Cook v Romanes

[2018] NZHC 2650

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE

CIV-2018-463-82

[2018] NZHC 2650

IN THE MATTER OF

the Companies Act 1993

BETWEEN

RAYMOND NOEL COOK KIM JUDY LORRIGAN and MIOCHAEL JOHN ROMANES

as trustees of the M J ROMANES TRUST Plaintiffs

AND

DANIELLE NATAHSA ROMANES and JOANNE CYNTHIA ROMANES

as trustees of the J C ROMANES TRUST Defendants

Hearing:

26 September 2018

Appearances:

K Quinn for the Plaintiffs

J Hosking for the Defendants

Judgment:

12 October 2018

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on 12 October 2018 at 12 noon

pursuant to Rule 11.5 of the High Court Rules.

…………………………………

Deputy Registrar

Solicitors:

Foley Hughes, Rotorua, for the Plaintiffs MJC Legal Ltd, Rotorua, for the Defendants

Copy for:

Kelly Quinn, Auckland Jo Hosking, Auckland

COOK v ROMANES and [2018] NZHC 2650 [12 October 2018]

[1]    The trustees of the M J Romanes Trust apply for an order that their partnership with the trustees of the J C Romanes Trust be put into liquidation.  In response, the   J C Romanes trustees have applied for a stay of the proceeding.

[2]    The proceeding arises out of the break-up of the marriage of Mrs Joanne Cynthia Romanes and Mr Michael John Romanes. Mr and Mrs Romanes married in 1986. They separated in July 2016. They have four adult children. The family home was on a “hobby” farm called Big Hill Farm. The owner of the farm is a partnership of mirror family trusts: the plaintiffs and the defendants. The trusts were each established by deeds on 30 April 1991. Mr Romanes is the settlor of the M J Romanes trust, but not a beneficiary.  The final beneficiaries of each trust are the children.  Mrs Romanes is one of the discretionary beneficiaries of the M J Romanes Trust. Mrs Romanes is the settlor  of  the  J  C  Romanes  Trust,  but  not  a  beneficiary.  Mr Romanes is one of the discretionary beneficiaries. The two trusts carry on business in partnership, but there is no written partnership agreement. The partnership owns not only Big Hill Farm (said to have an estimated value of $4 million), but also properties on Kawau Island and in Lawrence, Otago. Before the partnership owned it, Big Hill Farm was an asset of Mr Romanes’ company, Mikro Holdings Limited.

[3]    Part of the background to this case is a proceeding in the Family Court under the Property (Relationships) Act 1976 between Mr and Mrs Romanes. Mr Romanes relies on agreements under s 21 of the Property (Relationships) Act to say that much of his wealth is separate property. Mrs Romanes has applied to have the agreements set aside and to divide relationship property. She also claims under s 9A of the Property (Relationships) Act increases in Mr Romanes’ separate property attributable to the application of relationship property or her contributions to it.

[4]    The Family Court has given a decision on an application for interim relief by Mrs Romanes. Finding that Mr and Mrs Romanes lived at Big Hill Farm under a tenancy from the partnership, it made a tenancy order allowing Mrs Romanes to live

in the house and curtilage subject to her meeting the costs of outgoings.1 Mr Romanes has appealed against the orders for interim relief, including the tenancy order.

This proceeding

[5]    Under s 240B of the Companies Act 1993, the court can order an association to be put into liquidation. “Association” is defined in s 2 to include a partnership.2 Section 240B replaces former s 17A of the Judicature Act 1908, which gave the court jurisdiction to make liquidation orders for associations.3 Under the Companies Act, schedule 11, cl 2, the grounds for putting an association into liquidation are that the association is dissolved, has stopped business, is terminating its affairs, is unable to pay its debts, or that it is just and equitable.

[6]    The Michael Romanes trustees began this liquidation proceeding in July 2018 relying on the just and equitable ground. The statement of claim pleads that the two sets of trustees have lost trust and confidence in each other. Mrs Romanes is alleged to have accused Mr Romanes of verbal abuse, bullying, domestic violence, aggressiveness, deceitfulness, acting in bad faith and with ulterior motives, and conducting economic warfare against her. The Michael Romanes trustees say that they have lost confidence in the Joanne Romanes trustees’ management of the farm and give particulars. They complain that they have been excluded from any meaningful participation in the partnership business. The Michael Romanes trustees invited the Joanne Romanes trustees to agree to a dissolution of the partnership, but that was rejected. They plead that as the parties remain in serious conflict it is just and equitable that the partnership be put into liquidation. While the Michael Romanes trustees say that Mr Romanes’ company, Concrete Structures (NZ) Limited, has not been paid for work it carried out on the Big Hill Farm, there is no suggestion of balance sheet or cash flow insolvency. The Michael Romanes trustees do not allege that the partnership is unable to pay its debts.

1      Romanes v Romanes [2017] NZFC 9928 at [71].

2      Companies Act 1993, s 2.

3      Section 17A was inserted by s 2 of the Judicature Amendment Act 1993 with effect from 1 July 1994.

The stay application – principles

[7]    The Joanne Romanes trustees have applied for a stay of the proceeding under r 31.11 of the High Court Rules 2016. The Court’s inherent jurisdiction is not limited by the rule.4 Stay applications come up most frequently on creditors’ liquidation applications against companies. For those cases it is common to cite the principles stated by Wallace J in Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd.5 Those principles are important as illustrating the application of the inherent jurisdiction. While that was an alleged insolvency case, parts of what he said apply more widely:6

The jurisdiction to stay is an inherent one to prevent abuse of process and that there is no inflexible rule.

The governing consideration is whether the proceedings savour of unfairness or undue pressure.

It is, however, a serious matter to stay winding-up proceedings so that the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which it is usually appropriate to consider on an application for an interim injunction.

That caution is required, lest the court prejudge the merits of the case. In a proceeding on the just and equitable ground, there are invariably differences between the parties. In a stay application the court cannot and should not pre-judge the ultimate outcome when it has only limited evidence, which has not been tested in cross-examination. Something more is required to find an abuse of process.

Is this proceeding an abuse of process?

[8]    The Joanne Romanes trustees point to the pending proceeding in the Family Court as a reason for staying the proceeding. That proceeding, however, is under the Property (Relationships) Act and deals with other matters – the division of property owned by Mr and Mrs Romanes personally, not the termination of a partnership of

4      Rule 31.11(3).

5      Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ 379 (HC).

6      At 385.

their trusts. This proceeding cannot be said to be abusive for dealing with a matter that is the subject of a concurrent proceeding in another Court.7

[9]    The Joanne Romanes trustees also attack the proceeding as a spiteful manoeuvre by Mr Romanes to defeat the Family Court tenancy order. They also allege oppressiveness by fighting Mrs Romanes on two fronts when he is in a better position to fund proceedings than she is. They say that once the partnership is put into liquidation, Mr Romanes will be able to buy Big Hill Farm from the liquidators and force Mrs Romanes from the property. Those arguments go to the merits of the proceeding. They do not provide grounds for finding an abuse of process. In cases where abuse of process is said to arise from improper use of the court process, it is standard to distinguish between a plaintiff’s intention to achieve a result and his motive for taking the proceeding. In Williams v Spautz the High Court of Australia explained:8

The purpose of a litigant may be to bring the proceedings to a successful conclusion so as to take advantage of an entitlement or benefit which the law gives the litigant in that event. Thus, to take an example mentioned in argument, an alderman prosecutes another alderman who is a political opponent for failure to disclose a relevant pecuniary interest when voting to approve a contract, intending to secure the opponent's conviction so that he or she will then be disqualified from office as an alderman by reason of that conviction, pursuant to local government legislation regulating the holding of such offices. The ultimate purpose of bringing about disqualification is not within the scope of the criminal process instituted by the prosecutor. But the immediate purpose of the prosecutor is within that scope. And the existence of the ultimate purpose cannot constitute an abuse of process when that purpose is to bring about a result for which the law provides in the event that the proceedings terminate in the prosecutor's favour. It is otherwise when the purpose of bringing the proceedings is not to prosecute them to a conclusion but to use them as a means of obtaining some advantage for which they are not designed…

[10]   Under that distinction the Joanne Romanes trustees have not shown that this proceeding is an abuse of process. The Michael Romanes trustees say that the partnership should be terminated by being put into liquidation. That can be done only by a court order under s 240B of the Companies Act. The fact that Mr Romanes hopes to gain some advantage by obtaining a liquidation order does not make the proceeding illegitimate.

7      As in Yeoman v Public Trust [2011] NZFLR 753.

8      Williams v Spautz [1992] HCA 34, (1992) 174 CLR 509.

The relevance of alternative remedies

[11]   Liquidation is commonly regarded as a remedy of last resort when the just and equitable ground is relied on. The court normally needs to be satisfied that there is no alternative remedy. The basis for this can be seen in decisions for proceedings to wind up a company on the just and equitable ground. Liquidation was regarded as such a drastic remedy that the alternative of relief against oppression under s 174 of the Companies Act was enacted.9 In Jenkins v Supscaf Ltd Heath J recognised that the availability  of   alternate   remedies   remained   a   cogent   consideration.10   In   SEA Management of Singapore Pte Ltd v Professional Service Brokers Ltd I said:11

The deadlock must be so serious as to impede the continued operation of the company. The essential basis for the court to give relief is frustration by internal discord. The court may order liquidation in its discretion if it is satisfied that there is no other way out of the impasse.

[12]   In the case of companies there are commonly alternative remedies through share pre-emption provisions in the constitution and relief under s 174 of the Companies Act. Liquidation may be oppressive if it halts the operation of a viable business, by the appointment of a liquidator who takes control of the company out of the hands of shareholders and directors appointed by them, with the added costs associated with a winding up under Part 16 of the Companies Act. Experience shows that when shareholder differences continue into liquidation, expenses can escalate.12

[13]   Those considerations may not apply quite so strongly in the case of a partnership. Here there is no written partnership agreement. There is nothing to stop either partner giving notice under s 35(1)(c) of the Partnership Act 1908. Equally the Court can order the dissolution of a partnership on the just and equitable ground.13 One of the differences between a dissolution under the Partnership Act and a liquidation under the Companies Act is that the partners retain control of the dissolution and arrange a distribution after a final statement of accounts (but with recourse to the court when there are differences), whereas an independent liquidator

9      Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [57].

10     Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC) at [98] and [117].

11     SEA Management of Singapore Pte Ltd v Professional Service Brokers Ltd HC Auckland CIV- 2011-404-5315, 25 January 2012 at [3].

12     For example, see Re Roslea Path Ltd (in liq) [2013] 1 NZLR 207 (HC).

13     Partnership Act 1908, s 38(f).

takes control of the partnership assets, administers the liquidation under Part 16 of the Companies Act. A liquidation under Part 16 of the Companies Act is a more drastic remedy for taking control of assets away from the partners and imposing an added layer of costs on the partners. The availability of alternative remedies remains a proper consideration on an application to put a two-member partnership into liquidation on the just and equitable ground.

[14]   The separation of Mr and Mrs Romanes bears on the termination of the partnership. They are unravelling their property interests and other ties. That makes it unlikely that the partnership will continue, at least not in its present form. The use of mirror trusts operating in partnership, with each spouse a trustee of a trust in which the other is a beneficiary, may have been suitable during the marriage, but cannot be expected to survive their separation. The question is not so much whether the partnership will be terminated, but how it should be brought to an end. Liquidation is only one option. Others are dissolution by one party giving notice to the other under s 35 of the Partnership Act; dissolution by court order on the just and equitable ground under s 38(f); an application for division of property under s 339 of the Property Law Act 2007; and an application adjusting the trustees of the trusts, if necessary, by court order.14 Given that liquidation is a more severe remedy, the court will need to consider whether other options are not viable.

[15]   For the Joanne Romanes trustees Ms Hosking referred to another option – orders under s 182 of the Family Proceedings Act 1980:

182     Court may make orders as to settled property, etc

(1)On, or within a reasonable time after, the making of an order under Part 4 of this Act or a final decree under Part 2 or Part 4 of the Matrimonial Proceedings Act 1963, the Family Court may inquire into the existence of any agreement between the parties to the marriage or civil union for the payment of maintenance or relating to the property of the parties or either of them, or any antenuptial or post-nuptial settlement made on the parties, and may make such orders with reference to the application of the whole or any part of any property settled or the variation of the terms of any such agreement or settlement, either for the benefit of the children of the marriage or civil union or of the parties to the marriage or civil union or either of them, as the court thinks fit.

14     Trustee Act 1956, s 51.

(2)Where an order under Part 4 of this Act, or a final decree under Part 2 or Part 4 of the Matrimonial Proceedings Act 1963, has been made and the parties have entered into an agreement for the payment of maintenance, the Family Court may at any time, on the application of either party or of the personal representative of the party liable for the payments under the agreement, cancel or vary the agreement or remit any arrears due under the agreement.

(3)In the exercise of its discretion under this section, the court may take into account the circumstances of the parties and any change in those circumstances since the date of the agreement or settlement and any other matters which the court considers relevant.

(4)The court may exercise the powers conferred by this section, notwithstanding that there are no children of the marriage or civil union.

(5)An order made under this section may from time to time be reviewed by the court on the application of either party to the marriage or civil union or of either party’s personal representative.

(6)Notwithstanding subsections (1) to (5), the court shall not exercise its powers under this section so as to defeat or vary any agreement, entered into under Part 6 of the Property (Relationships) Act 1976, between the parties to the marriage or civil union unless it is of the opinion that the interests of any child of the marriage or civil union so require.

[16]   While Mr and Mrs Romanes have been separated for more than two years, there has so far been no application to dissolve their marriage. But once the marriage is dissolved, s 182 provides another arguable way of dealing with the partnership of trusts.

[17]   It is arguable that not only each family trust, but also the partnership may be the subject of orders under s 182. Each trust involves a post-nuptial settlement made on the parties under s 182, in that assets (partnership property) were settled on the trustees of each trust to hold according to the terms of their trust deeds. The establishment of each trust with the settlement of a share of partnership assets on each trust during the marriage comfortably meets the requirements for a nuptial settlement.15 The provisions for the children of the marriage as ultimate beneficiaries does not count against each trust being a nuptial settlement. The fact that the two trusts held assets in partnership should not count against s 182 applying. The

15     Clayton v Clayton [2016] NZSC 30, [2016] 1 NZLR 590 [31]–[38].

establishment of mirror trusts, under which each spouse is a trustee for a trust under which the other benefits, with both trusts acting in concert and partnership, can be considered an agreement relating to the property of the parties and a nuptial settlement made on the parties. Given the failure of the marriage, orders under s 182 might be made on or after dissolution of the marriage. In Clayton the majority said:16

Nuptial settlements are premised on the continuation of the marriage or civil union. The purpose of s 182 is to empower the courts to review a settlement and make orders to remedy the consequences of the failure of the premise on which the settlement was made.

In that case the Supreme Court indicated that the parties’ interests may be best served by creating two trusts. In this case two trusts are already established, thereby reinforcing equal sharing. The matter may instead require adjustment of trustees and directions on how the partners are to deal with partnership assets.

[18]   There are potential advantages in using s 182 of the Family Proceedings Act to deal with the termination of the partnership and the adjustments to the trusts. For   Mr and Mrs Romanes to disengage their interests, there is a greater efficiency if all matters are dealt with in the same court. The Family Court has original jurisdiction for relationship property proceedings and applications under s 182. As it is currently dealing with the division of relationship property, it can ensure that any orders under s 182 mesh with any orders under the Property (Relationships) Act. Having all matters heard in one court improves the prospects of an outcome tailored for the parties’ circumstances.

[19]   Liquidation remains a possibility, but before the court should consider whether to make a liquidation order, it should give the parties the opportunity to see whether the termination of the partnership can be better resolved by other remedies. In particular by orders under s 182 of the Family Proceedings Act.

[20]   It is a case management question how the alternative remedy question should be addressed. The Joanne Romanes trustees could be left to argue the point at a final hearing of the liquidation application along with all the other matters that would be

16     Ward v Ward [2009] NZSC 125, [2010] 2 NZLR 31 at [15]; and Clayton v Clayton at [60].

traversed in a contested hearing on the just and equitable ground. But Mrs Romanes can take steps now, by obtaining a dissolution of marriage, so as to apply for orders under s 182 of the Family Proceedings Act. If she is prepared to do that, it should not be necessary for the parties to go through the pleadings and other interlocutory steps in this proceeding. As liquidation is a remedy of last resort, as a matter of case management the court should allow other remedies to be explored first. Further steps in this proceeding are not required until it is known what will be done about other remedies.

Outcome

[21]   While this proceeding is not an abuse of process, the reasonable likelihood of other remedies suggests that they should be addressed first before continuing with this liquidation application. I direct the parties not to take any further steps in this proceeding while they pursue other possible remedies.

[22]   I adjourn this proceeding to a telephone case management conference in the week beginning 10 December 2018. Before the conference the parties should file memoranda advising whether other steps have been taken to seek alternative remedies. The judge taking the conference will then direct whether further steps need to be taken in this proceeding while alternative remedies are pursued.

[23]   If costs are sought on this application and counsel cannot agree, memoranda may be filed for me to decide costs on the papers. They should be sent to my associate as well as filed in court.

……………………………….

Associate Judge R M Bell