Jacanna Holdings Ltd v Pacific Auto Carrier (NZ) Ltd

[2019] NZHC 931

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2018-419-229

[2019] NZHC 931

IN THE MATTER OF

an application to interplead under rr 4.58(1), 4.59(3), 4.63(2)(f) and 4.63(4)

BETWEEN

JACANNA HOLDINGS LIMITED

Plaintiff

AND

PACIFIC AUTO CARRIER (NZ) LIMITED

First Defendant

AND

IBC JAPAN

Second Defendant

AND

ROBERT DEVON STONE

First Interested Party

AND

LUCIANE DE SOUZA FERNANDES

Second Interested Party

AND

MELANIE ELEANOR LATUMBO

Third Interested Party

Hearing:

22 March 2019

Counsel:

M D Branch for Interested Parties D Harrison for First Defendant

J A MacGillivray for Second Defendant

Judgment:

30 April 2019

JUDGMENT OF PAUL DAVISON J

This judgment was delivered by me on 30 April 2019 at 4:30 pm

Pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Harkness Henry, Auckland Gurnell Harrison Law, Auckland Tompkins Wake, Hamilton

JACANNA HOLDINGS LTD v PACIFIC AUTO CARRIER (NZ) LIMITED [2019] NZHC 931 [30 April 2019]

Introduction

[1]                   This proceeding involves two long-standing business partners, Mr Robert Stone and Mr Hohua Hemi, who have fallen out and have commenced legal proceedings against each other and their respective entities. This interlocutory application by the interested parties including Mr Robert Stone, is therefore part of a much wider dispute between him and Mr Hemi. Mr Hemi presently controls both the first defendant, Pacific Auto Carrier (NZ) Limited (PAC), and also the second defendant IBC Japan (IBC). Until fairly recently Mr Stone controlled IBC.

[2]                   IBC is owned equally by Mr Stone and Mr Hemi, and through it they have for many years conducted their business of arranging the export and shipping of motor vehicles from Japan to New Zealand.

[3]                   By this interlocutory application the interested parties, including Mr Stone and his partner Ms Fernandes, apply for an order directing that the money paid into Court by Jacanna Holdings Limited (Jacanna) as interpleader, which are profits derived from IBC shipping vehicles to New Zealand, and which sum presently exceeds $10 Million, together with all further funds to be paid into Court by Jacanna (“the Jacanna funds”), shall remain in Court pending a further order determining the parties’ entitlement to them.

[4]                   On 27 February 2019 Jagose J made an order by consent, directing the plaintiff, Jacanna to pay the Jacanna funds into Court, being the business profits then held by Jacanna with accrued interest thereon, together with future profits as they are accumulated on a monthly basis.

[5]The consent order included the following:

(b) The profits paid to the Court shall be held by the Court for the  defendants on the basis that it shall be paid by the Court to the second defendant on 1 April 2019 unless, on or before 29 March 2019 the Court makes an order ( which may be an order extending the 1 April 2019 date) in proceedings to be filed by one or more of the interested parties that the disputed funds should not be paid to the second defendant.

…

(e) The interested parties shall file any proceeding in this Court [in] which they seek orders to prevent the disputed funds from being paid to the second defendant (in terms of order (b)) by no later than 8 March 2019.

[6]                   The interested parties filed their interlocutory application on 8 March 2019, and it was heard before me on 22 March 2019. At the conclusion of the hearing I reserved my decision. On 29 March 2019 I made an order extending and enlarging the time specified in the consent order from 29 March 2019 to 31 May 2019. The order extending the time specified in the consent order was made in order to preserve the status quo pending delivery of a reserved decision.

[7]                   The first defendant PAC, claims to be entitled to control and direct the Jacanna funds, and it proposes that the funds be advanced on loan to the second defendant, IBC. Mr Harrison, the solicitor and counsel for PAC, by memorandum confirms that PAC has consented to the Jacanna funds being paid to IBC pursuant to the consent orders, and advises that PAC does not consent to the orders sought by the interested parties. Mr Harrison says that PAC, being aware that IBC is actively opposing the making of the orders sought by the interested parties, is content to abide the outcome of the application, and has requested Mr MacGillivray as counsel for IBC, to confirm PAC’s position to the Court at the hearing, which he has done.

[8]                   The interested parties say that the Jacanna funds belong to IBC and should be remitted to IBC outright rather than being lent to it by PAC. They say that all of the Jacanna funds should be applied to repayment of IBC’s bank loans. Mr Stone is also concerned however, that if the funds are paid to IBC, whether outright or as a loan, Mr Hemi cannot be relied on to apply them to IBC’s bank loans, and may apply them towards meeting IBC’s outstanding business expenses, or misuse the funds for his own personal purposes as Mr Stone alleges Mr Hemi has previously done with PAC’s funds. The interested parties challenge whether the first defendant is able to either direct or agree to the Jacanna funds being paid or loaned to the second defendant. They say that as the Jacanna funds are the rightful property of IBC, there is no legal basis for PAC to direct or consent to the funds being paid and advanced on loan to IBC and that in the circumstances it is necessary that the Court makes an order that the Jacanna

funds remain in Court while ownership of the funds is pursued by the parties and determined by the Court.

[9]                   The issue I must determine is whether the interested parties have established that it is necessary that the Jacanna funds remain in Court pending determination of the dispute over their ownership. If an order is not made directing the funds to remain in Court, pursuant to the consent orders they will be paid to IBC which is, as I have said, presently under Mr Hemi’s control.

The background

[10]IBC is a company based in Japan. It was incorporated in 1991.

[11]               Mr Hemi1 and Mr Stone are IBC’s directors, and each own 50% of the shares in the company. Mr Hemi is presently the representative director of the company, and as such controls the company.2 Mr Stone is a guarantor of 85 percent of IBC’s debt owed by way of bank loans.

[12]               IBC’s core business is that of selling, exporting and shipping used motor vehicles from Japan. The plaintiff, Jacanna Holdings, is an independent freight forwarder located in Auckland. It provides customs clearance and delivery services for imported vehicles. IBC uses Jacanna Holdings as its customs clearance broker in relation to the cars it exports from Japan into New Zealand.

[13]               In addition to IBC, Mr Hemi and Mr Stone also own and operate a number of other entities engaged in the global auto-trading business, including businesses involved in the importing and distribution of vehicles, shipping and logistics. All of these entities in their business partnership are ultimately owned beneficially by Mr Hemi and Mr Stone, with each having a 50 percent share.

[14]               In 1998, Mr Hemi and Mr Stone incorporated Autoterminal International Limited (ATI) in the British Virgin Islands. In June 2000, ATI entered into an

1      Mr Hemi is also known as “Jojo” Hemi.

2      Under Japanese law, the representative director is the director that has authority to represent and legally bind the company in connection with contractual and business matters.

agreement with IBC and Mitsui Osk Lines Limited (Mitsui) pursuant to which ATI was to act as the shipper of IBC cargo being carried into New Zealand on ships operated by Mitsui. In 2012 ATI became involved in the importation of vehicles into New Zealand from Japan for New Zealand customers buying the cars for themselves, rather than importing them through IBC. This was known as a Door-to-Door (“D2D”) service. To facilitate this, ATI incorporated the first defendant as a wholly owned New Zealand based subsidiary. The first defendant was originally named Pacific Carrier Line (NZ) Limited, but that name was later changed to Pacific Auto Carrier (NZ) Limited (PAC). From its incorporation until 2016, Jacanna, as a non-exclusive sub- agent of PAC, collected from vehicle import customers, all D2D rates including shipping and transport charges, Customs clearance fees, GST (when applicable), compliance, vehicle grooming, servicing and insurance charges and remitted these charges to PAC as ATI’s agent.

[15]               On 1 July 2012 ATI and PAC entered into a management agreement pursuant to which PAC agreed to provide management services to ATI. The agreement provided for PAC to charge ATI a monthly management fee of $2000 inclusive of GST. The agreement described the management services that PAC was to provide as follows:

1.   Management Services. PAC NZ shall provide and undertake the following management services (“the Services”) to ATI, as ATI may from time to time request and direct PAC to provide and undertake:

(a)To collect and receive funds, payments, commissions, fees, charges and/or monies including those for Ocean Freight, Bunker Adjustment Factor (BAF) and Freight Commission for and on behalf of ATI.

(b)To remit or transfer funds representing the payments for Ocean Freight and BAF received for and on behalf of ATI to shipping lines such as Mitsui OKS Lines (“MOL”) and Maersk NOR as may be instructed in writing by ATI.

(c)To remit or transfer funds representing Freight Commissions received for and on behalf of ATI on a monthly basis to be paid not later than the 5^th day of the following month after the applicable month when payments were received, by deposit to the bank account provided by ATI to PAC NZ.

(d)To provide other services in connection with or related to the foregoing services and such other services that ATI may, from time to time, require PAC NZ to provide or undertake.

[16]The Management Agreement further provided:

4. Relationship Between the Parties. The relationship between the parties is that of independent contractor. The parties to this Agreement, and nothing herein shall be interpreted so as to create a partnership, joint venture, employee or agency relationship between ATI and PAC NZ.

[17]               Pursuant to the terms of the Management Agreement PAC’s role was to collect and receive funds for freight commission on behalf of ATI and to remit the funds to ATI on a monthly basis. PAC would receive the funds from Jacanna which would collect the funds from customers. IBC was not directly involved in this process.

[18]               In around 2014 the business relationship between Mr Hemi and Mr Stone deteriorated, and as a consequence the two men are now involved in a number of separate legal proceedings regarding their partnership business in various jurisdictions, including Japan, New Zealand, British Virgin Islands and the Philippines.

[19]               Mr Hemi says that in 2015, Mr Stone pressed him to agree to channel money derived from ATI’s D2D business and PAC, to IBC to reduce the IBC bank debt. Mr Hemi says that at that time there was no suggestion that IBC had any entitlement to the funds. Also at that time Mr Stone held the position as IBC’s representative director.

[20]               By letter of 28 April 2016, Mr Stone, writing as Chief Executive Officer of IBC, directed Jacanna to remit all future D2D profits to IBC.

[21]               On 9 May 2016 Mr Hemi forwarded an email to Mr David Roberts who was the director of ATI and copied it to Mr Kenneth Quigley, the sole director of Jacanna Holdings Ltd. Mr Hemi wrote:

…

The documentation that I will be sending to you will show clearly that the Japan to NZ shipping services that ATI is providing using MOLs³ carriers to ship NON-IBC Cargo is profitable and no where [sic] does it state within the contracts that IBC Japan is a party to this shipping contract. IBC Japan has been added as a cargo supplier of its own volumes so it can avail of the accumulative volumes from both non-IBC and IBC cargo.

…

3      Mitsui O.S.K. Lines.

Mamoru, Ken, Until such time as you receive specific instructions from ATIs director Dave Roberts any suggestions by Stone to send monies to IBC Japan should be ignored as the documents that Dave will be sent will clearly show that this money has always been and still is ATIs. Once he has had a chance to examine these documents I would allow him to make a decision if the monies need to be sent to IBC or remain the property of ATI.

Send the monies to ATI’s account as previously instructed.

[22]                 In July 2016, Mr Hemi learned that on or about 30 June 2016 Mr Stone had directed Jacanna to transfer funds it was holding for ATI to IBC, and that acting on Mr Stone’s instructions, Jacanna had remitted approximately NZ$1.3 Million directly to IBC being money that previously they would have sent to PAC as agent for ATI.

[23]               On 29 July 2016, Gurnell Harrison, Lawyers, representing NPLH (NZ) Limited, which owns 50 percent of the shares of ATI and is beneficially owned by Mr Hemi’s interests, wrote to Jacanna to remind it that its agency agreement was with ATI, emphasising that Jacanna was only ever to pay funds under that agreement to ATI or its appointed manager PAC. In their letter Gurnell Harrison made demand of Jacanna for payment of the money it had paid to IBC on 30 June 2016 on the instructions of Mr Stone.

[24]               Jacanna responded to being confronted with contradictory instructions from the two business partners by thereafter retaining and accumulating the D2D funds it received. Between 2016 and 2018, Jacanna was aware that negotiations between Mr Hemi and Mr Stone were underway in an attempt to resolve their dispute, and having regard to the partners’ competing claims regarding the funds, it maintained its position of retaining and accumulating the funds pending a resolution being achieved.

[25]               Then in April 2018 Jacanna was informed by Mr Stone that court proceedings had been commenced against Mr Hemi alleging that he had misappropriated PAC’s funds. Mr Stone alleged that Mr Hemi had taken $4 Million of the funds that Jacanna had sent to PAC, and had used the money to purchase property and pay legal and other expenses unrelated to the shipping business.

[26]               On 24 May 2018, IBC (under the control of Mr Stone as the representative director) commenced proceedings in the High Court at Hamilton against PAC, Mr

Hemi, and ATI, and made interlocutory applications for: an ancillary order directing PAC and Mr Hemi to answer questions regarding the payment of a sum of approximately $1.0 Million made by PAC on 7 May 2018; an order directing the return of the money to PAC’s bank account or alternatively an order preserving the money, or a freezing order in relation to the money.

[27]               On 31 May 2018 the Board of IBC passed a resolution appointing Mr Hemi as representative director of the company in place of Mr Stone.

[28]               Mr Stone immediately advised Mr Quigley at Jacanna that he was contesting Mr Hemi’s appointment as representative director and CEO of IBC in proceedings commenced in Japan. He made it very clear that so far as he was concerned the Jacanna funds were the property of IBC. In his letter of 31 May 2018, he said:

Dear Ken,

Demand for payment of Funds being Held on behalf of IBC Shipping Business

As you are already aware, Jojo Hemi has appointed himself as Representative Director of IBC Japan during the May 31, 2018 Board of Directors meeting of the company.

This change adversely affects IBC, considering his continuing acts constitute breach of fiduciary duties as director. Pertinently, as an example, Jojo set up PAC and put in place the transactions to generate a separate income stream independent of IBC which he could use to advance loans to himself and pay his own personal expenses. Part of the transactions involve his directing funds of $1.68M held by PAC to be transferred to himself, transferring NZD1.07 from PAC to Nguyen Que Tam’s law firm CSP Legal to fund legal proceedings initiated by him, paying from PAC for personal expenses such as accounting, legal and other services for his own companies where he is a director or shareholder or the ultimate beneficiary thereof.

His appointment may cause the winding up of IBC as I have confirmed with Japanese Banks as well that they will cease their support to IBC in the event he is appointed as representative director, especially that I have the obligation as personal guarantor of the IBC loans, to disclose that Jojo diverted money away from the company in an attempt to keep the funds out of their reach during the period 2012 -2016 (when IBC was in the Japanese courts fighting statutory demands for repayment by Resona Bank and then later by Mizuho Bank).

Consider this letter as formal notice to you as Director of Jacanna that I am contesting the appointment of Jojo as Representative Director of IBC before Japanese courts to protect the interest of IBC and the group, in the following actions:

1.   An action to remove them as directors of IBC for breach of fiduciary duties proven by their acts of disloyalty and consummation of conflicting interest transactions to the disadvantage and loss of IBC as summarized above ; and

2.   A derivative action (in my capacity as shareholder/director of IBC) to hold Jojo and his wife, both personally liable for the losses they have caused to IBC.

I also have actions in play in the New Zealand courts to protect IBC’s interest in the funds that have been remitted to PAC and to protect the shareholders of ATI so that Melanie is reappointed a director of PAC so that the business can have proper oversight and to have the PAC bank account frozen which has been actioned by the courts. My position as Director of IBC remains that the funds from the IBC Shipping business with Jacanna belong to IBC and my expectation remains that these funds are remitted to IBC. I also confirm that David Roberts has by Board Resolution in December 2016 removed all authority for anyone, except himself, to act on behalf of ATI. The only person who should be giving instructions on behalf of ATI is David Roberts. I can have David send you this confirmation directly if needed. I remind you that Jojo is not the only shareholder of ATI and he has no more rights that the other shareholder and now David has removed all authorities he has no right to act on behalf of ATI through PAC.

In the midst of all this, my position as Director of IBC is that the funds you are holding belong to IBC. I expect that those funds are sent back to IBC. If those funds are sent anywhere else other than IBC I will take immediate action against Jacanna and its Officers, for damages, gross negligence and bad faith in the performance of its obligations under our arrangement.

Yours truly, Robert Stone

Director- IBC Japan Ltd.

[29]               Then on 8 June 2018 Mr Hemi, as CEO and representative director of IBC, also wrote to Jacanna. He explained that on 31 May 2018 the Board of IBC had passed a resolution appointing him as the representative director of IBC to replace Mr Stone with immediate effect. He said that IBC had no claim to the Jacanna funds. In his letter he said that IBC Japan was formally instructing Jacanna that it had no objection to Jacanna paying the accumulated D2D funds it held to PAC as the collecting agent for ATI under the arrangements that were put in place for the running of the D2D business in 2012. He said:

…

As you know, in June 2016, Mr Stone, as the then-representative director of IBC, informed you that the proceeds of the D2D business conducted between Jacanna and Pacific Auto Carrier (NZ) Limited (as agent for Autoterminal

International Limited) were for the benefit of IBC Japan. I understand that Mr Stone instructed you to pay the money collected by Jacanna under the D2D business to IBC and one payment was made in July 2016. After this instruction was objected [to] by PAC, I understand that Jacanna has retained and accumulated the income from the D2D business in a trust account instead of paying to PAC on the basis that there was a dispute raised by Mr Stone on behalf of IBC Japan.

Please note that the position that Mr Stone has taken and the instructions that Mr Stone gave you with regard to the D2D income were given without the approval of the Board of IBC Japan. In fact, the D2D business was always intended to be kept separate from IBC Japan and was always intended to be operated by ATI with PAC acting as its collecting agent and Jacanna being the forwarding agent in New Zealand. In my new position as IBC Representative Director I have not been provided any legal document by Mr Stone which shows that the D2D business was IBC’s business or was operated by IBC.

This letter is a formal instruction that IBC Japan has no objection to you paying/releasing the income produced by ATI/PAC from the D2D service including the amounts currently held on trust by Jacanna in relation to D2D services and any amounts collected in future in respect of D2D services, to PAC as collecting agent for ATI under the engagement between the respective parties that were put in place for the D2D business to run since 2012.

I will be conducting an internal audit on the treatment of the amount paid by Jacanna to IBC under Mr Stone’s instructions in 2016 and will deal with this properly in due course.

I appreciate that the previous instructions received from Mr Stone put Jacanna in a difficult position as IBC Japan is an important customer of Jacanna. IBC looks forward to continuing to work with Jacanna in relation to IBC’s own business and I look forward to meeting you soon.

[30]               On 20 June 2018 a director of PAC advised Jacanna that unless the funds it was holding were distributed to PAC by 22 June 2018, legal proceedings would be commenced.

[31]               On 24 July 2018 solicitors representing Mr Stone and the interested party Ms Melanie Latumbo, advised Jacanna that Ms Latumbo had filed a summary judgment application seeking an order declaring that as she had been unlawfully removed from her position as a director of PAC she had never ceased to be a director of the company, and that PAC’s bank account had been frozen pending determination of her status as a director. Ms Latumbo’s solicitors advised that she maintained that the Jacanna funds belonged to IBC and there was no legal basis upon which Jacanna could pay the funds it held to PAC.

[32]               Confronted with demands from both PAC and IBC for the commission funds it held, Jacanna commenced this proceeding on 27 July 2018 as an application to interplead, and seeking orders requiring PAC and IBC to resolve their dispute over ownership or entitlement to the funds it held, so that Jacanna could release the funds to the correct party.

[33]               It is also relevant to note that in a Judgment delivered on 25 October 2018, Van Bohemen J dismissed two applications brought by the third interested party, Ms Latumbo in separate proceedings. In the first proceeding filed on 13 February 2018 she sought leave to bring a derivative action on behalf of PAC against Renata Kahuroa (as a director of PAC), and Mr Hemi (as a deemed director of PAC), in respect of transactions made in the name of PAC which Ms Latumbo alleged were in breach of ss 131 and 134 of the Companies Act 1993. In the second proceeding filed on 9 April 2018, Ms Latumbo sought a declaration by summary judgment that she is a director of PAC.4 Both applications were dismissed.

[34]               On 10 September 2018 Mr Stone commenced a derivative action in Japan in the name of IBC against PAC and Mr Hemi. The proceedings were called for mention in the court in Japan on 26 March 2019. In this action he alleges that the shipping service provided by PAC competes with IBC’s business, and that Mr Hemi breached his fiduciary duties as a director of IBC by establishing and operating PAC in ways that caused damage and loss to IBC. Mr Stone further alleges that he has demanded that Mr Hemi pay the Jacanna funds collected through PAC’s business to IBC, and that Mr Hemi has refused to do so.

[35]               Mr Stone’s lawyer in Japan, Mr Junichi Aratake, has sworn an affidavit in which he confirms the filing and basis of the proceeding, and says that based on his experience the proceedings will take another 6-12 months from March 2019 to be resolved by the court. In his affidavit, Mr Aratake has described the position of IBC in relation to its loans from eight banks in Japan totalling 3,814,479,000 Japanese Yen (approximately $NZ 50 Million). Mr Aratake confirms that Mr Stone is a guarantor of the four largest loans which total approximately 3,300,000,000 Japanese Yen. By

4      Latumbo v Pacific Auto Carrier (NZ) Limited [2018] NZHC 2773.

reference to an internal IBC report, Mr Aratake says that loans totalling 2,895,127,000 Japanese Yen fell due for repayment on 31 January 2019. Other loans advanced pursuant to overdraft facilities of approximately 400,000,000 Japanese Yen will become due following notice from the banks that the term loans due on 31 January 2019 are in default. Mr Aratake explains that under Japanese law, a company is deemed to be insolvent if it cannot generally and continuously pay its debts as they fall due. Noting that loans totalling 2,895,127,000 Japanese Yen and due on 31 January 2019 have not been repaid, Mr Aratake says that if that is correct information, in his view IBC is “technically insolvent”. He further explains that IBC is currently awaiting a decision from the lead bank Mitsubishi UFJ (MUFJ) as to how it will proceed. He says that having regard to the unpaid loans the banks in Japan could file bankruptcy proceedings against IBC, or take some other enforcement action. He is of the view that if one of the banks were to commence enforcement action the others would all follow suit. Mr Aratake says that demands for repayment of the loans would strip IBC of its operating capital and lead to cessation of its operations.

[36]               As I have earlier noted all parties (being the plaintiff, first and second defendants and the interested parties) agreed to the consent orders made by Jagose J on 27 February 2019.

[37]               In or about March 2019, Ms Fernandes instructed lawyers in the British Virgin Islands to apply to the court for approval authorising her to commence a derivative action in the name of ATI against PAC, Mr Kahuroa and Mr Hemi. Should she be granted leave to bring the derivative action, Ms Fernandes proposes to file proceedings in the High Court at Hamilton in which ATI will seek interim orders relating to the Jacanna funds directing that the funds be retained by the Court pending determination as to their ownership by ATI or IBC.

Submissions

Submissions for the Interested Parties

[38]               Mr Branch, for all three interested parties, commenced by noting that his clients were not challenging the ability of IBC to receive the Jacanna funds. He submits that the focus of the interested parties’ application is on whether PAC is able

to agree to the funds that it is entitled to being paid to IBC. He says that while the interested parties would agree to the Jacanna funds being paid to IBC if certain safeguards were put in place, their primary argument is that there is no legal basis for the Jacanna funds to be transferred from PAC to IBC, and it is therefore appropriate that the funds remain in Court while the ownership of the funds is determined.

[39]               Mr Branch says that all the grounds raised by the interested parties in support of their contention that the Jacanna funds should not be paid to IBC relate to PAC, and he notes that PAC has adopted a neutral position in response to the present application. There is therefore no opposition from the very party that the interested parties say has no authority or ability to consent to the payment of the Jacanna funds to IBC. He submits that in the absence of any opposition by PAC, there is no basis for the Court not making the orders sought by the interested parties regarding PAC’s ability to deal with the Jacanna funds.

[40]               Mr Branch submits that the Court must be satisfied that the payment of the Jacanna funds to IBC is lawful and in accordance with PAC’s contractual and legal obligations relating to the Jacanna funds. He says that in any event, the interested parties have shown there is a sufficient basis for the Court to make an interim injunction and freezing orders in relation to the Jacanna funds, thereby preventing them from being paid or transferred from the Court to IBC or anyone else, pending further order of the Court.

[41]               Mr Branch acknowledges that Mr Stone has previously stated that he considered that the Jacanna funds belong to IBC, and that they should be paid to IBC. Mr Branch notes the contention made on behalf of PAC and IBC that as Mr Stone’s position has previously been that the funds should be paid to IBC, the interested parties cannot now credibly oppose the money being paid to IBC. He submits however that the situation of IBC has changed since Mr Stone made those statements stating that the funds should be paid to IBC, as the company is no longer solvent and trading profitably. He says that when Mr Stone previously proposed that the funds be paid to IBC and be distributed as profits, the company was solvent and the funds could be distributed. Mr Branch submits that now the company is not solvent and is not trading profitably, the basis of Mr Stone’s previous proposal “falls away”. He submits that

IBC itself has no entitlement to the Jacanna funds and so the central issue is whether PAC has the power and is entitled to send the funds to IBC if it chooses to do so.

[42]               Mr Branch says that PAC is the party legally entitled to the funds, and if they were transferred to IBC by way of a loan advance, there would be no ability for PAC to secure repayment unless Mr Hemi, who has now taken over from Mr Stone as the representative director of IBC, agrees to do so. Mr Branch says that during the time that Mr Stone was the representative director of IBC, he initiated proceedings in New Zealand to determine ownership of the Jacanna funds, but when Mr Hemi became the representative director of IBC, the proceedings were promptly discontinued.

[43]               Mr Branch advances five grounds in support of his clients’ application that the Jacanna funds should remain in Court. They are:

(a)That it is highly likely that the second interested party, Ms Luciane Fernandes (Ms Fernandes), will be successful in obtaining leave to issue a derivative action claim on behalf of ATI against PAC in relation to the Jacanna funds. ATI holds 100 percent of the shares of PAC, but currently has no director and is unable to act.

(b)If a derivative claim is brought, there is an unanswerable claim to the Jacanna funds based on: the terms of the Management Agreement that requires all money other than the $2000 monthly management fee to be remitted by PAC to ATI; an allegation of breach of trust, being the failure of PAC to pay the Jacanna funds to ATI, and assisting Mr Hemi to take and use the funds for his personal use; and by way of an injunction pursuant to s 164 of the Companies Act 1993 (the Act) to restrain a company or a director proposing to engage in conduct contrary to the constitution of the company, or of the Act.

(c)Ms Fernandes has standing in her own right to bring a claim alleging that any payment of the Jacanna funds to IBC would be an abuse of process and a tort upon which she could sue. Alternatively Ms Fernandes has standing to request the Court to invoke its inherent

jurisdiction to prevent an abuse of process, being that payment of the funds to IBC will be unlawful by being a breach of trust and/or a breach of the Act.

(d)The first interested party, Mr Stone, has commenced court proceedings in Japan which challenge PAC’s ability to deal with the Jacanna funds, and which seek payment of the Jacanna funds to IBC as their rightful owner.

(e)The third interested party, Ms Melanie Latumbo (Ms Latumbo), has an extant claim in proceedings in which she alleges that she is a director of PAC, and as such she does not consent to the Jacanna funds being paid or advanced to IBC.

[44]               Mr Branch submits that unless or until PAC can show that it can lawfully consent to the Jacanna funds being sent to IBC, the funds should remain with the Court in New Zealand. He submits that the interested parties are not required to establish that they are entitled to interim relief by way of an order for an interim injunction. He says that the issue is simply whether there is a reasonable or sensible basis for the Jacanna funds remaining in Court while, for example, the ATI derivative action claim is progressed and determined. He submits that the terms of the consent order specifically provided for the possibility of an extension of time during which a decision as regards the funds would be made, and there is no mention in the consent order of the interested parties needing to obtain an injunction or similar relief by or before the specified date.

[45]               Counsel submits that on those grounds, the Court cannot currently be satisfied that it is “safe” to allow the Jacanna funds to leave New Zealand, while on the other hand the Court can be satisfied that it is in the interests of all parties that the funds remain in Court until ATI confirms that it consents to the funds being paid from PAC to IBC, and ATI has executed a special resolution to that effect.

[46]               Responding to Mr McGillivray’s submission that Mr Stone’s opposition to the money being sent to IBC represents a complete about-face from his earlier position as

expressed in correspondence and his affidavit evidence in which he has said that the Jacanna funds belong to IBC, Mr Branch says that the issue is not where the money goes, but is rather the basis on which it goes, and the effect that will have on Mr Stone. He submits that if the Jacanna funds are remitted to IBC in Japan and are applied to repayment of loans and reduction of debt, the effect will be to both improve IBC’s solvency and reduce Mr Stone’s liability as a guarantor. If however the Jacanna funds are advanced to IBC by PAC as a loan, even if used to repay bank lending, the net position will not change as repaid debt to the banks will be substituted for debt owed to PAC. Moreover, if the Jacanna funds are treated by IBC as working capital and used to meet outstanding and current business expenses, there would be no reduction of Mr Stone’s liability under his guarantee and consequently he would receive no real benefit from IBC receiving the funds, and indeed his position may even be worse.

[47]               Mr Branch notes Mr Hemi’s explanation of the reason for his proposal that PAC advance the Jacanna funds to IBC as being that the funds were D2D business profits in the wider business partnership. Mr Branch further notes that Mr Hemi says that he has always accepted that he and Mr Stone as business partners, had contemplated advancing profits from the separate D2D business to assist IBC to pay off its bank debt. However, despite Mr Hemi acknowledging that the Jacanna funds are profits of the business partnership, he nevertheless now maintains that the funds should be loaned by PAC to IBC provided that there were “appropriate protections” in place.

[48]                 Mr Branch submits that Mr Hemi’s position lacks consistency, as being profits of the business partnership, the Jacanna funds belong to IBC, and should be remitted to IBC outright and not advanced by PAC as a loan. He submits that should ATI and PAC nevertheless consider that the Jacanna funds are the property of PAC and that it was free to deal with the money, PAC would have the ability to issue proceedings.

[49]               Mr Branch further says that Mr Hemi and IBC have refused to advise Mr Stone as to how much of the Jacanna funds, if paid to IBC, would be used to repay debt and how much would be applied to meeting IBC’s running expenses and trading losses. He submits that the proper inference to be drawn from Mr Hemi’s failure to provide an explanation of how the money would be applied, is that in fact very little of the

Jacanna funds would be used to repay debt, while the rest would be used to “plug the hole resulting from Mr Hemi’s mismanagement of IBC”.

[50]               Mr Branch also responds to Mr MacGillivray regarding the offer of an undertaking by Mr Hemi and IBC that the Jacanna funds will be applied by IBC to debt reduction and working capital. Mr Branch says that such an undertaking is of no use to the interested parties, as: IBC is insolvent and in any event has no other assets in New Zealand; Mr Hemi is a resident of Japan; Mr Hemi has previously demonstrated his willingness to disregard his legal obligations; and the terms of the proposed undertaking are inconsistent with Mr Hemi’s statement in his most recent affidavit in which he said that he intended to use the Jacanna funds if they are paid to IBC, “in part to pay down and service bank debt and in part for the running expenses of IBC.”

[51]               Mr Branch submits that in any event, the interested parties have made out the grounds for obtaining: an interim injunction and order restraining PAC from dealing with the Jacanna funds; a preservation order; and a freezing order.

Interim injunction

[52]               In support of an interim injunction Mr Branch submits that the interested parties have clearly established that there is a serious question to be tried, by reason of: the ATI derivative action that Ms Fernandes is currently seeking leave to commence; the breach of the Companies Act and the abuse of process that would occur were PAC to remit the funds to IBC; the application by the interested parties for the Court to exercise its inherent jurisdiction; and the extant proceedings in which Ms Latumbo claims that she is a director of PAC and does not authorise the transfer of the funds to IBC.

[53]               Counsel submits that the balance of convenience clearly favours the interested parties. The status quo is that the funds are presently located in New Zealand and are held by the Court. Should the funds be transferred out of New Zealand it will effectively render any claim to the fund nugatory. He submits that PAC will not suffer any loss by reason of the funds being restrained by an interim injunction as the interest being earned on the funds held by the Court exceeds the interest rate that PAC would

receive on the funds from IBC. He further submits that PAC would only suffer a loss if it is found to hold the Jacanna funds on trust for ATI but is free to use the money without the approval of ATI. If that were the outcome, then half of the money held would belong to the second interested party and would be available to meet any damage suffered by virtue of the injunction.

[54]               Mr Branch also refers to and relies on the extant proceedings commenced by Mr Stone in Japan in which the issue of ownership of the Jacanna funds is to be determined. Those proceedings will not be heard and determined for 6-12 months, and in the meantime Mr Branch submits the Jacanna funds should be preserved pending the outcome of that proceeding.

[55]               Mr Branch says that if an undertaking as to damages is required it could be provided, and supported by a payment into Court by the interested parties. However as half of the funds held by the Court are beneficially owned by the first interested party, Mr Stone, there is no real utility in a such payment into Court as there is well sufficient funds to cover any damage caused by an injunction. On the other hand says Mr Branch, PAC would have no ability to repay in excess of $10 Million if the Jacanna funds are transferred out of New Zealand and are not able to be recovered in full.

[56]               Mr Branch also relies on the fact that proceedings have already been commenced in Japan to determine ownership of the Jacanna funds. He submits that the balance of convenience favours waiting for those proceedings to be determined in Japan before any decision regarding the payment and disposition of the funds held in New Zealand is made. Counsel further submits that although Mr Stone and the other interested parties have proposed terms to Mr Hemi upon which payment of the funds to IBC would be made provided it was wholly applied to the reduction of IBC bank debt, Mr Hemi has rejected the proposal, saying that some of the funds would be applied towards meeting IBC’s running expenses, without detailing what those expenses are or the amounts involved.

[57]               Referring to the account given by Mr Stone in his affidavit, Mr Branch says that Mr Hemi has previously taken over $1.0 Million from ATI and has applied it to meeting his personal legal expenses. Having regard to that conduct, Mr Branch

submits that Mr Stone and the other interested parties can have no confidence that Mr Hemi would not similarly elect to use the Jacanna funds, or at least part of them, for his own personal purposes, should the funds be transferred to IBC.

[58]               Mr Branch says that on the basis of those matters the balance of convenience clearly favours the interested parties, and the Court should exercise the discretion to grant an interim injunction ordering the funds to be held in Court pending determination of ownership.

Preservation order

[59]               Mr Branch submits that here the Jacanna funds lie at the centre of the litigation, and the claims relating to the funds would be rendered nugatory prior to the substantive hearing and determination of the ownership of the money, were the funds released from the Court and paid to IBC in Japan.

Freezing Order

[60]               Mr Branch submits that here the independent parties have satisfied the requirements for the making of a freezing order by showing that they have a good arguable case based on the existence of the proceedings commenced in Japan by Mr Stone and on the application seeking leave to commence a derivative action which has been commenced by Ms Fernandes in the British Virgin Islands. The Jacanna funds are clearly an asset to which a freezing order can apply, and they have also demonstrated that there is a real risk that the Jacanna funds will never be returned to New Zealand should they be paid to IBC. In this regard he notes that IBC has not taken issue with the evidence of the interested parties alleging that IBC is insolvent. He says that Mr Hemi’s actions of taking money from ATI for his personal use and of refusing to explain what the running expenses of IBC are that the funds (or part of them) would be applied to if the funds were transferred to IBC, demonstrates that there is a real risk of dissipation should the funds be released from the Court and transferred to IBC.

[61]               Regarding an undertaking as to damages, Mr Branch says that there is already an undertaking in place in relation to the freezing order that Ms Latumbo obtained in her proceeding against PAC in relation to a specific PAC bank account. He submits

that pursuant to the undertaking in that proceeding the sum of $50,000 is currently being held in Ms Latumbo’s solicitors’ trust account. Those same funds could also be employed as security for an undertaking as to damages in the present proceeding.

Submissions for the Second Defendant

[62]               Mr MacGillivray for the second defendant, but also speaking on behalf of the first defendant in this limited respect, confirms that the first defendant will abide the decision of the Court in relation to the interested parties’ application, upon the basis that the application is being opposed by the second defendant. Mr MacGillivray explains that he previously appeared as counsel for both the first and second defendants when the consent orders were made.

[63]               Mr MacGillivray notes that IBC and PAC are both businesses which are part of the business partnership conducted by Mr Hemi and Mr Stone, and in which they each have a half share. He says that from the commencement of the D2D business in 2012 for the importation of cars into New Zealand from Japan, through until June 2016, the funds collected by Jacanna were remitted to PAC. Then in April 2016, Mr Stone as representative director of IBC directed that no further funds were to be paid to PAC and the funds should be paid by Jacanna to IBC, as IBC’s income. Mr Hemi disputed Mr Stone’s instruction regarding the funds, and as a consequence Jacanna retained the funds and ceased remitting funds to either PAC or IBC.

[64]               Mr MacGillivray says that as Mr Stone had previously asserted that IBC is the outright owner of the Jacanna funds, the consent orders were intended by PAC and IBC to preserve Mr Stone’s ability to pursue his claim that IBC is the owner of the funds, while permitting the funds to be paid to IBC on terms that would preserve all the parties’ rights in relation to the issue of legal ownership, including those of the interested parties.

[65]               MacGillivray submits that while the common position of PAC and IBC is that the Jacanna funds belong to PAC, both PAC and IBC also agreed that it was always contemplated by Mr Hemi and Mr Stone that the profits from PAC’s D2D business would be advanced to IBC to assist it to pay down its bank debt. Counsel says that there is no dispute between the parties that both PAC and ATI have no capital

requirements and no debt, and that the Jacanna funds represent profit of the 50/50 business partnership of Mr Hemi and Mr Stone. Mr MacGillivray says despite the practical solution proposed that would see the funds remitted to IBC, Mr Stone and the other interested parties opposed the proposal, resulting in the negotiation of the terms of the consent orders which provide that the funds will be remitted to IBC unless within the stipulated time the interested parties obtain an order that the Jacanna funds “should not be paid to [IBC]”.

[66]               Mr MacGillivray draws the Court’s attention to several statements by Mr Stone in earlier affidavits filed in other proceedings in which he has asserted that the Jacanna funds are owned by IBC.

[67]               Counsel submits that the terms of the consent orders require the interested parties to make out the grounds for either an interim injunction or freezing order in order to show that the disputed funds should not be paid to IBC. He submits that none of the grounds upon which the interested parties now oppose the funds being paid to IBC, provide any sensible basis for why they need a Court order to prevent the funds being sent to the very party they consider to be the legal owner of the funds.

[68]               Mr MacGillivray also notes that in their Notice of Opposition to the second defendant’s application to strike out the appearances of Mr Stone and Ms Latumbo, Mr Stone stated that as a guarantor of IBC’s debts, he had a legitimate interest in seeking a declaration that the Jacanna funds are an asset of IBC. Ms Latumbo asserted that she is a director of PAC, stating that her position is that the Jacanna funds belong to IBC and that PAC should not make a claim to the fund. Counsel says that against that background and contrary to their prior claims that the Jacanna funds belong to IBC, Mr Stone and the interested parties are now endeavouring to prevent the funds being paid to IBC on the grounds that to do so would be to ignore ATI’s interest in the funds.

[69]               Mr MacGillivray says however that it is clear that the real reason Mr Stone has changed his position and now does not want the funds to go to IBC, is that in IBC the funds will be under Mr Hemi’s control.

[70]               Mr MacGillivray submits that the interested parties’ opposition to the Jacanna funds being paid to IBC appears to be based on:

(a)Mr Stone’s insistence that the funds be paid to IBC as its income;

(b)a risk of dissipation or misuse by IBC;

(c)that PAC cannot lawfully consent to the funds being paid to IBC, and that in any event PAC and ATI would be prejudiced by the payment to IBC.

[71]               In relation to Mr Stone’s contention that the Jacanna funds should be paid to IBC as income (rather than loaned from PAC to IBC) or not at all, Mr MacGillivray submits that should Mr Stone establish in the context of the proceeding he has commenced in Japan that IBC is the owner of the funds, then the money will be treated as its income and profit, and it will contribute to its balance sheet. He submits that pending determination of Mr Stone’s proceedings the issue of how the funds should be treated by IBC in its accounts will be a matter for the company’s accountants and legal advisors in Japan.

[72]               In relation to the issue of any risk of dissipation, Mr MacGillivray acknowledges that as the representative director of IBC, Mr Hemi has wide ranging powers to make decisions and enter into contracts for the company. However, he says there is no evidence of Mr Hemi having been involved in any misuse of the IBC assets or of any misuse of his powers as the representative director. He notes that Mr Hemi has agreed that the Jacanna funds will only be used for paying down bank debt and meeting running costs of IBC’s business. Moreover says Mr MacGillivray, he is instructed that Mr Hemi will undertake to the Court and the interested parties, that if paid to IBC, the Jacanna funds will be applied to debt reduction and for use as working capital. He says that Mr Hemi denies Mr Stone’s allegations of any prior misuse of PAC/ATI funds.

[73]               Mr MacGillivray further says that the second defendant disputes the interested parties’ allegation that it is insolvent. He says that although the bank is yet to formally

renew the existing loans, that does not mean that IBC is insolvent. He notes that Mr Hemi has explained that IBC has a working accommodation with its bank, and that the bank’s concerns relate to the existence of the dispute between the two business partners, rather than any trading issues. Counsel submits that as Mr Stone’s concerns regarding the application of the funds relate to how the money should be applied, his real concerns are based on control of the company and his claimed concerns about solvency are without foundation. In fact, any receipt of the Jacanna funds would only improve IBC’s financial position and reduce solvency concerns.

[74]               Mr MacGillivray submits that if Mr Stone has any real concerns that Mr Hemi might misuse his position as representative director to misapply IBC’s assets, then he can seek relief from the Court in Japan. Such concerns as have been raised do not provide an adequate basis for this Court preventing the remittance to IBC in Japan of funds that Mr Stone himself says is money that properly belongs to it.

[75]               Counsel responds to the interested parties’ contention that PAC cannot consent to the Jacanna funds being paid to IBC, by first noting that this ground of objection while ostensibly being advanced by Ms Fernandes, is in fact being advanced by her on behalf of Mr Stone who is her de facto partner. He notes that until recently the shares held by Ms Fernandes in ATI were held by Mr Stone, and he submits that there is therefore a reasonable foundation for treating Mr Stone as having effective control of that shareholding. In any event, says Mr MacGillivray the interests of Ms Fernandes and Mr Stone are closely aligned.

[76]               Mr MacGillivray says that as Ms Fernandes contends that the Jacanna funds should go to IBC and be recorded as IBC’s income or profit, this must entail PAC and or ATI giving up any claim they have to the funds. Given that position, she cannot also be heard to object to PAC consenting to the payment of the funds to IBC by Jacanna subject to a later determination of IBC’s rights. Counsel submits that in any event if Ms Fernandes makes a proper disclosure to the Court that in fact she holds a contrary position and believes the funds should rightly go to IBC, it is unlikely that Ms Fernandes will be granted leave to commence a derivative action on behalf of ATI so that it can bring proceedings to claim an entitlement to the Jacanna funds. He submits that Ms Fernandes’ application for leave to bring a derivative action should be

regarded as little more than a tactical move designed to try to create grounds for opposing the consent order being given effect, and the funds paid to IBC.

[77]               Mr MacGillivray further submits that as PAC has already consented to the funds being paid to IBC no further consent or action by PAC is now required. He notes that the interested parties did not object to PAC consenting to the terms of the consent orders, and in fact they all consented to it themselves. Counsel notes that the consent orders do not provide for the Jacanna funds to be loaned by PAC to IBC, but simply that the funds be “paid by the Court to the second defendant”. Accordingly he submits that as PAC is not described as lending the funds, and has not conceded any position whatsoever regarding ownership of the funds, it would not be prejudiced by the funds being paid to IBC.

[78]               Mr MacGillivray further says that while the interested parties’ primary contention is that the Jacanna funds properly belong to IBC, they are also endeavouring to advance the proposition that by reason of ATI and PAC interests, the Jacanna funds cannot and should not be paid to IBC. He submits that those propositions are mutually inconsistent and irreconcilable.

[79]               Finally, Mr MacGillivray says that Mr Stone has never disputed Mr Hemi’s evidence that it was always intended by the two partners that the profits from the D2D business would be channelled to IBC as that part of the business partnership which carried the burden of bank debt.

[80]               Turning to the issues of the injunction, preservation and freezing orders sought by the interested parties, Mr MacGillivray submits that s 164 of the Companies Act 1993 which is relied on by the interested parties provides for applications for an injunction by the company, a director or shareholder of the company or an entitled person.5 None of the interested parties qualify and therefore have no standing to apply pursuant to that provision of the Act. Moreover, here PAC has consented to the funds being paid to IBC as part of the resolution of the interpleader proceedings, and consent orders have been made to give effect to that consent. Counsel submits that having

5      Companies Act 1993, s 164(2).

regard to that background, the interested parties cannot now contend that PAC’s consent was a contravention of the Companies Act.

[81]               Mr MacGillivray says that being the case, the only basis upon which the interested parties can apply for an interim injunction is pursuant to rule 7.53 of the High Court Rules 2016. Counsel notes that rule 7.54 requires a party seeking an interlocutory injunction to file a signed undertaking that the applicant will comply with any order for the payment of damages sustained through the injunction. Mr MacGillivray says that the interested parties have however not filed an undertaking as to damages. He says that the interested parties attempt to rely on the undertaking as to damages given by IBC in the proceedings brought by Ms Latumbo in which she sought an interim injunction to restrain PAC from dealing with its assets without her consent,6 and does not and cannot satisfy the requirement for an undertaking as to damages in the context of this proceeding.

[82]               Counsel submits that there is no serious issue to be tried here, as the Jacanna funds are proposed to be paid to the party that the interested parties themselves say is the party entitled to the funds. He further submits that the inconsistency between the interested parties’ position as to ownership of the funds and their opposition to the funds being paid to IBC, demonstrates that the interested parties have an ulterior motive for their opposition to the funds being paid to IBC, namely their desire to exercise some control over the management of IBC. Mr MacGillivray submits that the balance of convenience clearly lies with IBC and PAC, as it is not disputed that the parties’ intention, including the intentions of Mr Hemi and Mr Stone, was always to make the D2D profits available to IBC to be applied to debt servicing and reduction. The funds being retained in Court prevents the Hemi/Stone business partnership from utilising significant funds for the benefit of the business. Moreover, as the interested parties all wish the funds to be paid to IBC outright and for PAC to have no claim to be entitled to repayment, there is no risk of dissipation, and no basis for the making of a preservation order. Similarly, says Mr MacGillivray, as all the parties agree that the Jacanna funds belong to IBC, there is no good arguable case for a freezing order, no real risk of dissipation, and no undertaking as to damages.

6      Latumbo v Pacific Auto Carrier (NZ) Ltd & Ors [2018] NZHC 2773.

[83]               The second defendant accordingly seeks an order dismissing the interested parties’ application and also seeks an order for costs.

Discussion

[84]               The terms of the consent orders make it clear that the parties to the proceeding including the interested parties, have already agreed that the Jacanna funds are to be paid to IBC unless the interested parties obtain an order of the Court that the disputed funds should not be paid to IBC Japan. Thus the default position now, is that the parties have agreed that the Jacanna funds should be paid to IBC unless the interested parties obtain an order that the funds be held by the Court pending the determination of proceedings brought by the interested parties in connection with the funds.

[85]               While PAC has already consented to the Jacanna funds being paid to IBC, as it claims to own and control the funds, the basis on which the funds would be provided by PAC to IBC would be by way of a loan advance. On that basis, while IBC would have use of the funds, it would also have a liability to repay PAC, and its receipt of the Jacanna funds would not have improved its balance sheet position irrespective of whether the funds were applied to pay down its bank loans. However, Mr Stone and the other interested parties contend that IBC is the rightful and outright owner of the Jacanna funds, and that while the funds should ultimately be paid to IBC, they should not be transferred to it in the present circumstances in which Mr Hemi has control of IBC and cannot be relied on to apply all of the funds to paying down IBC’s bank debt.

[86]               Thus although all parties agree that the funds themselves should now, or ultimately, be paid to IBC, the basis upon which the funds are paid, and the use to which they would be put upon receipt by IBC, are matters of dispute.

[87]               I do not accept Mr Branch’s submission that the issue I am to decide is simply whether there is a reasonable or “sensible” basis for the Jacanna funds remaining in Court while, for example, the ATI derivative action claim is progressed, and that the interested parties are not required to establish that they are entitled to interim relief by way of an order for an interim injunction. In my view the terms of the consent orders that provided for the interested parties to apply for an order that the disputed Jacanna funds should not be paid to IBC, was simply a means of affording them an opportunity

during a short time period to apply for an interim order, before the funds would be sent to IBC Japan where they would be beyond the jurisdiction of the Court. In order to obtain an order of the Court that the Jacanna funds should not be paid to IBC, the interested parties are required to establish the existence of grounds for the making of an interim injunction order, preservation order or freezing order.

Section 164 of the Companies Act 1993

[88]               Section 164 of the Companies Act 1993 provides that the company, its director, shareholder or entitled person may make an application for an injunction restraining the conduct of a director who proposes to engage in conduct that would contravene the company’s constitution or the Companies Act.

[89]               The jurisdiction under s 164 is independent from the equitable jurisdiction to grant an injunction, and must be exercised in light of the purposes of the Companies Act.7 However, the main questions in equity – whether there is a serious issue to be tried, and where the balance of convenience lies – nonetheless provide useful guidance on whether an injunction under s 164 should be issued.

[90]               As Mr MacGillivray for the defendants correctly points out, none of the three interested parties are a director, shareholder, or entitled person of PAC. While Ms Latumbo has an extant claim in proceedings in which she alleges that she is a director of PAC, she does not satisfy the requirement of being a director such as would enable her to rely on s 164 of the Act. Consequently, there is no need to rely on s 164, and the provision does not assist them in establishing a serious case to be tried.

Legal principles applicable to interim injunctions

[91]The principles applying to the grant of an interim injunction are well-settled.

It requires the Court to find that:8

(a)there is a serious question to be tried;

7      JJ International Ltd v Streetsmart Ltd HC Auckland CIV-2005-404-857, 11 March 2005 at [18].

8      NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 at [12]; American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL).

(b)the balance of convenience favours the granting of the injunction; and

(c)the overall justice of the case requires it.

[92]               A serious question is one that is not frivolous or vexatious, and one where the plaintiff has a real prospect of succeeding at trial. The essence of the latter two inquiries is whether the effect of refusing the injunction would be harder on a plaintiff who succeeds at trial than it would be on an ultimately successful defendant. In making this assessment, the Court should consider what is in the overall interests of justice by reference to the relative strengths of the cases, the preservation of the status quo, the compensable disadvantages to either party, and the adequacy of damages as a remedy.9

Have the interested parties established grounds for an interim injunction?

The Fernandes ATI derivative action

[93]               The interested parties submit that there is a serious question to be tried in relation to the extant application by the second interested party, Ms Fernandes, for leave to bring derivative action on behalf of ATI against PAC in relation to the Jacanna funds. ATI holds 100 percent of the shares in PAC, but at present ATI has no director and is unable to act. The interested parties contend that should leave be granted to Ms Fernandes to bring a derivative action, the claim against PAC would be “unanswerable” having regard to: the terms of the management agreement which require PAC to hold the Jacanna funds for ATI; a breach of trust by assisting Mr Hemi to take Jacanna funds for his own personal use; and her ability to obtain an injunction pursuant to s 164 of the Companies Act 1993.

[94]               In her affidavit sworn in support of the interested parties’ interlocutory application, Ms Fernandes says that she agrees with Mr Stone that the Jacanna funds belong to IBC. She says however that should the Court determine that the Jacanna funds belong to PAC, as the beneficial owner of shares in ATI she has an interest in the funds. Ms Fernandes explains that 50 percent of the shares of ATI are held by GTCS Nominees Ltd, which is a company based in the Cayman Islands, and are held

9      Wellington International Airport Ltd v Air New Zealand Ltd HC Wellington CIV-2007-485-1756, 30 July 2008 at [6]-[14].

on trust for her as the beneficial owner. Ms Fernandes says further, that if Mr Hemi’s previous contention is correct and PAC does hold any Jacanna funds it receives, on trust for ATI, then she claims a beneficial interest in those funds by virtue of her beneficial interest in the shares in ATI held for her by GTCS Nominees Ltd.

[95]               The interested parties also say that Ms Fernandes has standing in her own right to pursue a claim that any payment of the funds to IBC by PAC would be an abuse of process and actionable as a tort, as PAC would be effectively asking the Court to sanction it acting unlawfully by transferring the Jacanna funds to IBC other than pursuant to a special resolution and thereby in breach of s 129 of the Companies Act 1993. Alternatively the interested parties say that Ms Fernandes has standing to ask the Court to invoke its inherent jurisdiction to prevent an abuse of process by the payment of funds to IBC in breach of trust and contrary to s 129.

[96]               While Ms Fernandes has taken the preliminary steps to commence this proceeding by making an application for leave to bring a claim against PAC on behalf of ATI, she is yet to obtain leave to do so. Ms Fernandes has however annexed a draft statement of claim of the intended proceeding to her affidavit sworn in support of the interested parties’ interlocutory application. In the proposed claim she alleges that ATI has never given PAC authority to conduct business on its behalf, or to enter into any agency agreement. It is further alleged that between June 2012 and March 2016 although PAC received approximately $6.0 Million from Jacanna, ATI received the benefit of only $888,817, while payments totalling in excess of $1.4 Million were paid from PAC’s bank account to ATI following which Mr Hemi, acting without authority, paid approximately $600,000 to a trust that he is a beneficiary of. The intended claim further alleges: that in October 2016, approximately $1.7 Million was withdrawn from PAC’s bank account and paid to a company beneficially owned by Renata Kahuroa; and in May 2018 the sum of approximately $1.0 Million was transferred from PAC’s ASB bank account to an entity described as “CSP Legal LLC” with a reference: “J Hemi Legal Exps”. It is alleged that PAC has failed to remit all of the funds it has received from Jacanna. The claim seeks damages of $5.0 Million and also relief by way of an order that the Jacanna funds be held in Court in the name of ATI until such time as it is determined whether the funds are owned by ATI or IBC, or in the

alternative an injunction preventing PAC from paying further funds received from Jacanna to IBC without the approval of ATI.

[97]               While the application for leave to bring this proceeding is yet to be obtained, I consider that the interested parties have demonstrated there to be an arguable case in relation to the claim that would be made. I consider that it is certainly arguable that funds have been transferred from PAC to interests or parties associated with Mr Hemi, and it is also certainly arguable that the Jacanna funds represent profits from the IBC D2D operation that IBC has a beneficial interest in.

[98]               This proposition is well supported by the evidence contained in Mr Stone’s affidavits and correspondence. In his affidavit in support of Ms Latumbo’s application for leave to bring a derivative action by PAC against Ms Renata Kahuroa (the director of PAC), and Mr Hemi, Mr Stone said:

It was never discussed or agreed that ATI would be the beneficiary of income or profits from the shipping of non-IBC cargo. Given IBC’s debt burden, all funds were to be for IBC’s benefit. The non-IBC cargo needed a third-party ‘identity buffer’, so that IBC’s competitors didn’t feel they were aiding the ‘enemy’, a name for branding was required [but] was not needed for operation as a corporate entity.

[99]               In his letter to Mr Quigley of Jacanna dated 31 May 2018, Mr Stone explained that Mr Hemi had set up PAC in order to generate an income stream that he could use to advance loans to himself and pay his own personal expenses. He said that Mr Hemi had by that means diverted money away from IBC in an attempt to keep the Jacanna funds out of reach of IBC’s Japanese banks during a period when IBC was defending statutory demands for repayments by two banks. Mr Stone further explained in this letter that Mr Hemi’s actions were prejudicial to him as he was a personal guarantor of the IBC loans. He clearly stated that, “…my position as Director of IBC is that the funds you are holding belong to IBC”.

[100]           And in his affidavit filed in the present proceedings in support of his application for leave to intervene and for a freezing order, Mr Stone said:

[4]     I believe that the funds which are held by the Plaintiff, Jacanna Holdings Limited (“Jacanna”), belong to IBC Japan. I am seeking a declaration that the funds held by Jacanna belong to IBC Japan. I refer to the draft Statement of

Claim attached marked “A”. I have filed a derivative action against Mr Hemi and his wife Motoki Hemi, as directors of IBC Japan, seeking repayment of all funds diverted to Pacific Auto Carrier (NZ) Limited (“PAC”) from IBC Japan, and for the removal of both as directors for breach of fiduciary duty in Japan. That application is progressing through the Japanese Courts.

[5]   As a shareholder, director and guarantor of IBC Japan’s bank loans, I consider that I have a clear interest in ensuring that those funds go to IBC Japan without condition. I note that Mr Hemi has previously claimed that the money belongs to Autoterminal International Limited (“ATI”) and is held by PAC on trust. However, Mr Hemi also asserted previously that the fund belongs to NPLH Trust.

[6]   I will abide by the decision of the Court in this proceeding. However, I consider that I should be granted leave to intervene as a party who has potential rights in the fund and who is affected by the outcome of this proceeding. If there is a finding that the money is IBC’s then my interest in IBC will increase in values by 50% of the sum held by Jacanna. Looking at it from the other side [my] guarantee obligation (supported by my personal assets) will reduce.

…

[8] I think the proper owner of the fund needs to be determined by the Court. If I am right and the funds are IBC Japan’s, then it should have the fund outright. That will have important implications for IBC Japan’s balance sheet. I say that the total amount of the funds that PAC has already used (without ATI’s authority) is about NZD 16.6M.

…

[11]     Furthermore, as I have already noted, Mr Hemi has previously also asserted that his entity NPLH should receive the funds. Attached marked “C” is a copy of an email from his solicitor, Tam Nguyen, which asserted this. I do not trust Mr Hemi not to deal with the funds if they are released to PAC in the manner in which the parties have proposed.

[12]    In summary, I consider that I should be permitted to intervene in this proceeding because I have a potential proprietary interest in the fund as a 50% shareholder of IBC Japan and a guarantor of IBC Japan’s debts. I do not believe that either Defendant currently represents my proprietary interests. Mr Hemi is controlling both PAC and IBC Japan ( I was removed as a Representative Director from IBC Japan and replaced by Mr Hemi on 31 May 2018 and two hours after the appointment of Mr Hemi as the Representative Director of IBC Japan. Mr Hemi and his wife withdrew a legal action filed by IBC Japan in New Zealand).

[13]   The sole director of PAC, on the other hand is, is currently Mr Kahuroa who, I believe, simply acts on Mr Hemi’s instructions. Mr Kahuroa already allowed Mr Hemi to take funds offshore from PAC despite having no authority from ATI to do so. I have no confidence in Mr Kahuroa’s actions.

[101]           Accordingly, although Ms Fernandes’ proposed derivative action claim on behalf of ATI is yet to be commenced, I am satisfied that the prerequisite application

seeking leave to bring the action has been filed and that Ms Fernandes will prosecute her application and commence the proceeding if granted leave to do so.10 It is therefore reasonable to proceed on the basis that there is a real prospect of Ms Fernandes claim being commenced in the near future.

[102]           The evidence of Mr Stone and Mr Aratake establishes that Mr Stone has also commenced a derivative action in Japan in the name of IBC against PAC and Mr Hemi and that the issue of rightful ownership of the Jacanna funds is sought to be established in that proceeding. Were the Jacanna funds released from the Court and paid to IBC, PAC’s interest in the funds would remain to be decided and in the meantime the funds could be utilised in ways which would irreversibly prejudice IBC and the interested parties, particularly Mr Stone.

[103]           I am satisfied that the interested parties have established that there is an arguable case to be heard regarding the ownership of the Jacanna funds. Although at this stage of the proceeding the Court is limited to an assessment of the evidence appearing by the affidavits and documentary exhibits filed, it nevertheless appears that the business structure whereby the D2D part of IBC’s business was separated from its other vehicle exports, and the income derived from the D2D business was routed via Jacanna to PAC on behalf of ATI, was a structure devised and intended to enable IBC to appear not to be competing with its customers who engage it to arrange shipping of their vehicle exports from Japan to New Zealand. As described by Mr Stone, IBC has significant bank loans from Japanese banks, and the income derived from IBCs vehicle shipping activities was intended by the two partners to be applied towards servicing and repaying the bank loans. Mr Stone has explained in his affidavit evidence, that it was never discussed between Mr Hemi and himself that ATI would be the ultimate beneficiary of income or profits from shipping of non-IBC cargo, as IBC’s debt burden required all shipping revenue to be paid into its account in Japan. That explanation is, at the very least, seriously arguable on the evidence before me.

10 Since the hearing on 29 March 2019 Ms Fernandes has filed and commenced a derivative action claim in the British Virgin Islands and seeking leave to commence derivative actions on behalf of ATI against PAC, Mr Hemi and Renata Kahuroa.

The terms on which PAC receives and hold the Jacanna funds

[104]           The interested parties argue that as well as the issue of rightful ownership of the Jacanna funds, there is an issue as to the ability of PAC to deal with the funds other than strictly in accordance with the terms of the management agreement. The interested parties say that the terms of the management agreement between PAC and ATI require PAC to hold the Jacanna funds on trust for ATI. Consequently PAC has no legal basis or authority to consent to the Jacanna funds being paid to IBC, and no ability to lend the Jacanna funds to IBC. The interested parties submit that by transferring or consenting to the transfer of the funds to IBC, PAC would be acting in breach of the terms of trust upon which it had received and held the funds.

[105]           In my view, the provisions of the management agreement are clear. The relationship between ATI and PAC is expressly described as being that in which PAC is an “independent contractor”, and further provides that nothing in the agreement should be interpreted as creating a partnership, joint venture, or agency relationship between the parties. The terms of the management agreement require PAC to remit or transfer the Jacanna funds that it receives “for and on behalf of ATI”, to ATI each month. It is clear from the terms of the management agreement that PAC has no beneficial interest in the funds and that its role is limited to receiving and holding the funds on behalf of, and remitting to, ATI. Accordingly, other than perhaps at the express direction of ATI, PAC has no lawful ability to do anything other than hold the funds for ATI and remit the accumulated balance each month to ATI. On the basis of the evidence presently before the Court, PAC has no power or ability to independently consent to the payment of the funds to IBC, or to decide that it will advance the funds to IBC by way of a loan.

[106]           Accordingly, although PAC consented to the making of the consent orders, and although it now abides the Court’s decision and aligns itself with the position taken by the second defendant in connection with the current interlocutory application, its position is to be examined in terms of its obligations under the management agreement. In my view as trustees of the Jacanna funds for ATI, and absent evidence of a direction from ATI to do so, PAC itself has no lawful ability to consent to the funds being paid away to another party. However the fact that PAC has consented to

the consent orders and maintains that it has the ability to decide not only whether to consent but also whether to lend the Jacanna funds to IBC, demonstrates why the issue of ownership of the funds requires determination before they should be released by the Court, and provides further support for the independent parties’ contention that determination of ownership of the Jacanna funds is necessary before the funds should be released.

Undertaking as to damages

[107]           Rule 7.54 of the High Court Rules 2016 requires that with every application for an interim injunction under r 7.53, the applicant must file a signed undertaking as to damages.

[108]           The undertaking is expressed in rule 7.54 as a mandatory requirement, however in appropriate cases, the Court has permitted the late filing of an undertaking, and even dispensed with an undertaking altogether.11 This discretion is only to be exercised in narrow circumstances.12

[109]           The interested parties have failed to comply with the requirements of rule 7.54 by not filing an undertaking as to damages. Mr Branch submits that the undertaking as to damages previously provided by IBC in other proceedings brought by the third interested party, Ms Latumbo, could be treated as being an undertaking for the purpose of this application, but that undertaking, which in any event has lapsed, could not satisfy the requirement that the interested parties file an undertaking as to damages.

[110]           Mr Branch further submits that as Mr Stone and his interests have a beneficial interest in 50 percent of the Jacanna funds, the funds held by the Court can fulfil the work of an undertaking as to damages by providing actual funds that could be used to satisfy a claim for damages resulting from the interim order. While I accept there is some force in this submission, at present the issue of ownership of the Jacanna funds is yet to be determined and the provisions of rule 7.54 require an undertaking to be given. Here, because of the substantial sum being held by the Court and the nature of

11     Knight v European Language Academy (NZ) Ltd HC Auckland CIV-2008-404-2411, 14 November 2008.

12     A v Fairfax New Zealand Ltd HC Wellington CIV-2011-485-569, 29 March 2011 at [3].

the dispute between Mr Stone and Mr Hemi, the absence of an undertaking is unlikely to cause the defendants any prejudice. In the circumstances, I propose to require the interested parties to file an undertaking as to damages within five business days of delivery of this judgment.

Balance of convenience

[111]           Furthermore, I am also satisfied that the balance of convenience clearly favours the funds being retained in Court until the issue of ownership of the funds is determined. While the interested parties and the first and second defendants are all in favour of the Jacanna funds being paid to IBC, until the issue of ownership of the funds is determined, and the use to which the funds will be put once received by IBC clarified with certainty, there is a real risk that the funds will be applied in a manner that is prejudicial to the interests of the interested parties and in particular, Mr Stone.

[112]           Mr Branch, relying principally on the evidence contained in Mr Aratake’s affidavit submits that IBC has pressing solvency issues. Mr Hemi has explained that IBC has a working accommodation with its bank, and that the bank is aware of and concerned about the dispute between he and Mr Stone, not with IBC’s solvency. On the evidence before the Court it appears that the banks are presently content to await progress or resolution of the matters in dispute between Mr Hemi and Mr Stone. Accordingly I do not consider that the issue of IBC’s solvency bears directly on my assessment of the balance of convenience.

[113]           Having regard to all the circumstances, it is necessary and appropriate to exercise the discretion and make an order directing that the Jacanna funds remain in Court under the direction of the Registrar pending determination of the issue of their rightful ownership by IBC or PAC and ATI or until further order of the Court. While it is common ground that the Jacanna funds should be transferred to IBC for its use, until ownership of the Jacanna funds is determined, the basis upon which the funds will be paid and received by IBC cannot be determined. The interested parties have established that there is a seriously arguable case in support of their claim that IBC is the rightful and outright owner of the funds.

[114]           It is unnecessary to make any findings as to preservation and freezing orders. The aims of these orders are met by the terms of the injunction, and any orders made would not add anything in terms of preservation of the Jacanna funds that is not otherwise achieved by the terms of the interim injunction.

Conclusion and result

[115]Accordingly I make the following orders:

(a)An order directing that the money paid into Court by Jacanna Holdings Limited (Jacanna) as interpleader, which are profits derived from IBC shipping vehicles to New Zealand, and which sum presently exceeds

$10 Million, together with all further funds held or received by Jacanna that it would otherwise pay and remit to PAC are instead to be paid into Court by Jacanna (“the Jacanna funds”), and shall remain in Court under the control of the Registrar pending further order of the Court.

(b)The Registrar is directed to hold the funds in an interest bearing account.

(c)The interested parties are directed to file an undertaking as to damages within five business days of the date of delivery of this judgment.

(d)The interested parties having succeeded are entitled to costs. The interested parties are to file and serve a memorandum as to costs within ten working days from the date of delivery of this judgment. The first and second defendants are to file their memoranda as to costs within ten working days following their receipt of service of the costs memorandum filed by the interested parties. The costs memoranda are not to exceed three pages in length apart from intituling and any annexures.

Paul Davison J