Jenkins v Supscaf Ltd HC Auckland CIV 2005-404-5222
[2006] NZHC 416
•26 April 2006
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IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2005-404-5222
UNDER the Companies Act 1993
IN THE MATTER OF SUPSCAF LIMITED BETWEEN TERRY MARK JENKINS AND
MICHAEL ROBINS Plaintiffs
ANDSUPSCAF LIMITED Defendant
Hearing: 17 and 23 March 2006
Counsel: J Strauss for Messrs Jenkins and Robins
M Tingey and D J Vizor for Supscaf Ltd, Mr and Mrs Boughton and
Boughton Trust Ltd
Judgment: 26 April 2006
JUDGMENT OF HEATH J
Solicitors:
Stevenson Campbell, PO Box 35 077, Browns Bay
Bell Gully, PO Box 4199, Auckland
Counsel:J Strauss, PO Box 2202, Auckland
ROBINS V SUPSCAF LIMITED HC AK CIV 2005-404-5222 26 April 2006
[1] Supscaf Ltd (Supscaf) was incorporated in March 2001. It came into being as a result of a commercial transaction entered into between interests associated with Mr Boughton (on the one hand) and Messrs Jenkins and Robins (on the other).
[2] The parties to the transaction were Superior Scaffolds Ltd (Superior), a Boughton company, and Scaffolding Concepts Ltd (Concepts), a Jenkins/Robins company. In part, the transaction was designed to extinguish a debt owed by Superior to Concepts as at 27 February 2001. The transaction was evidenced by a document dated 27 February 2001 (the Agreement).
[3] The Agreement contemplated that the Boughton and Jenkins/Robins interests would each hold 500 shares in the company. However, at the request of Mr Boughton, 50 shares were subsequently issued in favour of Mr Yelas, an employee of Superior. The addition of Mr Yelas as a shareholder altered Supscaf’s shareholder dynamics. In a voting sense, Mr Yelas holds the balance of power. As an employee of Superior he is more likely to side with Boughton interests in the event of any dispute arising between the original incorporators.
[4] Around September 2005, the relationship between Mr Boughton and Messrs
Jenkins and Robins soured. Questions of trust and confidence arose.
[5] On 15 September 2005, Mr Jenkins and Mr Robins, in their capacity as shareholders, issued proceedings to liquidate Supscaf. The application was based on the “just and equitable” ground. They also sought the appointment of an interim liquidator; that application was filed on 19 September 2005. Subsequently, Mr Jenkins and Mr Robins withdrew that application for reasons to which I refer later.
[6] The substantive application to put Supscaf into liquidation was heard on 17 and 23 March 2006. The question is whether Supscaf should be put into liquidation.
[7] As at 27 February 2001, Superior owed $68,000 to Concepts. The debt related to hireage of scaffolding equipment. Superior was unable to pay that debt. I am satisfied that the need for this debt to be paid was the catalyst that led to the Agreement.
[8] A substantial degree of trust existed among Messrs Jenkins, Robins and Boughton in February 2001. They were all involved in the scaffolding industry. All understood that mutual benefits would flow from a collaborative commercial enterprise by which a new company, jointly owned by the parties, would hire scaffolding equipment to Superior at a concessional rate. Superior would pay for the hireage of the equipment. Supscaf’s profits would be divided equally between the Boughton and Jenkins/Robins interests respectively. The Agreement addressed those underlying ideas in more detail.
[9] The preamble to the Agreement recorded that
a) Superior hired scaffolding from Concepts, b) Superior was indebted to Concepts and
c) Superior and Concepts agreed to contribute equally to the establishment of a new company (Supscaf) “for their mutual benefit”.
[10] Clause 1 of the Agreement stated that Supscaf was intended to be owned equally by Superior and Concepts, with both parties having equal control.
[11] Clauses 3, 4 and 5 dealt with the equalisation of the parties’ capital contributions:
a) Superior agreed to transfer its existing scaffolding equipment and a forklift (net of debt) to Supscaf for $143,000. In return, Superior would receive 66% of the share capital.
b)Concepts agreed to transfer scaffolding equipment (free of debt) to Supscaf for $75,000. In return, Concepts was to be allocated 34% of the shares in Supscaf.
c) Superior agreed to transfer 16% of its shares in Supscaf to Concepts, in consideration for the debt of $68,000 being extinguished.
[12] Clauses 6-11 of the Agreement set out the way in which the new company was intended to operate:
6. [Mr Boughton] shall be a director of [Supscaf]. Both [Superior] and
[Concepts] shall be entitled to appoint two directors of [Supscaf].
7. [Superior] will wherever possible hire all its scaffolding from
[Supscaf].
8.The hireage rate payable by [Superior] to [Supscaf] will be concessional. As a guideline the concessional rate will be 10% below the rate charged by [Concepts] to customers comparable to [Superior].
9.In the event that scaffolding is not available from [Supscaf] then [Superior] will wherever possible hire the scaffolding from [Concepts] or its associates.
10.The parties shall arrange for [Supscaf] to invoice [Superior] in accordance with normal trade practice.
11.[Superior] shall pay [Supscaf] in accordance with normal trade practice. It is acknowledged that the nature of the industry means that there can be cash flow problems. If [Superior] requires some cushioning, that is, it wants to delay or defer hireage payments then it needs to open its books to [Concepts] subject to any reasonable confidentiality requirements.
[13] Clause 12 of the Agreement recorded that all profits and losses of Supscaf were to be divided equally between Superior and Concepts. Clause 13 stated:
It is acknowledged that [Superior] will need most of its profit entitlement paid to it.
[14] Clause 14 stated that Concepts would give “favourable consideration” to some part of its share of profits being retained by Supscaf on the basis that Supscaf would use those funds to acquire further scaffolding equipment to expand its business.
Mr Yelas’ shareholding in Supscaf
[15] There is no evidence to explain clearly the basis on which Mr Yelas became a shareholder in Supscaf. I regard the best account as that given by Mr Robins in oral evidence before me.
[16] Mr Robins deposed that Mr Yelas was issued shares at a concessional price because of his relationship with Mr and Mrs Boughton in Superior. Mr Robins said that Mr and Mrs Boughton were concerned that, if they did not offer Mr Yelas equity in Supscaf, they may lose his services as a valued employee of Superior.
[17] Mr Yelas was issued 50 shares on or about 5 October 2004. The shares were valued at $553.80. The calculation of that value is set out in a letter from Supscaf’s
accountants to Mr Yelas of 6 October 2004 as follows:
Scaffolding value at 31 March 2003 450,000 Increase for the year ended 31 march 2004
173,000
Total value
623,000
20 shares issued valued at $450
=
9,000
30 shares issued valued at $623
=
18,690
Total for 50 shares
$27,690
[18] As at 31 March 2004, Mr Yelas owed $17,190, he having previously paid
$10,500 on account of the shares to be issued. Although those figures are set out in the accountants’ letter to Mr Yelas of 6 October 2004, they are not replicated in either the 2004 or 2005 financial statements.
[19] Mr Yelas has not entered an appearance on the liquidation proceeding. He has, however, sworn an affidavit in opposition to the application to put Supscaf into liquidation, thereby aligning himself to the Boughton interests.
Problems arising between March 2001 and September 2005
(a) Introductory comments
[20] Supscaf’s business operations appear to have been satisfactory to both the Boughton and Jenkins/Robins interests in the period between incorporation and September 2005.
[21] However, three issues arose during that period that, in my view, have coloured the approach of those two shareholder groups to the events of September
2005 that precipitated the liquidation proceeding.
(b) The Fletcher’s arrangement
[22] An oral agreement had been entered into between Mr Jenkins and Mr Robins (on behalf of Pacific Scaffolding Ltd (Pacific)) and Superior, by which Superior was given the right to supply scaffolding equipment to several companies associated with Fletcher Residential Ltd.
[23] The oral agreement required Superior to render an invoice to Pacific for the supply of scaffolding to those companies and the work which it carried out, at a rate approximately 15% less than the total amount charged by Pacific to the relevant company. Those arrangements, in Mr Boughton’s view, required Superior to hire significantly more scaffolding equipment from Supscaf than it had previously.
[24] In December 2003, the Jenkins/Robins interests advised Superior that they were terminating the oral agreement. Termination of that arrangement reduced Superior’s turnover significantly. It enabled companies associated with Messrs
Jenkins and Robins to deal directly with the Fletcher Residential companies, thereby benefiting the Jenkins/Robins interests to the detriment of Superior.
[25] Mr Robins told me that, in his view, the oral agreement with Mr Boughton enabled Pacific to terminate the oral agreement on reasonable notice. Mr Boughton disagreed.
[26] This issue did not involve Supscaf directly. It was a contractual dispute between Pacific and Superior. No steps were taken by Superior to seek mediation, arbitration or Court resolution of any grievance that Superior may have had at the time termination was effected.
[27] These events demonstrate the conflicting interests of the different shareholder groups – not only were they joint venturers but they were also competitors in the same or similar markets. That commercial reality was always going to strain the underlying personal relationships on which Supscaf had been created.
(c) Extent of hireage of scaffolding equipment
[28] The second issue concerned the extent of Superior’s obligation to hire scaffolding equipment from Supscaf.
[29] Mr Robins contended that Superior’s obligation was to hire all equipment Supscaf had available at any given time. Mr Boughton disputed that assertion. It is unclear from the evidence when this issue first arose.
[30] This issue raised a question of interpretation of the Agreement, particularly cl
7 and 9: see para [12] above. While Supscaf was not a party to the Agreement those clauses were certainly inserted for its benefit: s4 Contracts (Privity) Act 1982.
[31] The need for Superior to hire from Supscaf or, when not available, from Concepts lends support to the position taken by Messrs Jenkins and Robins. But, again, this issue highlights the underlying problem of a joint venture between competitors, both of whom wish to operate for their own commercial advantage.
(d) Pricing issues
[32] The third issue involved price.
[33] The basis on which the rate of hire was to be fixed was stated imprecisely in cl 8 of the Agreement. While, it was acknowledged that the hireage rate would be “concessional”, the Agreement refers to a “guideline” of 10% below the rate charged by Concepts to customers comparable to Superior.
[34] The Agreement did not include a dispute resolution mechanism to deal with disagreements about price. The Constitution of Supscaf contained a dispute resolution clause, requiring mediation in the first instance but, if no agreement could be reached on the appointment of a mediator or if the mediation process were to fail to resolve the dispute, disputes were to be referred to arbitration: cl 25.9(i) and (ii).
[35] The dispute resolution mechanism came into play if any dispute arose between directors of the company in connection with any of the relationships created by or recorded in the Constitution and “a complete or temporary deadlock in the management by the Board of the affairs of the company” was created by that dispute. Mediation was to be invoked if a special meeting of shareholders could not resolve the deadlock.
[36] It seems to me that pricing could not be resolved by the dispute resolution mechanism created by the Constitution. The pricing issues are contractual in nature. As with the hireage issue, while Supscaf was not a party to the Agreement, cl 8 of the Agreement was inserted for its benefit and s4 of the Contracts (Privity) Act 1982 would apply.
Shareholding in Supscaf as at September 2005
[37] By September 2005, the formal shareholding of the Boughton and Jenkins/Robins interests in Supscaf had changed. The 1050 shares in Supscaf are now held as follows:
a) 498 shares are held by Mr and Mrs Boughton and Boughton Trust Ltd jointly.
b) 250 shares are held by Mr Jenkins. c) 250 shares are held by Mr Robins. d) 50 shares are held by Mr Yelas.
e) One share each is held by Mr and Mrs Boughton personally.
[38] When liquidation proceedings were issued Mr and Mrs Boughton, Mr Jenkins and Mr Robins were the directors of Supscaf.
The events of September 2005
[39] Mr Robins and Mr Jenkins say that they became concerned, during the course of 2005, about amounts owing by Superior to Supscaf and two Jenkins/Robins’ companies.
[40] As at 31 August 2005, $16,012 was said to be owing by Superior to Pacific, this being the balance of a January 2005 invoice for a total sum of $23,004. As at the same date Superior owed Supscaf $21,127, of which $20,000 had been outstanding for more than three months. Superior also owed $4,488.77 to an associated company of Pacific.
[41] Mr Robins deposed that, based on equipment owned by Supscaf, an income of $1000 per day from Superior ought to have been available to Supscaf. Yet, Superior did not appear to have money to pay its debt to Pacific. Mr Boughton disputed the basis on which Mr Robins calculated that income. The dispute turns on the extent of Superior’s obligation to hire equipment from Supscaf, an issue to which I have already referred.
[42] Mr Robins and Mr Jenkins asked for a meeting with Mr Boughton. A meeting was held on 5 September 2005. At that meeting views were aired about the rate to be paid for the hire of equipment. Mr Robins and Mr Jenkins regarded the meeting as unsatisfactory.
[43] On 7 September 2005, (draft) financial statements were provided by Supscaf’s accountants to Mr Robins and Mr Jenkins. It is clear that those financial statements had been completed well before 7 September 2005; Mr Boughton had signed the copy given to Mr Robins on 11 June 2005, almost three months earlier.
[44] Mr Robins deposed that “the alarm bells sounded very loudly” on receipt of the 2005 financial statements. Those financial statements related to the historical period to 31 March 2005. They contained comparative figures for the 31 March
2004 financial year. Mr Robins concerns were that, while Supscaf’s assets had increased in value, turnover had decreased by over 40%.
[45] Supscaf’s financial statements for the 2004 financial year had been signed by Mr Robins. Accordingly, I take those financial statements as an accurate starting point for analysis.
[46] A further meeting was requested. Mr Boughton declined to attend a meeting. As a result, on 8 September, Mr Jenkins and Mr Robins wrote to Mr and Mrs Boughton in the following terms:
Terry Jenkins and I, Michael Robins in our capacities as shareholders and directors of Supscaf Limited, Scaffolding Concepts Limited, Pacific Scaffolding Limited and Pacific Scaffolding Franchise Limited, requested a meeting with you today which you have refused to agree to and wish to delay. There is great urgency as steps will have to be taken to protect the assets of Supscaf Limited.
We are addressing you in your capacities as shareholders and directors of
Superior Scaffolds Limited as well as Supscaf Limited.
There are several issues of great concern to us. Although separate, these issues are related and may also concern other entities in which you have an interest.
As far as Pacific Scaffolding Limited and Pacific Scaffolding Franchise Limited are concerned in the matter is relatively simple – they want to be paid and this is a formal demand for payment. The amount owing to Pacific
Scaffolding Limited by Superior Scaffolds Limited is $19,515.18 and that owing to Pacific Scaffolding Franchise Limited $4,488.77. the amount owed to Pacific Scaffolding Limited by Supscaf Limited is $17,803.69.
In our capacities as shareholders of Supscaf Limited we are seeking payment of the dividend declared by Supscaf Limited which dividend was payable on the 31st of July 2004. It appears that you have taken your dividend.
In terms of the 2001 agreement between Superior Scaffolds Limited and Scaffolding Concepts Limited, the former was, wherever possible, to hire all its scaffolding from the New Company (ie Supscaf Limited). The hire was to be at a concessional rate with 10% below usual rate taken as a guideline. In terms of the agreement, Supscaf Limited was to invoice Superior Scaffolding Limited in accordance with normal trade practice and payment was to have been made according to normal business practice.
Having reviewed the latest financial statements of Supscaf Limited (which statements were made available yesterday afternoon, 7 September 2005) we are very concerned. Having regard to equipment with which the company was started in 2001 and the equipment acquired since then, Supscaf should have received a very substantial rental income from Superior Scaffolding Limited over the last few years. The calculated income (based on 80% of the usual rate) comes to several hundred thousand dollars over the period but there is no evidence of this in the records.
In our capacities as directors and shareholders of Supscaf Limited, we are seeking immediate access to all the financial records of Supscaf Limited. We also require full particulars of where Supscaf’s property is to be found.
All the indications are that Superior Scaffolds Limited is trading in insolvent circumstances and that may be the reason for the incorporation for the new entities in which the two of you have interests. As it is clear that Superior is indebted to Supscaf and that Superior cannot pay, Scaffolding Concepts is in terms of the 2001 agreement entitled to inspect Superior’s books. This is a formal request on behalf of Scaffolding Concepts to exercise that right.
The two of you have at all times been in control of both Superior and Supscaf. Unless we can be satisfied that their investment in Supscaf is secure and that Superior is in a position to meet its obligations, the only option would be to approach the Court as a matter of urgency to appoint interim liquidators to take control of the assets of Supscaf, investigate the dealings between Supscaf and Superior and take whatever steps may be necessary to recover what is due to Supscaf.
Please advise us no later than close of business today that you agree to meet tomorrow and that you will make the records and information sought available at the same time.
[47] On 12 September 2005 Mr Robins wrote to Supscaf’s accountants with queries arising out of the financial statements for the year ended 31 March 2005. Mr Robins wrote:
As I explained we are seriously concerned about the accounts of Supscaf Limited and the undeclared income from the Company. Below I set out the situation as we see it based on the Heads of Agreement document and as agreed to and confirmed by Nic Boughton in our office on Friday 9
September 2005.
Year ending Accounts Our calculation Variance March 2002 96000 140294 (44294) March 2003 117891 158982 (41091) March 2004 151852 245751 (93899) March 2005 89190 306814 (217624) To 31 August 2005* 25000 141446 (116446) Totals 479933 993287 (513354)
*Estimate based on only monies paid to Supscaf are those required to pay for loan from Speirs Finance taken out in December 2004 as well as payments made to Pacific Scaffolding Limited on account of outstanding account as at
31 March 2005 not shown in accounts.
As you can see from our calculations there appears to be under reporting of Hire Income in excess of $500,000.00 which is a grave concern to us. This also brings into play the situation in regards Superior Scaffolds Limited and whether or not these figures are included in their accounts. If they are not we are concerned as to the Solvency of Superior and the accuracy of their accounts and the fact that they may be trading while insolvent. We clearly do not support such a situation and have asked Nic to supply us with copies of Superior Scaffolds Accounts for the last four years in accordance with clause 11 of the Heads of Agreement as Superior are clearly behind in their payments to Supscaf Limited.
Another point regarding the accounts is that as at 31 March 2005 Supscaf Limited owed Pacific Scaffolding Limited $39,307.69 for equipment purchases made in January to March 2005, this amount is not shown in the accounts as owing as at 31 March 2005. We therefore have concerns about what assets are being shown in the accounts as well as the overall accuracy of the accounts.
Basically we are very concerned as to what information has been supplied to yourselves to produce the accounts in the past as well as what information is currently being supplied as we believe there have been no invoices as such drawn on Superior Scaffolds to show hire in the last four and a half years.
We are currently considering applying to the courts to have Supscaf Limited Liquidated and have an interim liquidator appointed to investigate the activities of the Company and Directors, in particular reference to the handling of charges to Superior Scaffolds Limited. We are also extremely concerned as to the actual location of the assets and have been promised a complete listing of their whereabouts, this we have yet to receive in spite of promises being made that this would be available immediately.
We have not been able to contact Nic since our meeting with him on Friday in spite of leaving messages for him on Saturday and today as he had agreed to arrange a meeting for today with you and us to discuss the accounts.
We understand you are meeting with Nic tomorrow morning and we urge you to have him contact us as the advice we have received is to take the actions as outlined above to protect our interest in this matter.
[48] On 13 September 2005 the solicitors who then acted for the Boughton interests wrote to Mr Robins. They conveyed Mr Boughton’s instructions that Mr Robins had told him, in late December 2003, that Pacific’s activities were being restructured; in particular, franchises were being established. The solicitors wrote:
It was clear that this would impact adversely on [Superior] and as a consequence impact adversely on Supscaf. Further it was against the spirit of the Heads of Agreement dated 27 February 2001.
This appears to have been the first occasion on which this issue was raised formally.
[49] The solicitors noted that Mr Robins had signed the 31 March 2004 accounts. They contended that he could not complain of matters relating to Supscaf’s financial performance before 1 April 2004.
[50] The solicitors advised that in December 2004 Supscaf borrowed $100,000 from a commercial lender, with relevant financial information being made available to Mr Robins at that time.
[51] On 14 September 2005 counsel instructed by the Jenkins/Robins interests wrote to the solicitors for the Boughton interests to express concerns about the business conducted between Supscaf and Superior. Among other things the letter stated:
At all times material hereto Mr and Mrs Boughton were in effective management control of both Supscaf and [Superior].
Messrs Jenkins and Robins are very concerned about the way in which Supscaf has been administered and in particular about how business is being conducted between Supscaf and Superior. Because of the long-standing relationship between the parties, Messrs Jenkins and Robins relied totally on the integrity of Mr and Mrs Boughton and never questioned the information and assurances provided by them in regard to the management and accounts of Supscaf. However, it has now become apparent that business between the
two companies has not been conducted on a proper commercial basis and there appears to be a lack of proper documentation in Supscaf.
[52] The solicitor for the Boughton interests responded on 15 September 2005. They conveyed their clients’ view that the Jenkins/Robins interests had “in one guise or another, become competitors of Superior and Supscaf”. For that reason, the solicitors advised, the Boughton interests “have not felt inclined to disclose the location of jobs where Supscaf equipment has been deployed”. Further, they said, recent “dealings with [the Jenkins/Robins interests] have indicated that information of this type would be used to [their] commercial advantage”.
[53] Plainly, the positions taken by the Boughton and Jenkins/Robins interests hardened significantly in the first two weeks of September. The late disclosure of the 2004-2005 financial statements and the failure of the Boughton interests to answer adequately the queries of the Jenkins/Robins interests sowed the seeds of distrust.
[54] By 15 September 2005 battle lines had been drawn. Mr Jenkins and Mr
Robins decided to issue liquidation proceedings immediately.
What happened after the liquidation proceeding was issued?
[55] Further issues emerged as a result of the issue of liquidation proceedings.
[56] On 7 October 2005, all shareholder interests (including Mr Yelas), entered into a settlement agreement designed to resolve all differences among them, in particular to settle the liquidation proceedings.
[57] The settlement agreement evidenced an intention on the part of the Boughton interests to acquire the Jenkins/Robins shares in Supscaf for $400,000. The settlement monies were to be paid by 4 November 2005. In return, Messrs Jenkins and Robins agreed to withdraw the application to appoint an interim liquidator.
[58] The interim liquidation application was withdrawn. But, the Boughton interests failed to complete their side of the bargain.
[59] In oral evidence on 17 March 2006, Mr Boughton deposed that, while the amount required to settle was not available as at the date on which settlement was to be implemented, the money was available before the liquidation proceeding was advertised in the New Zealand Herald on 15 November 2005.
[60] In a subsequent affidavit, sworn on 22 March 2006 and filed pursuant to directions I made at the end of the 17 March hearing, Mr Boughton deposed:
14. In my evidence on 17 March 2006 I became confused as to the arrangements which I had made to pay the monies due under the settlement agreement. The moneys which were paid into Whaley & Garnett’s trust account in respect of the settlement agreement were in fact transferred into their trust account on 24 November 2005, not prior to the advertisement of the application to liquidate Supscaf as I had previously thought. I can confirm however, that these monies were available from 11 November 2005.
15. During the week of 4 November 2005 I also arranged sufficient finance through Speirs Finance Ltd to enable me to pay the balance of the sum of $250,000 to the plaintiffs had they agreed to sell their shares in Supscaf for that amount. At the time that I made the offer to the plaintiffs to purchase their shares for this amount I had the funds available to immediately pay that sum to the plaintiffs. That is what I meant when I told the Court that I had the funds available to settle with the plaintiffs. At that time I did not have the $400,000 required under the settlement agreement. The plaintiffs declined my offer to purchase their shares for the amount of
$250,000. I therefore continued in my efforts to raise the full amount required to be paid to the plaintiffs under the settlement agreement. As the plaintiffs had advertised the application to liquidate Supscaf, this was not possible.
Whaley and Garnett were the former solicitors for the Boughton interests.
[61] The second issue arose out of the way in which a dividend payable to the shareholders in Supscaf was used to reduce indebtedness of Superior to Supscaf during the 2005 financial year. In contrast, the dividend payable to the Jenkins/Robins interests had been retained as working capital. This issue was raised in Mr Robins’ letter of 8 September 2005. It was the reason why the Jenkins/Robins interests sought payment of the dividend.
[62] As at 31 March 2004, a debt of $30,540 was owed by Superior to Supscaf. As at 31 March 2005, a debt of $16,877 was owed from Supscaf to Superior. During the 2005 financial year a dividend of $50,137 was declared to the two main shareholder groups.
[63] Not only was the debt owed by Superior to Supscaf reduced by the payment of the dividend but, in respect of the balance of the distribution, a new debt was created from Supscaf to Superior.
[64] The effect of this transaction, as recorded in the financial statements, was to convert Superior’s equity interest in the company into a debt. On liquidation, payment of a debt has priority over a distribution of capital. A bona fide debt owed by a company to a person who also happens to be a shareholder will not be treated, if paid, as a distribution to the shareholder: see my comments on this issue in Re DML Resources Ltd (In liquidation) [2004] 3 NZLR 490 at 506, para [67].
[65] Initially, I saw this transaction as disadvantaging the Jenkins/Robins interests. However, on reflection, because the distribution to be paid to them has been recharacterised as a debt and there are no arm’s length unsecured creditors who would be prejudiced by that reclassification, I regard this issue as neutral. In reaching that view I have also taken account of the likelihood that the accounting methodology used was on advice from the accountants rather than a deliberate choice by Mr Boughton.
[66] The third issue involved the unauthorised retention of moneys by Superior that ought to have been paid to Supscaf. Details of those retentions emerged in correspondence shortly before the hearing and the oral evidence of Mr Boughton before me. They are confirmed by his recent affidavit.
[67] Mr Boughton’s explanation for these retentions is set out in paras 10-13 inclusive of his affidavit. He said:
10. Since giving evidence in this matter I have reviewed the notes of evidence. It is apparent to me that I became confused and misunderstood some of the questions which I was asked. I have been under a large amount of pressure as a result of this dispute and when giving evidence was under medication from my doctor for stress, and was taking a 20mg dose of Citaloprant Hydrobromide. I believe that this may have caused my confusion. Since giving evidence I have also had the opportunity to confirm the proper sequence of events by reference to the trust account records held by Whaley & Garnett and by reviewing bank statements which I had not done prior to giving evidence. I wish to correct the evidence which I have given in what follows.
11. From the time of the liquidation application, based on legal advice which I received, I did not pay from Superior’s bank account funds which would normally have been paid to Supscaf pending resolution of the dispute with the plaintiffs. Superior operated an overdraft facility with its bank. The limit of the facility would have allowed the amount owing to Supscaf to be paid in full from time to time, but not at all times. At all times, however, Superior had the ability to borrow sufficient sums to enable the Supscaf debt to be paid in full throughout the period.
12. In addition, on 24 November 2005 the sum of $70,000 was paid to my former solicitors, Whaley & Garnett, to hold on trust. The purpose for which the sum of $70,000 was paid to Whaley & Garnett was initially to be used to make payments to the plaintiffs to purchase their shares to resolve these proceedings. Annexed marked “H” is a letter from Whaley & Garnett confirming the availability of those funds as at 24 November 2005. Also annexed marked “I” is a copy of Whaley & Garnett’s trust account. The funds held by Whaley & Garnett were deposited into a trust account in the name of myself and my wife. I have blanked out the details of those transactions recorded in the trust account which relate to my personal affairs.
13. Following the settlement agreement dated 5 October 2005 (the settlement agreement) being cancelled on 13 December 2005, I left $20,000 of the sum held by Whaley & Garnett along with the balance of the account
$2,160) in Whaley & Garnett’s trust account pending resolution of the dispute with the plaintiffs. This was an amount which would otherwise have
been paid by Superior to Supscaf.
[68] Since the hearing was completed on 23 March 2006, I have received confirmation that all monies that ought to have been paid by Superior to Supscaf since 1 September 2005 have now been deposited into Supscaf’s bank account. The sums deposited and the dates on which they were deposited are:
a) $3,335 – on 20 March 2006
b) $20,000.00 – on 21 March 2006 c) $39,447.01 – on 21 March 2006 d) $6,453.78 – on 22 March 2006
Total: $69,235.79
Superior has had the use of those monies since 1 September 2005, to the detriment of the Jenkins/Robins interests.
The financial viability of Supscaf
[69] Two affidavits in opposition to the liquidation proceeding were filed to deal with the financial position of Supscaf. The first is from Mr Apps, an Associate Director of Staples Rodway Corporate Finance Ltd. The second is from a partner in the firm of chartered accountants who act for both Supscaf and Superior, Mr K W Whaley.
[70] Mr Whaley produced final financial statements for the years ended 31 March
2002 to 31 March 2005 (inclusive). While the financial statements for the year ended 31 March 2005 have not been signed by Mr Robins, those financial statements have been used as the basis for tax returns filed on behalf of Supscaf with the Commissioner of Inland Revenue.
[71] Mr Whaley confirms, in his affidavit, that Mr Robins, in his letter of 12
September 2005 to him, asserted that Supscaf’s revenues had been under reported to the extent of $513,354. Mr Whaley said he had no reason to believe the revenue figures had been under-reported in the financial statements for any of the financial years in question.
[72] Mr Apps dealt with pricing comparisons and calculation of gross revenues. Mr Apps placed much weight, in calculating gross revenues, on “the financial hardship placed on Supscaf following a large investment in equipment to service Fletcher Residential Ltd contracts … [being] terminated by Pacific almost immediately following the acquisition of such equipment”.
[73] Mr Apps opined that Supscaf had generated sufficient income to achieve market rates of return for the type of company operating in its industry.
[74] Mr Apps opines that Supscaf is a profitable company, generating adequate market returns. He estimates the cost of liquidation would be in the vicinity of
$20,000 (minimum) and that the assets of Supscaf are likely to be sold at a substantial discount on liquidation, when compared with an orderly sale while Supscaf remained a going concern.
[75] Although Mr Apps comments at length on the pricing arrangements between Superior and Supscaf, I place no weight on that evidence as it tends to ignore the imprecise manner in which pricing arrangements were addressed in the Agreement. For reasons which will become apparent, I also regard the pricing dispute as of little moment in the context of the liquidation proceeding.
Competing submissions
[76] Mr Tingey submits that the starting point for analysis is the Agreement and the Constitution of Supscaf. The Constitution contains an arbitration agreement which may have been relevant to the types of dispute that existed before liquidation proceedings commenced: cl 25.9 of the Constitution.
[77] Mr Tingey submitted that there was always a possibility of a price dispute. Any issues of price ought to have been resolved by negotiation, mediation or arbitration.
[78] Further, Mr Tingey submitted that the absence of any real disputes until September 2005 meant that the conduct of Mr Jenkins and Mr Robins in early September ought to be characterised as threatening in nature, designed to place inappropriate commercial pressure on the Boughton interests to pay an unsupportable amount for the Jenkins/Robins shares in the company or to forego their business interests in Superior.
[79] Mr Tingey submitted that the post liquidation proceeding conduct of Mr Boughton ought to be judged in that light. He submitted that, whatever the rights and wrongs of the commercial and legal positions taken by Mr Boughton, it was understandable that he reacted as he did to the actions of Messrs Jenkins and Robins.
[80] Mr Tingey submitted that Supscaf was still capable of functioning, notwithstanding the alleged breakdown in trust and confidence between its incorporators. He submitted that, taking account of the likely adverse impact of liquidation on the value of Supscaf and the effect of liquidation on Mr Yelas, Superior and employees of Superior, a liquidation order would be too extreme a
response to the circumstances disclosed. He submitted that alternative methods of resolving disputes existed; particularly an application under s174 of the Companies Act 1993 (the Act) designed to require the Boughton interests to buy out the Jenkins/Robins interests.
[81] Mr Strauss submitted that the breakdown in trust and confidence was the paramount consideration, with post-liquidation proceedings events confirming the concerns that Mr Jenkins and Mr Robins held about Mr Boughton’s lack of trustworthiness at the time they issued the proceedings.
[82] Mr Strauss submitted that, while the Agreement provides background to the application, the existence of those arrangements cannot be determinative of the liquidation proceeding.
[83] Mr Strauss raised queries about Superior’s solvency. If those queries were well founded, the inability of Superior to meet ongoing hireage would detrimentally impact upon Supscaf.
Credibility findings
[84] Both Mr Robins and Mr Boughton gave evidence before me on 17 March
2006. I prefer the evidence of Mr Robins to that of Mr Boughton where their evidence conflicts.
[85] My assessment of Mr Robins is that he is an experienced, tough but fair businessman, genuinely concerned that the investment Mr Jenkins and he made in Supscaf has been undermined by Mr Boughton’s conduct. He was prepared to concede points where appropriate. His evidence gave me no cause to disbelieve him. Whilst Mr Robins had some difficulty in grasping the thrust of questions phrased in legal jargon, he answered in a straightforward manner once he understood the nature of the question. I accept his evidence.
[86] On the other hand, I do not regard Mr Boughton as a reliable witness. On many occasions I judged his answers to be evasive. Unlike Mr Robins, when a point
called out for a concession he was not prepared to make it. From the tone of his answers, I gained the distinct impression that he was unwilling to hold himself accountable to Mr Robins and Mr Jenkins. Further, he seemed willing to say whatever was necessary to prevent the liquidation of Supscaf and the consequential problems that would cause to Superior’s business.
[87] Those observations reflected my view of Mr Boughton’s reliability at the conclusion of his evidence. Those initial impressions were confirmed by Mr Boughton’s affidavit of 22 March 2006 filed in response to an order I made at the end of the hearing on 17 March 2006. I ordered the affidavit to be filed to ensure all moneys payable by Superior to Supscaf were paid by 22 March 2006, Mr Boughton’s evidence having been that he had not paid a substantial portion of the moneys payable since 1 September 2005 on advice from his former lawyers. Relevant passages from that affidavit are set out in paras [60] and [67] above.
Legal principles
[88] In the present case there is a clash between two factors, one of which would likely justify a liquidation order and the other not.
[89] On the one hand, as Mr Tingey submitted, because the parties formed Supscaf on the basis of the Agreement of 27 February 2001 Mr Jenkins and Mr Robins ought not to be permitted to repent of that Agreement. On the other hand, as Mr Strauss submits, the distrust that now exists fundamentally affects the joint enterprise carried on through Supscaf.
[90] Mr Strauss’ submission has three facets:
a) The first is that the joint venture company is in the nature of a “quasi- partnership” which ought to be liquidated if the necessary trust and confidence dissipates.
b)The second is based on the likelihood that existing distrust will, inevitably, lead to the failure of Supscaf in the future, due to the parties’ inability to co-operate.
c) The third is the suggested need for an investigation into the affairs of
Supscaf by Court appointed liquidators.
[91] I reviewed the principles on which a winding up order might be made on the “just and equitable” ground in World Vision of New Zealand Trust Board v Seal [2004] 1 NZLR 673. That case involved an application to dissolve a body corporate and to cancel a unit plan under s46 of the Unit Titles Act 1972.
[92] The phrase “just and equitable” has a respectable legal pedigree. It is a phrase used as a touchstone to determine whether a corporate entity should be placed in liquidation or a partnership dissolved: generally, see s241(4)(d) of the Act, s25(1) Charitable Trusts Act 1957, s15(e) Agricultural and Pastoral Societies Act 1908, ss90 and 138 of the Friendly Societies and Credit Unions Act 1982 (in relation to a Friendly Society and a Credit Union respectively), s282(1)(f) Te Ture Whenua Maori Act 1993 (a Maori incorporation), s25(e) of the Incorporated Societies Act
1908, s38(f) of the Partnership Act 1908 and s17A of the Judicature Act 1908 (unincorporated associations).
[93] When considering the “just and equitable” ground to liquidate a company, Lord President (Clyde) said, in Baird v Lees 1924 SC 83 at 90:
… a wider view now prevails regarding the ambit of the discretion which is entrusted to the Court. This discretion must, however, be judicially exercised. It is not enough for the Court in exercising it to have, in the familiar phrase of a decree-arbitral, “God and a good conscience” before its eyes; grounds must be given which can be examined and justified.
Other members of the Inner House of the Court of Session agreed with that observation.
[94] The jurisdiction to order liquidation of a company on the just and equitable ground stems from s241(4)(d) of the Act. That provision states:
…
(4) The Court may appoint a liquidator if it is satisfied that—
…
(d) It is just and equitable that the company be put into liquidation.
[95] Under the predecessor to the 1993 Act, there was a specific provision by which the Court was enjoined not to make a winding up order on the just and equitable ground if it were “of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy”: s220(2) Companies Act
1955.
[96] Section 220(2) of the 1955 Act provided:
(2)Where the petition is presented by members of the company as contributories on either of the grounds specified in paragraph (da) or paragraph (f) of section 217 of this Act, the Court, if it is of opinion-
(a) That the petitioners are entitled to relief either by winding up the company or by some other means; and
(b) That in the absence of any other remedy it would be just and equitable that the company should be wound up –
Shall make a winding-up order, unless it is also of the opinion both that some other remedy is available to the petitioners and that they are acting unreasonably in seeking to have the company wound up instead of pursuing that other remedy.
[97] In Charles Forte Investments Ltd v Amanda [1964] Ch 240 (CA) it was held that the prohibition against making a winding up order on the just and equitable ground only arose if, otherwise, the Court were of the view that an order ought to be made. The existence of alternative remedies or unreasonable conduct was designed to prevent a party using a liquidation procedure for ulterior purposes: see Willmer LJ at 255-257, Danckwerts LJ at 261 and Cross J at 262-263.
[98] Repeal of s220(2) has removed the prohibition on the making of a liquidation order on the just and equitable ground when unreasonable conduct is made out and
an alternative remedy exists. However, those factors remain cogent considerations when exercising the discretion to liquidate.
[99] The nature of the “just and equitable” jurisdiction to liquidate a company has been the subject of much judicial analysis. In Callaway, Winding Up on the Just and Equitable Ground (Sydney, Law Book Co Ltd 1978) the learned author said, at 5:
The Court must balance all the conflicting claims, giving proper weight to each consideration of right, duty and fairness brought forward by the parties. The expression “just and equitable” may be regarded as an example of statutory hendiadys, the reference to equity not being by way of an additional test but for the purpose of ensuring that the justice to be applied will be equitable justice, “the justice of the individual case”. Accordingly justice and equity are referred to herein as one criterion, not two criteria. (citations omitted)
[100] There is conflicting authority on the time at which the Court must determine whether an applicant has established that a company ought to be liquidated on the “just and equitable ground”.
[101] The Privy Council has held that the appropriate time at which to judge whether the discretion ought to be exercised is at the date on which the proceeding to liquidate is filed. In D Davis Co Ltd v Brunswick (Australia) Ltd (1936) 36 SR (NSW) 215 (PC) at 227-228. At 227, Lord Maugham said:
Holding an even hand between the two conflicting interests in the present case, Their Lordships are of opinion that the decisive question must be the question whether at the date of the presentation of the winding up petition there was any reasonable hope that the object of trading at a profit, with a view to which the company was formed, may be attained. (my emphasis)
[102] Other cases, while not referring to Davis, have held that the issue should be judged as at the date of hearing: see Re Fildes Bros Ltd [1970] 1 All ER 923 at 927, Re Deep Sea Trawlers Ltd (1984) 2 NZCLC 99,137 at 99,146 and Re Rongo-ma- Tane Farms Ltd (1987) 3 NZCLC 100,145 at 100,150. There is no discussion, in those cases of the competing view set out in D Davis Co Ltd.
[103] Logically, it seems sensible to determine an application to put a company into liquidation on the basis of information available at the time of the hearing. Such information might qualify information available at the time the application was filed
or emphasise aspects of the evidence on which one or other party might rely. That conclusion accords with the view expressed in Re Fildes Bros Ltd at 927. Megarry J said:
. . ., in my judgment the question whether it is just and equitable to wind up the company is one which must be answered on the facts which exist at the time of the hearing. If on the facts existing when the petition was presented it was then just and equitable to wind up the company, but subsequently it has ceased to be so, I do not think a winding-up order should be made. Section
222(f) of the Companies Act 1948 is cast in the present tense, providing for an order if the court ‘is’ of opinion that it ‘is’ just and equitable that the company should be wound up. No doubt if there were cogent grounds for complaint at the time when the petition was presented, but they afterwards melted away, there may be consequences in relation to costs; but a winding- up order under this head must be based on subsisting facts and not on past history.
[104] There is another reason that militates against application of the Privy Council decision in D Davis & Co Ltd. That decision was given at a time when both English and Australian law regarded the date of filing of a petition to wind up a company as the date of commencement of the winding up. That was also the position in New Zealand under the Companies Act 1955 and its predecessors.
[105] The commencement of winding up went back to the date of filing of the petition to wind up the company (under the procedure applying at that time) because of the modified effect given to the doctrine of relation back in a company liquidation. That doctrine was borrowed from the law relating to personal bankruptcy. The relation-back rule for the purposes of a company liquidation was captured in s222 of the Companies Act 1955:
222. Avoidance of dispositions of property, etc, after commencement of winding up – In a winding up by the Court, any disposition of the property of the company, including things in action, and any transfer of shares, or alteration in the status of the members of the company, made after the commencement of the winding up, shall be void unless the Court otherwise orders at any time (whether before or after the hearing of the winding-up petition or the making of the disposition, transfer or alteration).
[106] When the 1993 Act was enacted a change was made so that the liquidation commenced on the date at which the liquidation order was made rather than the date on which the application to liquidate was filed in Court. Section 241(5) of the Act states:
(5) The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.
[107] The focus of s241(5) of the Act, being on the date and time at which a liquidator is appointed, adds weight to the need to consider whether to make an order appointing a liquidator on information available as at the date of hearing.
[108] For those reasons, I prefer the approach evidenced in Re Fildes Bros Ltd, Re
Deep Sea Trawlers Ltd and Re Rongo-ma-Tane Farms Ltd to that of D Davis Co Ltd.
[109] The breadth of the discretion to liquidate on the “just and equitable” ground was reasserted in Re Westbourne Galleries Ltd; Ebrahimi v Westbourne Galleries Ltd & Ors [1973] AC 360 (HL), the case now regarded as the leading authority on this subject.
[110] In giving the principal speech, Lord Wilberforce, at 379-380 made it clear that it would be “impossible and wholly undesirable” to define the circumstances in which an order ought to be made. His Lordship regarded the “just and equitable” provision as subjecting the exercise of legal rights to equitable considerations, namely considerations of a personal character which may make it unjust or inequitable to insist on legal rights or to exercise them in a particular way. Lord Wilberforce said:
The superimposition of equitable considerations requires something more, which typically may include one, or probably more, of the following elements: (i) an association formed or continued on the basis of a personal relationship, involving mutual confidence – this element will often be found where a pre-existing partnership has been converted into a limited company; (ii) an agreement, or understanding, that all, or some (for there may be “sleeping” members), of the shareholders shall participate in the conduct of the business; (iii) restriction upon the transfer of the members’ interest in the company – so that if confidence is lost, or one member is removed from management, he cannot take out his stake and go elsewhere. (at 379)
[111] Viscount Dilhorne, Lord Pearson and Lord Salmon agreed with the speech given by Lord Wilberforce. Lord Cross of Chelsea delivered a concurring judgment.
[112] Lord Cross, at 383-384 said:
People do not become partners unless they have confidence in one another and it is of the essence of the relationship that mutual confidence is maintained. If neither has any longer confidence in the other so that they cannot work together in the way originally contemplated then the relationship should be ended – unless, indeed, the party who wishes to end it has been solely responsible for the situation which has arisen.
At 387, Lord Cross made it clear that an applicant seeking a liquidation order on the “just and equitable” ground must “come to Court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue”. In the context of the Westbourne Galleries case, Lord Cross took the view that the first instance Judge was right to make a winding up order having found that the relevant loss of confidence might have been due “to a tragic and inexplicable misunderstanding”.
[113] Westbourne Galleries reinforces the notion that a company may be put into liquidation on the “just and equitable” grounds if, had the shareholders been partners, those grounds would have been sufficient to justify an order dissolving a partnership. That principle is dependent on the premise that the relevant company was formed to conduct a joint venture to which the incorporators were parties: see also Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 (CA) at 431-432 (Lord Cozens-Hardy MR, with whom Pickford LJ agreed) and 434-435 (Warrington LJ) and Loch v John Blackwood Ltd [1924] AC 783 (PC).
[114] Lord Wilberforce, in Westbourne Galleries, emphasised that while speaking of a “quasi-partnership” or an “in substance partnership” may be convenient, it may also be confusing. His Lordship said:
It may be convenient because it is the law of partnership which has developed the conceptions of probity, good faith and mutual confidence, and the remedies where these are absent, which become relevant once such factors as I have mentioned are found to exist: the words “just and equitable” sum these up in the law of partnership itself. And in many, but not necessarily all, cases there has been a pre-existing partnership the obligations of which it is reasonable to suppose continue to underlie the new company structure. But the expressions may be confusing if they obscure, or deny, the fact that the parties (possibly former partners) are now co-members in a company, who have accepted, in law, new obligations. A company, however small, however domestic, is a company not a partnership or even a
quasi-partnership and it is through the just and equitable clause that obligations, common to partnership relations, may come in. (at 380)
[115] Re Westbourne Galleries Ltd has been applied on many occasions in New
Zealand; eg Vujnovich v Vujnovich [1988] 2 NZLR 129 (HC) and (CA) and [1989] 3
NZLR 513 (PC), Re Gerard Nouvelle Cuisine Ltd (1981) 1 NZCLC 98,148, Re
Rongo-ma-Tane Farms Ltd and Cornes v Kawerau Hotel (1994) Ltd (1999) 8
NZCLC 261,815. I need not go into the New Zealand cases. They illustrate the application of settled principle rather than make new law.
[116] More recently, In re a Company (No 00709 of 1992) O’Neill v Phillips [1999] 2 All ER 961 (HL), Lord Hoffmann, delivering the principal speech on behalf of the House, echoed Lord Wilberforce’s warning about the dangers of invariably treating a closely held company as if it were a partnership. Lord Hoffmann said, at
966-967:
… First, a company is an association of persons for an economic purpose, usually entered into with legal advice and some degree of formality. The terms of the association are contained in the articles of association and sometimes in collateral agreements between the shareholders. Thus the manner in which the affairs of the company may be conducted is closely regulated by rules to which the shareholders have agreed. Secondly, company law has developed seamlessly from the law of partnership, which was treated by equity, like the Roman societas, as a contract of good faith. One of the traditional roles of equity, as a separate jurisdiction, was to restrain the exercise of strict legal rights in certain relationships in which it considered that this would be contrary to good faith. ….
While Lord Hoffmann was considering the concept of “unfairly prejudicial” conduct in s459 of the Companies Act 1985 (UK), he made it clear, at 967, that he saw the concept of unfairness as applying equally to the “just and equitable” ground for liquidation.
[117] In my view, to justify a liquidation order in this case, the Jenkins/Robins interests need to demonstrate both that their lack of trust and confidence in Mr Boughton is justified and that to liquidate the company is the only appropriate method of bringing their commercial relationship with the Boughton interests to an end.
[118] Mr Robins has not been excluded from the management of Supscaf. Supscaf’s business remains viable: it has a ready market enabling it to hire its equipment to Superior. No real issue of deadlock arises: in reality, Mr Yelas, though associated with the Boughton interests, holds the balance of power at a general meeting. No major transactions could be entered into without the consent of both Jenkins/Robins and Boughton interests. Nor could a resolution to liquidate Supscaf be passed without a 75% majority.
[119] For those reasons, it is unnecessary to consider cases in which the “just and equitable” jurisdiction has been invoked to deal with de facto expulsion, a failure of the substratum of an intended business or those arising out of genuine deadlock.
[120] I refer to three further cases which have considered justifiable lack of confidence and trust as a basis for making a winding up order on the “just and equitable” ground.
[121] In Loch v John Blackwood Ltd, at 788, Lord Shaw of Dunfermline, delivering the advice of the Privy Council, said:
It is undoubtedly true that at the foundation of applications for winding up, on the “just and equitable” rule, there must lie a justifiable lack of confidence in the conduct and management of the company’s affairs. But this lack of confidence must be grounded on conduct of the directors, not in regard to their private life or affairs, but in regard to the company’s business. Furthermore the lack of confidence must spring not from dissatisfaction at being outvoted on the business affairs or on what is called the domestic policy of the company. On the other hand, wherever the lack of confidence is rested on a lack of probity in the conduct of the company’s affairs, then the former is justified by the latter, and it is under the statute just and equitable that the company be wound up.
[122] Their Lordships, in Loch, adopted observations of the Lord President of the
Court of Session in Baird v Lees, at 92:
I have no intention of attempting a definition of the circumstances which amount to a “just and equitable” cause. But I think I may say this. A shareholder puts his money into a company on certain conditions. The first of them is that the business in which he invests shall be limited to certain definite object. The second is that it shall be carried on by certain persons elected in a specified way. And the third is that the business shall be conducted in accordance with certain principles of commercial
administration defined in [the relevant statute] which provide some guarantee of commercial probity and efficiency.
[123] In Menard v Horwood & Co Ltd (1922) 31 CLR 20 (HCA), the High Court of Australia affirmed a decision of the Chief Judge in Equity of the Supreme Court of New South Wales not to make an order ordering winding up the company on the grounds of a loss of trust and confidence. Street CJ in Eq’s reasons for judgment are summarised in the report of the proceedings in the High Court of Australia and were adopted by that Court.
[124] In the case before him, the Chief Judge found no habitual dishonesty or untrustworthiness on the part of the person whose conduct was impugned. Rather, he saw the conduct as an isolated occurrence that did not justify an order liquidating the company. However, the Chief Judge made it clear that had habitual dishonesty or untrustworthiness been established, an order winding up the company may well have been made.
Factors in favour of a liquidation order
[125] Supscaf was created for the mutual benefit of both Boughton and Jenkins/Robins interests. The Jenkins/Robins interests have lost confidence in and no longer trust Mr Boughton. They no longer wish to be in business with him.
[126] As Westbourne Galleries, Loch and Baird v Lees make clear, loss of confidence and trust, grounded on the conduct of a person who manages a company’s business, will justify a liquidation order if the evidence were to establish a lack of probity in the conduct of the company’s affairs.
[127] Taking into account conduct revealed during the course of the liquidation proceeding, it is difficult to envisage Messrs Jenkins and Robins being able to work with Mr Boughton. They have experienced his failure to complete settlement of an agreement to acquire their shares in Supscaf and the unilateral withholding of moneys lawfully payable to Supscaf by Superior following initiation of the liquidation proceedings. I am satisfied that those events demonstrate a lack of commercial probity on the part of Mr Boughton.
[128] Those actions of Mr Boughton, coupled with what I regard as unsatisfactory explanations contained in Mr Boughton’s affidavit of 22 March 2006, suggest strongly that the parties cannot work together. All other things being equal, those factors would justify a liquidation order.
Factors against a liquidation order
[129] Mr Tingey advanced persuasively a number of factors which, in his submission, militated against a liquidation order being made.
[130] First, he submitted that the precipitate action of Messrs Jenkins and Robins in issuing not only liquidation proceedings but also an interim liquidation application so soon after raising concerns in early September 2005 suggested that they were using the liquidation procedure for an ulterior motive. In that sense Mr Tingey submitted their actions should be seen as unreasonable.
[131] Mr Tingey also submitted that alternative remedies were available, particularly under s174 of the Act. That provision enables a minority shareholder to seek an order for their shares to be purchased at fair value in the event that they are being unfairly prejudiced.
[132] The combination of those two grounds led Mr Tingey to submit that had the application to wind up Supscaf been brought under the Companies Act 1955 an order could not have been made because of the unreasonable conduct and the existence of alternative remedies: see paras [95]-[97] above.
[133] Mr Tingey submitted that other factors militating against a liquidation order were:
a) The likely diminution in the value of Supscaf’s assets if they were to be sold by a liquidator.
b)The possibility of losses being caused to the third party shareholder, Mr Yelas.
c) The inherent viability of Supscaf, assuming co-operation to enable the company to continue business.
Should the liquidation order be made?
[134] Section 241(2)(d) of the Act places no fetter upon the discretion of the Court, either in relation to the factors that would justify an order or in relation to circumstances in which an order must be refused. Therefore, I proceed on the basis that I must balance all relevant factors available for consideration at the present time to determine whether an order ought to be made.
[135] The most powerful factor in favour of liquidation is the breakdown in trust and confidence. From the perspective of Messrs Jenkins and Robins, I regard that breakdown as irretrievable. I do not accept the position advanced on behalf of the Boughton interests, namely that the company could continue with Mr Boughton at the helm in a manner that would achieve the objectives of the parties to the Agreement. I regard evidence to that effect as self-serving in nature and given in an endeavour to protect Superior’s position rather than to advance Supscaf’s interests.
[136] The weight to be given to a justifiable loss of confidence and trust in a fellow incorporator involved in the management of the company is emphasised in Westbourne Galleries, Loch, Baird v Lees and Vujnovich. Supscaf was formed with good intentions to meet problems of the type I have described, particularly the need to ensure Superior paid its debt to Concepts. All parties took the view that collaboration would be mutually beneficial from a commercial perspective. However, because companies associated with the Boughton and Jenkins/Robins interests respectively were in competition with each other in the same industry, a collaborative business enterprise could only succeed for so long as trust and confidence remained among the people involved.
[137] To paraphrase Lord Cross of Chelsea’s observations in Westbourne Galleries (at 383-384), Mr and Mrs Boughton and Messrs Jenkins and Robins would not have become joint venturers unless they had confidence in one another. In the context of a joint venture between competitors, as soon as trust and confidence is lost the
relationship should, ordinarily, end; unless, as Lord Cross suggested, the party who wishes to end the relationship has been solely responsible for the situation which has arisen.
[138] In this case I am satisfied that the loss of trust and confidence was due to Mr Boughton’s actions rather than those of Mr Jenkins and Mr Robins. The following factors have influenced me in reaching that conclusion:
a) The draft financial statements for the year ended 31 March 2005 were the catalyst for the events that resulted in the application to put Supscaf into liquidation. Those draft accounts were made available to Messrs Jenkins and Robins in September 2005. Mr Boughton had had access to those draft accounts since, at the latest, 11 June 2005, the date on which he signed them. The delay in providing accounts raises a suspicion of misconduct on the part of Mr Boughton.
b)After Messrs Jenkins and Robins had considered the draft 2005 financial statements they requested a second meeting with Mr Boughton which he declined to attend. Relevant issues were raised in a letter sent by Messrs Jenkins and Robins to Mr and Mrs Boughton on 8 September 2005: see para [46] above. That letter made it clear that Messrs Jenkins and Robins required immediate access to all financial records of Supscaf and particulars of where Supscaf’s property was to be found. They needed assurance that their investment in Supscaf was secure. In the absence of information to provide the security sought, the option of applying to appoint interim liquidators was raised.
c) Detailed queries concerning the draft financial statements were sent to the accountants for Supscaf by Mr Robins on 12 September 2005: see para [47] above. Rather than responding to those queries, which included expressed concern about the location of assets, the accountants did not respond. Instead, the solicitors who then acted for the Boughton interests responded on 13 September 2005. Only at that
time was the adverse impact of the termination of the Fletchers’
arrangement raised.
d)Any concern that Messrs Jenkins and Robins may have had about the Fletchers’ issues being raised so late were plainly exacerbated by the contents of a further letter dated 15 September 2005 from the solicitor acting for the Boughton interests (see para [52] above) that suggested the Jenkins/Robins interests had become competitors of Superior and Supscaf and, for that reason, the Boughton interests “have not felt inclined to disclose the location of jobs where Supscaf equipment has been deployed”, considering that their recent “dealings with [the Jenkins/Robins interests had] indicated that information of this type would be used to [their] commercial advantage”.
e) The concerns that existed when the liquidation proceeding was launched were exacerbated by the additional information that emerged before and during the hearing before me. The failure of the Boughton interests to complete the settlement entered into on 7 October 2005 to resolve all differences in return for withdrawal of the interim liquidation application and the unauthorised retention of moneys by Superior that ought to have been paid to Supscaf gave Mr Jenkins and Mr Robins justifiable and additional reasons to distrust Mr Boughton.
In those circumstances, it is quite clear that the breakdown in trust and confidence demands that Supscaf must be liquidated.
[139] The remaining question is whether the factors to which Mr Tingey referred, singularly or cumulatively, outweigh that reason for putting the company into liquidation. In my view, they do not. I explain why briefly.
[140] While there are commercial benefits to Messrs Jenkins and Robins in ceasing Supscaf’s operations and in commencing more direct and open competition with Superior, I find that was not the reason for Messrs Jenkins and Robins raising concerns in early September 2005.
[141] In my view, the possible availability of alternative remedies, such as arbitration under the constitution or an application under s174 of the Act cannot be regarded as determinative because:
a) Clause 25.9 of the Constitution is unlikely to yield a result acceptable to the Jenkins/Robins interests. Indeed, if arbitration were to eventuate, there may be questions about the jurisdiction of an arbitral tribunal to make an order that affects the status of a company, if the arbitral tribunal were to conclude that liquidation was the appropriate remedy.
b)While an order could be sought under s174 of the Act that the shares of the Jenkins/Robins’ interests be acquired by the Boughton interests, that overlooks the point that the Boughton interests have already had an opportunity to acquire the Jenkins/Robins interests’ shares for an agreed consideration. They failed to settle. That is not a hopeful starting point for resolution by that means, particularly when the company would continue in operation meantime.
[142] The position of Mr Yelas is unfortunate. He has paid good money for shares in Supscaf. How much money remains owing is still unclear given the conflicting information contained in the letter from Supscaf’s accountants to Mr Yelas of 6
October 2004 and in the draft financial statements for 2005: see paras [17] and [18] above. However, the impact of liquidation on him is not a sufficient reason to dismiss the present application.
[143] Avoidance of possible economic detriment to Superior cannot be a good reason for refusing to order that Supscaf be put into liquidation because of a genuine and understandable loss of confidence in Mr Boughton by Messrs Jenkins and Robins. Superior will need to compete, if it can, in the marketplace with other companies, including those aligned with the Jenkins/Robins interests.
[144] Mr Tingey has suggested the likelihood of a reduced value being obtained for assets sold at a forced sale by a liquidator. He submitted that was a factor militating against an order appointing liquidators.
[145] I do not share that concern. First, this is a company which hires equipment to a single customer; to that extent there are no arm’s length unsecured creditors likely to be affected through non payment of debt if the assets were realised for less than market value. Second, it is in the interests of all shareholders to maximise recovery. Third, the duty of a liquidator is to obtain the best possible price for assets of the company so that the proceeds may be paid to creditors and, if a surplus, to shareholders. A liquidator is given power, to the extent necessary for the liquidation, to carry on the business of the company: cl (b) Sixth Schedule to the Act. It will be for the liquidators to determine whether short term continuation of the company’s business is necessary in order to maximise returns to creditors and shareholders.
[146] Finally, I do not regard the terms of the Agreement as militating against a liquidation order. Although it was acknowledged that Superior may not be able to meet debts in a timely manner, time was only to be available if Superior were “to open its books to [Concepts] subject to any reasonable confidentiality requirements”: cl 11 of the Agreement. Likewise, the acknowledgement that Superior would need most of its profit entitlement paid to it (cl 13) and Concepts promise to give “favourable consideration” to some part of its share of profits being retained by Supscaf to use to expand the business (cl 14) did not authorise payment of dividends differently, as between the Boughton and Jenkins/Robins interests, without the consent of both shareholder interests.
[147] I have considered whether, in this case, I ought to defer making a liquidation order to enable the possibility of a “last-minute agreement being reached to avoid the finality of” liquidation: Vujnovich at 150.
[148] In my view, the extent of distrust that now exists renders futile any postponement of a liquidation order. It is better for the liquidators take control immediately, investigate the company to determine whether all relevant information
has surfaced and decide how to realise assets for the benefit of all creditors and shareholders.
[149] As no interests not associated with the shareholders are likely to be affected by liquidation (a secured creditor holding guarantees from both Boughton and Jenkins/Robins interests) it is necessary to achieve finality and make a liquidation order immediately.
Result
[150] For the reasons given, John Trevor Whittfield and Boris van Delden both of Auckland, Insolvency Practitioners are appointed as joint and several liquidators of the company. The order is timed at 2.15pm on 26 April 2006. The effect of that order is to place Supscaf in liquidation: s241(1) of the Act.
[151] The present dispute is between two groups of shareholders. When a company is placed in liquidation at the suit of a creditor it is appropriate for the company to bear the costs of placing the company in liquidation. That is not the position when the contest is between shareholders. In my view, the Boughton interests must pay the costs of the Jenkins/Robins interests on the liquidation proceeding.
[152] I order that Mr and Mrs Boughton and Boughton Trust Ltd be jointly and severally liable to pay the costs of Mr Jenkins and Mr Robins on a 2B basis together with reasonable disbursements, both to be fixed by the Registrar.
[153] I thank counsel for their assistance.
[154] The Registrar is directed to send a copy of this judgment, once delivered, to the appointed liquidators.
P R Heath J
Delivered at 2.15pm 26 April 2006
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