Innes-Jones v Innes-Jones
[2018] NZHC 1889
•27 July 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-0493
[2018] NZHC 1889
BETWEEN EVAN DUNCAN INNES-JONES
Plaintiff
AND
REX ARTHUR INNES-JONES
First Defendant
SAILOR’S CORNER LIMITED
Second DefendantIJAY PROPERTIES LIMITED
Third Defendant
Hearing: 18 July 2018 Appearances:
J D Turner for Plaintiff
A E Hansen for Defendants
Judgment:
27 July 2018
JUDGMENT OF JAGOSE J
This judgment is delivered by me on 27 July 2018 at 4.00pm pursuant to r 11.5 of the High Court Rules.
.....................................................
Registrar / Deputy Registrar
Solicitors:
McVeagh Fleming, Albany Heimsath Alexander, Auckland
INNES-JONES v INNES-JONES & ORS [2018] NZHC 1889 [27 July 2018]
Introduction
[1] Evan Innes-Jones and Rex Innes-Jones are brothers. They are the shareholders of both Sailors’ Corner Limited – a marine chandlery business operating from premises on Westhaven Drive and Beaumont Street in Auckland – and Ijay Properties Limited, which owns the Beaumont Street premises (on a groundlease from Viaduct Harbour Holdings Limited) and leases them to Sailors’ Corner. Evan holds 35,000 shares, and Rex 45,000 shares, in each company. The shareholdings reflect the brothers’ initial capital contributions: Evan, $35,000, and Rex, $45,000.
[2] In this proceeding, Evan complains Rex is conducting the companies’ affairs in a manner unfairly prejudicial to Evan as shareholder. Evan seeks relief under s 174(2) of the Companies Act 1993 by way of Rex’s acquisition of Evan’s shares, or Rex’s payment of compensation to Evan, or the companies’ liquidation. Rex denies there is anything unfairly prejudicial to Evan in Rex’s conduct of the companies’ affairs, which are conducted in the companies’ best interests.
Background
[3] Both men worked in the Sailors’ Corner business: Rex as managing director, and Evan as company secretary (while maintaining other business interests). From its inception in 1983, Sailors’ Corner presented itself as a ‘one-stop shop’ for boat owners. Blessed by its proximity to Westhaven Marina, and its initial local monopoly, the business prospered, with an annual turnover of over $5m by the 1990s. The Sailors’ Corner workforce included Rex’s wife and their sons, and Evan’s wife and their daughter. Rex’s family members mostly worked full-time as employees in the business; Evan’s family members mostly worked as casual employees when required.
[4] Evan and Rex originally were each directors in both Sailors’ Corner and Ijay Properties. They were remunerated at agreed hourly rates, in a manner intended transparently to reflect their input into the business consistently with other managers. But their wages periodically were ‘topped up’ from operating surpluses to double their earnings over the preceding period, and then supplemented by any profit share. The ‘top up’ and profit share were made available to Evan and Rex as a ‘bonus’, which each would apportion between himself and his family. They used their ownership of
Ijay Properties also to extract surplus from the business as rental or other emoluments to their personal benefits from the business. Both wives initially were paid salaries, but that reverted also to hourly rates in later straightened business circumstances.
[5] After a heart attack in 2003, Evan substantially reduced his day-to-day input into the business. His remuneration from the business dropped accordingly. Rex’s hourly rate was maintained at the ‘topped up’ level of $120, and his remuneration increased because of his extra hours in Evan’s absence. Evan’s counsel, James Turner, conceded Rex’s higher earnings were “probably commensurate with his extra duties”. The $120 rate was acknowledged appropriate recompense for Rex’s duties in discussion between Evan and Rex in the presence of the business’ accountant.
[6] Ultimately challenged by local and internet competition, and the vicissitudes of the marine industry, Sailors’ Corner’s turnover and profitability reduced from the late 2000s. Sailors’ Corner declared largely losses in the first half of the present decade. In the winter of 2012, it required an estimated $300,000 in additional capital to hold it over until the better trading summer months. Rex contributed a proportion calculated in accordance with his 55 per cent shareholding; Evan contributed a proportion calculated in accordance with his much lower share of remuneration from the business (especially given his lack of day-to-day involvement). The brothers also agreed to halve their hourly rates, to be ‘topped up’ again in March 2013, as occurred. The funding shortfall was less than it may otherwise have been, because Sailors’ Corner’s rental agreement with Ijay Properties had expired, and no rent was being paid thereafter (although Ijay Properties’ outgoings continued to be paid by Sailors’
Corner).1
[7] By March 2013, the rift between the brothers – illustrated by their different approaches to funding the business – appears to have become embedded. Evan took the view the March 2013 ‘top up’ was subject to the business’ viability at the time, which had not improved. He considered Sailors’ Corner’s business model was no longer profitable, and thought Ijay Properties should be obtaining a commercial rental
1 Rental paid by Sailors’ Corner to Ijay Properties was not consistent. No formal rental was charged or paid for the first five years after Ijay Properties acquired Beaumont Street in 1997. Five-year rental agreements were established in 2002 and 2007, with annual rentals of $238,222 and
$311,229 respectively, the latter expiring on 31 March 2012.
from Sailors’ Corner (or another tenant), or should be sold. He disputed various distributions from the business.
[8] Evan withheld his agreement to the companies’ 2013 and 2014 accounts, and required to approve payments to creditors. When the business’ bank required new cheque-signing authorities in 2015, Evan required jointly to sign cheques over $1,000, and sought they be provided to him for signature at his home north of Warkworth (roughly 45 minutes’ drive from the business). In response, Rex called a shareholders’ meeting to discuss Evan’s removal as director of Sailors’ Corner, but Evan resigned as director from 30 October 2015.
[9] Sailors’ Corner’s business continues to be challenging, although Rex considers the 2021 America’s Cup events in Auckland offer room for some optimism.
The law
[10]Section 174 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
(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) unless the company or that person is a party to the proceedings in which the application is made.
[11] A broad view is taken of ‘the affairs of the company’, encompassing “anything generally concerning the company”.2 Although failure to comply with specified sections of the Act constitutes unfairly prejudicial conduct for the purposes of s 174,3 the qualifying conduct does not need to be unlawful or exercised in bad faith.4 Instead, s 174 is:5
… a remedial provision designed to allow the court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interests arising from the acts or conduct of the company in that way is justifiable.
The section is directed to respond to “an unjust detriment to the interests of a member of the company”,6 where it is “just and equitable to do so”. It is a “remedial, not punitive” jurisdiction, where the court may “subject the exercise of legal rights to equitable considerations”, to do fairly between affected individuals.7
[12]But there also are cautions against too liberal exercise of the jurisdiction:8
First, errors of judgment by management, inefficiencies, and poor business management without distinct elements of bad faith or self-interest cannot amount to oppression. …
Secondly, in any event, Judges are ill-equipped to evaluate business strategies, and have accordingly exercised self-restraint. … This is sometimes called the “business judgment” rule. Judges, on the other hand, do have training and expertise in dealing, for instance, with fraud, illegality, or conflicts of interest.
2 McCulloch v Quinn [2012] NZHC 16 at [30].
3 Companies Act 1993, s 175.
4 Thomas v H W Thomas Ltd [1984] 1 NZLR 686, (1984) 2 ACLC 610 (CA) at 693. Although addressing s 174’s predecessor (s 209 of the Companies Act 1955), Thomas remains the authority on qualifying conduct: Latimer Holdings Ltd v SEA Holdings New Zealand Ltd [2005] 2 NZLR 328, (2004) 9 NZCLC 263,694 (CA) at [112].
5 Thomas, above n 4, at 695.
6 At 693, affirmed in Latimer, above n 4, at [113].
7 Sturgess v Dunphy [2014] NZCA 266 at [148]; and at [144], citing Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL) at 379.
8 Latimer, above n 4, at [70]-[72].
Thirdly, the remedy is not (without more) appropriate for the facilitation of exit from a company where there are straight-out disagreements over company strategy. This point was distinctly reinforced by this Court recently in Yovich & Sons Ltd v Yovich … where, in delivering the judgment of this Court, McGrath J said at para [31]:
“The statutory protection for prejudiced shareholders is not intended to facilitate exit from the company in all cases where minority shareholders differ from the majority on the policy and direction of a company which they see as being to their disadvantage.”
Evan’s complaints
[13] In his amended claim, since his resignation as Sailors’ Corner director on 30 October 2015, Evan complains of:
(a)Rex’s refusal to acquire Evan’s shares in Sailors’ Corner;
(b)Rex’s management of Sailors’ Corner:
(i)such that it has not met its obligations for provide annual financial statements and tax returns, or to pay rent to Ijay Properties, and otherwise dysfunctionally such as to cause a breakdown of normal communications between the brothers;
(ii)to overpay his own remuneration and to make distributions in his interests, in preference to those of creditors, including Ijay Properties;
(iii)such that no dividends or distributions have been paid to Evan since 2012;
(iv)to default on current and prospective rent obligations to Ijay Properties;
(v)without renewing the business’ Westhaven Drive lease after its expiry on 19 March 2018; and
(vi)in withholding identified company and business records from Evan.
[14] Evan also complains Rex’s refusal as director of Ijay Properties to pursue contended unpaid rent from Sailors’ Corner, or to sell Ijay Properties’ assets, puts Ijay Properties’ ability to meet its own ground lease and maintenance obligations at risk.
Analysis
—refusing to acquire Evan’s shares in Sailors’ Corner
[15] In late 2003 (after Evan’s heart attack), Rex commissioned an informal valuation of Sailors’ Corner. The valuer – Richard Lockhart & Associates Limited, the business’ accountant – took the view the business was worth $2.5m-$3.0m, being goodwill valued at about $1m, and the balance in stock and fixed assets. In workings, the valuer settled on a 31 March 2003 valuation of $2.83m. The valuation recorded it was prepared for the purposes of the company’s sale, or sale of Evan’s shareholding. Evan said Rex refused to sell the business or to purchase Evan’s shares in it for fair value. He explained Rex was prepared to buy Evan out of both companies, but at a price unacceptable to Evan. Rex, however, could not recall any discussion about selling the business.
[16] I do not see anything in the skeletal evidence of the proposed transaction to identify any unjust detriment to Evan in the relevant affairs of the company under this head alone, such as may entitle me to consider whether it is just and equitable to provide a remedy. Viewed on its own, Evan’s plea is for the remedy without any underlying invasion of right.
[17] There is nothing in the company’s history or structure, or in Evan or Rex’s reasonable expectations as to its operation, to suggest one shareholder could require the other either to sell their shares, or buy the former’s. Sailors’ Corner’s articles of association provide for the giving of an irrevocable transfer notice to the company, which would entitle the other shareholder (or, at the company’s option, some third party) to acquire the shares for fair value (or ultimately, at the company’s option, “at any price”). There is no indication Evan engaged the process. Notably, the articles of association delete provision for inter-family transfers as of right, indicating Evan and Rex’s expectations they personally were in business together, through good and bad.
[18] Given Evan’s resignation as director, I do not see the cases on ‘irretrievable breakdowns’ to be particularly relevant. The factor motivating s 174 relief there is the company’s inability to operate effectively in those circumstances.9 But, allowing for its trading circumstances, Sailors’ Corner is continuing to operate effectively here. The breakdown in Evan and Rex’s relationship does not stymie its operation.
—Rex’s management of Sailors’ Corner
[19] Evan contends “my rights of control [were] protected under the company’s Articles of Association and memorandum carefully drawn up by my then solicitor”. That is not evidenced in the articles themselves, which substantially adopt the provisions set out in Table A in the Third Schedule to the Companies Act 1955, and otherwise are formulaic. There is no suggestion the company’s conduct is in breach of the articles.
[20] Beyond the articles of association, there is little contemporary evidence of Sailors’ Corner’s history or structure, or of Evan and Rex’s subjective expectations for its operation.10 The business was acquired at a discount on its predecessor’s failure at Westhaven Drive in 1983, and expanded by acquisition of the neighbouring Beaumont Street property in 1997. The brother agreed the conglomerate business should be separated into a trading company (Sailors’ Corner) and the property holding company (Ijay Properties). But the two companies otherwise support each other, including for tax purposes, in which they are grouped together.
[21] Although Rex responds the separation was (at Evan’s suggestion) to protect the business’ property from its creditors, Evan replies it was also to provide Evan and Rex with a passive income. I see no evidence for the latter contention. Instead, Ijay Properties had and has limited outgoings (including on borrowings to acquire beach sections, acquired in 2004), always paid by Sailors’ Corner, and enabled also extraction of surplus from Sailors’ Corner as ‘rent’ for distribution to Evan and Rex.
9 Eg, Burney v Waituna Brewing Company Ltd HC Palmerston North CIV-2009-454-0480, 9 October 2009; Hitchens v Double Zero Holdings Ltd HC Wellington, CIV-2009-485-1961, CIV-2009-485-2052, 5 February 2010.
10 Re Waitikiri Links Ltd (1989) 4 NZCLC 64,922 (HC) at 64,925.
[22] From the companies’ history and structure, Evan and Rex’s reasonable intentions appear to be the companies were to be operated jointly for the good of the overall business. Rex’s counsel, Angela Hansen, points out Evan’s agreement to Sailors’ Corner’s payment of a reduced rental to Ijay Properties as illustrative of these intentions.
[23] Subject to the business’ financial position, the remuneration arrangements made by Evan and Rex indicate the business’ operation was intended:
(a)first, to provide Evan and Rex each with income, at roughly twice the rate of managerial employees, calculated by reference to their individual participation in the business; and
(b)second and subsequently, to enable extraction of surplus proportionately to their shareholdings.
There is no evidence of any more sophisticated or extended business or investment objectives. In particular, those joint expectations were not readdressed on Evan’s reduced active participation in the business, or (more significantly) in the circumstances of its subsequent downturn. Their expectations inferentially anticipated such scenarios, and did not require revisiting when those scenarios in fact arose.
[24] The quantum of shareholder remuneration was driven by participation in the business. This was not only in application of hourly rates, but also in their periodic ‘top up’, which was not done by reference to proportionate shareholdings. Surplus for distribution to shareholders only arose after quantification of remuneration by hours worked. Although the ‘top up’ was deferred to ensure the business could afford it, if the business could afford it, its payment took priority over identification of surplus for distribution.
[25] Thus, as best as I can make them out from the slim evidence of the companies’ history and structure, Evan and Rex’s reasonable expectations were each to be paid from the business first, for their individual efforts in the business and at a premium, and only then proportionately to share in any surplus. Their treatment of both ‘top up’ and profit share as a ‘bonus’ does not detract from such a characterisation of their
expectations. Specifically, I see nothing in the evidence to establish an expectation the shareholders were to obtain any return on their investment in priority to the remuneration arrangements.
[26] Mr Turner made much in submission of contended disparate distributions between Evan and Rex, said to be illustrated in trial balance accounts for the 2013, 2014, and 2015 financial years. Rex’s explanation was the substantial payments to him and his family reflected his much larger participation in the business, compared to those smaller payments to Evan and his family. Although Evan complained that did not account for the very significant ‘allowances’ paid to each Rex and his family, above their hourly rate earnings, Rex said the allowances were apportionment of his ‘top up’, rather than his distribution of any profit.
[27] There was no forensic accounting evidence to support either party. I do not have the raw information necessary to interrogate the accounts. I observe, in seeking something so significant as the forced liquidation of a functioning commercial enterprise, I expected to see something rather more compelling than merely the shareholders’ competing accounts of their dealings. ‘Unjust detriment’ in shareholder distributions is looking for something in the nature of “fraud, illegality, or conflicts of interest”.11 It is a serious allegation, not lightly to be made. It would have required here evidence of diversion from the company’s reasonable and accepted remuneration practices, and/or of some sham to reattribute shareholder entitlements elsewhere. At the least, it would have been necessary to show Rex’s earnings from the business could not be justified on the basis of hours worked at an agreed rate. But there is no direct evidence of those hours.
[28] I prefer Rex’s explanation, which accords with the documents. By way of example, the trial balance for 2014 illustrates Rex’s ordinary earnings of approximately $100,000, and his family’s ‘allowances’ also of approximately
$100,000. At Rex’s hourly rate, that is referable to 1667 hours’ work, which does not strike me as disproportionate in management of a seven-day-a-week retail business, turning over $1.5m in that year.
11 Latimer, above n 4, at [71].
[29]The Court of Appeal in M Yovich & Sons Ltd v Yovich observed:12
Those who become shareholders in a family company operating a specialist business will often do so appreciating that a central and continuing objective of the company may be to employ one or more members of the family in the conduct of that business. … It will often also be the case that this objective reasonably subordinates for quite lengthy periods the interests of a minority who are not so employed. However particular circumstances can come to outweigh such understandings with the result that there is unjust detriment to shareholders who are not engaged in the company’s operations of a kind that s174 is intended to address.
[30] Comparably with Yovich, I see nothing unjustly detrimental to Evan in Rex’s management of the companies’ affairs. In particular, Evan’s concerns about the business’ efficiency, statutory compliance, and future lease and other prospects – even if made out – are simply those arising from his and the business’ changed circumstances. Those changed circumstances do not of themselves mean continuing conduct of the business in accordance with the shareholders’ original expectations is unjustly detrimental to him.
[31] But, distinctly from Yovich, neither is there anything in the companies’ present circumstances as makes those original expectations now unjustly detrimental to Evan’s interests. To the contrary, the business’ present economic and financial circumstances reinforce the sensibility of the shareholders’ original expectations, to favour the business’ success and participants’ reward over any determined return on shareholders’ investment. The alternative is likely to undermine the business itself.
[32] For completeness, Evan complains to have been held out of the business’ records, and seeks orders for delivery up of Sailors’ Corner’s records to him. I cannot identify any basis for Evan’s claim to possession of the company’s business records. Even so, I am satisfied Rex has made them available to Evan at the business’ premises (and otherwise, including in the course of this proceeding).
—Ijay Properties
[33] As noted, Evan separately contends his interests in Ijay Properties should be addressed on a standalone basis. For the reasons I have noted at [19] to [22] above, I
12 M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 (CA) at [32].
disagree. Again, from the exceptionally limited evidence of the companies’ history and structure, Evan and Rex’s reasonable expectations appear to be both companies were to be operated jointly for the good of the overall business, which is plainly what has occurred, and there is nothing in that original intention as makes it now unjustly detrimental to Evan.
Decision
[34] Evan has failed to establish the affairs of Sailors’ Corner and/or Ijay Properties have been, are being, or are likely to be, conducted in a manner that is – or their actions have been, are, or are likely to be – oppressive, unfairly discriminatory, or unfairly prejudicial of him. His application for orders under s 174 is dismissed.
Costs
[35] In principle, being successful, the defendants are entitled to costs. In the circumstances, I doubt that will be constructive. It may be the parties can agree a compromise. If not, costs are reserved for determination on short memoranda of no more than five pages – annexing a single-page table setting out any contended allowable steps, time allocation, and daily recovery rate – to be filed and served on the other by:
(a)the defendants within ten working days of the date of this judgment;
(b)Evan within five working days of service of the defendants’ memorandum; and
(c)the defendants strictly in reply within five working days of service of Evan’s memorandum.
—Jagose J
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