Davy v Scarrott
[2016] NZHC 1791
•4 August 2016
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-000466 [2016] NZHC 1791
UNDER Section 34 of the Companies Act 1993 IN THE MATTER
of an application for an order altering the constitution of a company
BETWEEN
KAREN DAVY AND JOHN DEWAR MARSH, DIRECTORS OF DORCHESTER APARTMENTS LIMITED
Plaintiffs
AND
GRACE NATALIE SCARROTT, PAUL RICHARD HEFFERNAN AND JULIE MARIE HEFFERNAN AND SANDY ALEXANDER THOMSON AND RICHARD NORMAN MARTIN, SHAREHOLDERS IN DORCHESTER APARTMENTS LIMITED, COMPANY NUMBER 21335
Defendants
Hearing: 27 July 2016 Appearances:
J Toebes for Plaintiffs
P OʼRegan and C Matsis for DefendantsJudgment:
4 August 2016
JUDGMENT OF VENNING J
This judgment was delivered by me on 4 August at 12.30 pm pursuant to Rule 11.5 of the High Court
Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: JTLaw, Wellington
Gault Mitchell Law, Wellington
Copy to: P O’Regan, Wellington
DAVY & ORS (DORCHESTER APARTMENTS LIMITED) v SCARROTT [2016] NZHC 1791 [4 August
2016]
Introduction
[1] Dorchester Apartments Limited (Dorchester) is a flat-owning company.1
Dorchester owns an 11 storey apartment (one apartment per floor plus a ground floor) built in the late 1960’s on Oriental Parade, Wellington. It has 10 shareholders. Each shareholder occupies one floor of the apartment pursuant to an occupation licence.
[2] The plaintiffs are two of the directors of Dorchester. They, and the other two directors at the time, David Corleison and Serena Barrett, formed the view, after taking advice, that all the original windows and balustrades in the building needed to be replaced.
[3] The occupation licence includes a provision for the shareholders to pay sufficient sums to reimburse the company for “repairs to and maintenance of all exterior parts of the building”. At a meeting on 11 December 2012 the shareholders had voted to approve a call of $50,000 (later increased to $60,000) for the proposed replacement work. Not all shareholders paid the levy. Miss Dimes (who was a shareholder at the time) and the Heffernans did not pay it. After the legality of the levy was queried on behalf of one shareholder, Ms Scarrott, the moneys were refunded to those who had paid.
[4] At an AGM on 13 November 2014 the directors proposed a resolution to amend the constitution by adding the words “and replacement” to the repairs and maintenance provision of the licence to enable the board to recover the cost of the replacement of all windows and balustrades from the shareholders. As the occupation licence is part of the constitution of the company it required a special
resolution or a 75 per cent vote in favour to change.2 Three of the shareholders
voted against the proposed resolution at the November 2014 meeting so it was defeated.
1 Under Part 7A, Land Transfer Act 1952.
2 Companies Act 1993, s 106(1)(a).
[5] The plaintiffs and the other two directors at the time commenced this proceeding seeking an order under s 34 of the Companies Act 1993 that the constitution of the company be altered by the Court.
Parties
[6] As noted, the plaintiffs are current directors of Dorchester. Together with Grant Corleison and Serena Barrett they brought these proceedings. Mr O’Regan suggested that the plaintiffs brought the claim as shareholders.3 But while they are also shareholders, they are described in the statement of claim as directors. I accept the proceeding was brought in their capacity as directors.
[7] At the last AGM in May 2016 Ms Barrett retired by rotation and Mr Corleison retired at the request of the defendants. The proceeding is pursued by the remaining directors. Mr Toebes did not seek to have the new directors added.
[8] As well as retiring as a director Ms Barrett and her partner have sold their shareholding in the company with effect from 26 April 2016. The transferee of that share does not seek to be added to these proceedings.
[9] Ms Dimes was formerly a defendant but has sold her shareholding with effect from 6 May 2016. The transferee of her share does not seek to be added to these proceedings.
[10] Finally, Sandy Thomson and Richard Martin (trustees of the Sandy Thomson Family Trust) were not shareholders at the time of the AGM in 2014 but have subsequently become shareholders by purchasing the shareholding relating to the penthouse apartment.
[11] The defendants did not oppose the removal of Ms Barrett and Ms Dimes as parties on the basis they potentially remain liable for costs up to the May 2016
AGM. I order accordingly.
[12] The defendants did, however, oppose the removal of Mr Corleison as a party from that date as they consider him to be a driving force behind the litigation even after his resignation as a director. They consider he should remain liable for costs from that time.
[13] The application for the orders is pursued by the board of Dorchester. There is no basis to maintain Mr Corleison as a plaintiff when he is no longer a director, purely for the purposes of costs. If the defendants consider they have a claim against Mr Corleison in relation to costs incurred between the May 2016 AGM (when he stood down as a director) and this hearing they will have to make a separate application for non-party costs against him for that period supported by evidence. Mr Corleison is removed from the proceedings but remains potentially liable for costs as a director in the current proceedings up to the May 2016 AGM.
The plaintiffs’ case
[14] Mr Toebes submits that, as the board of Dorchester, the directors have all necessary powers to manage the business of the company.4 The directors have taken advice and want to replace all the windows and balustrades. The work cannot be undertaken as there is currently no power to levy shareholders for the cost of replacing the windows and balustrades. The constitution only provides for levies for repairs and maintenance. It does not extend to complete replacement. The directors’
attempt to amend the terms of the occupation licence was defeated at the November
2014 AGM and so the Court should amend the constitution under s 34 of the Act.
[15] Mr Toebes accepts that the amendments sought are much more extensive than the addition of “and replacement” to the relevant provision of the occupation licence. The plaintiffs now seek amendments to align the constitution with the provisions of the Unit Titles Act 2010. At the outset of the hearing Mr Toebes presented yet further proposed amendments.
[16] Mr Toebes submitted that essentially the defendants generally supported the proposed changes but in the case of Messrs Thomson and Martin, improperly
maintained opposition in order to achieve a change to the constitution permitting Mr Thomson to keep a dog in his apartment. He submitted the other defendants appeared to be under a misapprehension as to their rights as shareholders and did not understand the role of the directors.
The defendants’ case
[17] The defendants’ position is that the test for the application of s 34 of the Act is not met. This is simply a case where the directors were unable to achieve the majority required to pass a special resolution to alter the constitution but that did not make it ‘impracticable’ as required by s 34.
[18] In addition the defendants say that:
(a) the proposed alterations would not be binding: s 101 of the Act; and
(b)the current shareholders could not be required to execute a new form of occupation licence even if the constitution was changed; and
(c) the proposed changes would deprive the shareholders of buyout rights under s 110 of the Act.5
Jurisdiction
[19] Section 34 of the Act reads:
34 Court may alter constitution
(1) The court may, on the application of a director or shareholder of a company, if it is satisfied that it is not practicable to alter the constitution of the company using the procedure set out in this Act or in the constitution itself, make an order altering the constitution of a company on such terms and conditions that it thinks fit.
(2) The applicant for the order must ensure that a copy of an order made under subsection (1), together with a copy of the constitution as altered, is delivered to the Registrar for registration within 10 working days.
(3) A person who fails to comply with subsection (2) commits an offence and is liable on conviction to the penalty set out in section
373(2).
The issues
[20] There are two issues. First, whether s 34 is engaged in this case, namely whether the Court is satisfied it is not practicable to alter the constitution using the procedure under the Act or the constitution; and second, if it is, whether in the exercise of its discretion the Court ought to make the extensive amendments now sought (or any other amendments).
[21] There is only one previous case where s 34 has been considered. In Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd MacKenzie J was faced with an application under s 34 of the Act for alteration of the constitution of Shell Todd Oil Services Limited.6 The alteration sought would have retrospectively validated the appointment of the existing Shell directors in the event their appointment was later held not to have been valid. MacKenzie J found that it was
practicable to alter the constitution using the Act or constitution, noting that a resolution had been passed on that issue.
[22] Mr Toebes submitted that as the directors could not achieve 75 per cent support (or in this case eight out of 10 shareholders’ support), it was not practicable to alter the constitution and an order under s 34 was required. Mr Toebes submitted that “not practicable” was not synonymous with impossible or not possible.
[23] For present purposes not practicable must take the same meaning as impracticable. Impracticable is defined in the Oxford English Dictionary online as:
That cannot be carried out, affected, accomplished or done, practically impossible.
[24] Importantly, the impracticability must arise in the context of it being not being practicable:
to alter the constitution … using the procedure set out in this Act or in the
constitution itself.
(emphasis added)
[25] The impracticability is directed at the process or procedure. It is only if it is not practicable to use the normal process to change the constitution that the Court’s intervention is necessary or justified.
[26] At chapter 9.16 of Morison’s Company Law the authors make that point:7
The court has the power to alter a company’s constitution on application by a director or shareholder where the court is satisfied that it is not practicable to alter the constitution using the procedures set out in the Act or the constitution itself. The court will not make an order simply where the requisite majority needed to alter the constitution cannot be reached. …
Examples of where the impracticability ground may be used include where it is impossible to obtain a quorum for a shareholders meeting, or where directors refuse to call a meeting or are unable to do so. The court may make an order altering the constitution on any terms and conditions it considers appropriate.
[27] There is a related section, s 123(1)(a) which deals with the situation where it is impracticable to call or conduct a meeting of shareholders in the manner prescribed by the Act or the constitution. In James Livingstone Reeves v Abano Healthcare Group Ltd Thomas J noted that “impracticable” has a narrow meaning.8
In that case the Judge considered that it was feasible or possible for the directors to
alter the constitution by holding a properly constituted meeting of the shareholders of the company and declined relief under s 123.
[28] In the case of Smith v Butler9 Lord Justice Arden in the Court of Appeal noted that it was impracticable to convene and hold a company meeting to consider a resolution for Mr Butler’s removal when Mr Butler’s attendance at the general meeting was necessary to make up the quorum and he had made it clear that he
would not attend the meeting.
7 Morison’s Company Law (online looseleaf ed, LexisNexis) at [9.16] (footnotes omitted).
8 James Livingstone Reeves v Abano Healthcare Group Ltd [2014] NZHC 1316, [2014] NZCCLR
23 at [42].
9 Smith v Butler [2012] EWCA Civ 314.
[29] Where, as here, a resolution was able to be put to a properly constituted meeting but failed only because it was not supported by the required 75 per cent, it is not apt to say that it is not practicable to alter the constitution.
[30] Even if it may be unlikely that a change to the constitution will be supported if put to the vote again, this does not mean that it is not practicable to use the processes in the constitution or the Act to change the constitution. Something more than the shareholders exercising their rights of shareholders to decline to vote in favour of a proposal is required to engage s 34.
[31] In this case the directors could have taken a number of steps to pursue the amendment. They could have met with the shareholders that did not support the resolution (indeed the directors say some at least agree in principle). They could have sought to present further information or to listen to the concerns of the shareholders and then bring the matter back for another vote. It is also relevant that since the resolution was defeated, there has been a change in the shareholding.
[32] I am not satisfied that on the evidence at the current time it can be said that it is not practicable to alter the constitution using the process under the Act or the constitution.
[33] In the event I am wrong in concluding that s 34 is not engaged, I go on to consider whether the Court should make the alteration sought. In Shell MacKenzie J went on to consider the exercise of the discretion and gave a number of reasons for not using the power under s 34 even if it was available. Importantly he noted:10
[16] Relief under s 34 will not ordinarily be appropriate when the reason why a constitution has not been amended is that the processes under the constitution have been followed, and a proposal for amendment has not been passed.
[34] While I agree with Mr Toebes’ submission that the case can be distinguished on its facts, I accept the general proposition noted by MacKenzie J that relief under s 34 will not ordinarily be appropriate when the processes have been followed and a
proposal for amendment has not been passed.
10 Shell (Petroleum Mining) Co Ltd v Todd Petroleum Mining Co Ltd, above n 6.
[35] The directors have sought to respond to the defeat of the resolution at a meeting on 13 November 2014 by the issue of these proceedings in May 2015 without seeking to address the concerns of the shareholders who did not support the change in the constitution. I am not satisfied that matters have reached the stage where an order under s 34 is appropriate.
[36] Next, a number of proposed changes are significant. The changes:
(a) potentially introduce a new standard “high quality and value
apartment building”;
(b)would allow the company’s agents to enter an apartment on not less than 48 hours notice to monitor compliance with the terms of the occupation licence;
(c) would allow the company on notice to remove part of a wall for sealing of any apartment to carry out capital works;
(d) introduce new subletting provisions; and
(e) propose to incorporate provisions of the Unit Titles Act 2010.
All are matters which should be put to the shareholders at a meeting rather than seeking to deal with them in this application. While the changes might well ultimately be beneficial they should be properly put to a meeting of shareholders.
[37] Further, the minutes of the shareholders’ meeting of 13 November 2014 record a discussion that the shareholders considered a motion to convert the company title to a unit title property. The matter was left on the basis as recorded in the minutes:
11.3 It was agreed that Paul and Sally would put together a pro’s versus Cons report with all of the costing and submit this to all shareholders for consideration in the New Year.
There is no evidence as to the matter being taken further other than by way of the issue of these proceedings.
[38] Next, as noted, since the date of the resolution in issue there have been a number of changes in the directors and in the shareholding. Mr Corleison and Ms Barrett, two of the four directors initially pursuing this matter, are no longer directors. Ms Barrett and Ms Dimes have sold their shareholding. Mr Thomson and Mr Martin have become shareholders. The three defendants who voted against the resolution at the meeting and therefore defeated it on 13 November 2014 were Ms Dimes, Ms Scarrott and the Heffernans. Ms Dimes has sold her shareholding. While Mr Thomson and Mr Martin are now replacement shareholders a resolution on the issue has not been put to a meeting involving them. The other shareholders, while not wanting to be a party to this proceeding, have the right to be heard on the further extensive amendments sought to the constitution.
[39] While there is force in Mr Toebes’ submission Ms Scarrott’s suggestion that matters should be done on a case by case basis by discussion amongst all shareholders does not fit with the obligations and powers vested in the directors under the Act, it is clear that Ms Scarrott would still support more substantial work and capital improvements if the case could be made for them. Mr Thomson has confirmed that he is in favour of updating the constitution and bringing it in line with the current body corporate procedures under the Unit Titles Act 2010, albeit that he would wish a standard clause from that Act to enable him to keep a pet dog be approved.
[40] Next, Mr Corleison says the work required to be undertaken extends from the replacement of windows and balustrades to exterior repainting and waterproofing of front ledges and decks. Painting and waterproofing would readily come within the definition of “repairs and maintenance” and be covered by the existing provisions of the licence. There would not seem to be any need for a change in constitution for that work to be done. Indeed some of the shareholders’ concern is directed at the lack of maintenance work carried out on the apartment.
[41] Finally, as noted by Arden LJ in Smith v Butler, it is important to have regard to the bargain in the articles (or constitution) between the parties and the balance of power between the shareholders.11 The shareholders in Dorchester Apartments became shareholders on the basis of the existing constitution and the bargain that it represented. Their protection is that any changes to the constitution and occupation licence requires a special resolution.
Result
[42] For the above reasons the application is declined. It is unnecessary to consider the other arguments raised by the defendants in opposition.12
Costs
[43] I reserve the issue of costs.
[44] Applications for costs by the defendants to be filed and served within 10 working days. Responses by the plaintiffs to be filed and served within 10 working
days.
Venning J
11 Smith v Butler, above n 9.
12 At [18] above.