PHL in its interlocutory application proposed pre-trial interlocutory application).
[33] Mr Smith submitted, in relation to the authorities on pleading requirements to which Mr Dale had referred, that CFL is essentially seeking to run a new case, relying the existence of a non-contractual joint venture. He submitted additional relief granted upon the basis of the declaratory relief (declaring a position in relation to a matter not expressly pleaded) would be inappropriate for three reasons:
(a)the pre-contractual joint venture featured in the course of evidence or argument at trial only by way of scene-setting, the declaration to that effect going beyond the pleaded case. The Court, were it to order the taking of accounts, would exacerbate that situation by adding executory relief to the declaratory relief;
(b)there are significant legal differences between pre-contractual joint ventures and contractual joint ventures, with the principal consequence of a pre-contractual joint venture being to impose on parties certain fiduciary duties of loyalty, including by not misappropriating opportunities or misusing confidential information; and
(c)were an account to be ordered, the parties will be forced to undertake two separate processes when, through one of them, PHL must in any event be wound up. There would be issues as to how the two processes would interact.
[34] Mr Smith additionally submitted, were the Court to order a taking of accounts, it should exclude any reference to the (2018) insurance policy proceeds being included as an asset of the pre-contractual joint venture. As I have reached the view that an account should not be ordered, I will not explore that submission.
Discussion
[35] I approach this matter afresh, ignoring the fact that the original judgment contained a direction for the taking of accounts.
[36] With the benefit of submissions addressed to the specific issue, I am satisfied it would be inappropriate to direct that there be a taking of accounts of PHL as the pre- contractual joint venture vehicle.
[37] There was a mutual recognition between the parties shortly before trial that the liquidation of PHL was appropriate. On the part of CFL, this was demonstrated by its late interlocutory application to enable it to pursue the liquidation of PHL. On the part of Scenic, its cooperation in relation to a winding up was signalled at the time. Mrs Hagaman has since confirmed on oath that it is Scenic’s intention to seek liquidation.
[38] As Mr Smith submitted, I did not make a finding in the original judgment that liquidation of PHL was inappropriate. The observation was limited to the fact that it was understandable, against the background of exit negotiations which the parties had conducted, that they had earlier not chosen to put PHL into liquidation.11 Given what has passed, and the continuing litigation between the parties, there would now appear to be little if any prospect of the cooperation and successful commercial negotiation which would see the benefit of tax losses enure.
11 Commercial Factors Ltd v Scenic Circle Hotels Ltd, above n 1, at [255].
[39] PHL has not traded for some years. On the evidence adduced it appears to be insolvent. The shareholders are deadlocked.
[40] The appropriateness of a liquidation is apparent. A liquidation will bring benefits beyond those which the taking of accounts will achieve. It will immediately move the shareholders of PHL to a position where an independent professional/s in the person of the liquidator/s will have the power and responsibility to determine and get in the assets of PHL and to resolve issues of liability. The liquidator will have the full powers under the Companies Act to seek such directions as are required.
[41] I recognise, with rights of the parties resting on equitable principles, there may be issues which the liquidators themselves cannot resolve without Court intervention but such would also be the position in relation to the taker of accounts.
[42] There is a further practical aspect, potentially of financial significance. The order sought is that CFL and Scenic procure the taking of accounts of PHL. One would expect a significant cost to the taking of accounts given all that has passed between these parties. The proposed order would require both parties to fund the taking of accounts, in the face of Scenic’s strong objection to that process. Through a liquidation process, there are options available to those seeking liquidation which may not carry the same cost implications, whilst having the prospect of expediting the resolution of at least as many if not more of the issues that may exist between the parties.
[43] On my assessment, the balance is strongly in favour of refusing the order sought by CFL when the alternative of the liquidation of PHL is immediately available to the parties.
[44] Happily, this does not reduce what is an important matter for both parties to a question of pleading. Had there not been a clear reason for refusing to direct the taking of accounts (on the basis identified above), I would have viewed the flexibility under the High Court Rules (subject to the right of both parties to file evidence and to be heard as they were) to be a matter tending in favour of the provision of supplementary relief. In the event, I make no finding in that regard.
Outcome (in relation to taking of accounts)
[45]I decline to make an order for the taking of accounts of Pacific Hotels Ltd.
[46] The judgment of 19 September 2019, as reissued on 13 December 2019, represents the concluded judgment in this proceeding.
[47]The costs and disbursements in relation to this resumed hearing are reserved.
Recall of judgment
[48] When the original judgment was recalled, in the recall judgment the directions for accounts was deleted (as identified at [5] above).
[49] Counsel at this hearing recognised that, upon the deletion of the direction for accounts, the recall should have extended to paragraphs [253] to [262], being the substantive discussion which led to the making of the direction for accounts.
Order
[50]I direct:
(a)Paragraphs [253] to [262] of the original judgment (Commercial Factors Ltd v Scenic Hotel Group Ltd [2019] NZHC 2370) are recalled and deleted.
(b)Paragraphs [263] to [265] are renumbered so as to read [253] to [255].
Osborne J
Solicitors:
Neilsons Lawyers, Auckland Meares Williams, Christchurch
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