Geerkins v Sietec Wholesale Networks Ltd
[2021] NZHC 1459
•21 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-1750
[2021] NZHC 1459
BETWEEN DENNIS JOHN GEERKINS
and
COMMUNITEL NZ LIMITED
PlaintiffsAND
SIETEC WHOLESALE NETWORKS LTD
First Defendant
SIETEC (NZ) LIMITED
Second Defendant
CIV-2020-404-2486 BETWEEN
SIETEC (NZ) LIMITED
PlaintiffAND
COMMUNITEL NZ LIMITED
First Defendant
SIETEC WHOLESALE NETWORKS LIMITED
Second Defendant
Hearing: 14 June 2021 Appearances:
Caitlin Hadlee and Sarah Cachopa for Geerkins and Communitel NZ Ltd
Chris Patterson and E Grove for Sietec (NZ) Ltd
Judgment:
21 June 2021
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 21 June 2021 at 12 noon
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
GEERKINS v SIETEC WHOLESALE NETWORKS LTD [2021] NZHC 1459 [21 June 2021]
[1] These proceedings concern internal differences in Sietec Wholesale Networks Ltd. In the first proceeding, the plaintiffs, Mr Geerkins and Communitel NZ Ltd, seek a liquidation order. In the second, the plaintiff, Sietec (NZ) Ltd, seeks relief under s 174 of the Companies Act 1993. Under that section the court may give relief to prejudiced shareholders where the affairs of the company are being conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to them. Sietec (NZ) Ltd applies to strike out the liquidation proceeding, saying that it no longer serves any useful purpose.
[2] In my judgment, the liquidation proceeding can still serve a useful purpose and should not be struck out. All the same, the liquidation application is awkward in the circumstances of this dispute. It could be improved if Mr Geerkins and Communitel NZ Ltd were also to seek relief under s 174 of the Companies Act. I can only suggest that, but cannot order it. The parties are working constructively to resolve differences. A hearing may not be required but I give directions as a back-up.
Background
[3] The protagonists, Mr Dennis Geerkins and Mr John McAdam, are the directors of Sietec Wholesale Networks Ltd. Sietec Wholesale Networks Ltd’s shareholders are Communitel NZ Ltd, a company associated with Mr Geerkins, and Sietec (NZ) Ltd, a company associated with Mr McAdams. Sietec Wholesale Networks Ltd was incorporated in December 2008.
[4] Communitel NZ Ltd, established in 2006, sold IT and telecommunications products and services. Sietec Wholesale Networks Ltd carries on a similar business, re-selling communications services. Until 2013, it was a wholly-owned subsidiary of Sietec (NZ) Ltd. Following negotiations and a memorandum of understanding in 2013, in 2014 Communitel NZ Ltd became a 50 per cent shareholder of Sietec Wholesale Networks Ltd and Mr Geerkins became a director. The transfer of its business was its consideration for the shares it took. At that time, there were three
directors – Mr Geerkins, Mr McAdams and a Mr Donald Hattaway. Mr Hattaway later resigned as director. There is no constitution or shareholders’ agreement for Sietec Wholesale Networks Ltd.
[5] Sietec (NZ) Ltd is the sole shareholder of these subsidiaries: Sietec Security Ltd, Sietec (8 Squared) Ltd and Sietec Advanced Networks Ltd. Mr McAdams is their sole director, although Mr Hattaway was director of the first two until 2019.
[6] Differences have grown between Mr Geerkins and Mr McAdams. Mr Geerkins’ essential complaint is that Mr McAdams has treated Sietec Wholesale Networks Ltd as if it were a wholly-owned subsidiary of Sietec (NZ) Ltd in the same way as the other subsidiaries, and has ignored Communitel’s 50 per cent interest. His complaints include:
(a)Sietec Wholesale Networks Ltd made a loan to Sietec (NZ) Ltd to fund the exit of a former shareholder. That loan was written off against unjustified and unreasonable charges by Sietec to Sietec Wholesale Networks Ltd;
(b)Sietec Wholesale Networks Ltd operates from the same premises as Sietec (NZ) Ltd but has been charged a disproportionate share of the rent for the space it occupies;
(c)Sietec (NZ) Ltd has charged Sietec Wholesale Networks Ltd unjustified and unreasonable costs, management fees and operating expenses. A cost-sharing scheme introduced in 2019 is calculated to divert Sietec Wholesale Networks Ltd’s profits to Sietec (NZ) Ltd;
(d)Mr Geerkins has been consistently out-voted at board meetings when he has objected to these matters;
(e)Mr Geerkins’ access to Sietec Wholesale Networks Ltd’s Datagate portal, email account, and Dropbox account has been removed and he
is unable to access customer details and cannot carry on his job properly;
(f)Sietec (NZ) Ltd has invoiced Sietec Wholesale Networks Ltd’s customers for work carried out by Sietec Wholesale Networks Ltd, leaving the costs with Sietec Wholesale Networks Ltd but the profits with Sietec (NZ) Ltd.
[7] In September 2020, Mr Geerkins and Communitel NZ Ltd began their liquidation proceeding but they named only Sietec Wholesale Networks Ltd as defendant. As director and shareholder, they have standing under s 241(2)(c)(ii) and
(iii) of the Companies Act 1993 to apply. They apply on three grounds:
(a)the company or the board has consistently and seriously failed to comply with the Companies Act (s 241(4)(b));
(b)the company, or one or more of its directors or shareholders, has in a persistent or serious way failed to comply with duties relating to the company under the Companies Act (s 241(4)(bb)(i)); and
(c)it is just and equitable that the company be put into liquidation (s 241(4)(d)).
[8] At the same time, they applied for an order appointing interim liquidators. I infer that that explains why they did not include a claim for relief under s 174 of the Companies Act. The prospects of putting the company into interim liquidation would not have been so good if they also claimed under s 174. On an application to appoint an interim liquidator, the court must be confident that a liquidation order will be made. Such an application would not look so convincing if relief were sought under s 174, where a liquidation is only one of a number of remedies.
[9] The interim liquidator application was resolved by Sietec (NZ) Ltd and Mr McAdams undertaking not to compete against Sietec Wholesale Networks Ltd. There have been difficulties with that undertaking. It was conditional.
Sietec (NZ) Ltd has threatened to disregard the undertaking on the basis that the condition is not being satisfied. Sietec (NZ) Ltd filed a statement of defence as shareholder under r 31.16(2) of the High Court Rules 2016.
[10] In December 2020, Sietec (NZ) Ltd began its proceeding seeking relief under s 174 of the Companies Act. The statement of claim pleads a deadlock in management between Mr McAdams and Mr Geerkins, but does not otherwise plead anything oppressive, unfairly discriminatory or unfairly prejudicial under s 174. Communitel NZ Ltd’s statement of defence admits that it is just and equitable to grant relief but says that the relief is required to avoid prejudice to it.
[11] In a case management conference of 26 February 2021, I recorded the parties’ agreement that there is a deadlock and a separation of interests needs to be arranged. The parties advised me that they were exploring a process to value shares and set a buy-out price. They said that if that process could be completed that would save the parties spending time and money on litigation. I held that the parties were not required to take any steps in either proceeding in the meantime. The parties have treated that as a stay of both proceedings. In a minute of 26 March 2021, I recorded that the parties had not yet reached agreement but they hoped to do so soon. Sietec (NZ) Ltd made its strike-out application on 22 April 2021.
[12] In the hearing, the parties confirmed that progress has continued in arranging for expert determination by an accountant to fix a buy-out price for the business, with each side to submit tenders for the business. They agreed that they were 99 per cent of the way there.
Procedural matters
[13] Before the strike-out application, some procedural matters need attention. In the liquidation proceeding, Sietec (NZ) Ltd was not initially joined as a defendant. In a minute of 2 October 2020, Associate Judge Smith held that Sietec (NZ) Ltd was entitled to file a statement of defence under r 31.16, without it being joined as a party. With great respect to Associate Judge Smith, I disagree. As there is a deadlock in the management of Sietec Wholesale Networks Ltd, no one can give instructions for that
company to defend the proceeding. In deadlock cases, it is always appropriate to join the opposing shareholder as a party to the proceeding, to ensure that those opposing the liquidation application have standing as a party, with all the associated rights and liabilities – for example, to defend the proceeding, to present evidence and submissions, to appeal and to pay any costs. The parties agreed that Sietec (NZ) Ltd should properly be a party to the liquidation proceeding. It is added as a second defendant under r 4.56 of the High Court Rules.
[14] Part of Sietec (NZ) Ltd’s case is that the pending liquidation application is having an adverse effect on its business. I deal with that aspect later, but it does raise the matter of advertising. Under r 31.9 of the High Court Rules, a liquidation application must be advertised. Advertising is appropriate when liquidation is sought on the insolvency ground. That is because other creditors of the company should be given the opportunity to take part in the proceeding. But it is not always appropriate in other cases. Here the parties are confident that the company is solvent and is meeting all current liabilities. If the proceeding were advertised, suppliers and other creditors may unjustifiably infer that the company is not solvent. In this case, advertising would be detrimental. The parties agreed that the liquidation proceeding should not be advertised. I make an order by consent under r 31.11(1) of the High Court Rules restraining advertising, pending further order of the court.
The strike out application
[15] Sietec (NZ) Ltd says that the liquidation application is no longer serving any useful purpose. If matters are not resolved by the settlement process now being set up, its proceeding under s 174 gives the appropriate procedural framework for separating the parties. Remedies under s 174 include not only one party buying out the interests of the other, but also a liquidation order.1 All the orders which Mr Geerkins and Communitel NZ Ltd seek in their proceeding can be given in the s 174 proceeding, plus other remedies. The liquidation proceeding is a Damocles sword hanging over the company prejudicing the business. It suggested that the threat
1 Companies Act 1993, s 174(2)(a)(b) and (g).
of a liquidation order was being used to force Sietec (NZ) Ltd to pay more for the Geerkins interests.
[16] There is a hypothetical element to Sietec’s application. At present, both proceedings are stayed while the parties try to resolve matters. From what counsel told me, the parties have made good progress to set up a procedure by which the value of the business can be established objectively and independently, and which will allow a clean break. Neither side suggested that I should doubt their confidence to arrange an orderly separation of interests. The question of strike-out or not will only arise if the negotiations fail or the process breaks down.
[17] Sietec (NZ) Ltd has applied under r 15.1(d) of the High Court Rules that the liquidation proceeding is an abuse of process. It does not rely on the other grounds under r 15.1(1), that is, that there is no reasonably arguable cause of action or the proceedings are likely to cause prejudice or delay or that it is frivolous or vexatious. The statement of claim is properly pleaded. It pleads conventional matters normally seen in liquidation applications on the just and equitable ground.
[18] The application does not fall into the normal categories of proceedings held to be abusive. All the same, the categories are not closed. For this decision, I accept that it may be a proper ground for strike-out that the proceeding no longer serves a useful purpose. For example, because of events and circumstances that have changed since the start of a proceeding, a defendant may show that the issues pursued by the plaintiff are moot, or that the plaintiff has already obtained their objective, albeit without orders against the defendant. I do not rule out the application because it does not fit within existing cases for strike-out under r 15.1. If need be, I would invoke the inherent jurisdiction of the court, which is saved under r 15.1(4). So the question is whether the liquidation application no longer serves a useful purpose.
[19] In proceedings on the just and equitable ground, the availability of alternative remedies is always a relevant consideration and may count against a liquidation order.2
2 Charles Forte Investments Ltd v Amanda [1964] Ch 240 (CA); Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC) at 95–98; SEA Management Singapore Pte Ltd v Professional Service Brokers Ltd HC Auckland CIV-2011-404-5315, 25 January 2012 at [4] and [85]; Cook v Romanes [2018] NZHC 2650 at [11]–[13].
Sietec Wholesale Networks Ltd is still operating, apparently profitably, and each side is interested in acquiring the business. That makes a liquidation order unappealing and strengthens the alternative remedy defence.
[20] In many cases, the question of alternative remedy is decided only at the final hearing. The court hears evidence and arguments to establish the state of affairs within the company and deals with the alternative remedy question only at the discretionary stage of the decision, whether to make an order or not.3 In other cases, the court stays the proceeding to see if the matter can be resolved by other remedies.4
[21] Sietec (NZ) Ltd’s application is more ambitious as it seeks a strike-out now, even before a full hearing and before the viability of alternative remedies has been established.
[22] The strike-out argument is that everything can be resolved in Sietec’s s 174 proceeding even if the settlement process fails. I am not confident that that is so. On the evidence presented by Mr Geerkins and Communitel NZ Ltd and on Sietec’s own pleadings, it is not clear that Sietec would obtain relief under s 174 in its proceeding. Mr Geerkins and Communitel NZ Ltd’s case is that Mr McAdams and Sietec (NZ) Ltd have acted in a matter that is oppressive, unfairly discriminatory and unfairly prejudicial to them. Sietec (NZ) Ltd pleads a deadlock but it is possible that at a defended hearing, the court may find that Mr McAdams and Sietec (NZ) Ltd are responsible for having brought about that deadlock because of their oppressive misconduct. The purpose of s 174 is to give relief to the oppressed, not the oppressor. A possible outcome in Sietec’s proceeding is that the court may not make any orders under s 174 because of its disentitling conduct. That suggests that the liquidation proceeding should be kept alive so that, even if a liquidation order is not made, there is a proper basis on which alternative relief can be considered.
[23] For Mr Geerkins and Communitel NZ Ltd it was submitted that there are other reasons for maintaining the liquidation proceeding. Sietec (NZ) Ltd had given its
3 Jenkins v Supscaf Ltd, above n 2, at 141; Strachan v Denbigh Property Ltd (2011) 10 NZCLC 264,813 at [57]–[63].
4 Cook v Romanes, above n 2 – an application to liquidate a partnership, but the same principles applied.
undertaking not to compete only in the liquidation proceeding and the undertaking would expire when the proceeding was struck out. The Geerkins interests pointed out the difficulties with the undertaking, with Sietec (NZ) Ltd having threatened to disregard the undertaking. The liquidation application should be kept alive so that the Geerkins interests could seek further interim relief if required. They were also concerned that Sietec may not prosecute its s 174 proceeding in a timely manner.
[24] In response, Sietec (NZ) Ltd gave reassurances, for example, to maintain the undertaking notwithstanding the liquidation proceeding being struck out and to pursue its s 174 proceeding with due diligence. While noting that, the Geerkins’ submissions in support of the liquidation application give further reasons for not striking out now.
[25] Keeping the liquidation proceeding alive in the meantime should not cause undue prejudice to Sietec Wholesale Networks Ltd. Mr McAdams makes only generalised assertions about the prospect of harm to the company. He has not given specific examples to suggest a serious risk of harm. Sietec’s own proceeding under s 174 will remain on foot. While there is no advertising, it may become known to people outside the company that there are internal differences and there are court proceedings to resolve those internal differences. Whether those proceedings are only under s 174 or also under s 241 is not likely to matter much.
[26] Overall, I am not satisfied that the liquidation application should be struck out as no longer serving a useful purpose.
[27] Having said that, the Geerkins’ case could be improved if Communitel NZ Ltd were to seek relief under s 174, as well as liquidation. They would lose nothing by it. While a liquidation order may be made under s 174, the section flexibly has options which can be tailored for the circumstances of the case. As the oppressed shareholder, Communitel may claim relief under s 174, when there is the risk that Sietec (NZ) Ltd’s s 174 claim could fail.
[28] Counsel for Mr Geerkins were unsure whether a claim under s 174 could be combined with a liquidation application under pt 31 of the High Court Rules. I see little difficulty with that. It is open to Mr Geerkins and Communitel NZ Ltd to add a
second cause of action under s 174, or to substitute it for the original liquidation application. I can do no more than point these matters out. It is for the plaintiffs to decide whether to.
Outcome
[29] Case management directions were discussed. In case the planned settlement does not work, this case is given a fixture for four days beginning 7 June 2022.
[30] The case is to be called in the companies miscellaneous list on 16 July 2021 at 11.45 am for case management directions.
[31]The strike-out application is dismissed.
[32] Sietec (NZ) Ltd is to pay the Geerkins’ interests the costs of the strike-out application. If the parties cannot agree costs, memoranda may be filed and I will decide costs on the papers.
[33]Leave is reserved to apply for further directions.
…………………………………….
Associate Judge R M Bell
Solicitors:
Hudson Gavin Martin (Caitln Hadlee/Sarah Cachopa), Auckland, for the Plaintiffs Simon J McArley, Grey Lynn, Auckland, for Sietec
Copy for:
Kevin T Glover, Barrister, Auckland, for the Plaintiffs
Christopher T Patterson Barristers Ltd (Chris Patterson/Edward Grove), Auckland, for the Defendant
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