Jigsaw Preschools Limited v New Zealand Childcare Centres Limited
[2013] NZHC 1017
•8 May 2013
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV 2013-409-000852 [2013] NZHC 1017
BETWEEN JIGSAW PRESCHOOLS LIMITED Plaintiff
ANDNEW ZEALAND CHILDCARE CENTRES LIMITED
Defendant
Hearing: 8 May 2013
Counsel: S van Bohemen for Plaintiff
S L Kaminski for Defendant
Judgment: 8 May 2013
JUDGMENT OF WHATA J
[1] On 3 May 2013 I granted a temporary injunction preventing the dispersal of proceeds of sale of a preschool under agreement between New Zealand Childcare Centres Limited and Picador Leasing Limited. Essentially the plaintiff, Jigsaw Preschools Limited (Jigsaw) claims that the proceeds of sale should be directed to it being the company responsible for the preschool. New Zealand Childcare Centres Limited maintains that Jigsaw is one of three related companies which are in effect relationship property belonging to Patricia Ann Ireland (Trish) and Hamish Robert Kay Ireland (Hamish). Hamish says that all three companies have significant tax liabilities that must be paid and the proceeds of sale are needed urgently to pay that tax liability.
[2] As stated in my minute of 3 May it was my hope that the parties might come to some agreement as to the management of the proceeds. They have not. Accordingly, it falls to me to resolve whether a freezing order should be granted pending the resolution of the substantive claim. I will apply the orthodox threshold
test for interim injunction, namely I will assess whether:
JIGSAW PRESCHOOLS LIMITED V NEW ZEALAND CHILDCARE CENTRES LIMITED HC CHCH CIV
2013-409-000852 [8 May 2013]
(a) There is a serious issue to be tried; and if there is
(b) Whether the balance of convenience favours the freezing order.
The essential claim
[3] The plaintiff essentially claims:
(a) The defendant has entered into a contract for the unconditional sale
of the plaintiff’s business at Lincoln;
(b) The plaintiff claims that it has an interest in the proceeds of sale of the
Lincoln Preschool by the defendant by virtue of a constructive trust;
(c) The defendant has refused to acknowledge that the plaintiff has a beneficial interest in the proceeds of sale of the Lincoln Preschool; and
(d)The defendant has refused to give an undertaking, in short, not to disperse any proceeds of sale of the Lincoln Preschool without the plaintiff’s consent.
[4] An affidavit was filed by Trish on behalf of the plaintiff. In that affidavit she avers to the following:
(a) She is the sole director of the plaintiff;
(b)Through her management and directorship the plaintiff has established and operated preschools known as Jigsaw Preschools in a variety of locations, including at Lincoln;
(c) For reasons that she does not know, Hamish organised the leases of Jigsaw Preschools at Lincoln, Ashburton and Richmond in the name of the defendant company;
(d)The plaintiff has always paid the lease and other outgoings in relation to the preschools at Lincoln, Ashburton and Richmond;
(e) The preschool at Lincoln was sold, with the vendor recorded as the defendant, the sale price as $425,000 plus GST and a possession date of 28 March 2013 or by mutual agreement;
(f) There are various conditions of the sale agreement binding on the plaintiff, including in respect of the trade name “Jigsaw Preschools Lincoln,” and in relation to a contract with the Ministry of Education;
(g)She sought an undertaking from the solicitors for the defendant. The defendant did not agree to such an undertaking;
(h) There is email correspondence between Trish and the solicitor for
Hamish, recording the following in an email from Trish:
Hamish and I met last week and this is what was decided that out of the proceeds of sale of Lincoln all costs will be covered (legal, accounting and valuation) and then split evenly between IDL and Jigsaw and this goes to the IRD.
(i)Trish says that that statement does not reflect the wider agreement, namely that distribution of funds was part of a package of proposed agreements dealing with, among other things, ongoing ownership of the Jigsaw Preschools at Ashburton and Richmond, other relationship property and trusts matters.
[5] The defendant opposes the granting of freezing orders. An affidavit has been filed by Hamish in support of that opposition. He says:
(a) Their central corporate vehicle was Ireland Developments Limited (IDL). The defendant was incorporated some years later, as was the plaintiff;
(b)All the shares Trish and Hamish beneficially own in all three companies are relationship property;
(c) He is the only director of IDL and of New Zealand Childcare Centres (NZCC). Trish is the only director of Jigsaw. But he says, in their capacity as owners of the net assets of the companies, as their shareholders, there is a symmetry between Trish and Hamish. This is illustrated in the following description of the shares:
NZCC
Total Number of Shares: 100
Only Shareholder in NZCC: Ireland Developments Ltd
Only Shareholders in Ireland Developments Ltd: Trish & Hamish jointly
Jigsaw
Trish Trish/John Dallison/Hamish Hamish
5 shares 90 shares jointly 5 shares
(d)The 90 shares in Jigsaw are said to be registered in the joint names of Trish, John Dallison, and Hamish, as the only trustees of the HRK Ireland Family Trust. He says the trustees are required to act unanimously.
(e) All three companies had tax liabilities as at 20 March 2013 as follows:
IDL GST $164,653.52 PAYE $348,112.03
NZCC GST $5,412.65
Jigsaw GST $141,784.78 PAYE $154,911.37
(f) Hamish has promised to make payments to the IRD out of proceeds of the sale of Lincoln Preschools. As a result of Trish’s application for a freezing order, the IRD has had to be advised there will at least be a delay.
(g) Trish has resiled from their agreement (recorded above at [4](h)).
Hamish still wants to make the payments to the IRD. (h) Jigsaw’s undertaking as to damages is worthless;
(i)He has rejected an invitation to meet because he says Trish is trying to take advantage of the companies’ tax difficulties for her own benefit.
Serious issue to be tried
[6] The claim by Jigsaw Preschools Limited is that there is a constructive trust in relation to the monies now it appears held by NZCC. On my review of the evidence provided by Hamish, three affected companies are plainly inter-related. The apex of these companies is IDL, which is jointly owned by Trish and Hamish. IDL is the only shareholder in the defendant. Completing the picture, Jigsaw is largely owned by the HRK Ireland Family Trust, the trustees of which are required to act unanimously. Those trustees include Trish and Hamish.
[7] What emerges from this arrangement of the companies is that at the governance level, decision making was to be shared jointly. At the management level, however, directorship was split between Hamish (in relation to IDL and NZCC) and Trish (in relation to Jigsaw). In the result, Hamish has decided on behalf of NZCC (the defendant) to apply the proceeds of sale to tax liability. Trish, on behalf of Jigsaw, does not want the proceeds dispersed until the wider issues affecting relationship property and interest in the companies are resolved.
[8] Assuming for present purposes that the defendant was authorised to sell a Jigsaw business, it is fairly arguable that the proceeds of such sale must be held on behalf of Jigsaw being, on the evidence before me, the company responsible for the running of the Jigsaw Preschools. Mr Kaminski properly in my view accepted there was an arguable case for a constructive trust.
[9] I am fortified in this view because the governance arrangements clearly contemplate a consensus based decision making, with the involvement of Trish to any such decision making. Plainly the disposition of the proceeds of the sale of a preschool is a major transaction (although I do not use that term in the technical sense for the present purpose). Trish understandably would have a reasonable expectation that such decision, given its import, would be made jointly.
[10] I appreciate that there appears to be email correspondence confirming Trish’s agreement to the disposal of the sums to pay off IRD debt. However, she says that this formed part of a wider agreement and that is a matter that will need to be explored further at a substantive hearing. I was initially concerned about the fact that Mr Dallison, acting on behalf of the plaintiff, corresponded directly with Trish, knowing that she was represented by solicitors on this commercial aspect of the transaction. It appears however that Trish was reporting back on discussions she had had with Hamish. The problem remains however that any such agreement was not formally recorded. I therefore prefer to approach that agreement with some caution and do not place great weight on it for the purposes of this interim application.
[11] Given the foregoing, and in the limited time available to me, I consider that there is a serious issue to be tried, namely whether or not the proceeds of sale held by the defendant are impressed with a constructive trust in favour of the plaintiff.
Balance of convenience
[12] Hamish has given evidence that there is some real urgency in the need to pay down tax debt. But while plainly penalty interest is mounting, there is no direct evidence that IRD is about to commence proceeding or take other steps that might immediately imperil the companies. Further, as I indicated above, the sale of the preschool is a major transaction in the affairs of the companies and the dispersal of the proceeds of sale represents a significant impact on the interest of the shareholders of the companies, including Trish. Balanced against that, whatever interest Trish has in the proceeds (whether directly or indirectly) will likely be subject to any claim by the IRD in relation to such funds. The balance of convenience therefore is finally balanced in this case.
[13] Ultimately I have come to the view that it is necessary and on balance preferable to preserve the status quo. If the proceeds are dispersed now it is not clear to me that Jigsaw will have a straightforward remedy. Indeed it appears that NZCC and IDL are struggling financially. Conversely I am told by counsel that Jigsaw is still operating two preschool businesses and is paying its debts, including ongoing tax liability. In addition I am told that a short period is required to better understand
the financial affairs of the companies, which might in turn provide a proper basis for Jigsaw agreeing to the payment of the IRD debt. In short, at present Jigsaw does not accept that there is cross company debt that might warrant such a payment. That might change on closer inspection of company accounts.
[14] The Court’s tolerance however is limited. Plainly if there is clear evidence that the companies will collapse as a consequence of inactivity, the balance will shift and I think in favour of the dispersal of some or all the funds to the IRD. I am therefore going to extend the freezing order by 21 days to enable Jigsaw to review the financial position of the companies but with leave granted for the defendant to apply at any time to have the freezing order uplifted. Any such application will need better evidence of the risk to the defendant or IDL. I also wish to note that if Jigsaw wishes an extension of the freezing order it will likely need to produce better evidence of its capacity to pay on the undertaking as to damages. Order is accordingly.
Solicitors:
Godfreys Law, Christchurch
Dallison Stone, Christchurch
P Egden, Christchurch
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