Heagney v Scaffold Alchemy Limited

[2024] NZHC 1031

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-2662

[2024] NZHC 1031

BETWEEN

CHRISTINE BELINDA HEAGNEY

Plaintiff

AND

SCAFFOLD ALCHEMY LIMITED

Defendant

Hearing:

On the papers

Appearances:

ACN Fuiava for the Plaintiff

No appearance for the Defendant

Judgment:

1 May 2024

JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 1 May 2024 at 4 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Denham Bramwell Lawyers, Manukau

HEAGNEY v SCAFFOLD ALCHEMY LIMITED [2024] NZHC 1031 [1 May 2024]

Introduction

[1]                 The plaintiff, Ms Heagney, has applied to liquidate the defendant company, Scaffold Alchemy Limited (Company), pursuant to s 241(4)(d) of the Companies Act 1993 on just and equitable grounds.

[2]                 Ms Heagney is a 50 per cent shareholder in the Company. Mr Marcus Raymond Kennerly holds the remaining 50 per cent of the shares and is also the Company’s sole director.

[3]The Company provides scaffolding services.

[4]                 The plaintiff and Mr Kennerly worked together in the Company business and were in a personal relationship from 2021. The relationship ended in December 2022 and the plaintiff ceased working in the Company’s business from that time.

[5]                 The plaintiff has made proposals as to a process for her shares to be transferred or bought out of the company. She has also requested company information, including financial records, and has proposed mediation to resolve the issues in respect of her continuing shareholding.

[6]                 Ms Heagney says Mr Kennerly, as director of the Company, has either refused or not acted on any of these requests. The plaintiff therefore makes this application to liquidate the Company on just and equitable grounds on the basis that the relationship between the plaintiff and Mr Kennerly is in a state of deadlock and there are no realistic alternatives other than liquidation.

[7]                 An affidavit of service has been filed confirming the Company was served with these proceedings at its registered office on 16 November 2023, including the verifying affidavit of Ms Heagney and the liquidator’s consent to act. The documents were accepted by a personal assistant. No steps have been taken by the Company in response to the application and so I determine the application on the papers.

[8]                 I begin by setting out the principles applying to an application for liquidation on just and equitable grounds before applying them to the facts in this case.

Principles for liquidating on just and equitable grounds.

[9]                 In McGehan v Te Hoe Diaries Limited, Associate Judge Andrew (as his Honour then was) approached the issue of whether it was just and equitable to make orders liquidating the company by resolving two issues:1

(a)Has the relationship between the parties deteriorated to the point where there is a serious deadlock imperilling the continued operation of the company?

(b)If so, are there other realistic alternatives to the impasse, other than liquidation?

[10]             Associate Judge Andrew held that the deadlock must be impeding the operation of the company, referring to Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd where it was held that “the essential basis” for the Court’s relief is “frustration by internal discord”.2

[11]             I consider this a useful approach for determining this application and therefore consider the two questions above after setting out the background facts.

Factual Background

[12]             Before setting out the background I record that it is necessarily based only on the evidence of Ms Heagney as no affidavit has been filed on behalf of the Company or Mr Kennerly.

[13]             Ms Heagney says she and Mr Kennerly started a casual relationship in 2019 that became more serious from early 2020 and that in about December 2021, they decided to set up a company to work together.

[14]             Ms Heagney’s evidence is that the Company was funded with $10,000 cash from “Marcus and I” without being more specific.

1      McGehan v Te Hoe Diaries Ltd [2021] NZHC 1796 at [4].

2      At [17] referring to Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd HC Auckland CIV-2011-404-005315, 25 January 2012 at [3].

[15]             The Company was registered on 15 February 2022, and started trading in April 2022.

[16]             Ms Heagney says that both she and Mr Kennerly worked in the Company and were responsible for its management. Ms Heagney has experience in administration and management and Mr Kennerly has experience in building scaffolding and is licenced to do so. Ms Heagney therefore undertook the day-to-day administration including bookkeeping, managing customers and working on site as labour when necessary.

[17]             In November 2022 the Company obtained an overdraft of $30,000 and a business loan of $15,000. Ms Heagney and Mr Kennerly both personally guaranteed the overdraft and the business loan. Ms Heagney’s evidence is that the repayments were dependent on her income, including her child support payments, because the business would not qualify on its own. Copies of correspondence with ASB are annexed to Ms Heagney’s affidavit confirming this.

[18]             During the period where Ms Heagney and Mr Kennerly were both working in the Company, Ms Heagney says shareholder drawings were taken as wages by each of them. Her evidence is that as the Company was in the startup phase, only what was absolutely necessary was paid out, all other funds were invested back into the Company.

[19]             On many occasions Ms Heagney says her personal funds were used to purchase company equipment and those funds were repaid when the Company received money in, sometimes months later. Ms Heagney says that Mr Kennerly was not able to secure credit and it always fell to her. A chain of messages between Ms Heagney and Mr Kennerly is annexed to her affidavit apparently confirming this.

[20]             Ms Heagney’s personal vehicle was also used as a work vehicle to tow trailers. She says she agreed to this on the basis that the Company would pay for its servicing but that she has not been reimbursed for the last service. A chain of messages annexed again confirms this.

[21]             Ms Heagney says she assisted in securing the Company's biggest contracts with Dominion Constructors Limited and Q Construction Limited, witnessing the agreement with Dominion Constructors Limited, which recorded her title as business partner and attending the pre-letting meeting.

[22]             When Ms Heagney worked in the Company, she deposes that it was doing well with high value invoices being paid. Extracts from Xero showing invoice values are annexed to her affidavit.

[23]             Ms Heaney says that since she was forced out of the Company, there have been several creditor invoices that have been left outstanding. Ms Heagney still receives these notices directly from creditors as administrator of the Company. Ms Heagney is aware that Mr Kennerly has asked for extensions for payment with copies of various follow ups from creditors annexed to her affidavit.

[24]             A claim was also brought against the Company in the Disputes Tribunal in respect of outstanding invoices and Ms Heagney was named as a party. Ms Heagney’s evidence confirms Mr Kennerly asked for an adjournment, admitting the breakdown in their working relationship had impacted the proceedings.

[25]Mr Kennerly ended the relationship on 20 December 2022.

[26]             When the relationship ended Ms Heagney says that they initially agreed that day that she would continue to work in the business until the two main contracts with Dominion Constructors Limited and Q Construction Limited had finished and that Ms Heagney’s shares would then be bought by Mr Kennerly and he would run the Company on his own from then on.

[27]             However, on the same day, 20 December 2022, Ms Heagney says she noticed that Mr Kennerly had put through personal  spending  on  the Company  account.  Ms Heagney asked him not to do that from the business account and to use his personal account until she was bought out of the Company as she was concerned it would affect the value of the Company.

[28]             Ms Heagney says that Mr Kennerly then told Ms Heagney to leave the Company right then and there and that she felt she had no choice, which put her in a difficult financial position just before Christmas.

[29]             After telling her to leave, Ms Heagney says Mr Kennerly told customers she was no longer working for the Company, despite things as far as Ms Heagney was concerned being up in the air.

[30]             During this time Ms Heagney says that Mr Kennerly admitted that he needed Ms Heagney as a credit source for the business, annexing correspondence confirming this. Ms Heagney says despite this Mr Kennerly made communication very difficult as he blocked Ms Heagney on Messenger, text and email when it suited him.

[31]             By January 2023, Ms Heagney says Mr Kennerly refused any direct communication and asked that everything  be  directed  through  their  accountant. Ms Heagney says she found this extremely challenging as it did not help to resolve matters and was a wasted expense for the Company.

[32]             Ms Heagney says she became concerned when she discovered payments from the business account which did not appear to relate to the operation of the Company. In particular the sum of $5,000 was deducted on 9 February 2023 from the business account and $3,859.07 on 17 March 2023 for a rental car which was used for a trip to Australia. Copies of ASB bank statements are annexed to Ms Heagney’s affidavit confirming this.

[33]             Ms Heagney says that she instructed lawyers, Blackhawk Law, in February 2023 who wrote to Mr Kennerly and the Company about her concerns and requested that he either buy Ms Heagney’s shares or that they run the Company together as per their initial agreement. Mr Kennerly instructed Fisher Foley who responded and ultimately agreed that the Company would need to be valued but suggesting that a proposal would then be made to Ms Heagney “to settle their relationship property.”

[34]             The Company accountant was instructed to prepare year end financial accounts. Ms Heagney says she hoped that once the accounts were finalised she and

Mr Kennerly could reach agreement as to the value of the shares and how she would exit as a shareholder. Unfortunately, the year end financial accounts took longer than anticipated to be finalised and there are still issues that Ms Heagney has raised with the accountant.

[35]             In  the  meantime,  Ms  Heagney  says  she  had  serious  concerns   about   Mr Kennerly’s management of the Company. As she was working with the accountant, Ms Heagney’s evidence is that there were several invoices from contractors (including Mr Kennerly's brother) that had insufficient detail, payments referenced as tax being paid to Mr Kennerly's personal account or the contractors’ account, and the purchase of mobile phones for Mr Kennerly and his brother on burdensome contracts in comparison to what was in place previously.

[36]             Ms Heagney says that one of her biggest concerns is the personal guarantees she signed with the ASB bank. She tried to revoke these, but ASB will not release her until she is removed as a shareholder. Copies of correspondence with ASB is annexed confirming this. Ms Heagney says she took the precautionary step of freezing the Company bank account in late March 2023 after taking advice from the bank and to ensure protection of the Company funds.

[37]             Rather than resolve the dispute between them, Ms Heagney says Mr Kennerly opened another business bank account and informed all customers of the new account. By doing this, Mr Kennerly is no longer servicing the loan and overdraft facility, for which Ms Heagney is a personal guarantor. Copies of bank statements are annexed to her affidavit confirming this.

[38]             Furthermore, Ms Heagney’s evidence is that Mr Kennerly has not given Ms Heagney any updates as to the running of the Company and has revoked her access to Xero and ability to view the Company bank statements. Ms Heagney says that the only funds in the original bank account were paid by a customer, and Mr Kennerly immediately requested that Ms Heagney authorise those funds be released, which she declined.

[39]             Ms Heagney proposed a figure for her shares through her lawyer on 14 June 2023, along with her release from the personal guarantees. A copy of the letter is annexed to her affidavit but the amount proposed is redacted.

[40]             Following no formal response to her proposal, on 3 August 2023 Ms Heagney’s lawyers suggested mediation and a mediator who was available. Mr Kennerly declined the mediator. Ms Heagney’s solicitor then proposed an alternative mediator, but there was still no progress in agreeing to a mediation. A copy of this correspondence is again annexed to her affidavit.

[41]             Ms Heagney’s evidence is that she asked the Company’s accountant to request a director’s report from Mr Kennerly but this was met with hostility and declined.

[42]             On 14 September 2023, Mr Kennerly advised he was instructing a new lawyer, but up until the date of Ms Heagney’s affidavit filed in support of this application, there had been no correspondence from a new lawyer.

[43]             On 22 September 2023, Ms Heagney’s lawyer made a request to inspect financial information of the Company, pursuant to the constitution and s 216 of the Companies Act 1993. This was initially agreed to by Mr Kennerly directly but then declined on 26 September 2023. In the email chain annexed to Ms Heagney’s affidavit, Mr Kennerly says this was because of Ms Heagney’s “outburst and personal position with opposing companies”.

[44]             Around the same time, towards the end of 2023, there was correspondence exchanged in relation to a shareholders’ meeting. Various issues arose however with both parties alleging the other had failed to comply with Companies Act requirements resulting in no shareholder meeting having been held.

[45]             Finally, Ms Heagney says that Mr Kennerly has a son in Australia whom he visits around school holiday time. Mr Kennerly has said these were business trips to justify company spending, but Ms Heagney says the Company has no customers in Australia and the business is too small to expand overseas. Ms Heagney’s evidence is that Mr Kennerly has also said that he is going to Egypt and Japan for business. Again,

Ms Heagney is concerned this is a misuse of Company funds, which directly impacts the value of her shares.

Has the relationship between the parties deteriorated to the point that there is a serious deadlock imperilling the continued operation of the company?

[46]             Counsel for Ms Heagney submits that the parties’ professional relationship has broken down subsequent to their personal relationship creating extreme distrust and tension.

[47]             Ms Heagney’s evidence is that communication between her and Mr Kennerly is very difficult, even when they had both instructed lawyers. When this application was filed, Mr Kennerly no longer appears to have been instructing a lawyer with all recent communication being sent by him directly.

[48]             There has been a significant amount of correspondence between Ms Heagney and Mr Kennerly’s lawyers which demonstrates the difficulties in agreeing to a process for Ms Heagney to exit the Company.

[49]             From the evidence filed the parties appear to be unable to communicate effectively including through counsel and particularly now that Mr Kennerly seems to be unrepresented. Issues are clearly arising relating to company decision making, including issues with servicing financial commitments, operating bank accounts and preparing financial statements. Although Mr Kennerly may still be able to provide scaffolding services in the name of the Company, it appears to be in a separate structure from the Company itself.

[50]             I therefore consider Ms Heagney has established that the relationship between the parties has deteriorated to the point that there is a serious deadlock imperilling the continued operation of the Company in the interests of both shareholders.

Are there other realistic alternatives to the impasse, other than liquidation?

[51]             Ms Heagney’s evidence sets out the numerous failed attempts at resolution of the impasse. Her affidavit annexes a significant amount of correspondence between counsel and with Mr Kennerly directly in an attempt to resolve the dispute. These

attempts include proposals to buyout Ms Heagney’s shares, to mediate and to hold a shareholders’ meeting. None of these attempts have been successful and they have been ongoing since 23 February 2023. I accept the evidence shows that considerable effort has been made to resolve the impasse but there is no longer any realistic alternative aside from liquidation.

[52]             Ms Heagney says in her affidavit that she and Mr Kennerly have a separation agreement, which “sets out how we deal with our relationship and separate property upon separation”. A copy of this is not included in the evidence. Ms Heagney says “the company shares are not described in that agreement as the shares are quite clear about being equal” and that Mr Kennerly “continues to try and muddle our relatively small issues around returning of items of property with the shares in the Company.” Ms Heagney believes this is an example of his inability to separate their personal relationship with their business one.

[53]             It is difficult in the absence of a copy of the separation agreement to assess this evidence. Ms Heagney’s lawyer confirmed in a letter to Fisher Foley on 28 March 2023 that the parties had executed a contracting out agreement and that any relationship property is to be dealt with under that agreement. The letter then states:

[3]        …Under clause 6.1 of the agreement, property acquired by our respective clients jointly or produced by their joint efforts will be relationship property and divided equally at separation. The shares in Scaffold Alchemy Limited are already held equally, consistent with the contracting out agreement. There is no dispute about the shareholdings.

[4]        There is however a dispute between the shareholders as to how the company will be managed going forward. Given the shares in the company are jointly held and the arrangement from the commencement of the business was to be equally owned and run, our client has rights to be kept informed and be involved in the management of the company.

[54]             Later correspondence provided to the Court does not appear to refer to the contracting out agreement. However, an order appointing a liquidator to the company will not prevent the assets being shared in accordance with the contracting out agreement if it applies to the shares. I do not therefore consider the uncertainty around this aspect should prevent a liquidator being appointed.

[55]             Furthermore, the company has been served and so has been given an opportunity to respond yet has taken no steps.

[56]             Mr Kennerly has also clearly contemplated liquidation as he has pointed out in correspondence that if the company is liquidated there would be “zero asset[s] at liquidation”.

[57]             Counsel for Ms Heagney filed a further memorandum on 9 April 2024 recording that Ms Heagney is continuing to receive email correspondence suggesting that the Company may be operating without paying its debtors. Counsel submits that Ms Heagney is concerned the Company’s assets are at risk and emphasises that this is deeply concerning as Ms Heagney cannot be released from her obligations as a personal guarantor of the Company’s loans from ASB Bank until she is removed as a shareholder.

[58]             I consider that Ms Heagney has established that all alternatives to liquidation have been attempted. There appears to be no choice but to liquidate the company on just and equitable grounds.

Consent of liquidator to act

[59]             Ms Heagney has filed a letter from Mr Simon Dalton of Gerry Rea Partners dated 6 November 2023 confirming that he consents to being appointed as the liquidator. The letter of consent sets out the hourly rates for the liquidator and his staff which are within the usual bands.

[60]             In the circumstances I consider it is appropriate to appoint Mr Dalton as the liquidator of the company on the grounds that it is just and equitable to do so.

Costs

[61]             Ms Heagney is in receipt of a grant of legal aid for these proceedings but her counsel submits that legal aid is a loan and not a gift and is required to be repaid. Counsel submits that if Ms’s Heagney liquidation application is granted, costs ought to follow on a 2B basis or the actual costs of legal aid, whichever is the lesser.

[62]The plaintiff confirms her legal aid costs as of 13 February 2024 were

$7,225.20. Costs on a 2B scale at that stage were $2,868, including 0.2 of a day for sealing the order made and disbursements of $836.65. Further memoranda have since been filed so 2B costs will have increased. I therefore direct that costs are to be paid on a 2B basis as fixed by the registrar but on the basis that costs do not exceed the actual costs of legal aid.

Result

[63]I order:

(a)The plaintiff’s application to appoint a liquidator to Scaffold Alchemy Limited on the basis that it is just and equitable to do so is granted.

(b)Simon Dalton is appointed to act as liquidator.

(c)The rates of remuneration of the liquidator and staff working under his supervision and control are fixed at the rates set out in the liquidator’s consent dated 6 November 2023.

(d)The liquidator is to apply at the conclusion of the liquidation for approval of his overall remuneration.

(e)Costs and disbursements are to be paid on a 2B basis by Scaffold Alchemy Limited as fixed by the Registrar, following confirmation that the actual costs of legal aid are more than the 2B costs claimed.

(f)These orders are timed at 4 pm today.

Associate Judge Sussock