Karikaas Natural Dairy Products Holdings Limited
[2023] NZHC 3672
•13 December 2023
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2023-409-413
[2023] NZHC 3672
UNDER Section 290 of the Companies Act 1993 and Part 19 of the High Court Rules 2016 IN THE MATTER
of an application to set aside a Statutory Demand
BETWEEN
KARIKAAS NATURAL DAIRY PRODUCTS HOLDINGS LIMITED
Applicant
AND
ARUNDEL FARM HOLDINGS LIMITED
Respondent
CIV-2023-409-414 UNDER
Section 290 of the Companies Act 1993 and Part 19 of the High Court Rules 2016
IN THE MATTER
of an application to set aside a Statutory Demand
BETWEEN
KARIKAAS NATURAL DAIRY PRODUCTS LIMITED
Applicant
continued ……
Hearing: 7 November 2023 Appearances:
G K Riach and H H Hughes for Applicant S R A Hayman for Respondent
Judgment:
13 December 2023
Reissued:
14 December 2023
JUDGMENT OF ASSOCIATE JUDGE LESTER
KARIKAAS NATURAL DAIRY PRODUCTS HOLDINGS LIMITED v ARUNDEL FARM HOLDINGS LIMITED [2023] NZHC 3672 [13 December 2023]
ANDJOHN LAMERS and HEATHER LYNLEY LAMERS
Respondents
[1] John and Heather Lamers (the Lamers) with Alan and Diana Hawkins (the Hawkins), purchased a cheese manufacturing business in 2004. The purchase was by Karikaas Natural Dairy Products Holdings Limited (Holdings), which is the parent of the trading company, Karikaas Natural Dairy Products Limited (Trading).
[2] The Lamers and the Hawkins have fallen out. The Lamers have wanted to end their involvement in the venture since at least August 2021.
[3] In January 2004, around the time the purchase of the business settled, the Lamers, the Hawkins and Holdings entered a shareholders agreement (the Agreement) which recorded that the Lamers, in addition to their purchase of shares, would advance $333,000.00 to Holdings. That advance was made with the Agreement recording that the loan was to be documented in a separate loan agreement. While an unsigned copy of the loan agreement has been produced, it is common ground that the advance was for an initial term of two years. Part payments were made against the debt in 2008, 2012 and 2013 leaving a balance of $200,000.00 outstanding. In 2006, this advance was put in the name of the Lamers’ company, Arundel Farm Holdings Limited (Arundel). In July 2023, Arundel called for repayment of the advance.
[4] In addition, both the Lamers and the Hawkins are, via their respective companies, owed money as recorded in current accounts. The amount recorded as owing by Holdings to Arundel under its current account is $78,893.00.
[5] In 2018 and 2019, the Lamers advanced a total of $377,073.00 to Trading. This loan has not been repaid. The Hawkins interests also advanced funds to Trading, the relevance of which is noted below.
[6] Arundel and the Lamers have issued statutory demands in respect of the amounts they say are presently due and payable. Arundel under its current account and the balance of the loan originally made by the Lamers and the Lamers in relation to the advance referred to in the preceding paragraph.
[7] Holdings and Trading have applied to set aside the demands. As the issues in each application overlap, this judgment deals with both demands together save where separate issues concerning Holdings or Trading arise.
[8]The application to set aside relies on the following clauses of the Agreement:
8Dividend Policy and Funding
8.1The Parties agree to the following general policies:
(a)The Board will, subject to the Company meeting the solvency test in Section 52 of the Companies Act 1993, and after having regard to the Company’s need for funds to maintain it as a viable business make a distribution by way of a dividend its entire after tax profit for each financial year. Such dividends allocated to the Parties shall be paid or credited to their respective separate shareholder’s current accounts with the Company.
(b)Each Party will fund in proportion to their shareholding the Company’s operations so as to maintain the Company as a viable business.
8. 2 If at any time the Parties are unable to agree as to whether or not the above general policies should be carried out, or as to the extent to which or the manner in which they should be carried out, then Clause 12 shall apply.
(emphasis added)
[9] In the Agreement, the reference in cl 8.2 to cl 12, is to a provision entitled “Termination by Reason of Fundamental Disagreement”. Clause 12.1(c) and 13 provide:
12.1 If a Fundamental Disagreement as to a major matter shall occur as stipulated in Clause 12.2 or the Parties are unable to agree on:
…
(a)Any Party shall be entitled to give to the other notice in writing (“Notice of Termination”) that unless the matter in dispute is agreed within the period specified in the Notice of Termination (not being less than three months) the Agreement shall be terminated. If such
matter is not agreed within the period so specified, then unless it shall otherwise be agreed in writing, the following provisions shall apply;
(i)The Parties shall endeavour to reach agreement whereby one of them or its nominee shall buy out all of the shares of the other in the Company;
(ii)If no such agreement is reached within the period of one month after expiration of the Notice of Termination, then, within a further period of fourteen (14) days, each Party shall submit to the Company competitive bids to purchase the other parties shareholding. The highest bid will prevail, and in that event the Party making the highest bid, and the other Party, will be bound together in a contract for the sale and purchase of the other Party’s shares, at the tendered price.
(emphasis added)
…
13.1Any sale and purchase pursuant to Clauses 11 and 12 shall be completed as soon as practicable with the purchasing Party paying a deposit of 20% with the balance payable on settlement in twelve
(12) months from the date of payment of the deposit. On settlement the Party selling shares shall deliver to the Party purchasing shares a duly executed transfer in respect of the shares in question and any resolutions that need to be signed by the selling Party approving the share transfer and letters of resignation of the Director/s appointed to represent the holders of such shares against payment by the purchaser of the sale price.
13.2Any sale and purchase of shares pursuant to Clauses 11 and 12 shall be on terms that the relevant shares shall be sold free from all liens, charges, encumbrances or other adverse rights and together with all rights and benefits attaching to them on the date of sale, that all loan accounts shall be repaid as between the Company and the Party selling shares and that the Party selling shares shall be released from any guarantees given for the benefit of the Company or shall be indemnified against liability under such guarantees by the Party or Parties purchasing shares.
[10] In May 2023, the Hawkins’ solicitors invoked cl 12.1(c) ultimately leading to them giving notice on 23 June 2023 that the Agreement was terminated. The Lamers’ letter calling up the advances, as noted above, was on 4 July 2023, leading the Hawkins to say the calling up of the debt and the issue of statutory demands is tactical.
[11] That the amounts claimed in the demands are owed to Lamers/Arundel, nor the quantum of those amounts, is in issue.
The grounds of challenge to the statutory demands
[12] As well as asserting the demands were issued for collateral purposes, as both Mr Hawkins and Mr Lamers are directors of both companies,1 the companies assert Mr Lamers is in breach of his director’s duties to the companies in calling up the advances. However, the main focus of Mr Riach’s submissions (as counsel for the companies), was as the parties agree the shareholder buyout process at cl 12.1(c) has been kept alive, despite the 14 day period having expired, cl 13.2 provides loans will be repaid as part of the cl 12 share buyout. Mr Riach submits this means that as the cl 12 process remains alive and as payment of the loans is tied to that process, that in turn means the statutory demands were premature.
Shareholders agreement has been cancelled
[13] The issue of a notice under cl 12.1(c) of the Agreement sets time running on the life of the agreement. Unless the notified dispute is resolved; “… the agreement shall be terminated”. The 23 June 2023 notice of termination gave three months for agreement to be reached on the disputes raised in the letter. The three months expired on 23 September 2023 without resolution being achieved. The Lamers do not dispute the validity of the 23 June 2023 termination notice.
The link between cl 8 and termination
[14] The Agreement provides that termination of the agreement: “… shall not affect such rights and obligations of the Parties as are intended to survive the termination
…”.
[15] Clause 8.2 of the Agreement provides that if the parties cannot agree on whether the general policy of shared proportional funding (joint funding) should be carried out, or to what extent, then the termination provisions apply. Firstly, cl 8.2 of the Agreement confirms joint funding is a general policy only and secondly, contemplates that joint funding will be subject to ongoing discussion. Further, if how joint funding policy is to be applied and to what extent, cannot be agreed, a notice of termination may be issued. In my view, a party cannot be entitled to terminate because
1 Mr Lamers has consented to the company bringing these applications.
of a disagreement over the joint funding policy but nevertheless be obliged to continue joint funding or not to withdraw existing funding on termination.
[16]In my view, cl 8 of the Agreement did not survive termination.
An implied duty to support the company despite cl 8 not applying?
[17] The parties recorded their rights and duties as shareholders in the 2004 Agreement. I am satisfied there is no room to imply an obligation to continue to fund the companies following the termination of the Agreement. That would be to find an implied agreement or some other duty obliging the parties to continue with obligations akin to those in cl 8 when here, a disagreement over funding in accordance with that clause, has brought their Agreement to an end.
[18] However, the cl 12 buyout process had been kept alive by the parties at the time of the hearing.
[19] Mr Riach refers to cl 13 of the Agreement which relates to the settlement procedures where there is a sale and purchase of shares pursuant to cl 12. Clause 13.1 provides on the sale and purchase of shares under cl 12, all loan accounts shall be repaid as between the company and the parties selling their shares with repayment being within 12 months from the notice buyout. This is an obligation that survives termination given it is intended to govern how the termination provisions should operate. Clause 12.1(c)(ii) was intended to create a “quick fire” process where each party would put forward their best price for the shares with the highest offer being successful.
[20] Despite the 14 days in cl 12 having expired, both parties have treated the cl 12 process as running on.
[21] As the cl 12 buy-out offer process had not been completed by the time of the hearing, there was a good argument that cl 13 defers the payment of loans until the cl 12 and cl 13 process has been completed, at least insofar as loans caught by cl 13. The parties had explored amendments to the cl 13 sale process but kept open the option of reverting to the basic cl 12 process. Accordingly, at the conclusion of
the hearing I considered it was arguable that a party could not call up their loans as if a buyout under cl 12 was to occur, then cls 13.1 and 13.2 would defer when the vendor’s loans would be repaid.
Breach of director’s duties
[22] Ms Hayman, counsel for Mr Lamers, submitted no breach of director’s duties arise as alongside the duties Mr Lamers has as director, he also has personal contractual rights.
[23] Ms Hayman referred to Hunan Holdings Ltd v Virionyx Corporation Ltd, where the Court held that a director who enters into transactions with a company is free to exercise contractual rights under those contracts and in doing so, prefer their own interests over the interests of the company.2 Such a director is not constrained to exercising their personal contractual rights in the best interests of the company; to require otherwise would “operate as a disincentive to directors of private companies in providing debt capital, as it would most likely prevent them from ever seeking repayment”.3
[24] I accept Ms Hayman’s submissions on this point. If Mr Riach was right, then advances by directors to companies would be “locked in” if the company was not able to repay them. Loans would become the equivalent of equity, even where a loan had fallen due for repayment.
[25] Holdings is a party to the Agreement. Holdings has therefore agreed to the loans being repaid on the cl 12 process being completed. Having so agreed, Holdings cannot say the Lamers requiring repayment is a breach of Mr Lamers’ duty either as part of the cl 12 process or outside that process if neither party seeks to buy out the other. As discussed, Mr Riach submitted the parties have treated Trading as also caught by the Agreement. If that is correct, then Trading also cannot complain of a breach of duty.
2 Hunan Holdings Ltd v Virionyx Corporation Ltd, HC Auckland, CIV-2005-404-1480, 13 December 2005 at [116].
3 At 116.
Collateral purpose
[26] It will be recalled that the letter calling up repayment of the debts was sent shortly after Hawkins issued their notice of cancellation of the Agreement. The timing creates the arguable appearance that the calling up of the loan was a response to termination, but that does not make calling up the loans an abuse of process.
[27] Cancellation of the Agreement put in train a process that would see either the Lamers/Arundel or Hawkins’ loans repaid depending on who was the higher bidder in the cl 12.1(c) bidding process. In other words, repayment of the Lamers/Arundel debt was inherent in the notice of termination if Hawkins bought the Lamers’ shares.
[28] Clause 13 of the Agreement determines when the loans were to be repaid. If cl 13 applies then the collateral purpose submission does not add anything. If cl 13 does not apply, then as cl 8 is no longer in force there is, in my view, nothing objectionable to a creditor seeking recovery of what they are owed.
[29] The situation at the hearing on 7 November 2023 was that the parties had left open the ability to have recourse to the original cl 12 procedure. Ms Hayman, counsel for Arundel, was concerned that either time would drift with the parties negotiating amendments to the cl 12 procedure or, if they reverted to the cl 12 procedure with the original 14 days having run, there would be no set timeframe for that process to be completed. The hearing concluded on the basis the parties would confer on whether to use the cl 12 process or not and report back to the Court. Release of this decision was deferred on that basis.
[30] The bidding process set out in cl 12 was completed on 24 November 2023. The Hawkins’ interests bid $1.00 which was apparently set as a reserve. The Lamers’ sheet of paper tendered by them stated that they submitted “no bid”.
[31] The Lamers say that the Agreement does not require them to submit a bid. The Hawkins’ position is apparently that if both Lamers and Hawkins were to submit what they consider to be the minimum bid, that is the reserve of $1.00, the Lamers’s bid would necessarily be “the higher” and therefore the winning bid, as it would be a bid of
$1.00 for the purchase of only 40.03 per cent of the shareholding (the Hawkins’
interests shares) as opposed to a bid of $1.00 for 59.97 per cent of the shareholding held by the Lamers interests.
[32] Counsel for the Lamers’ interests submits that the Hawkins’ bid of $1.00 may not have been intended to be a genuine bid as it appears it was submitted in circumstances where the Hawkins believed the Lamers were bound to submit a bid of
$1.00 that would necessarily mean they won the auction.
[33] The bidding process does not call for an attempt to place a value on each share held by the parties in the way the approach attributed to the Hawkins would suggest, that is, $1.00 for 40.03 per cent would be a higher per share price than a bid of $1.00 for a bid of 59.97 per cent.
[34] The cl 12.1(c)(ii) process is blunter than that. A party simply proposes a price for the other side’s shareholding, not a price per share. The lodging of one price avoids the need for any attempt to try and arrive at a per share price. Such is not what the process contemplates. Nor does the setting of a reserve require a bidder to meet the reserve. If the reserve is not met, a lot is passed in.
[35] The idea that the setting of a reserve could be manipulated to compel the Lamers’ interest to purchase, on the basis their offer was the higher per share price, cannot have been contemplated by the setting of a reserve.
[36]Accordingly, the position is as follows:
(i)If the Hawkins’ interests were to seek orders, as is apparently contemplated, to require the Lamers’ interests to bid $1.00, then there would be a deadlock on the price and the cl 12 process will have failed.
(ii)In the alternative, if the Lamers’ construction of the meaning of cl 12 is correct and they did not need to tender a price, then the Hawkins are the highest buyer and are obliged to buy the Lamers’ shares and to pay out all the Lamers’ interests advances in accordance with the agreement
reached as part of the sale process; that all loans would be subject to the cl 13 payment timing.
[37] Counsel for the Lamers’ interests advises that they have called upon counsel for the Hawkins’ interests to confirm whether their $1.00 bid can be treated as a genuine bid.
[38] If the cl 12 process has failed, the Lamers’ interests are entitled to call up their loans. If the Hawkins do not confirm their bid then the cl 12 process has failed. If the Hawkins confirm their bid the cl 12 and 13 process applies.
[39]Accordingly, my judgment in respect of the statutory demand is as follows:
(i)If the Hawkins’ interests confirm that their $1.00 bid is a genuine bid then they will be the successful purchasers under the cl 12 process and the statutory demands will be set aside with the parties having agreed that all loans will be repaid pursuant to cl 13, that is in 12 months’ time.
(ii)If the Hawkins’ interests state that their bid is not a genuine bid then the cl 12 process will have failed and the application to set aside the statutory demands will be dismissed and the time for payment of the demands will be extended to 31 January 2024.
(iii)The Hawkins’ interests are to confirm their formal nomination to me within 48 hours of the release of this decision. If no confirmation is received from the Hawkins that their bid is genuine, the application to set aside the demands will be dismissed.
Costs
[40] If the Hawkins’ interests do not confirm their bid and the application to set aside the statutory demands are declined then the respondents are entitled to costs on a 2B basis plus disbursements as fixed by the Registrar.
[41] If the Hawkins’ interests confirm their bid then there shall be no order as to costs.
Associate Judge Lester
Solicitors:
Harmans, Christchurch (for Applicants)
Lane Neave, Christchurch (for Respondents)
Copy to counsel:
G Riach, Barrister, Christchurch (for Applicants)
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