CSR Pokeno Limited v Yes Investment NZ Limited
[2022] NZHC 2378
•16 September 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1410
[2022] NZHC 2378
BETWEEN CSR POKENO LIMITED
Plaintiff
AND
YES INVESTMENT NZ LIMITED
First defendant
QING YE
Second defendantPOKENO WEST LIMITED
Third defendant
Hearing: 13 September 2022 Appearances:
JWA Johnson, C Jiang and W D Hofer for plaintiff
L C Sizer and L M Edginton for first and second defendants
Date of judgment:
16 September 2022
JUDGMENT OF JAGOSE J
This judgment was delivered by me on 16 September 2022 at 12.00pm.
Pursuant to Rule 11.5 of the High Court Rules.
…………………………
Registrar/Deputy Registrar
Counsel/Solicitors:
JWA Johnson, Barrister, Auckland Tompkins Wake, Auckland
Buddle Findlay, Auckland
CSR POKENO LTD v YES INVESTMENT NZ LTD [2022] NZHC 2378 [16 September 2022]
[1] Pending determination of its claim for relief from alleged contractual and related breaches, the plaintiff (CSR) seeks to prevent the first defendant (YINZ) and its sole director and shareholder second defendant (Mr Ye) from transferring CSR’s shares in the third defendant (Pokeno West), whether to itself or at all, and removing CSR’s sole director and shareholder from his position as director of Pokeno West. By consent, pending my determination of the application, “interim interim” orders prevent such transfer and removal.1
Background
[2] Pokeno West is the vehicle by which CSR and YINZ jointly own a sizeable rural property in the Waikato’s Pōkeno, to be rezoned residential under a proposed district plan (subject to appeal). The property independently was valued at $14.500 million in February 2020 in anticipation of the property’s rezoning under the proposed district plan, and at $50.000 million in February 2022 on its rezoning.
[3] CSR was the originally nominated purchaser of the property. Agreement to sell and purchase the property for $12.000 million was entered on 31 January 2017, for settlement on 3 May 2020 (deferred to 3 August 2020 at an increased purchase price of $12.500 million). CSR progressively paid a $2.000 million deposit. When the balance of the purchase price remained unpaid, the vendor served a settlement notice on CSR, requiring payment by 20 August 2020 (including late settlement interest at 14 per cent per annum, or some $3,830 daily).
[4] CSR required an additional $9.000 million to pay the ($10.000 million) balance of the purchase price, which YINZ agreed to provide. The arrangement was CSR and YINZ respectively would take 70/30 shares in Pokeno West, for Pokeno West to acquire the property: YINZ paying $4.050 million for its 30 per cent share, and lending CSR $4.950 million for a two-year term; and CSR paying the remaining $1.000 million for its 70 per cent share (taking into account the loan, deposit and expenses relating to the rezoning paid by CSR).
1 CSR Pokeno Ltd v Yes Investment NZ Ltd HC Auckland CIV-2022-404-1410, 22 August 2022 at [2(a)–(b)].
[5] Notwithstanding payment being required by 20 August 2020, the parties appear to have proceeded on the basis settlement was to occur before mid-August 2020. A draft heads of agreement document was initiated by CSR’s solicitors on 6 August 2020. Marked-up versions of the draft heads of agreement were exchanged with YINZ’s in-house solicitors, without conclusion by Friday, 7 August 2020. After reference to and further exchange with YINZ’s external solicitors on Monday, 10 August 2020, YINZ’s solicitors advised the draft was to be replaced by “a full suite of legal doc[ument]s”, ultimately provided late on 11 August 2020 for signing in Auckland (and settlement) the following day, as occurred.2
[6] CSR’s narrative evidence — suggesting the documents were to reflect concluded heads of agreement, as a building block to CSR’s lack of knowledge of any terms diverging from that position — is not made out on the contemporaneous evidence. Instead, the documents included a term loan agreement for YINZ’s $4.950 million loan to CSR, secured by mortgage over the property and a general security agreement over CSR’s shares in Pokeno West; and a Pokeno West shareholders’ deed, describing the company’s business as “owning the Property and potentially developing and/or subdividing the Property”, as to which the parties would “act in good faith toward each other” and significant decisions above $5,000 requiring directors’ unanimity. But for the general security agreement, the deed prohibited the shareholders from encumbering their shares in Pokeno West.
[7] The deed included a “Call Option”, by which CSR — in consideration for YINZ’s $4.950 million loan, and its entry into the deed — granted YINZ an option to purchase all CSR’s shares on default under the loan agreement or CSR breaching the deed. The option also was exercisable on any unconsented change in CSR’s ownership, or CSR’s insolvency. The price for exercise of the option was the amount of principal owing under the loan agreement for “set off against CSR’s obligation to pay the balance of the principal”, for which CSR was to transfer its shares to YINZ.
2 11 August 2020 also was the day on which four new cases of COVID-19 were identified in the wider Auckland region (after national eradication in June 2020), leading to the Auckland region’s Alert Level 3 restrictions from 12 noon on 12 August 2020.
[8] On some date in May 2022, Pokeno West was presented with an offer to acquire the property for $150 million, conditional on the purchaser’s satisfaction in all respects. In discussion between the directors, Mr Ye rejected the offer.
[9] The loan was due on Friday, 12 August 2022. On Monday, 8 August 2022, CSR asked YINZ to assign the general security agreement for refinancing and to waive its call option, described as “roadblocks” to refinancing. YINZ’s Tuesday response sought “full details of the refinancing proposal”. CSR advised late that evening each named and unnamed prospective financier was unwilling to proceed beyond “indicat[iv]e offers” until YINZ responded to the ‘roadblocks’. YINZ explained late on Wednesday the financiers’ identities were important to consideration of any assignment, which could lead to that person becoming a shareholder or transferring the shares to a third party, and sought identification of the second financier. On Thursday afternoon, CSR nonetheless sought YINZ’s “substantive response … as a matter of urgency” and in particular specification of the amount owing. YINZ provided the latter detail by return email. Mid-afternoon on Friday, CSR identified the second financier and sought an extension of the loan to 26 August 2022 to enable YINZ’s substantive response.
[10] CSR did not pay the loan when it fell due. On 15 August 2022, YINZ exercised its call option for transfer of all CSR’s shares. This proceeding, and the present application for interim relief, followed.
Applicable legal principle
[11] Interim injunction applications are determined on the basis if the plaintiff has a serious question for trial, and the balance of convenience favours granting the injunction.3 ‘Overall justice’ is the ultimate consideration, being “whichever course seems likely to cause the least irremediable prejudice to one party or the other”.4
3 Commerce Commission v Viagogo AG [2019] NZCA 472, [2019] 3 NZLR 559 at [30]–[31], citing American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL). See also NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90 at [12], citing Roseneath Holdings Ltd v Grieve [2004] 2 NZLR 168 (CA) at [35]–[37].
4 Commerce Commission v Viagogo AG, above n 3, at [30]–[31], citing Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142 and National Commercial Bank Jamaica Ltd v Olint Corp Ltd [2009] UKPC 16, [2009] 1 WLR 1405 at [16] and [17].
[12] By ‘serious question for trial’ is meant one not vexatious or frivolous, on which the plaintiff has at least “a tenable basis upon which it might be able to succeed at trial”.5 As to ‘balance of convenience’, the question is if refusing the injunction would be harder on a plaintiff who was successful at trial, than granting it would be on the successful defendant.6 This assessment is undertaken by reference to the adequacy of damages, preservation of the status quo, the uncompensable disadvantages to either party, and the relative strengths of their cases.7 The merits of the cases (in so far as they can be ascertained at the interim injunction stage) can be relevant to the balance of convenience, and to the overall justice of the case.8
[13] But more than inconvenience is required:9 interlocutory injunctions lie to protect a plaintiff against “irreparable damage” for which they cannot adequately be compensated.10 The point of interim injunctions generally is to restore the status quo
— “the last peaceable state between the parties”11 — if required to enable determination and any remedy of the parties’ contested rights at trial: “to enable substantial justice to be done between the parties”.12 (Hence, where damages provide adequate compensation, “no interim injunction should normally be granted”.13) Thus interim injunctions are to prevent specified actions alleged irremediably to change the status quo in reliance on one party’s contention as to those rights. They are not intended in themselves to require compliance with the other party’s contention as to those rights.
5 Intellihub Ltd v Genesis Energy Ltd [2020] NZCA 344 at [24] and [27].
6 Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV 2007-485-1756, 30 July 2008 at [4] citing Cayne v Global Natural Resources Plc [1984] 1 All ER 225 (CA) at 237.
7 At [6]–[14].
8 See, for example, Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, above n 4, at 142, and Roseneath Holdings Ltd v Grieve, above n 3, at [41]–[42], noted in Brooks Homes Ltd v NZ Tax Refunds Ltd [2013] NZSC 60 at [6].
9 Pollen-Plus Ltd v Znel Ltd HC Tauranga CIV 2010-470-0848, 20 October 2010 at [40].
10 Finnigan v New Zealand Rugby Football Union Inc (No 2) [1985] 2 NZLR 181 (HC) at 183; and
American Cyanamid Co v Ethicon Ltd, above n 3, at 406.
11 Wellington International Airport Ltd v Air New Zealand Ltd, above n 6, at [10], citing R & M Wright Ltd v Ellerslie Gateway Motels Ltd HC Auckland CP188/90, 11 July 1990, at 8.
12 Commerce Commission v Viagogo AG, above n 3, at [81].
13 Wellington International Airport Ltd v Air New Zealand Ltd, above n 6, at [6].
Discussion
—serious question for trial
[14]CSR raises six causes of action, alleging:
(a)YINZ’s ‘denial’ of the general security agreement’s assignment and of the call option’s waiver was in breach of express and implied good faith obligations;
(b)in breach of an implied term, YINZ’s exercise of the call option only may acquire so many of CSR’s shares as reflect the loan’s outstanding value;
(c)otherwise, the call option constitutes an unenforceable penalty;
(d)the loan and general security agreements, and shareholders’ deed, together constitute an oppressive credit contract, entitling CSR to relief under the Credit Contracts and Consumer Finance Act 2003;
(e)s 149 of the Companies Act 1993 only permits Mr Ye, as a Pokeno West director with exclusive information material to an assessment of the value of its shares, to acquire such shares for not less than their “fair value”; and
(f)Mr Ye’s refusal of the conditional offer to purchase the property was oppressive and unfairly discriminatory and prejudicial to CSR.
[15] While there are substantial arguments available against each of the causes of action, the call option mechanism — which YINZ may exercise in a range of circumstances, including without any default on the loan agreement, at a price defined by reference only to the balance of principal (if any) owing under the loan agreement
— offers CSR a tenable basis upon which it might be able to succeed at trial, whether in construction of the agreement, as an unenforceable penalty or under the 2003 Act.
[16] That is because there appears a mismatch between the value of the transfer and the price to be paid for it, on its face arguably inviting alignment by construction. The
price of the full loan at $4.950 million for transfer of CSR’s 70 per cent share infers the property’s value at about $7.071 million. If a penalty “out of all proportion” or “exorbitant”,14 or otherwise oppressive in terms of YINZ’s $9 million interest in a property acquired for $12.500 million, is to be determined by “an objective exercise of construction, notionally undertaken at the time of contract formation, and by reference to the terms and circumstances of the contract”.15 The issues are not frivolous or vexatious: they present serious questions to be tried.
[17] If, on its proper construction, the call option may be construed a primary obligation or not penal — as Luke Sizer urges for YINZ, in reliance also on the call option’s commerciality in the circumstances — does not exclude CSR’s prospect of success at trial as a matter of construction (or under the penalty head or the 2003 Act). I cannot determine the point on an interlocutory basis. As such, CSR crosses the initial threshold for interim relief.
—balance of convenience
[18] So far as the balance of convenience is concerned, however, I consider it disfavours any injunction.
[19] First, damages appear entirely adequate a remedy for CSR, essentially in the amount of a fair price for CSR’s shares, which may include any opportunity foregone by loss of the property. YINZ appears to have net assets sufficient to meet even optimistic recovery. Conversely, particularly given CSR’s search for funds, its undertaking may not adequately provide a remedy for YINZ if unable to obtain transfer until after trial.
[20] Next, YINZ contributed 75 per cent of the property’s purchase price on terms including no (other) encumbrances and the call option, both of which CSR sought to avoid for refinancing. From that perspective, YINZ cannot be said to have ‘blocked’ refinancing, as Jeremy Johnson argues for CSR, but rather they are precisely the consequences of the terms on which the property initially was acquired. Injuncting
14 127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53, [2020] 1 NZLR 179 at [56] and [91(a)].
15 At [91(b)].
YINZ from exercise of its contractual entitlements, while retaining its capital contributions, would be to rewrite the parties’ bargain. That is not to maintain the status quo.
[21] Then, if retention of the property’s ownership constitutes a uncompensable benefit to either party in their development objectives, it is a benefit had equally by both parties (if in different shares). Continuing ownership in itself carries no weight in either direction. But continuing co-ownership uncompensably disadvantages YINZ, in being held to a relationship with CSR at odds with that it entered.
[22] Last, so far as I can assess the merits of the parties’ respective cases from the present distance, CSR does not have a strong case. The mismatch between transfer value and price justifies trial, but little more.
—overall justice
[23] Standing back, for what appears to be its wish to avoid a further week of $3,800 daily penalty interest before settlement, CSR relatively abruptly accepted terms presented through each party’s legal advisors for YINZ’s payment of $9.000 million. That may turn out simply to be an improvident bargain. CSR should not be allowed to tie up the property’s valuable resource on its own terms, pending trial. Ultimately, the least irremediable prejudice is achieved by permitting the transfer to continue.
Result
[24] CSR’s interlocutory application for interim relief is declined. The present consent orders are discharged.16
Confidentiality
[25] By consent between the parties given in the course of the hearing, and being satisfied YINZ’s statement of financial position as at August 2022 is properly confidential information in which there is no public interest, I prohibited publication of the statement and any information derived from it. The statement appears at page
16 See [1] and n 1 above.
401.0320 of the common bundle, being the exhibit marked QY-2/315 annexed to Mr Ye’s affidavit sworn 9 September 2022. Derivative information includes paragraph 6 of that affidavit. Because the prohibition is not conclusively deciding any legal dispute (subject only to appeal), but conferring a procedural privilege, the order may be revoked, or reviewed and varied, by the Court at any time on notice to YINZ.17
Costs
[26] In my preliminary view, from what I presently know — as the unsuccessful party in this averagely complex proceeding requiring counsel of average skill and experience, and in which a normal amount of time is considered reasonable for each step on the application — CSR should pay 2B costs jointly to YINZ and Mr Ye on each step in its application. I would allow for second counsel as part of the application’s ‘average’ characterisation.
[27] If my view is not accepted by the parties, or they cannot otherwise agree, I reserve costs for determination on short memoranda each of no more than five pages
— annexing a single-page table setting out any contended allowable steps, time allocation and daily recovery rate — to be filed and served (desirably jointly) by YINZ and Mr Ye within ten working days of the date of this judgment, with any response or reply to be filed within five working day intervals after service.
—Jagose J
17 Fujifilm Business Innovation New Zealand Ltd v Whittaker [2022] NZHC 1775 at [6].
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