Kaur v RSK Farming Limited
[2022] NZHC 3330
•9 December 2022
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2022-419-000127
[2022] NZHC 3330
BETWEEN SARBJIT KAUR
Plaintiff
AND
RSK FARMING LIMITED
Defendant
CIV-2022-419-000088 BETWEEN
BALBIR SINGH-HEER and DABAU MINDHRO KAUR SINGH-HEER
Plaintiffs
AND
RSK FARMING LIMITED
Defendant
Hearing: 7 September 2022 Appearances:
K I Bond for Rupinder Singh-Heer M Reason / F A King for Sarbjit Kaur
M J Fisher / J T Toon for Balbir Singh-Heer and Dabau Mindhro Kaur Singh-Heer
Judgment:
9 December 2022
JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 9 December 2022 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
KAUR v RSK FARMING LTD [2022] NZHC 3330 [9 December 2022]
Introduction
[1] Sarbjit Kaur was born and raised in India. Rupinder Singh-Heer was born and raised in New Zealand. They married in India in 2007. The following year, Sarbjit1 came to New Zealand with Rupinder to live on his family farm in Te Aroha.
[2] Rupinder’s parents, Balbir Singh-Heer and Dabau Mindhro Kaur Sing-Heer, bought the Te Aroha farm in the 1990s. Rupinder was raised on the Te Aroha farm and has worked there all his adult life. In 2007, Balbir and Dabau incorporated Sunsuraj Limited (Sunsuraj) and transferred ownership of the Te Aroha farm to that company.
[3] RSK Farming Limited (RSK) was incorporated in 2011, with Rupinder the sole director and shareholder. In 2012, Sarbjit was made a director and 50 per cent of the shares in RSK were transferred to her. Sunsuraj, as owner of the Te Aroha farm, entered into a share milking agreement with RSK as share milker. Before that, Rupinder worked on the farm for a wage. Sarbjit also worked on the farm but says she was unpaid.
[4] In 2016, Sunsuraj sold the Te Aroha farm, and some Fonterra shares, to RSK. The purchase price was $7,246,343, made up of $6,539,293 for the land and improvements and $707,050 for the shares. The purchase was funded by a loan from ASB secured by a first ranking mortgage, an advance from Balbir and Dabau secured by an agreement to mortgage, and an advance from Rupinder also secured by an agreement to mortgage.
[5]
[5]
.
1 In view of the commonality of surnames, I use first names in this judgment.
[6] Sarbjit has filed a statement of claim under s 174 of the Companies Act 1993 (the Act).2 She claims that the affairs of RSK have been conducted in a manner that is unfairly prejudicial to her as a 50 per cent shareholder.
[7] In this interlocutory application, Sarbjit applies for an interim liquidator to be appointed. She asks that the interim liquidator be given the power to manage RSK, examine its directors, shareholders, and others, investigate and report on its financial position and the way in which it acquired its assets, establish reasonable director salaries, and set aside the debt arrangement with Balbir and Dabau.
[8] Rupinder, Balbir and Dabau oppose an interim liquidator being appointed.3 They maintain that an order under s 174(2)(a) that they acquire Sarbjit’s shares in RSK for fair value is the fairest and most logical way to divide the interests of the shareholders without unnecessarily destroying shareholder value or risking the loss of the family farm.
[9] Sarbjit also applies for leave to intervene in proceedings between Balbir and Dabau, and RSK.4 In these proceedings, Balbir and Dabau apply for summary judgment of their claim for specific performance of the deed of agreement to mortgage RSK gave when it purchased the farm. Sarbjit wishes to intervene, by way of derivative action, to defend the summary judgment for RSK.
[10] Again, Rupinder, Balbir and Dabau oppose Sarbjit’s application to intervene.5 Rupinder says it would be a waste of time and money for RSK to defend the summary judgment proceedings, particularly as any relief that is able to be obtained may be to RSK’s detriment.
[11] The crux of Sarbjit’s complaint is that she has been unfairly prejudiced by the way that Rupinder and his parents structured RSK’s acquisition of the Te Aroha farm
2 CIV 2022-419-127.
3 Rupinder filed a notice of appearance in opposition to the s 174 proceeding and a notice of opposition to the appointment of an interim liquidator on 30 June 2022. Balbir and Dabau did the same on 23 June 2022.
4 CIV 2022-419-88.
5 Notice of opposition filed by Rupinder on 28 July 2022. Notice of appearance filed by Balbir and Dabau on 4 August 2022.
and the way the affairs of the company have been managed since then. According to draft management accounts to 31 March 2021, the net asset position of RSK is only
$121,322 after the debts to ASB, Balbir and Dabau, and Rupinder are considered. As a result, despite living and working on the farm for 14 years, Sarbjit’s shareholding in RSK appears to be only around $60,000. Sarbjit says she has never been paid a wage, salary, director’s fee, or received a shareholder distribution, beyond a modest sum she took when she left Rupinder last year.
Legal principles
Interlocutory application for appointment of an interim liquidator
[12] Sarbjit applies for an interim liquidator to be appointed as a form of interim relief in her substantive proceeding under s 174 of the Act, which she brings as an oppressed shareholder of RSK. She does not specify the ultimate relief she seeks in her statement of claim.
[13]Section 174 provides:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2) If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the shareholder’s shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company’s affairs; or
(d) altering or adding to the company’s constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[14] To obtain relief under s 174, the shareholder must first show that the conduct of the company is “oppressive, unfairly discriminatory, or unfairly prejudicial”. Second, the Court must consider that it is “just and equitable” to make an order.
[15] The leading case on the first stage of the test is Thomas v H W Thomas Ltd.6 The Court of Appeal held that “oppressive, unfairly discriminatory, or unfairly prejudicial” conduct means conduct which is unjustly detrimental to the interests of a member or members of the company. The conduct need not be unlawful or carried out in bad faith. It must however be a visible departure from the standards of fair dealing, viewed in light of the history and structure of the particular company and the reasonable expectation of its members. The test is objective, asking whether a reasonable bystander would regard the conduct as unfairly prejudicial to the applicant shareholder.7
[16] Orders for liquidation under s 174 are comparatively rare.8 They are most commonly made where there has been an irretrievable breakdown of relationships within the company. For example, in Vujnovich v Vujnovich,9 the Court of Appeal ordered the winding-up of a company because there was a complete breakdown of relations in the company and both parties were equally to blame. Similarly, in Jenkins v Supscaf Ltd,10 the High Court ordered the winding-up of a company on s 241 (just and equitable) grounds because of the irretrievable breakdown of trust and confidence between the shareholders. Heath J concluded that a s 174 order for acquisition of the plaintiff’s shares by the remaining shareholders was inappropriate, as the remaining
6 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA), (1984) NZLC 99,148.
7 See Latimer Holdings Ltd v Sea Holdings New Zealand Ltd [2005] 2 NZLR 328 (CA), (2004) 9 NZCLC 263,694.
8 Rodney Craig and others Morison’s Company Law (online ed, LexisNexis) at [37.9].
9 The decision was upheld by the Privy Council in Vujnovich v Vujnovich [1989] 3 NZLR 513, (1989) 4 NZCLC 65,186 (PC).
10 Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC).
shareholders had already failed to settle purchase of the plaintiff’s shares pursuant to an earlier agreement.
[17]The Court appoints interim liquidators under s 246 of the Act, which provides:
246 Interim liquidator
(1) If an application has been made to the court for an order that a company be put into liquidation, the court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company, appoint a named person, or an Official Assignee for a named district, as interim liquidator.
(2) Subject to subsection (3), an interim liquidator has the rights and powers of a liquidator to the extent necessary or desirable to maintain the value of assets owned or managed by the company.
(3) The court may limit the rights and powers of an interim liquidator in such manner as it thinks fit.
[18] Associate Judge Osborne summarised the relevant considerations in Truck & Trailer Holdings Ltd v Skelly Holdings Ltd:11
[5] The application is filed under s 246 Companies Act 1993 which permits the Court to appoint an interim liquidator if it satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company. Accordingly, the over-arching criteria are necessity and expediency. The threshold indicated by the latter term has been explained by the Court in Carter Holt Harvey Ltd v Timbalok NZ Ltd as meaning:
fitting, suitable, desirable or convenient.
[6]Chisholm J observed that this conveys a relatively low threshold.
[7] Beyond the statutory criteria it has been recognised that there are three main pre-conditions to an interim liquidation:
(i)There must be a valid winding-up application underway.
(ii)The application will in all probability succeed.
(iii) The circumstances must be not merely urgent, but also justify the appointment of an interim liquidator.
[8]The Court has recognised as three important factors:
(a)Whether the company assets are in jeopardy.
(b)Whether the status quo should be maintained.
11 Truck & Trailer Holdings Ltd v Skelly Holdings Ltd HC Christchurch CIV-2012-409-000541, 11 May 2012.
(c)Whether the interests of creditors are safeguarded.
[9] These various formulations are ways of measuring whether necessity or expediency are established. They are a "litmus test", not exhaustive.
Application to intervene
[19] Sarbjit seeks leave to defend, by way of derivative action, the summary judgment proceedings brought against RSK by Balbir and Dabau.
[20]Section 165 of the Act relevantly provides:
165 Derivative actions
(1) Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a) bring proceedings in the name and on behalf of the company or any related company; or
(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c) any action already taken by the company or related company to obtain relief:
(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—
(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
(4) Notice of the application must be served on the company or related company.
(5) The company or related company—
(a) may appear and be heard; and
(b) must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.
(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
[21] The leading case on the application of s 165 is Vrij v Boyle.12 Fisher J held that the appropriate test in deciding whether to grant leave was whether a prudent businessperson in the conduct of his or her own affairs would have decided to bring or defend a claim, having regard to matters including the amount at stake, the apparent strength of the claim, the likely costs, and the prospect of executing any judgment.
[22] While the Court will assess the strength of the claim, it is trite law that it will not conduct an interim trial on the merits.13 The other mandatory requirements of s 165(2) include the costs of the proceeding in relation to the relief likely to be obtained. The availability of an alternative cause of action can be a relevant consideration, in terms of avoiding unnecessary cost to the company.14
[23] I now turn to Sarbjit’s claims, followed by Rupinder’s response, and additional submissions made by Balbir and Dabau.
Sarbjit’s claims
[24] Sarbjit claims that the affairs of RSK have been conducted in a manner that is oppressive, unfairly discriminatory, or unfairly prejudicial to her. Her main complaints are that:
12 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
13 He v Chen [2014] NZCA 153 at [38]; and Parkinson v O’Brien [2021] NZCA 309 at [36].
14 See recently Fruit Shippers Ltd v Petrie [2020] NZHC 749 at [69]–[76]; and Vijayakumar v Vasanthan [2021] NZHC 1827 at [26].
(a)she worked long hours on the Te Aroha farm and did not receive a shareholder’s salary, despite such a salary being declared each year in the financial statements;
(b)she was denied access to information regarding RSK’s affairs, and was excluded from management decisions by Rupinder and Dabau;
(c)she was not given independent advice and did not provide informed consent when RSK purchased the Te Aroha farm and borrowed 100 per cent of the purchase price;
(d)Dabau, when a signatory of RSK’s bank accounts, caused RSK to make unauthorised payments to Balbir and herself.
[25] Elaborating on these points, Sarbjit says that she was in a vulnerable position when she moved to New Zealand at the age of 23 to live with Rupinder after an arranged marriage. English is her third language. She says that she came to New Zealand on a one year visitor visa and continued to apply for one year work visas until she was informed by a friend that she could apply for a resident visa. She obtained a five year resident visa in 2012 and a permanent resident visa in 2017.
[26] Sarbjit says that from around 2008 to 2011, she worked up to 12 hours a day and seven days a week on the farm. She says that her work included working in the dairy milking shed, working in the paddocks, fencing, feeding the calves, spraying weeds, collecting material and equipment, and spreading fertiliser. She says she has never received a wage, salary, a director’s fee, or dividend for the work or services she undertook on the farm and on behalf of RSK. Sarbjit says that based on RSK’s financial statements which she has now obtained, the company has declared
$32,875.00 of shareholder salaries since 2012. She says she has never been paid any part of this sum.
[27] She took a modest sum of around $5,000 in January/February 2021 that enabled her to leave Rupinder.
[28]
[28]
.
[29] In relation to RSK’s purchase of the Te Aroha farm in 2016, Sarbjit says that she was informed of the intended transaction and loan from Balbir and Dabau when she arrived at their law firm to sign the documents. She says that she was under the initial impression that RSK had enough funds for the transaction. She says she did not understand and did not receive any advice about RSK’s financial position. Further, she says she was not given any advice as to the ramifications of the transactions or the opportunity to take independent legal advice. She says did not understand what she was doing when she signed the deed of agreement to mortgage as a director for RSK. She says that she has never been provided with a copy of the purported loan agreement. She says that she signed the agreement because Rupinder asked her to and was afraid of being abused by him if she did not.
[30] Mr Reason, for Sarbjit, submits that the solicitors who advised all parties to the transaction were conflicted and ought not to have acted for her or RSK. He also submits that the purchase was a major transaction and there is no shareholders’ resolution. He submits that the debt agreement was constructed to exclude Sarbjit from the equity in the farm business despite her years of unpaid work. Accordingly, the debt arrangement was unconscionable and unfairly prejudicial to her, made without her informed consent, and created without a special resolution of shareholders.
[31] In support of this allegation, Sarbjit has filed an affidavit from an independent legal expert, Timothy Jones. Mr Jones, who has reviewed the transaction documents, concludes that there is no evidence that the solicitors involved in advising the directors of RSK had disclosed that they had a conflict of interest as they were acting for multiple parties, or that they had advised the directors to obtain independent legal advice. He offers the opinion that in such a multi-faceted and multi-party transaction,
the solicitors should have sent RSK and its directors to another law firm for independent legal advice. Without that, neither the company nor its directors, nor the directors in their capacity as guarantors, had any opportunity to consider the wisdom of the transaction and whether it was in the best interests of the company.
[32] He records that in this case there was 100 per cent borrowing to purchase the farm. ASB required Rupinder and Sarbjit to sign personal guarantees. He notes concern about Sarbjit’s lack of commercial sophistication and the fact that English is her third language. She deposes that she was only informed about the transaction on the way to the offices of the solicitors, but it appears that she signed the agreement for sale and purchase the previous month, in July.
[33] Mr Jones also offers the opinion that the transaction was a major transaction for the purposes of s 129 of the Act, which required a shareholder resolution. He has not seen any record of a shareholder resolution.
[34] Sarbjit also claims that Dabau, who administered RSK’s accounts, made unauthorised withdrawals from RSK’s bank account. Before ASB’s mandate was changed in October 2021 at Sarbjit’s instigation, Dabau was co-signatory to RSK’s account with Rupinder and Sarbjit. However, the mandate only required two signatures. Sarbjit claims that Dabau transferred $334,420 from RSK’s account to her personal account between April and September 2021.
Rupinder’s response
[35] Rupinder denies that Sarbjit has been oppressed or unfairly prejudiced. He says that because they were a married couple, their salaries and expenses during the marriage were relationship property. Consistent with that, they each own 50 per cent of RSK and were paid a joint salary which went into a joint current account in which they each own a 50 per cent interest. He says that their relationship expenses were met by RSK and offset against their joint current account each year, as is standard for farming companies of this sort.15 A shareholder’s salary was declared at year end to offset these drawings. He says that he did not receive any wage or director’s fee either.
15 Affidavit of Rory Noorland sworn 22 July 2022 at [5].
Rupinder says that both he and Sarbjit benefitted from the hard work on the Te Aroha farm due to their joint ownership of RSK, which is reflected in the increased value of RSK and the joint current account balance.
[36] Rupinder denies that Sarbjit did not have access to company information and that she was excluded from management decisions. He says she had little interest in the administration of RSK’s financial affairs and was consulted, albeit informally, regarding major transactions. He says that her signature appears on key documents relating to such matters.
[37] Rupinder says that Sarbjit has not pointed to any basis on which the loan from Balbir and Dabau could be said to be unfair and prejudicial to RSK, or what she would have done differently had she received independent legal advice. He points out that he and Sarbjit signed an acknowledgement that they had been given the opportunity to obtain independent legal advice and had waived that right.
[38] In relation to her request that an interim liquidator be appointed with the power to set aside the loan from Balbir and Dabau to RSK, Rupinder points out that RSK cannot both keep the Te Aroha farm and the money lent to purchase it. He says that if the loan is to be unwound as Sarbjit appears to want, then so must the entire transaction. That would involve the Te Aroha farm being returned to Sunsuraj in exchange for a refund of the purchase price and all loans repaid. He submits that that would not be in the interest of RSK, Sarbjit or himself.
[39] Rupinder refers to valuation evidence obtained by Dabau that the Te Aroha farm was worth $6,650,000 when it was purchased,16 which is $111,000 more than RSK paid for it. He submits that there is no dispute that the Fonterra shares were acquired for fair value. He says that RSK has not suffered any detriment because of the loan. The loan was on substantially more favourable terms than could have been attained from the third party lender. Notably, from 2016 until 2021, Balbir and Dabau did not charge any interest on the loan. He calculates that this saved RSK interest of
$774,532. Interest was charged from April 2021 to December 2021, but even then
16 Second affidavit of Dabau Mindhro Kaur Singh-Heer affirmed 24 August 2022, at [5] and exhibit “D”.
only at a concessionary rate of 2 per cent per annum, totalling approximately $37,500. Interest is not currently being charged.
[40] Rupinder says that the payments being made by RSK to Balbir and Dabau are reimbursements for payments they had genuinely made on behalf of RSK and are authorised and appropriate.17 He argues that in any event, Sarbjit is now a signatory to the ASB Bank, so has visibility on all payments made by RSK and all such payments require her approval.
Further submissions from Balbir and Dabau
[41] Balbir and Dabau support Rupinder’s submissions. They add that they were never put on notice that there was any irregularity affecting the consent of RSK to the deed of agreement to mortgage. They say they believed that Sarbjit and Rupinder as the directors of RSK had waived their opportunity to obtain independent legal advice.
[42] Dabau has filed an affidavit in which she describes the written offer she and Balbir have made to purchase Sarbjit’s shares in RSK at a fair value, to be determined by an independent expert. The offer states that the valuation process will consider the market value of the land and improvements; and the fair value of the shares in accordance with a share valuation process set out in the written offer. Balbir and Dabau submit that the offer cures any unfairness to Sarbjit in relation to RSK, referring to Birchfield v Birchfield Holdings Ltd.18
Application to appoint an interim liquidator
[43] Although Sarbjit’s interlocutory application to appoint an interim liquidator refers to s 174, the application must be decided according to the legal principles developed in relation to s 246. Namely, there must be a valid winding-up application underway, the application must in all probability succeed, and it must be necessary and expedient for the purpose of maintaining the value of the assets of the company that an interim liquidator is appointed.
17 Affidavit of Rupinder Singh-Heer affirmed 23 June 2022 at [19]–[20] and further affidavit of Rupinder Singh-Heer affirmed 28 July 2022 at [3]–[4].
18 Birchfield v Birchfield Holdings Ltd [2021] NZCA 428.
[44] I do not consider that these preconditions are made. First, I am not satisfied that Sarbjit will in all probability succeed in having RSK placed into liquidation. The appointment of interim liquidators is a drastic remedy which should only be made if it is almost inevitable that the company would ultimately be put into liquidation.19 It is problematic that Sarbjit does not specify the ultimate relief she seeks in her substantive proceeding under s 174. That is, she does not specifically apply for the company to be placed into liquidation.
[45] It is possible that the Court may decide that any unfairness to Sarbjit can be addressed with some other form of relief. The compulsory purchase of an applicant shareholder’s shares by the other shareholders, or by the company, is a common type of relief granted by the Court under s 174. As noted, Balbir and Dabau offered to purchase Sarbjit’s shares in RSK at a fair value, to be determined by an independent expert. Sarbjit has said that she cannot consider that offer without the financial position of the company being independently verified. The Court has a wide discretion under s 174. Should it find that Sarbjit has been unfairly prejudiced or oppressed, it could, for example, order an independent audit of the company’s financial position (including the debt arrangements) before any share valuation is undertaken.
[46] In deciding what relief is just and equitable, the Court will consider the fact that Rupinder wants the business to continue and that the Te Aroha farm has operated, and is likely to continue to operate, profitably.20 When proceedings are brought under s 174, liquidation is a remedy of last resort. This is particularly where, as here, the company concerned is solvent, with a viable business that one of the shareholders wishes to continue.
[47] For these reasons, I am not satisfied that it is almost certain that RSK will be placed into liquidation when Sarbjit’s substantive s 174 claim is determined.
[48] Second, I am not satisfied that there is a need for interim control of the company to preserve the status quo pending determination of the substantive
19 See for example Green v Glenhaven Farm Ltd [2021] NZHC 1307 at [12]. See also Elders Pastoral Holdings v New Zealand Ostriches Ltd HC Auckland M2-99, 8 February 1999.
20 Cashflow forecast dated 4 August 2022, annexed as exhibit “RGR4” to the affidavit of Renee Gemma Ranger sworn 4 August 2022.
proceeding. There is no evidence that RSK’s assets are in jeopardy, or that the interests of creditors need to be safeguarded by appointing an interim liquidator. Balbir and Dabau are substantial creditors and want RSK to continue trading. Sarbjit does not argue that the company’s assets are in jeopardy. The issue of Dabau making withdrawals from the company account has been resolved by her removal as a signatory and all withdrawals requiring Sarbjit’s signature.
[49] Additionally, the powers that Sarbjit wants the interim liquidator to exercise go beyond those of an interim liquidator appointed under s 246 of the Act. The rights and powers of an interim liquidator appointed under s 246 are the rights and powers of a liquidator, but only to the extent necessary or desirable to maintain the value of assets owned or managed by the company. The Court may limit the rights and powers of an interim liquidator under s 246(3) but may not expand them. This Court has confirmed that interim liquidators are appointed to maintain the assets of the company and can only exercise their powers to that end.21 It is not the role of interim liquidators to investigate the historical affairs of a company or set aside historical transactions, which is what Sarbjit seeks in this case. That is the role of an investigative accountant (in relation to the former) or a liquidator proper.
[50] Compounding the fact that there is no urgent need justifying the appointment of an interim liquidator, the appointment is likely to have adverse consequences for RSK. It seems that Fonterra has the right to cancel RSK’s supply contract or take other actions if a liquidator is appointed to RSK. Further, RSK will incur the costs of a liquidator which will substantially erode Rupinder and Sarbjit’s modest equity in RSK.
[51] For these reasons, the application to appoint an interim liquidator is declined. The substantive proceeding for relief under s 174 of the Act should progress through to a hearing as soon as possible. As I have said, the Court hearing Sarbjit’s substantive claim may decide, in its discretion, to order the very kind of investigation that Sarbjit seeks before making any orders for final relief.
21 Re CBL Insurance Ltd (in liq) [2018] NZHC 2547, [2019] 2 NZLR 262 at [51].
Application to intervene
[52] Before addressing the parties’ submissions, I set out some further background relevant to Sarbjit’s application to intervene.
[53] As mentioned above, Balbir and Dabau’s summary judgment proceedings seek:22
(a)a declaration that the deed of agreement to mortgage is binding; and
(b)an order for specific performance requiring registration of a second mortgage in their favour over the Te Aroha farm.
[54] Prior to signing the deed of agreement to mortgage, on 14 July 2016, Sarbjit and Rupinder signed an agreement for sale and purchase of the Te Aroha farm from Sunsuraj, and associated directors’ resolutions. The purchase price was $7,246,343, made up of $6,539,293 for the land and improvements and $707,050 for the shares. The purchase was funded by a loan of $2,815,931 from ASB secured by a first ranking mortgage, the advance of $2,500,000 from Balbir and Dabau secured by an agreement to mortgage, and an advance of $1,930,412 from Rupinder also secured by an agreement to mortgage. The $1,930,412 was Rupinder’s share of the proceeds of the sale of a dairy farm at Piako Road, which Rupinder had jointly owned with Balbir and Dabau.
[55] Sarbjit and Rupinder signed the deed of agreement to mortgage as directors of RSK on 17 August 2016. Through that deed, they acknowledged receipt of $2,500,000 from Balbir and Dabau and agreed to repay the advance on demand. They agreed to pay interest on demand at the rural floating rate charged by ASB. They also agreed to charge the Te Aroha farm with payment of the principal and interest under the loan; and to, on demand, execute in favour of Balbir and Dabau a good and registerable memorandum of mortgage over the Te Aroha farm to secure payment of the principal and interest.
22 Statement of claim dated 14 April 2022.
[56] Sarbjit and Rupinder also signed an identical deed of agreement to mortgage to Rupinder for the $1,930,412 he advanced RSK to purchase the farm.
[57] Balbir and Dabau did not demand payment of any principal or interest until 10 March 2021. On that date, they gave notice to RSK that interest on the outstanding loan at a rate of 2 per cent per annum would be payable from 1 April 2021. This was the month that Sarbjit left Rupinder. On 23 March 2021, Balbir and Dabau registered a caveat against the title of the farm.
[58] Balbir and Dabau say that on 20 December 2021 they demanded RSK to give and execute the registerable mortgage, and that Sarbjit informed their solicitors that RSK was not bound to execute a registerable mortgage.
[59] Further, on 6 April 2022 their solicitors served on RSK an authority and instruction document which, when executed by RSK, would give their solicitors authority to register against the title a memorandum of mortgage. RSK did not execute that document. Balbir and Dabau filed their application for summary judgment.
[60] Rupinder has filed an appearance as director and 50 per cent shareholder of RSK. He states that he does not oppose Balbir and Dabau’s claim but reserves his rights.
[61] Sarbjit says the deed of agreement to mortgage is invalid for the reasons described above. She says that she should be granted leave to defend the summary judgment proceedings on behalf of RSK, with RSK meeting the costs of the defence which she estimates will not exceed $50,000.
[62] Rupinder opposes Sarbjit’s application to intervene. He submits that a prudent businessperson would not attempt to defend the proceedings brought by Balbir and Dabau, or bring a counterclaim against them, because the defence and counterclaim is unlikely to succeed. He submits that Sarbjit has not adduced any evidence that the loan was at an undervalue, substantially unfair, or disadvantageous to RSK. Rather, the deed of agreement to mortgage was advantageous to RSK and relatively
disadvantageous to Balbir and Dabau. They loaned $2.5 million to RSK interest-free, pending demand, and the loan was secured by second mortgage only.
[63] He submits that the absence of a formal special resolution of shareholders is immaterial, as the shareholders informally consented to the transactions when they signed the resolution as directors to enter into the transaction.
[64] Rupinder says that even if the defence and counterclaim did succeed, Sarbjit has not set out the relief that she seeks, and any such relief would be of minimal value and far outweighed by the costs of the proceeding.
[65] Relatedly, Rupinder submits that any relief obtained by RSK in challenging the farm loan is likely to be an unwinding of a series of transactions pursuant to which RSK acquired the Te Aroha farm. That would be to the detriment of RSK. He submits that Sarbjit is already pursuing separate relief under s 174 for the same matters and it is more appropriate that arguments are addressed under that application.
[66] In my view, the question of whether Sarbjit should be granted leave to intervene in the summary judgment proceedings is finely balanced.
[67] On the one hand, there is a compelling argument that a prudent businessperson would not attempt to defend the proceedings or bring a counterclaim against Balbir and Dabau. An interest-free loan that enabled RSK to purchase the farm appears to have been advantageous to RSK and in turn Sarbjit and Rupinder as shareholders. There is merit in Rupinder’s submission that if the deed of agreement to mortgage was to be declared invalid, the loan advance and therefore the sale and purchase of the farm from Sunsaraj to RSK would need to be unwound. Putting aside whether that is even possible now with the years that have passed, such an outcome would seem to be to RSK’s disadvantage.
[68] Yet against that are the following considerations which, viewed cumulatively, suggest that Sarbjit should be given the opportunity to test the circumstances surrounding the debt arrangement in Court. First, Sarbjit was undoubtedly a vulnerable person, being relatively new to the country, commercially unsophisticated
and with English as her third language. There is no evidence that she was advised on the implications of the documents she was asked to sign or encouraged to take independent legal advice. Her evidence, as noted, is that she did not understand what she was signing. Based on her evidence and that of Mr Jones, that should have been apparent to Balbir, Dabau, Rupinder and the lawyers involved.
[69] Second, there are aspects of the transaction that could be, based on the limited evidence presented to me, irregular. No party has adduced into evidence a loan agreement. There appears not to have been one, with the deed of agreement to mortgage purporting to record both the terms of the “loan” and the agreement to mortgage. Dabau’s evidence is that the actual transfer of funds “was effected by assignments of debts and journal entries in the financial accounts of the parties”.23 She attaches to her affidavit a summary of these assignments and journal entries. The records are not themselves in evidence. The “loan” and agreement to mortgage may well all be in order but there has been no independent examination of the records to date.
[70] Third, Rupinder’s submission that if the agreement to mortgage is set aside the advance from Balbir and Dabau must also be set aside may be an oversimplification. The “loan” and the agreement to mortgage are two separate matters, albeit in this case they seem to have been recorded in the same document. The loan was undoubtedly advantageous to RSK. But was the agreement to mortgage?
[71] Fourth, when the agreement to mortgage is considered in the broader context, the benefit of the arrangements to RSK and in turn Sarbjit as a shareholder are less obvious. As noted, the draft management accounts to 31 March 2021 record the net asset position of RSK as only $121,322 after the debts to ASB ($2,961,400), Balbir and Dabau ($2,500,000), and Rupinder ($2,219,395) are considered. RSK’s debt seems to have increased since it acquired the farm in 2016. The outcome of this is that despite having owned and worked the farm for around six years, without receiving any payment of substance for their work or services, the only equity RSK’s shareholders appear to have in the farm is attributable to its increase in value over that period.24
23 Affidavit of Dabau Mindhro Kaur Singh-Heer affirmed 11 April 2022 at [7].
24 Rupinder deposes that the capital value of the Te Aroha farm at 1 July 2021 was $6,912,000.
[72] The amount at stake is significant. Legal costs of up to $50,000 (as estimated by Sarbjit) are not disproportionate.
[73] For these reasons, I consider that Sarbjit should be given leave to intervene, for RSK, in the summary judgment proceeding. However, because of the clear overlap between the summary judgment proceeding and Sarbjit’s s 174 proceeding, both of which involve a consideration of the 2016 debt arrangements, I propose that the two proceedings be case managed and heard together. The alternative is that the summary judgment proceeding is stayed until the s 174 proceeding is determined. In the meantime, Balbir and Dabau’s equitable interest in the farm arising out of the agreement to mortgage is protected by their caveat. I invite counsel to indicate their views on the alternative pathways.
[74] The Act requires the Court to order that interveners’ costs be met by the company unless it would be unjust or inequitable.25 There is a presumption that a shareholder’s derivative action will be indemnified unless it would be unjust or inequitable.26 Sarbjit is presently legally aided. She estimates a cost of $50,000 to intervene.
Result
[75] Sarbjit’s interlocutory application for the appointment of an interim liquidator is dismissed.
[76] I grant Sarbjit leave to intervene in the summary judgment proceeding to defend the proceeding on behalf of RSK.
[77] I order RSK to indemnify Sarbjit for the legal costs she incurs for RSK in defending the summary judgment proceeding, up to $50,000, subject to further order of the Court.
25 Companies Act 1993, s 166.
26 Rodney Craig and others Morison’s Company Law (online ed, LexisNexis) at [36.11] (noting that s 166 places a clear onus on the respondent to satisfy that the Court that it would be unjust or inequitable for the company to bear the costs).
[78] I direct the parties to confer and file a joint memorandum within 10 working days proposing the next procedural directions to progress the s 174 proceeding and the summary judgment proceeding to hearing. The memorandum should address the suggestion that the two proceedings should be case managed and heard together, or, in the alternative, the summary judgment proceeding is stayed until the s 174 proceeding is determined. Any differences between the parties should be set out in the memorandum.
Associate Judge Gardiner
Solicitors:
Braun Bond & Lomas Ltd, Hamilton McKenna King Dempster, Hamilton
Clancy Fisher Oxner & Bryant, Putaruru M J Fisher / J T Yoon, Auckland
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