Gillam v Gillam

[2012] NZHC 124

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-000060 [2012] NZHC 124

UNDER  the Trustee Act 1956

AND UNDER                 Companies Act 1993

BETWEEN  KAREN GAYLE GILLAM Plaintiff

ANDMARK ANTONY ANDREW GILLAM First Defendant

ANDENERSAVE PRODUCTS LIMITED Second Defendant

Hearing:         2 February 2012

Appearances: B Burke and K Hill-Dunn for Plaintiff

H Evans and D Weatherley for First Defendant
M Singleton for Second Defendant
K Dalziel and L Williams for NZ Trustee Services Ltd

Judgment:      10 February 2012

JUDGMENT OF FOGARTY J

This judgment was delivered by Justice Fogarty on

10 February 2012 at5.00 p.m., pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date:

Solicitors:

Harmans Lawyers, PO Box 5496, Christchurch

Young Hunter, DX WP 21513, Christchurch

Goodman Tavendale Reid, PO Box 442, Christchurch

Taylor Shaw, PO Box 1123, Christchurch 8140

GILLAM V GILLAM HC CHCH CIV-2012-409-000060 10 February 2012

[1]      This is an application for an interim mandatory injunction appointing the plaintiff as a director of the second defendant and authorising the plaintiff to carry out an audit of the second defendant.

[2]      In the substantive proceedings the plaintiff is seeking an order under the Trustee Act 1956 that the first defendant be removed from the office of Trustee of the Gillam Business Trust, which owns 98 of the 100 shares of the second defendant. And that her son, Nathan Gillam be appointed in his father’s place or some other trustee.  The statement of claim also seeks an order that the plaintiff be appointed a director of the second defendant and an order that the first defendant be removed as a director of the second defendant and an order authorising the plaintiff to carry out an audit of the second defendant in order to rectify the records of that company.

[3]      The  parties  are  close  to  a  settlement  of  interim  relief.     A  consent memorandum was prepared and is agreed to with one critical qualification.  The first defendant agrees that the plaintiff be appointed as a director of the second defendant but, “subject to the appointment of an appropriate qualified and independent third director”.  The first defendant says that he has approached a suitably qualified person who is overseas but will be back on 15 February 2012 and is likely to agree to being appointed.   The plaintiff is pursuing this application rather than waiting out the fortnight.

The company

[4]      Enersave Products Ltd (“Enersave”) has issued 100 shares.  Ninety-eight of them are owned by the trustees of the M and K Gillam Business Trust.  There are three trustees, the plaintiff, the first defendant and a limited liability company, New Zealand Trustee Services Ltd.  The other two shares are held, one share each by the plaintiff and  the  first  defendant.    The business  trust  deed  does  not  provide for majority  decisions  by  the  trustees.    The  company  has  one  director,  the  first defendant.  It used to have two, the first defendant and his wife, the plaintiff.  The business of the company is the wholesale of electrical products.

[5]      The company is in default to two significant debtors, the Heartland Bank and the vendor of the business which it purchased recently in April 2011.  The vendor issued a statutory demand against the company on 9 December for the sum of

$400,000 plus about $3,000 interest and costs.   That statutory demand is being opposed on the grounds of a misrepresentation as to qualities of the business at the time of sale.

[6]      The  company  defaulted  on  a  payment  of  $500,000  due  to  be  made  to Heartland on 31 December.   Heartland have issued a Property Law notice.   Some payments are being made of a sum between $100,000 and $200,000 in recent days.

[7]      A month after the company purchased the electrical wholesale business the marriage broke up.  Prior to the purchase of the business both the plaintiff and the first defendant had been directors of Enersave.   At the time of the purchase the plaintiff agreed not to be a director.   Following the break up of the marriage the plaintiff has been seeking to be reappointed as a director and to be provided with a salary or income from the company.   The plaintiff has no income.   She was until recently welfare beneficiary but that has ceased on her youngest child turning 18. She has no income at all.

[8]      In July of last year Mr Singleton, solicitor for Enersave, suggested entering into arrangements covering the governance of the company whereby the company would  continue  to  have  only one  director,  but  could  not  then  make  significant decisions without the approval of the shareholders by special resolution.  A number of matters were enumerated essentially providing for no material  change in the nature,  scope  or  size  of  the  business  or  in  financial  transactions  without  an agreement by the shareholders by special resolution.   This was not agreed by the husband and wife.

[9]      The plaintiff has considerable concerns about the management of Enersave by her husband which have been exacerbated by the significant defaults.   She contends that his personality has changed, that he is living lavishly and is concerned

that the family capital is at risk of being dissipated.  This is disputed.  The husband’s view of it is that he was caught by surprise by the adjustment to the stock figure which was due to forward purchases of stock which were not disclosed to him at the time of due diligence before the purchase of the company and by finding that a lot of the stock was out of date and hard to move.  The plan to repay Heartland from the sale of residential properties in Australia has proved difficult to conclude because of the weakness of the residential market in Queensland and New South Wales in this past year.  The picture he paints of an experienced businessman with difficulties, but in control of the situation.

[10]     In the course of the hearing I suggested two steps that could be taken as another possible interim arrangement.   The couple have an accountant, Mr White, who has been their accountant for several years and has the confidence of both of them.   I suggested an agreement that Mr Gillam would not make any significant business decisions without first seeking Mr White’s advice and secondly, not going ahead with any proposal against the written advice of Mr White.  Mr Gillam agrees with that restraint.  It is not agreed as a solution by Mrs Gillam.

[11]     Second, I suggested that Mr Gillam find a means whereby a revenue stream from the company (which he says is now trading profitably based on the company’s management accounts) be provided to meet living expenses of Mrs Gillam.   Mr Gillam is drawing, he says $4,000 per month.  He offered $1,000 a month.

Jurisdiction of the Court to grant a mandatory injunction

[12]     All counsel were agreed that the Court has a jurisdiction under s 174 of the Companies Act 1993 to appoint a person as a director of the company.  No counsel could find any case where such relief has been given under s 174.  As Mr Singleton put it, the cases show that normally in a situation of deadlock the Court removes a director to enable decision making to be done.  All counsel agreed that by its nature mandatory  injunctions  are  only  very  rarely  and  reluctantly  imposed  by  way  of interim relief.

[13]     Mr Evans, for the first defendant, argued that the facts complained of by the plaintiff did not, and could not amount to oppression as contemplated by s 174.  So that there was no serious argument against which interim relief could be given.  He said that Mr Gillam’s affidavit established that the cashflow problems of the business result largely from breaches of warranties by the vendors of the business.   In the circumstances he submitted, the plaintiff was not being oppressed in terms of s 174 of the Companies Act.  The company’s difficulties are not the result of any act of oppression and all the stakeholders in the company have suffered the same difficulty. The plaintiff has not been able to point to any particular transaction which can be considered as oppressive or which has been made in bad faith.

[14]     The  jurisdiction  under  s 174  can  anticipate  future  events.    Section  174 provides:

Prejudiced shareholders

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

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

(a)      Requiring the company or any other person to acquire the shareholder's shares; or

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

(c)      Regulating the future conduct of the company's affairs; or

(d)      Altering or adding to the company's constitution; or

(e)      Appointing a receiver of the company; or

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

(g)      Putting the company into liquidation; or

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

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

[15]     At the present time the first defendant as sole director of a company is not subject in fact to any restraint from the shareholders.  The major shareholders, the trustees of the business trust cannot vote unless they are unanimous.  The remaining two votes are held, one each.   Neither can out vote the other.   It is not possible, therefore, by the shareholders in general meeting to either remove the sole director or to appoint additional directors.   This deadlock is enabled by reason of the first defendant’s status as trustee.

[16]     That is an outcome contrary to the scheme and purpose of the Companies Act.   The Companies Act never intended to facilitate structures leaving a single director in sole control of a business enterprise without any practical restraint by the shareholders.   Nor does the law of trusts encourage deadlock between trustees paralysing decision making.

[17]    Section 174 provides relief for oppressive conduct, but also for unfairly discriminatory conduct.  The law of trusts, including the additional remedies of the Trustee Act enable the Courts to ensure the welfare of the beneficiaries is uppermost at all times.[1]

[1] Hunter v Hunter [1938] NZLR 520 (CA).

[18]     It was common ground between the parties that such capital of the company was all relationship property, arising from a marriage of 21 years.  By virtue of that statute prima facie, the husband and wife were co-owners of the capital that they introduced into the business.  It is in a substantial sense a family business.  It is set up so that the 98 of 100 shares are held for the benefit of the beneficiaries of the business trust who are primarily intended to be the husband, wife and two children. They are named as the “primary beneficiaries”.

[19]     On the one hand Mr Gillam is saying that the business is trading at a profit, that its indebtedness is manageable, and is drawing $4,000 per month from the

company.  The company is also selling products to a wholly owned subsidiary.  The

big picture is that Mr Gillam is maintaining his lifestyle and that since the break-up of the marriage, his wife, the plaintiff has no income.  There is a serious arguable case that the affairs of the company are being and are likely to continue  to be conducted in a manner which is unfairly discriminatory.  I am satisfied that there is jurisdiction  to  grant  interim  relief  by  reason  of  a  cause  of  action  under  the Companies Act.

[20]     The  argument  before  me  sought  interim  relief  based  under  s 174  of  the Companies Act.   In the course of argument I invited comment from counsel as to whether or not interim relief can also be justified under the Law of Trusts, given the paralysed  stated of decision-making by the trustee shareholders.   That paralysis benefits only one person, the husband who is only one of the discretionary beneficiaries there and who does not have a vested interest in any of the assets held by the trustees.  So far as I can tell there has been no vesting.  Indeed, there is not a clear-cut mechanism in the deed for vesting interests except upon termination of the trust.  Naturally counsel were not in a position to respond to this proposition.  I am inclined to the view, however, that there is a serious argument for relief under the Trustee Act for removal of one or both of the husband and wife trustees and possibly the third trustees and the substitution of a professional trustee capable of making decisions in the interests of all the discretionary beneficiaries:  see Hunter v Hunter supra.

[21]     In that situation, such professional trustee can then exercise ownership of the shares,  call  a special  general  meeting of the company and  appoint  and  remove directors.

[22]     If the business can trade, there is a serious argument that the husband by exercise of his deadlock power as trustee, should not profit at the expense of the

wife:  See Boardman v Phipps.[2]

[2] Boardman v Phipps

[23]     There is a real prospect that the settlement almost reached by the parties can ben achieved if the proposed third trustee, a prominent businessman who appears to have the confidence of both the husband and wife, accepts appointment.

[24]     As a general principle the Court should intervene in private affairs only to the extent necessary in the exigencies of any particular set of facts.  This is especially so in the case of interim relief and even more so in the case of mandatory interim relief. The plaintiff has been existing in the meantime on the support of friends and family who  are  also  funding  her  litigation.    She  does  not  need  immediate  relief  of  a financial nature.   On the other hand, she should have a reasonable expectation of some urgent solution being devised to provide her employment and a stream of income consistent with the law of insolvency, from one of the two business vehicles.

[25]     There is no doubt that the sole director is under enormous pressure at the present time. There is a significant risk that he will make a serious error of judgment if he acts without the benefit of professional advice.  He has agreed to act consistent with the advice of his company accountant who knows the business and the family and not to act against the writte advice of that man, Mr White.

[26]     This Court makes an order to that effect, in those terms, to endure for a minimum of 21 days and thereafter until set aside by this Court.  An application to set it aside can be made at any time, including within the 21 day period.

[27]     Second, there will be a further order that Mr White shall report in writing to the shareholders as to what advice has been sought from him by the first defendant as sole director and what advice he has given within two working days of having given that advice.  Any parties to these proceedings has leave to apply to this Court for further orders based upon the advice sought or given by Mr White.

[28]     Third, this case is to be called  before a Judge of this Court within one calendar month from the date of this judgment.

[30]     The plaintiff has been partially successful and is entitled to an order for costs on a 2B basis, but subject to the qualification that the success is partial only.  If the parties cannot agree on an order for costs, leave is reserved for them to apply within one calendar month for costs to be fixed.