Eliahu v Eliahu
[2022] NZHC 1226
•30 May 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2088 [2022] NZHC 1226
UNDER the Trusts Act 2019, the Companies Act 1993, and Part 18 of the High Court Rules 2016 BETWEEN
YARON ELIAHU suing in his personal capacity and as trustee of the PITA
BUSINESS TRUST
First Plaintiff
LIA ELIZABETH ELIAHU, LEO DANIEL
ELIAHU and LILY RON ELIAHU, together suing by their litigation guardian, YARON ELIAHU
Second Plaintiffs
AND
DANIEL ELIAHU sued in his personal capacity and as a trustee of the PITA
BUSINESS TRUST
First Defendant
(continued on next page)
Hearing: 12 April 2022 (via VMR) Counsel:
G P Blanchard QC and M C Staines for Plaintiff K F Gould for First Defendant
Judgment:
30 May 2022
JUDGMENT OF BREWER J
This judgment was delivered by me on 30 May 2022 at 3 pm pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
ELIAHU v ELIAHU [2022] NZHC 1226 [30 May 2022]
Continued
AND PITA BREAD LTD
Second Defendant
PITA HOLDINGS LTD
Third Defendant
Introduction
[1]This Judgment determines:
(a)The plaintiffs’ on notice interlocutory application for an interim injunction against the first defendant.
(b)The plaintiffs’ on notice application for leave to bring a derivative action on behalf of the second and third defendants.
Background
[2] This decision concerns a dispute between a son (the first plaintiff, “Yaron”) and his father (the first defendant, “Danny”).1
[3] Danny incorporated Pita Bread Ltd (PBL) in 1989. Yaron worked for it. PBL prospered. In 2008 Yaron joined Danny as a director. Yaron took responsibility for running PBL and Danny relinquished all day-to-day management functions.
[4] Danny and Yaron each had authority to access PBL’s bank accounts. Each had a PBL credit card (and so did Danny’s wife). According to Yaron, after Danny stepped back from involvement in PBL in 2008 he continued to access PBL’s bank accounts for his personal needs as and when he wanted to. Likewise, he and his wife used PBL’s credit cards for their personal needs as and when they wanted to.
[5] This became a point of contention between Danny and Yaron. A mediation between them failed. Yaron and his young children (Yaron is their litigation guardian) now sue Danny, PBL and the holding company, Pita Holdings Ltd (PHL).
[6]The legal structure of the business established by Danny is:
1 I will use first names not for informality but for ease of differentiation.
(a) PHL
Directors: Danny and Yaron
Shareholders: Pita Business Trust, 9,998 shares (Danny and Yaron jointly as co-trustees); Danny, 1 share; Yaron, 1 share.
(b) PBL
Directors: Danny and Yaron
Shareholder: PHL
[7]There are two associated family trusts, Ararimu Trust and Pita Property Trust.
Application for interim injunction
[8] As I have said, Danny’s use of PBL’s bank accounts for his own use and his and his wife’s use of PBL’s credit cards became a point of contention with Yaron. On 9 August 2021, at a combined board meeting of PBL and PHL, Danny and Yaron considered resolutions addressing these matters. The two voted together to pass one resolution. It reads:
Transaction approvals and authorities:
a.as General Manager Yaron may approve and authorise financial transactions and payments in the ordinary course of the business and affairs of both Pita Bread limited and Pita Holdings Limited:
ifor tax payments, including GST, PAYE and provisional tax – in any amount as required
iiFor all other payments, up to $60,000 per transaction
b.For all other transactions and payments, these must be approved by both directors either at a board meeting, or at any other time by agreement recorded in writing, including via email or SMS text message
[9]A resolution was also proposed to address the credit card problem:
“The Company Credit Card – the company accounts [sic] are not to be used for personal benefits. Only an active employee that is involved in day to day activity that requires usage of a credit card (repair and maintenance, travel, sales and marketing, business entertainment) will be issued with a credit card which will be only used for company benefit purpose.”
[10]Danny refused to vote in favour of the resolution and so it did not pass.
[11] Yaron pleads that despite the resolution quoted at [8], Danny has continued to use the accounts of PBL and also of PHL:
30.1On 16 August 2021 Danny withdrew an amount of $28,939.30 from PHL’s bank account no. [REDACTED] and transferred that to the account of his lawyer, Kevin Gould, apparently in payment of legal fees charged to Danny by Mr Gould for provision of legal services to Danny personally.
30.2On 27 August 2021 Danny transferred an amount of $20,030.00 from PBL’s account no. [REDACTED] to PHL’s account no. [REDACTED], and then immediately paid that same amount from PHL’s account to the Commissioner of Inland Revenue, apparently in payment toward Danny’s personal tax liabilities owed to the Commissioner.
30.3On 1 September 2021 Danny drew an amount of $25,000 from PHL’s bank account no. [REDACTED] and paid it to himself; an increase of
$5,000 on earlier and equally unauthorised payments to himself out of PBL and PHL accounts, again without any consultation with, or authorisation by Yaron.
30.4On the same date Danny procured a payment from PHL’s bank account [REDACTED] to the bank account of Hassida Eliahu (account no. [REDACTED]) in an amount of $3,000.
[12] On 15 March 2022, Gault J (by consent), and at Yaron’s application, made the following orders:
(a)Pending the on-notice hearing on 12 April 2022, an order restraining the first defendant from authorising or making any payments from the bank accounts of Pita Holdings Ltd or Pita Bread Ltd to himself or to any other person except for a monthly salary of $25,000 and his ordinary expenses (principally his life insurance payment, payment to his ex-wife and his credit card expenses).
(b)Leave reserved to either party to apply to vary this interim order.
(c)Costs are reserved.
[13] The plaintiffs seek an interim prohibitory injunction pursuant to ss 164 and/or 174 of the Companies Act 1993 (the Act) and r 7.53 of the High Court Rules 2016.
Discussion
[14]The test for granting an interim injunction is well-established:2
(a)there must be a serious question to be tried;
(b)the balance of convenience must favour granting the injunction; and
(c)there must be an assessment of the overall justice of the case.
[15]I will address each factor in turn.
Serious question to be tried
[16] Mr Gould, counsel for Danny, submits that there is no serious question to be tried. He says Yaron is simply complaining that Danny is drawing a salary and other expenses in the same way he has always done. Mr Gould suggests that Yaron is attempting to “turn back the clock” through these applications in an effort to justify his own unauthorised expenditure. Mr Gould further submits that these applications are merely a tool to assist Yaron in acquiring Danny’s interests in the companies without paying or paying at an undervalue.
[17] Mr Blanchard QC, for the plaintiffs, submits that the plaintiffs have a strong prospect of success at trial. In terms of s 164, he submits the evidence strongly suggests that Danny will continue to engage in conduct that contravenes the constitution of PBL or PHL, or the Act. With respect to s 174, the evidence also shows that Danny continues to conduct PBL and PHL’s affairs in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to Yaron as a shareholder of those companies.
[18] I consider that there is a serious question to be tried. The affidavit evidence clearly discloses a strong likelihood that Danny has breached his statutory duties as director of the companies.
2 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12].
[19] It is unnecessary to traverse the evidence in great depth beyond to observe that, among other things, Danny appears to have been using company funds for his own personal purposes and making unauthorised payments in contravention of the board resolution referred to at [8] above. It is not an answer to these objections for Danny to suggest that he has always drawn expenses in this manner nor to suggest that Yaron has himself been making unauthorised withdrawals. That is beside the point. I also give weight to Mr Blanchard’s submission that Danny may be in breach of his fiduciary duties to the companies to act in good faith and in the companies’ best interests, to not place himself in a position of conflict and to not profit from his position as a director.
Balance of convenience
[20] The balance of convenience concerns the impact that granting or refusing to grant an order will have on the parties.3 This often includes consideration of factors such as the adequacy of damages, the status quo, the parties’ conduct and the relative strength of their respective cases.4
[21] Mr Gould submits that Yaron has failed to produce any evidence as to his financial status and, accordingly, the Court should scrutinise the value of Yaron’s undertaking as to damages. With respect to the status quo, Mr Gould notes that Danny has given an undertaking that he will not draw from the term deposits held by the companies but will continue to draw his salary and credit card and other expenses pending disposal of the substantive proceeding.
[22] Mr Blanchard submits that if an interim injunction is not granted, Yaron (and PBL and PHL) will suffer irreparable harm that cannot be compensated in damages. He submits that the risk of insolvency, damage to customer goodwill and trade lines, reputational damage and civil penalties cannot be adequately compensated by an award of damages. Moreover there is a question as to Danny’s ability to pay damages based on his financial position. On the other hand, if the interim injunction is granted, Danny will not suffer loss. Mr Blanchard further submits that the status quo leaves
3 At [12].
4 See On-Line Digital Solutions Ltd v Riddick [2021] NZHC 3199 at [103].
the companies vulnerable to further unauthorised drawings by Danny, the parties’ conduct supports granting an interim injunction and the plaintiffs’ case is disproportionately stronger than Danny’s case.
[23] I consider that the balance of convenience weighs in favour of granting an interim injunction.
[24] With respect to the adequacy of damages, I am not persuaded that the evidence before the Court discloses a real risk of insolvency, or for that matter, serious damage to the companies’ reputation and business relationships flowing from Danny’s conduct. For example, Yaron’s affidavit refers to a letter from Mr Terry Baucher giving his concerns about Danny’s excessive drawings and the potential effect it was having on the solvency of the companies and trusts. But that letter is from 15 April 2013. I would need to see more recent evidence to support Mr Blanchard’s submission that there is presently a “serious real risk” of PBL and PHL not being able to meet their obligations.5
[25] But I accept that this factor weighs in favour of granting an injunction. There are some questions over Danny’s ability to meet any award of damages made against him given that the bulk of his assets are held in trusts. Moreover, if an interim injunction is granted, Danny will not suffer harm that cannot be compensated in damages. I note that any funds he would otherwise have taken will remain with the companies, in which Danny has interests as a shareholder of PHL and beneficiary of PBT.
[26] The status quo and the parties’ conduct also weigh in favour of granting an injunction. Mr Gould suggested at the hearing that because the companies are not endangered by Danny’s drawings the status quo should remain. I do not agree. The present course whereby Danny continues to withdraw large sums of money from the companies’ accounts, despite concerted attempts to prevent him from doing so such as the board’s resolution described above, is unlikely to be sustainable.
5 The fact that the Pita Property Trust initially did not have sufficient funds to meet its provisional tax obligations in August 2021 is not enough to support this claim. Yaron’s affidavit records that Danny transferred $15,000 from his personal account to the Trust’s account with the reference “Loan to property Trust” shortly after being notified of the issue.
[27] As to the relative strength of the parties’ cases, this factor again weighs in favour of granting an injunction. The plaintiffs’ affidavit evidence discloses an arguable case that Danny is in breach of his statutory duties as a director of the companies.
[28]The balance of convenience weighs in favour of granting an interim injunction.
Overall justice of the case
[29] The overall justice of the case favours granting an injunction. It is the appropriate means of preventing Danny from making further withdrawals from company accounts and does not prejudice his position prior to trial.
[30] Further, the plaintiffs have agreed that Danny will be paid $20,000 per month on a without prejudice basis pending resolution of the substantive proceeding.
[31] For the foregoing reasons I will grant the plaintiffs’ application for an interim injunction against Danny.
Application for leave to bring derivative action
[32] The plaintiffs apply for leave to bring a derivative action by way of cross claim in the name of, and on behalf of, the second and third defendants against Danny and the fourth defendants pursuant to s 165 of the Act.6 The proposed causes of action against Danny are breach of fiduciary duties and breach of statutory duties. The proposed cause of action against the fourth defendants is in knowing receipt.
[33]Section 165 of the Act provides:
165 Derivative actions
(1)Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a)bring proceedings in the name and on behalf of the company or any related company; …
6 The fourth defendants are Danny and DMG Trustees (Eliahu) Ltd as trustees of the Pita Property Trust.
…
(2)Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—
(a)the likelihood of the proceedings succeeding:
(b)the costs of the proceedings in relation to the relief likely to be obtained:
(c)any action already taken by the company or related company to obtain relief:
(d)the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3)Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—
(a)the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b)it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
[34]Yaron has standing as a co-director of PBL and PHL to bring the application.
[35] The threshold requirement in s 165(3) is met in the present case as PBL and PHL do not intend to bring or diligently continue proceedings against the first or fourth defendants. The co-directors of each company, Yaron and Danny, are in a deadlock. Yaron is now bringing proceedings against Danny, his co-director. This satisfies s 165(3)(a) of the Act.
[36] The issue is whether the Court should exercise its discretion to grant leave by reference to the factors identified in s 165(2). I will be guided by Vrij v Boyle:7
Applying those criteria, the first requirement is that the Court have regard to “the likelihood of the proceedings succeeding”. I adopt in that regard the useful test suggested in a slightly different context in Smith v Croft [1986] 1 WLR 580. It is not for me to conduct an interim trial on the merits. The appropriate test is that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at
7 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
stake, the apparent strength of the claim, likely costs and the prospect of executing any judgment.
[37] The Court will adopt the “prudent business person standard” in assessing each of the four factors identified in s 165(2).8 The relative weight afforded to each factor will depend on the facts of the case.
The likelihood of the proceedings succeeding
[38] Mr Gould submits that the proposed causes of action against Danny for breach of fiduciary duties and breach of statutory duties concern payments which are either explicable or barred by way of limitation. The only reason why the derivative action is being brought is to strengthen Yaron’s bargaining position in his attempt to gain control of the companies. Mr Gould further submits that given the delay, acquiescence and affirmation by the companies for some 32 years with respect to the credit card expenditure and for 13 years with respect to the other expenditure, the companies are disentitled from bringing the derivative proceedings.9
[39] Mr Blanchard submits that the proposed causes of action against Danny are supported by detailed affidavit evidence which provides a high level of specificity as to Danny’s irregular and unauthorised transactions and withdrawals. He submits that clear and documented misappropriation of company funds by a director without authorisation and for personal use provides strong grounds for an action by the company to recover the monies. There is accordingly a strong prospect of success.
[40] I am satisfied that there is sufficient evidence to support an arguable claim against Danny for breach of fiduciary duties and/or breach of statutory duties. The same can be said of the additional cause of action against the fourth defendants in knowing receipt. I do not consider that Yaron’s alleged acquiescence to Danny’s
8 He v Chen [2014] NZCA 153, [2015] NZAR 437 at [30].
9 Knight v Frost [1999] 1 BCLC 364 (Ch) at 375. Mr Gould also submits that the proposed pleadings fail to establish that the normal company procedures have failed to achieve the justice sought to be achieved in the derivative action. This alone is said to render the pleadings inadequate to establish the right of the plaintiffs to bring a derivative action. But it is clear that normal company procedures have failed to resolve the issues. Danny and Yaron are now deadlocked. Moreover, I do not regard this as a necessary prerequisite for bringing a derivative action in New Zealand and, in any event, such considerations are adequately accounted for in assessing whether a prudent business person would seek to bring the claim.
conduct (or the effect of any acquiescence if established) is so plain as to render these proceedings unlikely to succeed, such that I should decline leave at this early stage. I understand Mr Blanchard’s position to be that Yaron never in fact acquiesced to the relevant conduct. The limitation argument is also not determinative and, even if Mr Gould’s submissions on this point were accepted, would only affect the claims as they relate to payments made before April 2016.
The costs of the proceedings in relation to the relief likely to be obtained
[41] Mr Blanchard submits that Yaron has undertaken to meet the costs of the derivative action, leaving the issue of costs to be dealt with by the trial judge. Mr Gould submits that the Court should again be wary of accepting such an undertaking given that Yaron has chosen not to disclose his financial position. He further notes that the likely cost of the proceeding is estimated at $300,000 to claim relief of just $43,939.03. This is said to be “plainly uneconomic”.
[42] However, Mr Gould’s calculation of the potential relief excludes all those payments he contends are barred because of limitation, all payments to cover Danny’s “regular” expenses, his salary and Hassida’s expenses. These are payments which are in dispute. At this stage, I do not regard his suggested figure of $43,939.09 as accurately representing the potential relief that could be obtained by the plaintiffs from the proposed causes of action. There is also no basis to suggest that Yaron’s financial position is such that he cannot meet the costs of the derivative action.
[43] I am satisfied by reference to the prudent business person standard that the costs of the proceedings in relation to the relief likely to be obtained weighs in favour of granting leave.
Action already taken by the companies to obtain relief
[44]No action has been taken by PBL and PHL to obtain relief against Danny.
The interests of the companies in the proceedings being commenced
[45] Mr Gould submits that the derivative claims are unlikely to obtain any substantial benefits for either company given the limited amount of money at stake
once the statutory limitation period and Yaron’s longstanding acquiescence are taken into account. He further suggests that there would be little use in enforcing the judgments as the “ultimate beneficiary” of any executed judgment is the Pita Business Trust and Danny and Yaron, the co-trustees, are deadlocked.
[46] Mr Blanchard submits that the derivative claims are likely to have substantial benefits for both PBL and PHL given the quantum claimed and the very good prospect of success. He notes that PBL and PHL will not bring claims other than by means of derivative proceedings because Danny is a director and shareholder of each company. It is certain that Danny will not agree to PBL or PHL bringing ordinary proceedings against himself, and the companies are otherwise powerless to prevent company funds being misappropriated.
[47] I have already addressed the effect of Mr Gould’s limitation and acquiescence arguments. I am not persuaded that it is appropriate at this stage to consider them as limiting the scope of the proposed causes of action to such an extent that leave should be declined. I consider that a prudent business person would decide that it is in the interests of PBL and PHL to pursue the claims given the prospect of success and the quantum potentially involved. As to Mr Gould’s suggestion that there would be little use in enforcing the judgments owing to the deadlock between Danny and Yaron, I note Mr Blanchard’s submission that the relief sought (namely, the appointment of an independent trustee or a buyout order under s 174) would resolve this deadlock.
[48] In these circumstances, I am satisfied that it is in the companies’ interests that proceedings are commenced. For the reasons given above, I am further satisfied by reference to the prudent business person standard that the Court should exercise its overall discretion to grant leave to bring the proposed causes of action against the first and fourth defendants.
[49] I add this: Danny’s business structure of a holding company (the shares being vested in a family trust) owning a trading company is a common one in New Zealand. But the structure requires observance of company law and the law of trusts. That can be problematic where the underlying business is a family business and the family members operate it with scant regard to those laws. That seems to be the case here.
Yaron and Danny have fallen out and Yaron is now having recourse to some of the laws of companies and the laws of trusts which have previously been “missing in action” so far as the family business is concerned.
[50] The Court’s jurisdiction is limited to applying the law, which in cases like this can be a blunt instrument. The Court will not take account of family dynamics, and family history, except to any extent they are applicable to the legal issues.
[51]This is really a family case. It should be settled.
Result
[52] The application for an interim injunction is granted. I make the following orders pursuant to r 7.53:
1.1restraining the First Defendant, DANIEL ELIAHU, from authorising or making any payments from the bank accounts of Pita Holdings Limited (“PHL”) or Pita Bread Limited (“PBL”) to himself or to any other person or incurring any expenses for or on behalf of PHL or PBL other than in accordance with the terms of the resolution of the Boards of PBL and PHL passed on 9 August 2021;
1.2reserving leave to the parties to apply for orders varying the payment authorities agreed in the resolution of the Boards of PBL and PHL passed on 9 August 2021;
1.3directing the First Defendant to return his company credit card and to procure the return of Hassida Eliahu’s company credit card to PBL’s Finance Manager;
1.4directing the First Defendant to take all steps necessary to cancel the said credit cards with PBL’s bank;
1.5directing the First Defendant to take all steps necessary to cancel any direct debit mandates in place in respect of PBL bank accounts, for payment of any premium or other payments in relation to insurance policies in relation to the First Defendant as an insured party, or as a policy beneficiary in any capacity other than as a trustee of the Pita Business Trust.
[53] The plaintiffs have agreed that without prejudice to their claims, and pending determination of the substantive proceeding, Danny should receive a monthly payment from PHL or PBL of $20,000. I reserve leave to Danny to apply to vary or revoke any or all of the above orders if the said monthly payment falls into arrears.
[54] The application for leave to bring a derivative action under s 165 of the Companies Act 1993 is granted.
Costs
[55]Yaron is entitled to costs.
[56] If they cannot be agreed, Yaron is to file his memorandum by 1 July 2022 and Danny is to file his reply by 1 August 2022.
Brewer J
Solicitors:
McVeagh Fleming (Auckland) for Plaintiff DMG Solicitors (Auckland) for First Defendant
3
1