Galante v Orinoco Organics Ltd
[2020] NZHC 3154
•30 November 2020
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2020-442-21
[2020] NZHC 3154
Under Section 174 of the Companies Act 1993 BETWEEN
DORIT GALANTE
Plaintiff
AND
ORINOCO ORGANICS LTD
First Defendant
GILAD GRINBERG
Second Defendant
Hearing: 16 November 2020 Counsel:
A S Shaw and L C Yong for the Plaintiff
E M Horner and A D Goble for the Second Defendant
Judgment:
30 November 2020
JUDGMENT OF CULL J
Overview
[1] Dorit Galante (Dorit) applies for orders under s 174 of the Companies Act 1993 (the Act) for the liquidation of Orinoco Organics Ltd (the Company) and that her de facto spouse of 20 years, Mr Gilad Grinberg (Gilad), pay market rent for his exclusive occupation since August 2018 of the family home held by the Company (the Property).
[2] Gilad opposes the application, denying that there has been oppressive conduct and claiming that it is neither just nor equitable that the Company be wound up before the resolution of their relationship property matters.
GALANTE v ORINOCO ORGANICS LTD [2020] NZHC 3154 [30 November 2020]
The facts
[3] Dorit and Gilad have been in a de facto relationship for approximately 20 years, until their separation in August 2018 when Dorit left the Property.1 They incorporated the Company in May 2009, with the intention of conducting a business in the line of organic products. Both Dorit and Gilad are co-directors of the Company and equal shareholders holding 50 shares each.
[4] The Company’s major asset is the 5.6 hectare Property, on which is placed the former family home. The Company acquired the Property in 2011, and the parties have occupied it as their family home until their separation in August 2018. The Company owns various chattels and there are alpacas and horses on the Property, as well as equipment and vehicles, including a horse float.
[5] The Company has not actively traded nor had any employees since 2015. The parties have a son who is 17 years old and has lived with Dorit since August 2018. After the separation, Dorit left the Property and sought alternative accommodation for herself and the son (who was 15 years old at the time) and Gilad has remained in sole occupation of the Property since separation.
[6] Dorit and Gilad have interests in property in New York, held by two limited liability companies (109 Norfolk LLC and 509 Grand LLC). The companies respectively own substantial real estate. There is a third New York company, NY Brite Inc, which operated a cleaning company. Dorit claims this is her separate property.
[7] Dorit seeks relief under s 174 of the Act, seeking orders for the sale of the Property, the division of the net proceeds of sale between the shareholders, and the liquidation of the Company. Her claim is that in her capacity as a 50 per cent shareholder of the Company, she is prejudiced, because Gilad has effective control over the Company and its only asset. Her allegations are essentially that Gilad has not filed the necessary company office annual returns and failed to ensure the Property was insured. Among a number of other allegations, which it is not necessary to canvas
1 The separation date is disputed by Gilad, who says that the parties separated in September 2017. It is accepted however, that Dorit left the Property in August 2018.
in full, Dorit seeks that Gilad account to the Company payment for market rent because of his exclusive occupation of the Property since 2018. Dorit issued a statutory demand for approximately $50,000, being her calculation of occupation rental, which was ultimately paid by Gilad.
[8] Gilad defends Dorit’s claims, saying it would be unfair for her to be permitted to pursue the remedy she is seeking in relation to the Company without resolving the wider relationship property issues concerning their property interests in New York, which are in the process of being realised in part. Gilad understood that he and Dorit had wanted to deal with all property issues together and that he has offered to buy out her share of the Company once he has access to funds by way of the New York-based property assets.
[9] The relationship between Dorit and Gilad is acrimonious, and neither are speaking to each other. Gilad has not kept Dorit informed about the Property in New Zealand and nor has he asked her for her consent to rent the Property or allow tenants to stay in it. Further, he has undertaken some minor renovations and made changes to the Property, also without her consent and without seeking the necessary building consents.
[10] Dorit is in communication with the third director of the New York companies, Mr Shine, who deals exclusively with Dorit and who has offered to speak to Gilad by phone, but not in writing. Gilad considers that Mr Shine is not acting in his interests and has not spoken to Mr Shine. As a result, Gilad has not been informed, apart from the disclosure of estimated values in these proceedings and in the relationship property proceedings, about the status and current position of the New York companies interests. Gilad has just issued relationship property proceedings in the Family Court in September 2020 and a further step is required of Dorit, to file a narrative affidavit in response. No case management hearing has yet been undertaken.
[11] As a consequence of the acrimony and non-communication between Dorit and Gilad, their relationship as directors of the Company is dysfunctional.
[12] This proceeding was sent down for hearing in Nelson on 16 November 2020. On 30 October 2020, Gilad applied for a stay of the proceeding until the determination of all relationship property issues between the parties. The stay application was heard and declined by Associate Judge Johnston on 12 November 2020.2 He found that the stay application came too late and it was “not at all obvious” that Gilad would be prejudiced by the disposal of the claim in the present proceeding.3 He also observed:
[12] There is no doubt that the circumstances of this case are such as to trigger s 174 of the Companies Act. The company is deadlocked which means that it cannot discharge its obligations in respect of the filing of returns and matters of that sort. Neither party suggests otherwise.
The statutory provision
[13]Section 174 of the Act 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
2 Galante v Orinoco Organics Ltd [2020] NZHC 3008.
3 At [17].
(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.
…
[14]In the decisions applying s 174, the following principles emerge:
(1)The relief is remedial but not punitive.4
(2)An offer for buy out of a shareholder’s interests is the most frequently awarded.5
(3)Liquidation is an “extreme” form of relief.6
Issues
[15] The issues of determination on this application reflect the statutory wording under s 174. There are three issues:
(1)whether the affairs of the Company have been conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to Dorit;
(2)whether it is just and equitable for the Court to make orders under s 174; and
(3)if so, what is the appropriate relief to be granted?
[16]I deal with each of these in turn.
4 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 695; Sturgess v Dunphy [2014] NZCA 266 at [144] and [148]; and RPB Solutions Ltd v Avoca Holdings Ltd [2010] 2 NZLR 857 (HC) at [29].
5 Johnson v Sneyd HC Wellington CIV-2004-435-84, 7 December 2005 at [49]; and Sturgess v Dunphy, above n 4, at [148].
6 Vujnovich v Vujnovich [1988] 2 NZLR 129 (CA) at 155; and Thomas, above n 4, at 690.
Has there been oppressive, unfairly discriminatory, or unfairly prejudicial conduct?
[17] The leading authority on s 174 is still Thomas v H W Thomas Ltd,7 as confirmed by the Court of Appeal more recently in Sturgess v Dunphy.8 Richardson J for the Court of Appeal in Thomas emphasised that it was not necessary for a petitioner shareholder to prove a lack of probity or want of good faith towards him or her on the part of those in control of the company.9 There must be a balancing of all the interests involved and fairness should not be assessed in a vacuum or from one member’s point of view. In examining the statutory words “oppressive, unfairly discriminatory or unfairly prejudicial”, Richardson J said:10
The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.
[Emphasis added]
[18] Dorit’s concerns about the conduct of the affairs of the Company focus on Gilad’s exclusive occupation of the Property without accounting for rent since separation; his treatment of the Property as if it was his own, without consultation or agreement with Dorit; undertaking renovation and construction work on the Property; allowing for third parties to reside at the Property; and failing to attend to the Company’s annual return with the companies office and ensuring the Property and other chattels were appropriately and fully insured. There are other allegations about items of correspondence from Gilad that are unnecessary to canvas in light of the conclusions I have reached. I also consider, as I advised the parties, that some of Dorit’s allegations are overstated.
7 Thomas, above n 4.
8 Sturgess v Dunphy, above n 4, at [131].
9 Thomas, above n 4, at 693.
10 At 693.
[19] Both parties gave evidence. I consider that the claims of the Company administration shortcomings are attributable to both Dorit and Gilad. It is correct that Gilad has had exclusive occupation of the Property and has not accounted for occupational rent or tenancy of the Property. He has also undertaken non-consenting work on the Property. Dorit points to the valuers report, which identifies that a number of the renovations or changes have been completed without complying with the local body consent procedures. Mr Shaw for Dorit stressed that Dorit was prejudiced by the ongoing occupation by Gilad in the Property, without the payment of occupational rental, while Dorit is renting a property at her own expense and supporting their child herself.
[20] However, the principle issue here is the dysfunctional relationship between Dorit and Gilad as co-directors of the Company. Adopting Richardson J’s approach, currently the conduct of the Company is unjustly detrimental to both shareholders and adversely affects each of their interests, particularly in respect of the Company administration matters. With the two Company directors not communicating with each other, neither has agreed who should attend to the Company and Property matters and how expenses are to be paid. Amid accusations of who should have been responsible for the payment of the insurance premia and the completion of the Company returns, it appears that Gilad’s access to the Company email address and password had been altered. Whether Dorit had changed the password preventing Gilad from having access to the appropriate accounts and Company information was unclear on the evidence before me, but looked likely. Dorit had changed her son’s and her passwords and as a result, Gilad could no longer access the relevant information or accounts. It is clear that the situation has been reached that, in the absence of an agreed position between the directors, the affairs of the Company cannot be properly conducted.
[21] The underlying problem in this case is that the relationship property issues between the parties remain unresolved. The two property owning companies in New York have assets of an approximate worth of $3.3 million in respect of 109 Norfolk LLC and of $3.5 million for 509 Grand LLC. There is a third company, NY Brite Inc, which Dorit claims as her separate property and from which she has been receiving USD $6-7,000 a month since separation until March 2020.
[22] The third director, Mr Shine, is managing the two property owning companies and appears to be communicating exclusively with Dorit. There is no formal valuation of those companies or any information supporting the value of the companies. The approximate values I have described above emerged from the oral evidence of Dorit in the hearing before me. She was unclear about the certainty of those values.
[23] Dorit has taken no steps independently, in relation to the resolution of the relationship property issues. Instead, she has pursued a statutory demand of the Company to pay her $50,000, being her occupational rental claim for Gilad’s occupation of the family home. Dorit has also made this application, seeking liquidation of the Company and an accounting of Gilad’s further occupational rent.
[24] Gilad believed that the parties had an agreement that he would retain the Company and Property and buy-out Dorit’s share. Dorit, on the other hand, was to have the option of buying his shares out of the New York properties although realisation of some of the New York property assets was going to have to be undertaken. Gilad has offered to buy out Dorit’s share of the Company but awaits the disposition of sale proceeds from one of the New York properties held by 109 Norfolk LLC. An apartment has been on the market for a year and is currently under offer for
$2.14 million (USD).
[25] As noted, Gilad filed relationship property proceedings in September 2020 and those proceedings await their first case management conference. It is evident from the above that until the relationship property issues are resolved between the parties, the deadlock between them as directors of the Company will continue.
[26] I find that both directors have equal responsibility in respect of the current dysfunction and deadlock between them, such that both parties’ conduct in administering the Company is unjustly detrimental to each of the shareholders and adversely affects each of their interests. The detriment to Dorit is that without proper administration and independent investment, the value of the Property is likely to diminish. I find, therefore, that the conduct of the affairs of the Company has led to an unjust detriment to the interests of both shareholders and s 174(1) is triggered.
[27] For completeness, I do not uphold Dorit’s claim that she in particular has been prejudiced by Gilad’s exclusive occupation of the Property. Although Dorit is paying rent for alternative accommodation, I record that she dispersed $250,000 each to Gilad and herself from the parties’ bank account at the time of separation. Since separation, she confirmed to the Court she has received between $6-7,000 (USD) per month until March 2020 from NY Brite Inc, which she claims is separate property but Gilad claims is relationship property. Further, as a result of Dorit’s statutory demand, Gilad has paid her $48,000, and a further $89,000 (USD) in a US bank account was retained by Dorit on the basis she claims it was her separate property. I am therefore unable to uphold Mr Shaw’s submission that there has been financial prejudice to Dorit that warrants immediate or extreme relief.
Is it just and equitable for the Court to make orders under s 174?
[28] As Richardson J explained in Thomas v H W Thomas Ltd, it is the “unfairly detrimental” effect of a company’s affairs upon the complaining party that justifies relief.11 It is relevant to set out his observations, where he adopted the following passage from the speech of Lord Wilberforce in Ebrahimi v Westbourne Galleries Ltd:12
The words [just and equitable] are a recognition of the fact that a limited company is more than a mere legal entity, with a personality in law of its own: that there is room in company law for recognition of the fact that behind it, or amongst it, there are individuals, with rights, expectations and obligations inter se which are not necessarily submerged in the company structure. That structure is defined by the Companies Act and by the articles of association by which shareholders agree to be bound. In most companies and in most contexts, this definition is sufficient and exhaustive, equally so whether the company is large or small. The 'just and equitable' provision does not, as the respondents suggest, entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.
[29] Counsel for Dorit and Gilad acknowledge that the “just and equitable” requirement under s 174(2) requires that the Court engage in a balancing exercise,
11 Thomas, above n 4, at 694.
12 Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL) at 379.
weighing up the interests of all parties. The courts have made orders under s 174 where there has been an irretrievable breakdown of relationships within the Company, as Mr Shaw submits.13
[30] As I have concluded above, the underlying basis for the breakdown of the relationship and communication between the parties flows from the circumstances of their separation in August 2018. The dysfunctional relationship between them as co- directors of the Company is hampering the proper administration of the Company’s affairs and detrimentally affecting both their interests, as noted. I note also that, as a consequence of the parties separation, the purpose for which the Company was incorporated can no longer be furthered. The Company, however, holds the family home and Property as an asset and the preservation of that Property, by way of insurance, payment of rates and other outgoings needs to be sustained.
[31] The Court is given a broad discretion to “make such order as it thinks fit”, including interim relief such as the appointment of a receiver or, as appropriate, an interim liquidator, where there is “prima facie evidence of unfair prejudice”.14 However, the authorities reinforce that the remedy is not punitive but remedial and that liquidation is an “extreme” form of relief, which should be available only in exceptional cases.15 As the commentators record, of the various forms of relief, “there is no doubt that the buy-out order is by far the most frequently awarded”.16
[32] Applying those principles to the evidence in this case, I reach the following conclusions:
13 Fox v Jubilee Management Ltd HC Palmerston North CIV-2008-454-935, 6 March 2009; Campbell v Marble Point Winery Ltd [2017] NZHC 1412; and Vujnovich v Vujnovich [1989] 3 NZLR 513.
14 Peter Watts, Neil Campbell, and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at [21.3.3], see footnote 498 referring to Pounamu International Ltd v Lehen [2014] NZHC 3394 at [13]; Pringle v Callard [2007] EWCA Civ 1075 at [21]-[37]; Greymouth Holdings Ltd v Jet Trustees Ltd [2011] NZHC 2083 at [40]-[50]; Coleman v Lambie Assets Ltd [2013] NZHC 244 at [1], [6]-[10], [17]-[24]; and Simpson v Blythe [2013]NZHC 497 at [1]-[9].
15 Vujnovich, above n 6, at 155.
16 Watts, Campbell, and Hare, above n 14, at [21.3.3], see footnote 517 referring to Grace v Biagioli [2005] EWCA Civ 1222 at [74]-[75]; Stilwell v Ice Group (NZ) Ltd [2012] NZCA 136 at [79]; and Sturgess v Dunphy, above n 4, at [148].
(1)Gilad wishes to retain the Property and has made an offer to buy out Dorit’s share, when all the valuations of their respective relationship properties are available.
(2)Although the Company is not fulfilling its purpose by operating a business, it holds a property that requires preservation.
(3)If liquidation of the Company was ordered, a strategic or tactical advantage would be obtained by Dorit, because she still has her option of retaining the property in New York by buying out Gilad’s share. Gilad, however, will be deprived of his option to retain the New Zealand Property.
(4)There is fault on both sides of this dispute about the conduct of the Company.
(5)The buy-out option should be preserved by way of relief, as to order liquidation in these circumstances would be harsh, punitive and detrimental to one party’s property interests.
[33] In reaching those conclusions, I am cognisant of the decisions of Fox v Jubilee Management Ltd17 and Kerridge v Kerridge,18 in which parties were able to pursue remedies outside of the Property (Relationships) Act 1976. However, I consider it would be unjust and inequitable to ignore the wider relationship property context in this case, where the granting of “a blunt and drastic remedy” as described by the Court of Appeal in Thomas “is ringed with difficulties and disadvantages”.19
[34] As I have concluded, I consider that ordering liquidation of this Company would provide Dorit with a tactical advantage over Gilad, deprive him of the opportunity of retaining the family home and Property yet give her the option of retention and buy-out of the New York properties. All of the financial and valuation disclosure of the New York interests has not been provided, is not available to this
17 Fox, above n 13.
18 Kerridge v Kerridge [2008] NZCA 14, [2009] 2 NZLR 763.
19 Thomas, above n 4, at 690.
Court, and requires determination in the appropriate jurisdiction, namely the Family Court.
[35] I decline to make an order for liquidation of the Company under s 174(2)(g) of the Act. I have reached the view that the conduct of the affairs of the Company must be undertaken by an independent and competent professional, such as a local accountant, who can attend to the filing of the annual company returns, ensure that the Property is appropriately insured and can check on the progress of Gilad in obtaining compliance certificates for the changes made to the Property.
Relief
[36] In light of my conclusions and findings above, I confirm my indications to Counsel at the hearing that I was minded to appoint a receiver under s 174(2)(e) of the Act, as an independent professional to attend to the orderly administration of the Company’s affairs, oversee and organise the filing of the Company’s annual returns, the payment of insurance premia, and all other necessary outgoings to preserve the Property.
[37] In addition, in light of the non-compliance matters that were raised in the valuation report of the Property, Gilad has undertaken to his Counsel to attend to those compliance issues. The receiver should maintain contact with Gilad to check that those matters have been completed satisfactorily.
[38] I granted Counsel leave to file a memorandum within five days nominating an agreed and appropriate receiver, preferably a local accountant or professional with an appropriate fee rate to be approved by both parties. By agreement, Counsel have nominated Mr Geoff Falloon, Chartered Accountant of Biz Rescue Ltd, Nelson to be appointed as receiver of Orinoco Organics Ltd.
[39]Accordingly:
(1)I appoint Mr Falloon as receiver of Orinoco Organics Ltd, to conduct the affairs of the Company as required, to monitor the progress on work on the Property and to take such steps to preserve the Property, until the
determination of the relationship property proceedings extant in the Family Court in Nelson.
(2)As part of his function, Mr Falloon is to fix a notional occupational rental for the Property, by seeking an appropriate appraisal to determine the appropriate sum.
(3)The notional occupational is not payable by Gilad but will be factored into the final reconciliation of the Property and financial between the parties on resolution of their relationship property claims.
[40]The costs of the receiver are to be borne as follows:
(1)the cost of the receiver in the conduct of the affairs of the Company are to be borne equally by the parties;
(2)the outgoings of the Property, namely the rates and insurances and any costs of compliance, are to be borne in the first instance by Gilad as a consequence of his sole occupation of the Property, and are to be resolved in the final determination of property matters and financers of both parties; and
(3)the cost of obtaining any further Company valuations are to be borne jointly by the parties.
[41] Leave is reserved for Counsel to file memoranda, in the event further orders are required.
Cull J
Solicitors:
C & F Legal Ltd, Nelson for the Plaintiff
Mahony Horner Lawyers, Wellington for the Second Defendant
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