Crescent Construction Limited assignee of Luscious Living International Limited v Sachdeva
[2023] NZHC 3478
•1 December 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2023-404-001595
[2023] NZHC 3478
BETWEEN CRESCENT CONSTRUCTION LIMITED
assignee of LUSCIOUS LIVING INTERNATIONAL LIMITED
Appellant
AND
MANISH SACHDEVA
Respondent
Hearing: 3 October 2023 Appearances:
G Jindal for the Appellant
U Kuddus for the Respondent
Judgment:
1 December 2023
JUDGMENT OF TAHANA J
This judgment was delivered by me on 1 December 2023 at 12noon Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors/Counsel:
Ormiston Legal, Auckland MBC Law Ltd, Auckland
CRESCENT CONSTRUCTION LIMITED assignee of LUSCIOUS LIVING INTERNATIONAL LIMITED v SACHDEVA [2023] NZHC 3478 [1 December 2023]
Introduction
[1] This is an appeal against a District Court decision1 granting leave to Crescent Construction Ltd (Crescent) to join a proceeding, subject to first obtaining the Official Assignee’s consent. The Official Assignee has not consented, and Crescent now appeals to this Court.
[2] The key issue on appeal is whether the Judge erred in requiring Crescent to obtain the consent of the Official Assignee.
[3] Mr Kuddus for Mr Manish Sachdeva says Crescent does not have standing to bring the appeal and nor should the Court enlarge the time for the filing of the appeal, which was a day late. I therefore also need to consider those procedural issues.
[4] Before considering the above issues, I outline the relevant background and the Judge’s findings in the District Court.
Background
[5] On 20 December 2020, Luscious Living International Ltd (Luscious Living) and Mr Sachdeva, entered into a sale and purchase agreement for a business. A dispute arose between the parties and was referred to the Disputes Tribunal for resolution.
[6] On 6 July 2021, the Disputes Tribunal ordered Mr Sachdeva pay $30,000 to Luscious Living.2 Mr Sachdeva did not pay and appealed to the District Court in July 2021. Mr George Prinsloo, the sole director and shareholder of Luscious Living, was declared bankrupt that same month.
[7] On 13 April 2023, Luscious Living entered into a deed of assignment with Crescent purporting to assign its debt claim against Mr Sachdeva to Crescent for $1 (the Deed).3 The Deed was signed by Mr Prinsloo and Mr Ali Johar, who is a director of Crescent. Mr Prinsloo’s signature is witnessed; Mr Johar’s is not.
1 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647.
2 Luscious Living International Ltd v Sachdeva Disputes Tribunal CIV-2021-044-0184, 06 July 2021.
3 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [3].
[8] On 14 April 2023, Judge Clark directed that Crescent formally apply for joinder in the proceeding.4
[9] On 21 April 2023, Crescent applied under r 4.52 of the District Court Rules 2014 (the DCR) to be a party to the appeal by Mr Sachdeva on the basis that it had acquired the rights of Luscious Living pursuant to the Deed. Mr Sachdeva opposed that application.
District Court decision
[10] Judge Sinclair observes that the assignment may not be valid and enforceable in circumstances where Mr Prinsloo is an undischarged bankrupt.5 The Judge refers to the applicable provisions of the Companies Act 1993 (the Act) noting that under s 151(2)(b), Mr Prinsloo is disqualified from being appointed or holding office as a director because he is an undischarged bankrupt.6 Under s 157(1)(c), the office of director of a company is vacated if the person holding that office becomes disqualified from being a director pursuant to s 151.7
[11] The Judge then refers to the High Court, Court of Appeal and Supreme Court decisions in Clark v Libra Developments Ltd.8 In that case Mr Hyslop, who was the sole director of Libra, was adjudicated bankrupt and no replacement director was appointed. The High Court held that ss 158(b) and 126(1) of the Act validated Mr Hyslop’s actions on behalf of Libra following his bankruptcy. Section 158(b) provides that “[t]he acts of a person as a director are valid even though … the person is not qualified for appointment.”9 Further, Mr Hyslop remained a de facto director because in terms of the definition of director provided in s 126(1) of the Act, Mr Hyslop was a person “occupying the position of a director of the company by whatever name.”10
4 At [2].
5 At [6].
6 At [6].
7 At [6]; and Companies Act 1993, s 157(1)(c).
8 Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA and SC).
9 Companies Act 1993.
10 Companies Act 1993, s 126(1)(a).
[12] The Judge appears to accept the findings in Clark, but then goes on to note submissions by Mr Kuddus, counsel for Mr Sachdeva, that Clark can be distinguished because the potential consequences of finding Mr Prinsloo’s actions valid are different.11
[13] In Clark, Mr Hyslop had set up a family trust and then incorporated a company (Libra) with the trustees of the family trust as the shareholders. Mr Hyslop was the sole director and became bankrupt. He sought to argue that Libra (and not himself personally) had entered into a venture with Mr Clark and that any profits from that venture were payable to Libra. If they were paid to Mr Hyslop personally, they would be subject to his bankruptcy.
[14]In considering Mr Prinsloo’s position, the Judge noted that:
(a)the purported assignment has the potential effect of defeating the interests of any creditors of Luscious Living and of creditors in Mr Prinsloo’s own estate;12 and
(b)as a consequence of Mr Prinsloo’s bankruptcy, the Luscious Living shareholding is now vested in the Official Assignee meaning that any assignment requires the Official Assignee’s consent.13
[15] The Judge noted the absence of evidence that the Official Assignee had given consent, or had any knowledge of the proceedings.14 The Judge ordered that the Official Assignee’s written consent be obtained, and if so obtained, an order for joinder could be made at a subsequent case management conference.15
Relevant law
[16] Crescent applied to be a party under r 4.52 of the DCR, which sets out the basis on which a new party can be joined to a proceeding, as follows:
11 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [9].
12 At [11].
13 At [12].
14 At [12].
15 At [15].
4.52 New parties order
(1)Subclause (2) applies if, after a proceeding has commenced, there is an event causing a change or transmission of interest or liability (including death or bankruptcy) or an interested person comes into existence, making it necessary or desirable that—
(a)a person be made a party; or
(b)an existing party be made a party in another capacity.
(2)An application without notice may be made for an order that the proceeding be carried on between the continuing parties and the new party (a new parties order).
(3)The new parties order must, unless the court otherwise directs, be served on—
(a)the continuing parties to the proceeding; and
(b)each new party, unless the person making the application is the only new party.
(4)The new parties order is binding on a person served from the time of service.
(5)A person who is not already a party who is served with a new parties order must file a statement of defence in the same time frame and manner as a person served with a statement of claim.
[17] Rule 4.52(1) requires that after the proceeding has commenced there be an event that causes a change or transmission of interest. Here, the alleged event is the transfer of Luscious Living’s interest in the proceeding to Crescent.
Does Crescent have standing to bring the appeal?
[18] Mr Kuddus challenges Crescent’s standing to bring the appeal saying that Crescent is not a party to Mr Sachdeva’s appeal against Luscious Living.
[19] Crescent was the applicant under r 4.52 which was the relevant proceeding before the District Court. Under s 124 of the District Court Act 2016, a party to a proceeding in the District Court may appeal to the High Court against the whole or a part of a decision made in the District Court in relation to the proceeding. Crescent clearly has standing.
Should leave be granted for late filing of the appeal?
[20] Mr Kuddus then argues that this Court should not allow Crescent’s appeal because the filing fee was paid a day late.
[21] Crescent was required to file the notice of appeal by Wednesday 2 August 2023.16 It was emailed to the Court and Mr Kuddus on Monday 31 July 2023 (prior to the deadline). The filing fee was paid on Thursday 3 August 2023, one day after the deadline, and the appeal was accepted for filing.
[22] Mr Jindal for Crescent says he was in a hearing on Wednesday 2 August 2023 and this is the reason for the delay.
[23] The Supreme Court has confirmed the relevant factors when determining whether to grant leave are: the length of the delay and the reasons for it; the parties’ conduct; the extent of the prejudice caused by the delay; the prospective merits of the appeal; and whether the appeal raises any issue of public importance.17
[24] Mr Kuddus says Mr Jindal has a history of non-compliance and that is relevant when considering whether the Court should exercise its discretion. I do not consider that any history of non-compliance is such that it demonstrates prejudice to Mr Sachdeva. Particularly when the non-compliance in this instance is a matter of one day.
[25] Mr Kuddus also refers to an observation of Holland J in Saleman v Clarkson that, “I do not want it to be considered that time limits in the Rules can be ignored and are not matters of importance.”18 That observation must be read in the context of the judgment, where the Court noted that the District Court Judge did have jurisdiction to grant the enlargement of time. Mr Kuddus has not addressed the factors prescribed by the Supreme Court in Almond v Read and simply asserts that the strict time frame should be enforced. This is an unreasonable position.
16 High Court Rules 2016, r 20.4. An appeal is to be filed within 20 working days after the decision appealed against is given. The decision was given on 4 July 2023.
17 Almond v Read [2017] NZSC 80, [2017] 1 NZLR 801 at [38].
18 Saleman v Clarkson [1982] 2 NZLR 430.
[26] Mr Jindal has provided a reasonable explanation for the delay. He was in a hearing in Wellington on 2 August 2023. The length of the delay was only one day. There is no prejudice to Mr Sachdeva because his counsel had notice of the appeal. The appeal is not without merit and while it does not raise any issue of public importance, the circumstances of the delay support granting an enlargement of time.
[27] Having considered the relevant factors, I grant the application to enlarge time for the filing of the notice of appeal.
Did the Judge err in requiring the consent of the Official Assignee?
[28] Judge Sinclair does not set out the requirements of r 4.52 but I understand from the analysis that the Judge was concerned to ensure that there had been a transmission of Luscious Living’s interests to Crescent such that r 4.52 provided a basis for joining Crescent.
[29] Mr Jindal for Crescent says the Judge did not correctly apply the Supreme Court’s decision in Clark v Libra Developments Ltd19 and no reasons were provided for not applying it. In Clark v Libra the Court of Appeal reached its decision after considering the effect of the provisions of the Act and in particular s 158 which provides that the acts of a director are valid even though the person is not qualified for appointment. This equally applies to Mr Prinsloo’s conduct as a director.
[30] The Judge appears to have distinguished Clark because the consequences of finding the transaction binding in Clark were different to the consequences of finding the Deed binding on Luscious Living.
[31] The Judge referred to the fact that in Clark if a partnership existed, Libra could act as partner after Mr Hyslop was bankrupt and in circumstances where Libra’s shareholders did not appoint any other directors.
[32] The Judge noted that Mr Prinsloo was purporting to execute a document on behalf of Luscious Living assigning the right to enforce payment of a judgment sum
19 Clark v Libra Developments Ltd [2007] NZSC 16.
(if the appeal is unsuccessful) to Crescent. The Judge noted that the effect of the Deed was to potentially defeat the interests of creditors of Luscious Living and/or creditors of Mr Prinsloo.
[33] I do not consider that the consequences are relevant to the interpretation of the Act and s 158 as the consequences of Mr Hyslop’s conduct was not the reason for the Court of Appeal and the Supreme Court’s decision in Clark on how s 158 should be interpreted.
[34] The Judge then appears to accept that because Mr Prinsloo was the sole shareholder of Luscious Living, the Official Assignee’s consent was required for the Deed noting that, “[a]ny assignment requires the consent of the Official Assignee.”20 No reason was provided for this conclusion.
[35] It is necessary to identify the legal basis for the Judge’s finding that the assignment requires the consent of the Official Assignee. Especially when s 17(1) of the Act provides that no act of a company is invalid because the company did not have the capacity, the right, or the power to do the act or to transfer the property. This applies to the validity of the Deed, and Crescent is entitled to rely on s 17 to establish that the Deed is valid.
[36] Mr Johar, director of Crescent, provided an affidavit indicating that he negotiated the Deed on an arms-length basis. He checked the Companies Register and noted that Mr Prinsloo was the sole director and shareholder. He then received the signed Deed from Mr Prinsloo understanding that he was authorised to sign it.
[37] There is no evidence that Mr Johar did not act in good faith. While Crescent only paid $1, the value of the Deed depends on the value of the opportunity to successfully defend Mr Sachdeva’s appeal and recover the $30,000. That opportunity requires expenditure on legal fees, includes the risk of non-recovery, and an adverse costs order.
20 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [12].
[38] Further, there is no requirement for shareholders to consent to a transaction unless the constitution so requires and/or a special resolution is required for a major transaction.21 Mr Kuddus submits that it was a major transaction but there is no evidence before the Court as to the financial position of Luscious Living to support this contention.
[39] Luscious Living was not in liquidation at the time of the Deed and its financial position is unknown. It is accepted that the shares of Luscious Living were vested in the Official Assignee in circumstances where Mr Prinsloo was bankrupt. The correspondence with the Official Assignee indicates that it is taking steps to remove Luscious Living from the register. That suggests it has no interest in pursuing Mr Sachdeva or challenging the Deed, but the actual position is unknown. That however, was not information that was before the Judge.
[40] While the Judge was legitimately concerned with the interests of the Official Assignee, there was no analysis as to why the Official Assignee’s consent was required for the transaction. It was simply accepted that it was, without identifying how the Act or company constitution required shareholder approval. There was also no analysis as to how, if shareholder approval was required, a lack of approval impacted Crescent’s ability to rely on the Deed when s 17 expressly provides that a company’s act is not invalid merely because the company did not have the capacity, right or power, to do the act.
[41] Neither Luscious Living nor the Official Assignee was represented at the hearing. It is the interests of creditors of Luscious Living (and the Official Assignee as the shareholder of Luscious Living) that the Court was concerned to protect. If the Official Assignee wishes to challenge the validity of the Deed and provide evidence as to why Crescent is unable to rely on the Deed despite s 17, then they may apply to join the proceeding to challenge the validity of the Deed. On the evidence available, and based on Clark and the provisions of the Act which validate a company’s actions as against a third party such as Crescent, I consider that it is desirable that Crescent join the proceeding and defend Mr Sachdeva’s appeal.
21 Companies Act 1993, s 129.
[42] In the circumstances, I consider that the Judge erred in making the Official Assignee’s consent a condition of joinder. I do however, consider it appropriate that the Official Assignee be served with a copy of this judgment so they may determine whether to intervene in the appeal before the District Court.
Result
[43]The appeal is upheld in part.
[44] The orders at [15](a) and (c) of the District Court judgment are set aside. The judgment otherwise stands. I order that Crescent be joined to the proceeding and that it serve a copy of this judgment on the Official Assignee.
Costs
[45] Crescent is successful and my preliminary view is that it is entitled to 2B costs. If the parties are unable to agree, leave is granted to file costs memoranda.
Tahana J
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