Downey Management Limited v Lakewood General Partner Limited

[2020] NZHC 2340

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2020-419-000212

[2020] NZHC 2340

IN THE MATTER

of an application for an interim injunction

BETWEEN

DOWNEY MANAGEMENT LIMITED

Applicant

AND

LAKEWOOD GENERAL PARTNER LIMITED

First Respondent

DU VAL DEVELOPMENTS LIMITED
Second Respondent

STEELGRAVE INVESTMENTS LIMITED
Third Respondent

KRISTEN JAMES LAUGHTON HOLLAND

Fourth Respondent

PAUL BARY

Fifth Respondent

Hearing:

On the papers

Counsel:

C Walker QC for Applicant

No appearance by or on behalf of Respondents

Judgment:

9 September 2020

JUDGMENT OF WOOLFORD J

[As to interim injunction]

This judgment was delivered by me on Wednesday, 9 September 2020 at 11:00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

DOWNEY MANAGEMENT LIMITED v LAKEWOOD GENERAL PARTNER LIMITED [2020] NZHC 2340

[9 September 2020]

[1]    This is a dispute between limited partners in the Lakewood Plaza Limited Partnership (Partnership), which was formed to build and sell a 17-storey apartment building in Manukau City. The building is nearing completion.

[2]    The applicant, Downey Management Limited (Downey Management), has a 40 per cent interest in the Partnership. Mr Jeffrey Downey is the sole director and controlling shareholder of Downey Management. The apartment building is being built by Mr Downey’s company, Downey Construction Limited (Downey Construction), under an NZS 3910:2013 contract.

[3]    There are two other limited partners of the Partnership – the second respondent, Du Val Developments Limited (Du Val), which has a 40 per cent interest and the third respondent, Steelgrave Investments Limited (Steelgrave), which has a 20 per cent interest.

[4]    The Partnership is managed by a general partner, Lakewood General Partner Limited (General Partner), the first respondent. The General Partner is owned by the limited partners in proportion equal to their interest in the Partnership. There is a shareholders agreement that governs the General Partner. The shareholders agreement gives the right to appoint directors to each of the limited partners and provides that the directors must act together to form a quorum.

[5]    The limited partners have each appointed a director to the General Partner. The directors are:

(a)Mr Jeffrey Downey, appointed by Downey Management;

(b)The fourth respondent, Mr Kristen Holland, appointed by Du Val; and

(c)The fifth respondent, Mr Paul Bary, appointed by Steelgrave.

[6]    A dispute has arisen between Du Val and Steelgrave on the one hand, holding in total a 60 per interest in the Partnership (the majority partners) and Downey Management, holding a 40 per cent interest on the other hand (the minority partner) and between the majority partners on the one hand and Downey Construction on the

other hand in relation to delays and cost overruns in the building of the apartment building.

[7]    Downey Management has filed an urgent interlocutory application for an interim injunction without notice for an order, in effect, preserving the status quo while the various disputes are being worked through. An order is sought in particular because of a notice given by Mr Holland, as a director of the General Partner, of a general meeting of directors and shareholders to be held at 2.00 pm on 9 September 2020. The notice calls for a vote on various resolutions, including:

(a)That Mr Downey be removed as director of the General Partner;

(b)To appoint a director of iCLAW Culliney Partners as chairman, convenor and secretary of the meeting;

(c)To appoint iCLAW Culliney Partners as solicitors for the Partnership and to update the registered office of the Partnership and General Partner to the solicitor’s address;

(d)To close all bank accounts of the Partnership and for all funds to be swept to iCLAW Culliney Partners’ Trust Account;

(e)To update the address for service of the Partnership to iCLAW Culliney Partners’ address in relation to the construction contract; and

(f)To appoint a new accountant and uplift all existing files from the Mellow Group.

[8]In a statement of claim filed at the same time, the applicant seeks:

(a)A declaration that the proposed resolution that Mr Downey be removed as a director of the General Partner would be a breach of the shareholders agreement; and

(b)A declaration against all respondents that the remaining resolutions would individually or collectively constitute oppressive, unfairly discriminatory or unfairly prejudicial conduct within the meaning of   s 174 of the Companies Act 1993.

[9]Clause 8.1 of the Shareholders Agreement provides:

8.1Board of Directors

(a)Each Shareholder will exercise its rights as a Shareholder to ensure the Board is composed and conducted as set out in this agreement.

(b)At the date of this agreement the directors of the Company are Jeff Downey and Paul Bary (Initial Directors).

(c)Each Shareholder holding twenty percent or more of the shares in the Company has the right, by written notice to the Company, to appoint one Director for every twenty percent of the shares they hold in the Company (including the Initial Directors). Section 153 of the Companies Act will not apply to the Company.

(d)The minimum number of Directors shall be two.

(e)The quorum of Directors will be at least one Director appointed by each Shareholder who has appointed a Director in accordance with this agreement.

(f)At a meeting of the Board, each Director is entitled to one vote.

(g)All decisions at a meeting of the board are decided by a simple majority vote except those requiring a special or unanimous resolution of the Board.

(h)A Shareholder may appoint any person to be an alternate director in the place of that Director during any period.

(i)The Chairman of Directors will not have a second or casting vote.

(j)The Chairman of Directors will be appointed by the Directors from amongst their number for each financial year.

8.2Appointment and removals

(a)A shareholder may, at any time by written notice to the Company, remove and replace any Director previously appointed by that Shareholder. Section 156 of the Companies Act shall not apply to the Company. Shareholders shall give fourteen (14) days written notice to the other Shareholders

advising of the name of their nominated person to be a director.

(b)The Shareholders agree that any nominated Director for a removed Director should be such a person who can work harmoniously to achieve the objectives of the Company.

[10]   Clause 8.2 provides that s 156 of the Companies Act shall not apply to the company. Section 156, in turn, provides:

156 Removal of directors

(1)Subject to the constitution of a company, a director of the company may be removed from office by ordinary resolution passed at a meeting called for the purpose or for purposes that include the removal of the director.

(2)The notice of meeting must state that the purpose or a purpose of the meeting is the removal of the director.

[11]Section 174 of the Companies Act also provides:

174 Prejudiced shareholders

(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.

(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—

(a)requiring the company or any other person to acquire the shareholder’s shares; or

(b)requiring the company or any other person to pay compensation to a person; or

(c)regulating the future conduct of the company’s affairs; or

(d)altering or adding to the company’s constitution; or

(e)appointing a receiver of the company; or

(f)directing the rectification of the records of the company; or

(g)putting the company into liquidation; or

(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.

(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.

Discussion

[12]   The test for an interim injunction is well known. First, the applicant must establish that there is a serious question to be tried or, put another way, that the claim is not frivolous or vexatious. Secondly, the balance of convenience must be considered, which requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order. Thirdly, an assessment of the overall justice of the position is required as a check.1

[13]   In the limited time available, I have reached the view that there is a serious question to be tried. The removal of Mr Downey as a director of the General Partners would appear to be inconsistent with cl 8.1 of the Shareholders Agreement. Further, s 156 of the Companies Act, which allows a director of a company to be removed from office by ordinary resolution is specifically said to be inapplicable to the company by a clause 8.2.

[14]   The other draft resolutions, which are set out in the notice of meeting, also all appear to be designed to exclude Mr Downey and Downey Management from any further administrative involvement in the affairs of the General Partner. It appears that the majority partners have formed the view that he should be excluded from further involvement because of a conflict of interest. They allege that Mr Downey is putting his personal interests ahead of the General Partner contrary to s 131 of the Companies Act. But  the  construction  contract  was  never  an  arms-length  transaction  and  Mr Downey denies acting in bad faith. Mr Downey’s claim is clearly not frivolous or vexatious.

[15]   As to the balance of convenience, it is in everyone’s interests to complete the building as soon as practicable. If the status quo is maintained, the partnership’s ability to continue with and complete the building should not in any way be hindered. The Partnership should follow normal dispute resolution procedures contained in the

1      McGechan on Procedure, loose-leaf ed. HR 7.53.04

contract in respect of the disputed variations and liquidated damages. Downey Construction is itself seeking to resolve the issues by engaging through the contract and directly with the Engineer. It met with the Engineer on 4 September 2020. The Engineer is now processing Downey Construction’s claims to variations, extensions of time, the quantum of liquidated damages and issues relating to Default Notice 1.

[16]   On the other hand, if the resolutions are passed, the majority partners would be able to conduct the business of the Partnership with no reference to or consideration of the minority partner. I accept that there is the potential for real prejudice to Downey Management if it was effectively excluded from the Partnership. This would also appear to be contrary to the intent of the Partnership and the General Partner Shareholder Agreement. I note that cl 17.2 of the Shareholders Agreement provides for the primacy of the Agreement. It states:

17.2     Remedies

Each Shareholder acknowledges that the Company and each of the Shareholders is likely to be irreparably damaged if this Agreement is not specifically enforced. The Shareholders agree that specific performance and injunctive relief would be appropriate remedies for any threatened or actual breach of this Agreement.

[17]I am of the view that the overall justice favours preservation of the status quo.

Result

[18]   Having established the grounds for injunctive relief, there will be an order in terms of the draft supplied by the solicitors for the applicant with the following amendments:

(a)The words “except in a normal course of business” are to be added to [4](a)(ii).

(b)[4](b) is replaced with the words “Costs reserved”.

[19]   Leave is reserved to the parties to seek amendment of the orders if they hamper the normal course of business of the Partnership or General Partner.

Woolford J

Solicitors:           Norris Ward McKinnon (S W Hood), Hamilton for the Applicant Counsel:  C Walker QC, Hamilton