Culling v Culling

[2015] NZHC 3161

IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY

CIV-2015-442-000052 [2015] NZHC 3161

UNDER

the Companies Act 1993

IN THE MATTER

of an application to bring a derivative action and to set aside a statutory demand

BETWEEN

SHERYL KAY CULLING First Plaintiff

CULLING FARMS LIMITED Second Plaintiff

AND

MILES GARY CULLING Defendant

Hearing:	27 October 2015 (Judgment: 3 November 2015)
Appearances:	N A Ironside for Plaintiffs T Jeffcott and D Turley for Defendant
Judgment:	10 December 2015

COSTS JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      On 3 November 2015 the Court issued a judgment in favour of the plaintiffs. Mrs Culling was given leave to bring a derivative action on behalf of Culling Farms Limited, and the application by the company to set aside a statutory demand issued against it by the defendant was granted.  Costs were reserved.

[2]      On behalf of Mrs Culling and Culling Farms Limited, Mrs Ironside seeks an order for indemnity costs against Mr Culling.  These costs amount to $21,960 plus disbursements and GST, a total of $25,983.75.  Mrs Ironside says that costs on scale

(Schedule B Category 2) amount to $15,646, again including disbursements.

S K Culling & Culling Farms Ltd v M G Culling [2015] NZHC 3161 [10 December 2015]

[3]      Section 166 of the Companies Act 1993 provides:

166    Costs of derivative action to be met by company

The Court shall, on the application of the shareholder or director to whom leave was granted under section 165 of this Act to bring or intervene in the proceedings, order that the whole or part of the reasonable costs of bringing or intervening in the proceedings, including any costs relating to any settlement, compromise, or discontinuance approved under section 168 of this Act, must be met by the company unless the Court considers that it would be unjust or inequitable for the company to bear those costs.

[4]      Mrs Ironside submits that the costs are reasonable and that there is no basis on which the Court should decline to direct that the company pay the indemnity costs under s 166.

[5]      Mr  Jeffcott  does  not  specifically  deal  with  the  application  under  s  166, devoting his entire memorandum to the further application by Mrs Ironside that Mr Culling should be directed to pay indemnity costs to the company.

[6]      I see no reason on the material before the Court in this case to consider that it would be either unjust or inequitable for the company to bear the full costs incurred in bringing this proceeding.   I therefore direct that the whole of the costs actually incurred ($25,983.75) will be paid by Culling Farms Limited.

[7]      Culling Farms Limited also applies for an order against Mr Culling on an indemnity basis.

[8]      Responding  to  Mrs  Ironside’s  application  for  indemnity  costs  against Mr Culling, Mr Jeffcott says that once Mrs Culling took the step of freezing the company’s bank accounts Mr Culling lost all means of meeting ongoing company expenses including paying existing creditors or even covering his own living expenses.  It was for this reason that he took the step of demanding repayment of a portion of his current account, using the procedure under s 289 of the Companies Act for this purpose.

[9]      He also bought an application under the Property (Relationships) Act for

resolution of the parties’ property issues.  He did not seek to engage the procedure

available to him under s 25 of the Property (Relationships) Act to seek an interim distribution of relationship property, a course which would appear to have been open to him and which was significantly more appropriate than utilising the procedure in s 289.   I therefore reject any suggestion that Mr Culling had no alternative but to proceed as he did.

[10]     The strongest point favouring Mr Culling’s decision to issue a notice under s 289 is the judgment in Delany Transport Ltd v Steel.1     However, for reasons explained in the substantive judgment issued on 3 November, that case was readily distinguishable.  In that judgment, by reference to the sworn testimony of Mr Culling in the Family Court proceeding, it was found to be clear that on his own application he would not be entitled to a sum of $200,000 or any sum even approaching that amount.

[11]     Having reconsidered the evidence in this case the submissions of counsel and the  judgment  of  3  November,  I conclude  on  balance  that  Mr  Culling  used  the procedure under s 289 for the purpose of applying pressure on Mrs Culling at a delicately balanced point in their settlement negotiations.

[12]     Once the notice had been issued Mr Culling was repeatedly requested to withdraw it.  Further, as the judgment records, Culling Farms Limited was solvent and profitable.   As well, Mr Culling was a director.   In the judgment I have commented on whether it is appropriate for a director of a company to issue a notice under s 289 against that company knowing it to be solvent and profitable.   It is certainly strongly arguable that this is a breach of a director’s duty to the company, as it seeks to put the director’s personal interest ahead of that of the company.   It does  this  because  s 289  is  designed  to  create  an  evidentiary  foundation  for  an application to the High Court to place a company into liquidation, a consequence most certainly not in the interests of the company.  Time and time again this Court has had to comment on the incorrect use of the procedure provided for under s 289 as a means of putting pressure on a company to repay a debt which is in dispute.  In this case, Mr Culling himself, by virtue of his evidence in the Family Court, had

demonstrated a lack of entitlement to the sum sought, yet he chose to pursue a claim

1      Delany Transport Ltd v Steel HC Nelson CIV-2009-442-404, 10 December 2009.

for a sum to which he was not entitled, contrary to the interests of the company of which he was a director.

[13]     I appreciate, as Mr Jeffcott has pointed out on Mr Culling’s behalf, that this notice was issued in the midst of a relationship property dispute.  I am not prepared to enter into any debate about the rights and wrongs of the various steps taken by the parties in relation to offers and counter offers, or other tactical measures that may have been undertaken in this context apart from the issuing of the notice under the Companies Act.   In my judgment that was manifestly inappropriate in the circumstances  I  have  outlined,  including  the  availability  of  another  remedy  to Mr Culling.  In terms of r 14.6(4) I find that he has acted improperly in issuing the notice, and not withdrawing it when faced with requests to do so, and in continuing a defence of the application to set it aside.  Mr Culling even opposed the application under s 165 for leave to bring a representative action, submitting through his counsel that it was not in the interests of the company that the application be brought.  That was a manifest error of judgment.  It certainly was in the interests of the company that a notice pursuing his own interests over the interests of a solvent and profitable company should be the subject of an application by that company to set the notice aside.

Outcome

[14]     I make the following orders:

(a)     The costs incurred by the plaintiffs in this proceeding amounting to

$25,983.75 including disbursements and GST will be paid by Culling

Farms Limited pursuant to s 166 of the Companies Act 1993.

(b)Mr Culling will pay to Culling Farms Limited costs and disbursements in     the      sum     of     $22,665,   which       represents                the    same    fee   and

disbursements, but excluding GST.

J G Matthews

Associate Judge

Solicitors:

Ironside Law, Nelson.

Hamish Fletcher Lawyers, Nelson.