G J Lawrence Dental Ltd v Alusi Ltd

[2018] NZHC 1342

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-Ā-TARA ROHE

CIV 2018-485-117

[2018] NZHC 1342

IN THE MATTER

of a deed of association dated 2012

BETWEEN

G J LAWRENCE DENTAL LIMITED

Plaintiff

AND

ALUSI LIMITED

First Defendant

AND

OPENYD LIMITED

Second Defendant

AND

RUDAYNA IBRAHIM, ABDULAH ABDULQADIR AND OMAR JASSIM

Third Defendants

CIV 2018-485-118

UNDER

Part 31 of the High Court Rules

IN THE MATTER

of an application under section 241 of the Companies Act 1993 to put a company into liquidation

BETWEEN

G J LAWRENCE DENTAL LIMITED

Plaintiff

AND

OPENYD LIMITED

Defendant

Hearing:

7 May 2018

Counsel:

R C Laurenson for G J Lawrence Dental

C Griggs and C M Kenworthy for Alusi Ltd and Openyd Ltd and Third Defendants

Judgment:

8 June 2018

G J LAWRENCE DENTAL LIMITED v ALUSI LIMITED [2018] NZHC 1342 [8 June 2018]

JUDGMENT OF SIMON FRANCE J

[1]    Dr Gary Lawrence started a dental practice in Raumati Beach in 1980. In 1996, he sold a third of the practice to each of two dentists. Since then the business has effectively had three participants.

[2]    The operation model has generally been three individual entities with an association agreement between them covering matters such as organisation, staff and common costs. The three individual entities have for some time each formed companies through which to offer their professional services. When the practice became three, a joint company was formed, Openyd, as a holding and administration company. Ownership of one-third of Openyd, and directorship, generally transferred with each sale of a third. There were rules covering transfer of shares if one entity acquired two of the three units. Dr Lawrence has been a constant presence throughout the period. The other thirds have changed.

[3]    In 2012 Dr Ibrahim bought out an existing third. Like others before her, she formed her own company. So, in 2012 there were four companies:

(a)Openyd – the administration company;

(b)G J Lawrence Dental Ltd (Lawrence Dental) – Dr Lawrence’s practice;

(c)Creative Dentistry Ltd (Creative) – Dr Al-Sabak’s practice;

(d)Alusi Ltd (Alusi) – Dr Ibrahim’s practice.

A fresh deed of association was entered into between the three practices.

[4]    The three entities began to experience relationship difficulties in 2016. The history of this need not be detailed here but there have been, amongst other things, disputes over the intended sale of entities, either to a third party or to another of the

existing practices. In the latter case, the dispute was as to whether agreed processes were followed.

[5]    On 1 November 2017, the sale of Creative to Alusi was settled. Lawrence Dental submits that in these circumstances the Deed of Association requires Creative’s shares in Openyd to transfer to Lawrence Dental and Alusi equally. However, no transfer has occurred. Instead Alusi claims Creative has given it a power of attorney over its Openyd shares. If valid, Alusi controls two-thirds of Openyd.

[6]    To add to the complexities, in 2011 Openyd, the administration company, entered into an agreement to lease the existing premises for seven years with two rights of renewal. The owner of the premises, and lessor, is Dr Lawrence’s family trust. There is currently a dispute over Lawrence Dental’s occupancy, as Openyd has purported to terminate what is said to be a tenancy.

Present proceedings

[7]    Pursuant to the deed of association, on 13 November 2017 Lawrence Dental gave notice of an intention to retire from the association. This notice triggers rights in the other entities (by then only Alusi as now owner of two-thirds) to seek to purchase Lawrence Dental. Alusi chose not to.

[8]    Lawrence Dental sought unsuccessfully to sell to a third party. It says it was hampered in this endeavour by on-going disputes with Alusi. Whatever the cause, no sale eventuated. The deed of association provides that three months after the November notice, if the retiring party has not sold, the association is to be liquidated. That three month period obviously has passed.

[9]Lawrence Dental has filed two proceedings:

(a)118 – an application to place Openyd into liquidation. This is based both on the cancellation of the deed of association which removes Openyd’s purposes, and because it is said Alusi are operating Openyd in an oppressive, unfair and prejudicial manner to Lawrence Dental;

(b)117 – an application for declarations concerning the status of the deed of association, and an application that a receiver be appointed.

[10]   Alusi have challenged the proceedings by way of protest to jurisdiction, it being alleged that the subject matter of both proceedings is governed by the arbitration clause in the deed of association. Alusi seeks a stay of the proceedings. Lawrence Dental disputes the arbitration clause applies, and otherwise claims that Alusi by its conduct has submitted to jurisdiction.

[11]   This ruling addresses the jurisdiction dispute. The logical framework is first to decide if the arbitration clause applies. If it does, then the issue arises whether Alusi has nevertheless submitted to jurisdiction.

The deed of association

[12]The deed of association is fully described in G J Lawrence Dental v Alusi.1

The key arbitration provisions are cl 19 and 20 which provide:

19Termination of the arrangement shall not operate so as to affect any provisions of this agreement which are intended to continue after termination.

20All questions, differences or disputes whatsoever which may arise between parties touching or concerning this agreement or the construction, meaning, operation or effect hereby or any clause herein contained or as to rights, duties or liabilities of the parties or any of them under or by virtue of this agreement shall if they cannot be resolved by negotiation between the parties be referred to a single arbitrator nominated by mutual agreement between the parties and in the event of non-agreement between the parties of the Wellington District Law Society who shall not be or have every [sic] been a dental practitioner. The arbitration shall be conducted in accordance with the provisions of the Arbitration Act 1996 or any statutory modification or re-enforcement therefore for the time being in force.

[13]   As noted, the parties to this deed are Lawrence Dental, Alusi and Creative. Specifically, it is to be noted Openyd is not a party to the agreement.

1      G J Lawrence Dental Ltd v Alusi Ltd [2018] NZHC 533 at [11]–[14].

Openyd

[14]   There are three shareholders in Openyd – Lawrence Dental, Alusi, and Creative each hold one third. Since 1 November 2017, Alusi has had control of Creative’s share by way of a power of attorney and proxies. At a meeting, the legitimacy of which is contested, Dr Lawrence was removed as a director and chair and Dr Ibrahim’s son was appointed as a director and chair. Putting aside issues of validity, the present directors are Dr Ibrahim and her son.

Analysis

Proceeding seeking appointment of receiver to sell assets of association

[15]The proceeding in 117 seeks:

(a)a declaration that cl 14 of the deed, which deals with what happens when the business is dissolved, applies. The effect would be the appointment of a receiver to conduct the sale of assets;

(b)orders concerning who is to be receiver;

(c)an interim injunction (already dealt with);2 and

(d)an inquiry into damages for breach of the deed of association.

[16]   The pleading pleads the history, alleged role and functions of Openyd, the existence of the association and the terms of the deed of association, and then contains a section headed “Events since 22 December 2017”. These events are what are pleaded to amount to repudiation of the deed, and to breaches of the deed meriting the inquiry into damages.

[17]   It seems to me one only needs to set these out to recognise that at least at first blush, the arbitration agreement plainly applies. A key aspect of the proceeding is whether the deed has been validly cancelled and the effect of that if it has. It is

2      Alusi, above n 1.

common ground that by virtue by cl 19 of the deed, the arbitration clause, continues in effect to settle disputes concerning termination. Another key aspect is the claim for damages, something which necessarily raises the whole of the dispute.

[18]   Mr Laurenson’s response is that while all this is apparently so, the reality is that there is no dispute to refer to arbitration. He submits no one has challenged the validity of Dr Lawrence’s cancellation process, or its successful culmination which is to bring the association to an end. In making this submission Lawrence Dental rely on art 8(1) of Schedule 1 to the Arbitration Act 1996 which provides:3

8Arbitration agreement and substantive claim before court

(1)A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.

[19]   In Zurich Australian Insurance Ltd v Cognition Education Ltd, Supreme Court held that there is distinction between a situation in which one party’s argument is very likely to be overcome, and those where the defendant is not really raising a dispute at all.4 It is only the latter that came within art 8(1). The Court observed:

… The added words [i.e. those in italics in art 8(1) above] act so as to filter out cases where the defendant is obviously simply playing for time – the bald assertion of a dispute is not enough to justify the granting of a stay where it is immediately demonstrable that there is, in reality, no dispute.

[20]   Lawrence Dental refers to a collection of evidence consistent with the proposition that the deed of association is agreed to be at an end:

(a)Lawrence Dental’s letter to that effect;

(b)a letter from the solicitor for Alusi acknowledging the irrevocable effect of Lawrence Dental’s notice;

3      Emphasis added.

4      Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383.

(c)other correspondence that seems premised on the association having ended; and

(d)the de facto reality of separate businesses now being run (unhappily) out of the same premises.

[21]   Alusi provides only a partial answer to this proposition. It notes that Lawrence Dental claims the association is at an end by virtue of either repudiation by Alusi or the effect of Dr Lawrence’s notice. The idea of repudiation is contested, but the submissions did not address the second basis for cancellation.

[22]   However, that is not fatal to the application for a stay. The proceeding seeks damages for breach and thereby goes wider than the narrow issue of the effectiveness of Lawrence Dental’s notice of dissolution. The claim for damages in reality puts in issue the whole dispute. Whilst the pleading may focus on the events since December 2017, the background context and history is inevitably raised. These are all matters covered by the arbitration agreement.

[23]   It follows that, subject to the issue of whether Alusi has submitted to jurisdiction, pursuant to art 8(1) of Schedule 1 of the Act, a stay must be entered.

Proceeding (118) seeking an order placing Openyd into liquidation

[24]   Mr Laurenson opposes the stay application on two bases – first, that Openyd is not a party to the arbitration agreement, and second, that an application to place a company into liquidation is not arbitrable. The latter is a proposition of some complexity, but it is not necessary to resolve it. I am satisfied that the correct course is to stay 118 pursuant to r 15.1(3) of the High Court Rules 2016. The stay is to allow proceeding 117 to be resolved by arbitration. The reason for this is the link between the two proceedings.

[25]   The reference to Openyd not being a party to the arbitration agreement is technically correct but masks the reality of 118 as pleaded by Lawrence Dental. Lawrence Dental’s consistent position, found throughout the proceedings, is that

Openyd exists only as a functionary of the association. The parties to the association are its sole shareholders and it has no other purpose.

[26]   The pleading in 118 cites extensively from the deed of association. It pleads the events said to constitute cancellation and dissolution of the association. It claims shareholder oppression based on the same disputes and actions that will inform the damages claim in 117. These are two aspects of the same broad dispute.

[27]   I am not persuaded that the fact Openyd is not a party to the deed means that this proceeding is not affected by the arbitration agreement. The matters underlying the liquidation application very much involve the operation of the association and the rights, duties and liabilities of the parties to the deed. It cannot be ignored, as Lawrence Dental itself emphasises, that the reason for Openyd’s existence is to give effect to the deed and the association’s decisions.

[28]   The second matter raised by Lawrence Dental is that the court power to appoint a liquidator is one of an increasingly rare areas reserved to the Court and immune from arbitration. If that is correct, (which I do not determine) then the effect of the proceeding is an abuse of process. As discussed, the factual basis advanced for the claim that liquidation is just and equitable falls squarely within the scope of the arbitration agreement. To the extent that the agreement by the parties to resolve disputes by arbitration would thereby be thwarted by a choice of remedy, I consider there is an element of abuse of process.

[29]   Again, subject to the issue of submission to jurisdiction, it is for these two reasons I consider the proceeding should be stayed pending determination of the subject matter of 117. As discussed, determination of that subject matter will be of significance to the basis advanced for liquidation.

Submission to jurisdiction

[30]   Alusi (and related entities) filed a protest to jurisdiction in both matters in a timely way. It then participated in interlocutory proceedings prior to the hearing of its stay application. Lawrence Dental claims Alusi has thereby submitted to jurisdiction.

[31]There are two relevant acts by Alusi said to constitute submission:

(a)participating in Lawrence Dental’s application for interim relief; and

(b)filing a related set of proceedings.

[32]   In terms of interim relief, the 117 proceedings, concerning the winding up of the association, sought interim injunctions restraining Alusi, Openyd, and Openyd’s directors, from:

(a)taking any action of any kind against Dr Lawrence, his company and his employees; and

(b)taking any steps to enforce a notice of termination of tenancy.

[33]   The second of these applications was dealt with by an undertaking from all the defendants not to take any steps pending orders from the Court. There was an initial undertaking given under urgency, and then an expanded undertaking at the substantive hearing. The wider undertaking covered damages for non-compliance. However, in relation to the first injunction, a notice of opposition (but no evidence) was filed. The application was then successfully resisted.

[34]   The second act of Alusi said to constitute submission is the filing by Openyd of a further set of proceedings. In these proceedings Openyd have made an application for possession of land, namely the Raumati Dental Centre. Openyd seeks to enforce its purported termination of Dr Lawrence’s tenancy.

[35]   It is convenient to begin by noting art 9 of Schedule 1 to the Arbitration Act which makes it plain that a party may seek interim relief from a Court notwithstanding an arbitration agreement:

9Arbitration agreement and interim measures by court

(1)It is not incompatible with an arbitration agreement for a party to request, before or during arbitral proceedings, from a court an interim measure and for a court to grant such measure.

(2)For the purposes of paragraph (1), the High Court or the District Court has the same powers as an arbitral tribunal to grant an interim measure under article 17A for the purposes of proceedings before that Court, and that article and article 17B apply accordingly subject to all necessary modifications.

(3)Where a party applies to a court for an interim injunction or other interim order and an arbitral tribunal has already ruled on any matter relevant to the application, the court shall treat the ruling or any finding of fact made in the course of the ruling as conclusive for the purposes of the application.

[36]   In terms of whether participation in such an interlocutory matter amounts to submission to jurisdiction, Lawrence Dental relies primarily on Advanced Cardiovascular Systems Inc v Universal Specialties Ltd.5 There the Court of Appeal held that a protest to jurisdiction must be determined prior to the Court conducting a hearing on the proceeding, whether substantive or interlocutory. Otherwise, the party will have submitted to jurisdiction.

[37]   In that case, Universal Specialties Ltd (USL) filed proceedings in New Zealand seeking a contractual termination payment. USL also sought summary judgment. Advanced Cardiovascular Systems Inc (ACS) was served overseas. It responded by filing a protest to jurisdiction. This issue was considered by the Master who rejected the protest. ACS sought a review of the Master’s decision. The High Court decided  it should first hear the summary judgment proceeding, and proceeded to do so. The Court of Appeal held this to be in error, observing:6

… An application for summary judgment  is  an  interlocutory  application (R 138) and accordingly this particular application is part of a proceeding which is under challenge as to jurisdiction. If the Court entertains the summary judgment application it is thereby necessarily accepting jurisdiction to hear and determine the proceeding. It is difficult to see how the Court can thereafter logically decide that it has no jurisdiction. It is the jurisdiction of the Court to entertain the claim which is now at issue, and that must be determined prior to the Court embarking on a hearing of the proceeding, whether substantively or in any interlocutory way. If the summary judgment application were to proceed, ACS would have to submit to the jurisdiction if it desired to defend. That would almost certainly involve the filing of affidavits, as well as an appearance by counsel to argue the issues.

The emphasised sentence is relied on by Lawrence Dental.

5      Advanced Cardiovascular Systems Inc v Universal Specialties Ltd [1997] 1 NZLR 186 (CA).

6      At 189–190 (emphasis added).

[38]   Reliance is also placed on The Property People Ltd v Housing New Zealand Ltd.7 In that case proceedings concerning the termination of a contract were filed. Relief by way of interim injunction was sought. The injunction was opposed, and rejected. The plaintiff then unsuccessfully appealed. Subsequent to the appeal, the defendant raised a protest to jurisdiction. Salmon J held it was too late. However, his Honour expressed his conclusion in these terms:8

In order to be able to rely on art 8(1) the defendant should have applied for a stay at least prior to the hearing of the interim injunction application. Its failure to do so means that it cannot rely on art 8.

[39]   The difference here, of course, is that Alusi did file its protest before the hearing of the injunction. Advanced Cardiovascular Ltd can also be distinguished because there the application was for summary judgment, which by its nature addresses the substance and seeks to determine the proceeding. It is quite different from interim relief.

[40]   Article 9 expressly reserves to the Court the ability to grant interim relief, and to the parties the right to seek it without acting in a way incompatible with the arbitration agreement. It would be unexpected if defending a permitted application for interim relief constituted waiver of the protest to jurisdiction. I do not consider Advanced Cardiovascular should be read as requiring that outcome.

[41]   It accords with the justice of the matter not to see defending the injunction as having this drastic consequence. If as here the Court lists the interim relief matter for hearing, the defendant would be in an impossible position if to defend it would cost it the right to protest jurisdiction.

[42]   Similar situations have arisen. In Pathak v Tourism Transport Ltd the plaintiffs filed a notice of proceeding, statement of claim and an application for an interim injunction.9 Express reference was made at the time to an arbitration agreement. The interim relief application was resolved by way of undertakings. Subsequent to this resolution, the plaintiff took several further steps – seeking further and better

7      The Property People Ltd v Housing New Zealand Ltd (1999) 14 PRNZ 66 (HC).

8      At [24] (emphasis added).

9      Pathak v Tourism Transport Ltd [2002] 3 NZLR 681 (HC).

particulars of the defence, providing further particulars of the claim, swearing a list of documents, filing a memorandum of counsel which detailed the substantive claim, and inspecting documents.

[43]   Heath J held that these subsequent steps subsequent to the undertakings constituted submission to jurisdiction. However, of importance to this case, his Honour noted that had the plaintiff sought a stay immediately after the resolution of the application for interim relief, the proceedings would have been stayed.10 That is the situation here. The protest was lodged prior to interim relief, and the stay has been pursued after the matter was resolved by way of judgment.

[44]   Pathak was applied in Opus International Consultants Ltd v Projenz Ltd.11 Opus had filed a statement of claim and sought interim relief. However, it was made plain it would thereafter seek a stay. The Master considered a delay of three weeks between the interim relief decision and the stay application was not fatal. Unlike Pathak there had been no substantive steps taken in that time.

[45]   Consistent with these decisions, I do not consider Alusi’s participation in the interim injunction proceedings constitutes submission to jurisdiction. I consider that to be the logical effect of art 9, although as noted the better course is first to determine the protest.

[46]   The other matter relied upon as constituting submission is the filing by Openyd of an application for possession of the Raumati Dental Centre. Mr Laurenson submits it would be an abuse to allow Alusi to obtain a stay on these proceedings whilst itself submitting aspects of the dispute to the Court.

[47]   The resolution of these new proceedings lies in a determination of the legal basis on which Lawrence Dental occupies its position of the premises (leaving to one side the disputes about control of Openyd). I do not consider these proceedings constitute submission to jurisdiction in 117 or 118. The context is the same but the

10 At [49].

11     Opus  International  Consultants  Ltd  v   Projenz   Ltd   HC   Auckland   CIV-2003-485-1387, 17 March 2004.

particular order sought is quite different. It is open to Lawrence Dental, if it wishes, to claim the arbitration agreement applies.

Conclusion

[48]   The application for a stay is granted. The protest to jurisdiction is validly brought and Alusi has not submitted to the Court’s jurisdiction. Pursuant to art 8(1) the matter must therefore be stayed.

[49]   Memoranda on costs may be filed, but I indicate I am not aware of any reason why scale costs following the event should not apply.

[50]   There is an extant application for leave to appeal the costs aspect of the injunction decision. The parties should approach the Registrar for hearing time.

Simon France J