Cooper Trustees Limited v Lichfield Street 145 Limited

[2012] NZHC 1071

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-002662 [2012] NZHC 1071

IN THE MATTER OF     The Companies Act 1993

BETWEEN  COOPER TRUSTEES LIMITED Plaintiff

ANDLICHFIELD STREET 145 LIMITED Defendant

Hearing:         16 May 2012

(Heard at Christchurch)

Appearances: G K Riach and M Crimp for the Plaintiff

G M Brodie for Cooper-Davies No.6 Limited, a shareholder
No appearance for the Defendant

Judgment:      16 May 2012

JUDGMENT OF ASSOCIATE JUDGE OSBORNE [as to liquidation of a company]

[1]      This is an application by one of two equal shareholders to put the defendant company into liquidation on the basis that it is just and equitable to do so.

[2]      The defendant is not represented and does not appear.  The other shareholder defends the application.  He says that distribution of the assets of the company would not be just and equitable while the position between the fellow shareholders is in dispute and remains unresolved.

The people and entities involved

[3]      Lilly Cooper and James Davies have been closely related for some years, both personally and in business.  At a personal level, Mr Davies is married to Ms

Cooper’s  sister.     At  a  business  level  they  have  shared  careers  in  property

COOPER TRUSTEES LIMITED V LICHFIELD STREET 145 LIMITED HC CHCH CIV-2011-409-002662 [16

May 2012]

development and property ownership.  The personal relationship broke down in early to mid-2010.

[4]      Mr Davies is qualified in law.  He has acted as a legal adviser to Ms Cooper and, I infer, to himself.  He has set up the structures for ownership of the various interests they have.  Quite how many trusts and companies have been set up, I am not told.  They appear to be numerous.  The existence of a No. 11 company (below [8]) suggests as much.

[5]      This  application  relates  to  one  of  their  ventures.    In  2002  the  parties established  the  defendant  company,  which  I  will  call  “Lichfield”,  to  own  145

Lichfield Street, Christchurch.  On it was a commercial building known as “Leftclick

House”.

[6]      Lichfield was incorporated with ten shares.

[7]      A trust for Ms Cooper, the L J Cooper Family Trust No. 3 was established. Its trustee is Cooper Trustees Limited, the plaintiff in this proceeding.  Its beneficiary is Ms Cooper and her executors.  It holds five shares in Lichfield.  It appointed Ms Cooper director of Lichfield.   Mr Davies’ trust, of which Cooper-Davies Trustees No.6 Limited is trustee, owns the other five shares.   That trustee appointed Mr Davies director of Lichfield.

[8]      I introduce, at this point, another company controlled by Mr Davies and Ms Cooper, Madras Street 323 Limited.  Madras owns a property at 323 Madras Street on which stood a building known as  “Novo House”.   Mr Davies’ same trustee company took half the shares in Madras and appointed Mr Davies director.  Cooper Trustees  No.  11  Limited  took  the  remaining  shares  and  appointed  Ms  Cooper director.   The beneficiaries of the No. 11 Trust include both Ms Cooper and her children and grandchildren and some related parties.  There are other investments in which Mr Davies and Ms Cooper are together involved with ownership through some of the same entities but also through other trusts and trustee companies.

Deadlock in Lichfield

[9]      Mr  Brodie  has  submitted  that  there  is  no  deadlock  in  relation  to  the management of Lichfield, but deadlock there most certainly is.  It came about in this way.

[10]     Leftclick House was seriously damaged by the Christchurch earthquakes. The insurer, on 20 December 2011, paid to Lichfield a sum exceeding $3,600,000. The assets of Lichfield now comprise the balance of that sum together with the bare land on which the building previously stood.  The balance of the insurance payment, after agreed payments to Lichfield’s bank and to some third party creditors, is held invested  on  an  interest-bearing  deposit.    Nothing  is  happening  with  the  land. Lichfield has a number of debts owing to related parties.  Lichfield’s accountant, at the  time  the  proceeds  of  the  insurance  claim  were  to  be  received,  proposed repayment of those related party debts.  This has not happened because Mr Davies will not allow it to happen. The debts to parties associated with Ms Cooper were over $830,000.  The debt to Mr Davies’ trust is $150,000.  The accountant suggested also a further payment of $122,232.00 to Mr Davies to equalise shareholder current accounts.  That payment has also been caught up in Mr Davies’ opposition to any payments out of the insurance fund.

[11]     The loans to related trusts carry interest at 10.5 percent.  This must exceed by a substantial margin the return being received on Lichfield’s funds at the bank. There is no suggestion that Lichfield is making its interest payments on the loans. The expectation of Miss Cooper, if a liquidator is appointed to Lichfield, is that the liquidator will sell the bare land and all the funds will be distributed.

[12]     Mr Brodie made a suggestion in submissions that Lichfield might elect to land-bank its land with a view to later development but there is no suggestion in the evidence of Mr Davies that that is on his mind.  Correspondence exhibited tends to indicate that he may not be in a financial position to inject funds for further capital development.  In any event the most likely business course is to repay creditors, to sell the land and to distribute the balance after clearing all debt to members.

[13]     On 20 December 2011 Lichfield’s bankers froze the Lichfield bank accounts by reason of the impasse which had become apparent between the directors.   Ms Cooper then issued this proceeding.

The sub-plot – why Mr Davies has blocked payment out of Lichfield

[14]     Mr Davies considers that he has been wronged by Ms Cooper in relation to his trust’s shares in Madras.   A brief description of what occurred in relation to Madras will suffice.  Novo House owned by Madras was also seriously damaged in the Christchurch earthquakes.  In March 2011 Mr Davies commenced a negotiation to sell his Madras shares to Ms Cooper’s interest.  Discussion took place about the price having regard to the value of the property.   Throughout the period of the negotiation reports were being obtained on the state of the building.  Repair looked possible.

[15]     On 3 May 2011, Ms Cooper and Mr Davies and his wife, in a meeting with the accountant, agreed on $150,000 as the price for the sale of the Cooper-Davies No. 6 Limited shares to Ms Cooper’s interests.  A written contract was signed on 9

May 2011.  On the same date and afterwards, further reports on the land suggested that the damage might be such that the building was uneconomic to repair.   Mr Davies’ evidence is that he did not receive those reports.  The sale of the shares was completed  on  26  May  2011.    Cooper-Davies  Trustees  No.  6  Limited  received

$150,000 but immediately advanced it to Lichfield.  Lichfield immediately used it to repay another entity associated with Ms Cooper.

[16]     Subsequently Novo House was declared a total loss.   The Cooper interests have not disclosed to Mr Davies how much was received for the insurance payout. The payout on demolition was of much more value to Madras than would have been the case on a repair.   Mr Davies understands and fears that Ms Cooper’s interests have  distributed  the  Novo  House  insurance  pay  out.     He  has  caused  to  be commenced an ordinary proceeding in this Court by which he seeks an effective re- opening of the Madras share sale by reason of mistake and the failure of Ms Cooper as a director to provide him with all the relevant information.

[17]     The claim in relation to Madras remains unquantified because discovery has not taken place.  Mr Brodie anticipates a claim running into $millions.  Mr Davies’ opposition to the winding up of Lichfield is unashamedly by reason of his desire to be able to trace into the funds of Lichfield while it still has funds to put right the wrongs he alleges have occurred in Ms Cooper’s Madras dealings.   In closing his submissions, Mr Brodie appealed to the Court in the exercise of its discretion to not liquidate Lichfield so that the Court might craft relief across the litigation more broadly  so  as  to  prevent  one  shareholder  getting  all  the  money  out  of  both companies.  He suggested that there is no urgency to liquidate Lichfield.  This plea for the Davies’ interests was developed in some more detail by Mr Davies himself at paragraph 26 of his affidavit:

I do not agree that the winding up of Lichfield 145 Limited can be viewed in isolation to these matters.  This company was effectively a vehicle for our partnership.  The assets of Madras Street 323 Limited have as I understand the position been distributed completely and are unlikely to be recoverable except with great difficulty.   The money which is now held in Lichfield Street 145 Limited represents the funds which I received from the settlement of the sale of my shares in Madras Street 323 Limited and these monies were paid into Lichfield Street 145 Limited.   If this winding up proceeds, the intention is that that money will then be distributed to Ms Cooper.  I consider that this would be a serious injustice.  I see the money in Lichfield Street 145

Limited as no more than the balance of our collective partnership funds in respect of which I am entitled to an account.

The partnership

[18]     The Cooper Trustees Limited claims in terms of the benchmark observations of Lord Wilberforce in Ebrahimi v Westborne Galleries Limited[1]  that the parties shared –

[1] Ebrahimi v Westborne Galleries Limited [1972] 2 All ER 492.

(a)       first  an  association  which  continued  on  the  basis  of  a  personal relationship involving mutual confidence; and,

(b)secondly, an agreement or understanding that both shareholders would participate in the conduct of the business.

[19]     In the words often used in this context, this is a suggestion that there was something in the nature of a quasi-partnership between the parties.  Mr Davies, as already seen from the passage in his evidence I have quoted, puts the relationship higher than that.  He refers to a partnership.  He deposes in particular that there was a partnership in relation to these two properties in Lichfield and Madras Streets.  Mr Brodie observed correctly that Ms Cooper’s evidence had not responded directly to that allegation of a partnership but the Court is still required to look at what the documentary evidence indicates rather than to accept Mr Davies’ bare assertion.

[20]     I accept Mr Riach’s submissions that the concept of an actual partnership as against  a  quasi  partnership  is  wholly  unsupported  by  evidence  (other  than  Mr Davies’ bare assertion).  I note:

(a)       Mr Davies is a lawyer.

(b)He  was  the  legal  adviser,  not  only  to  himself  but  to  the  Cooper interests.

(c)      It  is  inconceivable  that  if  a  partnership  was  being  established  he would not have documented that partnership and made suggestions as to such matters as taxation reporting in the years to come.  There is no suggestion that he did either.

(d)Nothing  in  the  subsequent  records  of  the  parties  indicates  the existence of a true partnership, either through tax reporting or otherwise.

(e)      The setting up and running of distinct companies with different shareholdings  and  accordingly very different  director’s responsibilities to entirely different persons is inconsistent with a true partnership.

[21]     Mr Brodie referred to narrative evidence of Mr Davies to the effect that the business  of  Madras  and  Lichfield  had  been  mixed  together  through  inter-entity

advances.  No documentary evidence of that was produced.  The accounting records exhibited for the 2010 and 2011 years indicate that there were no such advances made or outstanding on those years.  That is not to say there were none in previous years.  But what it does indicate is that through the 2010 and 2011 financial years at least these two companies were not in some way being managed financially as one. They had distinct legal and practical existences.

[22]     Accordingly, distinct corporate entities were set up and maintained.  On the Cooper side, the shareholders are different persons (Cooper Trustees Limited in Lichfield and Cooper Trustees No. 11 Limited in Madras).   Contrary to the implication of Mr Brodie’s submissions  – that there was a dispute between  the common shareholders of Lichfield and Madras (above [2]) – the Madras dispute involves on the Cooper side a different legal entity.

The just and equitable jurisdiction

[23]     The  Court’s  jurisdiction  to  put  a  company  into  liquidation  on  just  and equitable grounds arises under the specific statutory provisions in s 241.4(d) Companies Act 1993 and also under the inherent jurisdiction.   Section 241.4(d) provides simply:

4) The court may appoint a liquidator if it is satisfied that—

...

(d) it is just and equitable that the company be put into liquidation.

[24]     As  Lord Wilberforce  in  Ebrahimi  indicated,  it  is  impossible  and  wholly undesirable to define the circumstances in which winding up on this ground should occur.  The following elements of the facts as I have reviewed them are significant in the exercise of the discretion in this case.

(a)       There was an association formed on the basis of a continuing personal relationship. That disappeared in friction in 2010.

(b)There  was  agreement  or  understanding  that  both  the  shareholders would participate in the conduct of the business.   The shareholders,

through Ms Cooper and Mr Davies, successfully did so until the day- to-day management of this company ground to a halt in December

2011.

(c)      The   company   is   now   without   trading   business   following   the demolition of its building.

(d)The blocking of normal business by Mr Davies prevents the directors of Lichfield from conducting the business of the company such as in relation to payment of creditors and decision-making in relation to its bare land.

Criticism of Ms Cooper’s conduct

[25]     There has been criticism of Ms Cooper’s conduct in Mr Davies’ evidence and in the course of submissions.  At heart, the criticism in fact relates to activities in relation to Madras.  Mr Davies has a civil claim in relation to Madras which he is pursuing.  He clearly feels grievances at a procedural level as well as a substantive level.   At a procedural level, those relate to Ms Cooper’s apparent failure to co- operate in providing information relevant to Madras.   At a substantive level they particularly arise from what Mr Davies views as the windfall which Ms Cooper has received out of the Madras insurance payout as a result of alleged breaches of duty. Those complaints however all go to the position relating to Madras.  They do not go to the position relating to Lichfield.   Lichfield is a distinct company with (on the Cooper side) a different shareholder/trustee (and different beneficial classes within the relevant trust).  I am not satisfied that any conduct of Ms Cooper in relation to Madras taints the appropriate action that the Court should take on this application. This application invokes the Court’s supervisory jurisdiction in relation to a deadlocked company and the situation it finds itself in.

Balancing

[26]     Assuming Mr Davies may have a valid claim in relation to Madras, it is a claim  in  relation  to  events  concerning  a  company  separate  from  the  defendant

company.  If a consideration of preservation or tracing of assets arises either before or after the Court tries the Madras proceeding, that will occur in the normal way as remedies available to a party aggrieved by another’s actions.   Focussing on this defendant company, Lichfield, it is clear that it is not meeting its obligations to creditors.  The directors are not meeting their duties in relation to the company.  The company is running up interest costs and losses which are avoidable.  The company is stalled in any proper consideration of the steps which the company should take in relation to its bare land.  Deadlock exists.  In contrast to the inability of the Board of Lichfield to carry out its duties, appointment of liquidators appears singularly appropriate to this company which is, apart from the need to dispose of its bare land, already cashed up.   Against that background, I find that it is just and equitable that the defendant be wound up.  I do not find any factor to weigh against the appropriate use of that order in the circumstances of the company’s deadlocked situation.

Costs

[27]   Counsel addressed me at the conclusion of their submissions as to the appropriate orders of costs.  It is accepted that this is appropriately a 2B case and that costs should follow the event.

Orders

[28]      I order:

(a)       Malcolm  Grant  Hollis  and  Maurice  George  Noone  are  appointed liquidators of Lichfield Street 145 Limited.

(b)      The  liquidators’ remuneration  is  approved  in  accordance  with  the

certificate  of  Mr  Noone  dated  15  May  2012  subject  to  s  284

Companies Act 1993.

(c)       The  liquidators  are  allowed  to  exercise  their  powers  individually pursuant to s 242 of the Act.

(d)There  will  be  costs  to  the  plaintiff  to  be  paid  by  Cooper-Davies Trustees No. 6 Limited on a 2B basis together with disbursements to be fixed by the Registrar.

(e)       The Order is timed at 3.33 pm.

(f)      This Order shall lie in Court until the Registrar sights an original of the signed consent of both liquidators.

Solicitors:

Harmans Lawyers – - Email:  [email protected] / [email protected]

Saunders Robinson Brown - Email: [email protected]
Counsel: G M Brodie - Email:  [email protected]