Kim v Pink Nails Limited HC Hamilton CIV 2009-419-1472

[2010] NZHC 1446

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2009-419-1472

BETWEEN  SANG HEE KIM Plaintiff

ANDPINK NAILS LIMITED AND SOON TAK HAN

Defendants

Hearing:         10 and 11 August 2010

Appearances: Mr G L Wilkin and Ms Baek for plaintiff

Mr J A MacGillvray for defendants

Judgment:      11 August 2010

(ORAL) JUDGMENT OF LANG J

[on application for orders under s 174 Companies Act 1993]

Solicitors:

Mr G L Wilkin, Hamilton

Tompkins Wake, Hamilton

KIM V PINK NAILS LTD AND ANOR HC HAM CIV-2009-419-1472  11 August 2010

[1]      The  plaintiff,  Mr  Kim,  and  the  second  defendant,  Mr  Han,  are  the shareholders of the first defendant, Pink Nails Limited.  They each hold fifty per cent of the shares in the company.  Mr Han is the sole director of the company.

[2]      On  or  about  1  August  2009  Pink  Nails  sold  the  two  businesses  that  it operated to a third party, Mansung Company Limited, for the sum of $50,000.  Mr Han received all of the proceeds of sale.  Mr Kim received nothing from the sale of the company’s assets.

[3]      In this proceeding Mr Kim contends that in conducting the affairs of the company in the way that he did, Mr Han caused the company to act in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to him in his capacity as a shareholder.   He asks the Court to exercise its powers under s 174(2) of the Companies Act 1993 to make an order requiring Mr Han to acquire his shares in the company for  the  sum  of $25,000,  being one  half  of  the  amount  for  which  the company sold its assets.   Alternatively, he seeks an order that Mr Han pay compensation to him in the sum of $25,000.

[4]      Mr Han denies that he has caused the company to act in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to Mr Kim’s interests as a shareholder.  He contends that he and Mr Kim expressly agreed that he, Mr Han, was to receive the whole of the sale price that the company received for its businesses.  In return, he was to transfer his shares in the company to Mr Kim.

[5]      In order to understand the issues that the proceeding raises, it is necessary to briefly refer in greater detail to the factual background.

Factual background

[6]      Pink Nails has operated a nail boutique from premises that it leased in the Chartwell Shopping Centre for some years.  In 2008 Mr Kim and Mr Han decided to open another boutique in Ward Street, Hamilton and the company entered into a further lease of premises there for that purpose.

[7]      Mr Kim and Mr Han have not, however, always been the shareholders in the company.   Originally, it appears that Mr Kim was the sole shareholder in the company.    Because  he  was  a  foreign  national,  he  could  not  be  the  company’s director.  For that reason another person, a Mr Ko, was recorded as the company’s director and he also owned shares in the company.  It is clear, however, that at all material times Mr Kim acted as a defacto director during this period notwithstanding the fact that Mr Ko was officially appointed as the company’s director.

[8]      In or about February 2008 Mr Han acquired one-third of the shares in the company, with the remaining two-thirds being held equally by Mr Kim and Mr Ko.

[9]      Later in 2008 Mr Ko resigned from the company and transferred his shares to Mr Kim and Mr Han in equal proportions.  Thereafter, Mr Kim and Mr Han each owned 50 per cent of the company.

[10]     When Mr Kim and Mr Han decided to open the shop in Ward Street the company required further capital to meet set-up costs.  Although Mr Kim disputes this fact, it seems clear that Mr Han assisted the company at this time by advancing it the sum of $40,000.  That fact is demonstrated by bank statements showing the funds being withdrawn from Mr Han’s bank account and deposited to the company’s bank account.  The advances are also recorded in the company’s financial statements for the year ended 31 March 2009 by way of a credit to Mr Han’s current account.

[11]     By the middle of 2009 the relationship between Mr Kim and Mr Han had become strained.  For that reason Mr Han indicated to Mr Kim in May 2009 that he wanted to sell his shares back to him.  He instructed his solicitor, Mr John Wiltshire of Beattie Rickman Legal, to prepare documentation recording the transfer of the shares to Mr Kim in consideration for a payment in the sum of $50,000.  Mr Han says that Mr Kim agreed to this price, but Mr Kim denies that that was the case.  He says that he had not seen the company’s records for some time because Mr Han controlled everything to do with the company’s day to day operations.  As a result, Mr Kim says that he was not in a position to agree to any purchase price until he had had an opportunity to consider the company’s financial position as disclosed by its records.  It is not necessary, however, to resolve this particular dispute because it is

common ground that Mr Kim never signed the documents and the sale of the shares did not proceed in accordance with the documents that Mr Wiltshire prepared.

[12]     The sale of the company’s two businesses occurred as a result of a meeting held at the offices of Beattie Rickman Legal on or about 29 July 2009.  Present at that meeting were Mr Kim, Mr Han and a person called Mansung Kim, to whom I shall refer for convenience as Mansung.   Mansung’s wife worked with Mr Kim’s wife at one of the shops that the company operated.  Mr Kim said that he had not invited Mansung to join him that day and that Mr Han must have done so.  Mansung confirmed that that was the case.   Mr Han, on the other hand, denied being responsible for Mansung’s attendance at the meeting.

[13]     On balance, I prefer the evidence of Mr Kim and Mansung on this point.  It also accords with Mr Wiltshire’s impression, gained as a result of an earlier meeting with Mr Han when he discussed the documents that he had prepared on Mr Han’s behalf with him, that the issue of whether or not the transfer of shares was to proceed needed to be further considered in the light of Mansung’s possible involvement. This suggests that both Mr Wiltshire and Mr Han knew early in July 2009 that Mansung might be interested in purchasing one or both of the businesses, and that this possibility could overtake the proposed share transfer to Mr Kim.

[14]   During the meeting at Beattie Rickman Legal on 29 July most of the conversation between Mr Han, Mr Kim and Mansung was conducted in Korean.  Mr Kim speaks very little English, and he was therefore unable to converse with Mr Wiltshire at all.  As a result, Mansung spoke to Mr Wiltshire on Mr Kim’s behalf. Both Mansung and Mr Kim have a good grasp of English, and they were able to provide Mr Wiltshire with a clear set of instructions arising out of the discussions that Mr Han, Mr Kim and Mansung held in Mr Wiltshire’s office.   Mr Wiltshire described these as follows:

6.After some discussions in Korean between the parties, it was indicated to me that while Mr Kim still wanted to purchase the 600 shares from Mr Han, Mr Kim then wanted to transfer the business to Mansung Kim’s company, Mansung Limited.   I was unaware of the nature of the relationship between Mr Kim and Mansung Limited.

[15]     The three men also wanted Mr Wiltshire’s firm to act for all of them in relation to the transaction.  Mr Wiltshire believed that Mr Kim and Mansung needed to  take  independent  advice  but  he  said  that  they  were  determined  that  Beattie Rickman Legal should act for all parties.   Mr Wiltshire therefore endeavoured to meet their request but ameliorate the possibility of any conflict of interest arising by asking another member of his firm, Mr Truman Wee, to act on behalf of Mansung in relation to the purchase of the businesses.  After taking instructions from Mansung, Mr  Wee  drafted  an  agreement  for  sale  and  purchase  providing  for  Mansung Company Limited to acquire the two nail boutiques from Pink Nails for the sum of

$50,000.

[16]     Mansung said in evidence that his wife wanted to acquire a nail boutique.  He had originally only intended to acquire the Ward Street boutique, and he had earlier made an unsuccessful offer to Mr Han to acquire this business for the sum of

$20,000.  During the meeting at Beattie Rickman Legal, however, he was presented with the opportunity to acquire both shops for the sum of $50,000.  He considered that this was too good an opportunity to refuse.   For that reason he and his wife signed the agreement that Mr Wee prepared as directors of their company, Mansung Company Limited.   The agreement provided for Mansung Company Limited to acquire both businesses, together with stock and goodwill, for the sum of $50,000. Mr Han later signed the agreement in his capacity as the director of Pink Nails.

[17]     Mr Wiltshire described his understanding of the agreement as follows:

10.    The agreement was subsequently drafted and executed on or about 28

July 2009.   It certainly appeared to me that the understanding of all parties was that although the sale was a sale by Pink Nails of its business, Mr Han would be receiving the $50,000.00 as the sale to Mansung Limited incorporated was effectively the sale of his shares in the business to Mr Kim’s nominated interests without the intermediate step of the actual share sale taking place.

[18]     Mr  Wiltshire’s  firm  did  not  act  on  the  completion  of  the  transaction. Although the landlords of the two premises did not consent to the assignment of the leases to Mansung Company Limited until some time later, Mansung paid the sum of

$50,000 directly into Mr Han’s private bank account on 1 August 2009.  He said that

he did that on Mr Han’s express instructions.  Mansung then took over the operation of the two shops immediately.

[19]     It is common ground that Mr Kim has never received any of the money that Mansung Company Limited paid to acquire the two businesses that Pink Nails sold to it.   Moreover, Mr Han has remained the director of Pink Nails and has also retained his shareholding in that company.  The company’s only assets of any value were its two businesses.  The sale of those businesses meant that the company ceased to trade and effectively became a worthless shell.

[20]     Before leaving the background facts it is necessary to mention one further issue.    Mr  Han’s  position  is  that  he  had  nothing  at  all  to  do  with  introducing Mansung as a possible purchaser of the businesses and that this was all Mr Kim’s doing.  He believes that Mr Kim arranged for Mansung to become involved because Mr Kim’s status as a foreign national meant that he could not be a director of Pink Nails.  It was for that reason that the transaction took the form of a sale of the two businesses rather than the transfer of Mr Han’s shares to Mr Kim.  The transaction was structured in that way so that Mansung would be the director of the company that owned the two businesses whilst Mr Kim remained in the background as the sole shareholder.

[21]     I accept that there was some discussion at the meeting about the fact that Mr Kim’s status meant that he could not be a director of a New Zealand company.  Mr Wiltshire also gained the impression that Mr Kim and Mansung knew each other and that they appeared to have some business association or relationship with each other. He presumed that Mr Kim had entered into some form of arrangement with Mansung whereby Mr Kim would be meeting or contributing to the purchase price that Mansung was ostensibly to pay for the two businesses.

[22]     It is not possible, however, for me to say that the sale was a sham or that it did not proceed according to the terms set out in the agreement for sale and purchase that the parties signed.  Mansung is adamant that Mr Kim did not contribute to the purchase price and that he (Mansung) funded the purchase from his own resources. He is also insistent that Mr Kim holds no interest whatsoever in Mansung Company

Limited.   There is no evidence to suggest that Mansung’s evidence in relation to these issues is incorrect, and I would have no basis for rejecting it.  I therefore find that the sale of the two businesses was a bona fide and arms length transaction between Pink Nails and Mansung Company Limited.

[23]     Against that background it is appropriate to consider Mr Kim’s claim.

Mr Kim’s claim

[24]     The statement of claim can charitably be described as sparsely in the extreme. Most of the pleadings are devoted to complaints regarding the fact that Pink Nails never held an annual meeting and that Mr Han has ignored Mr Kim’s requests for a copy of the annual report and financial statements of the company.  Those particular claims are no longer pursued.

[25]     The only remaining pleading in the statement of claim reads as follows:

MAJOR TRANSACTION

13THE defendant company carried on two businesses.   One is Pink Nails in Hamilton Central and the other one is Pink Nails in Chartwell shopping mall.

14ON or about 29 July 2009, the defendant company entered into an agreement  to  sell  both  of  its  business  with  a  consideration  of

$50,000.00.

15     FROM 1 August 2009, the company ceased its trading.

16THE plaintiff has never received any dividends after the company ceased its trading.

CONCLUSION

17THE plaintiff never received an annual report or financial statement of the defendant company, so that he has very limited understanding and knowledge of the management of the company.

18THE plaintiff never had an opportunity to discuss or make a comment on the management of the company.

THEREFORE the plaintiff claims that acts of the defendant company and the second defendant have been conducted in a manner that is unfairly prejudicial to the plaintiff in the plaintiff’s capacity as a shareholder of the company.

[26]     This aspect of the statement of claim is extremely poorly worded.  I conclude, however, that the gist of the claim is a complaint by Mr Kim that the company entered into a major transaction in which it sold both of its businesses for the sum of

$50,000 and then paid the entire sale proceeds to Mr Han.  Mr Kim received nothing following the sale and the company then ceased to trade.  It is in this context that Mr Kim contends that the company acted in a manner that was unfairly prejudicial to him in his capacity as a shareholder of Pink Nails. For this reason Mr Kim seeks orders under s 174(2) of the Act.

[27]     This leads to a consideration of whether ss 174 and 175 of the Act apply to the sale of the company’s assets to Mansung Company Limited.

Do ss 174 and 175 of the Companies Act 1993 apply to the sale of the company’s assets to Mansung Company Limited?

[28]     Section 174(1) of the Companies Act 1993 provides as follows:

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.

…

[29]     Section 175 of the Act deems certain conduct to be unfairly prejudicial for the purposes of s 174.   This includes, under s 175(1)(l), a failure to comply with s 129  of  the  Act,  which  relates  to  major  transactions.    Section  129  prohibits  a company from entering into a major transaction unless the transaction is approved by a special resolution or it is contingent on approval by a special resolution.  A major transaction  is  defined  under  s  129(2)(b)  as  including  any  disposition  of  the company’s assets where the value of those assets represents more than half the value of the company’s assets before the disposition.

[30]     In the present case there can be no doubt that the agreement to sell the company’s assets to Mansung Company Limited amounted to a major transaction for Pink Nails.  As at 31 March 2009 Pink Nails owned assets totalling $131,917.  These included stock on hand ($1,300), property, plant and equipment ($47,785) and goodwill ($70,000).  All of those assets, together having a total value of $119,085 were  disposed  of  when  the  company sold  its  businesses  to  Mansung  Company Limited.   There is nothing to suggest that the values of the company’s plant, equipment, goodwill and stock were materially different as at 1 August 2009

[31]   It is also common ground that the company did not comply with the requirements of s 129(1) when it entered into the agreement.  For that reason there has been a breach of s 129(1).  This means that the act of the company in disposing of the businesses is presumed to be unfairly prejudicial to Pink Nails’ shareholders in terms of s 175(1)(l).

[32]     Counsel for Mr Han accepted that this was the end result of the failure to comply with s 129 notwithstanding the fact that Mr Kim expressly consented to the transaction  that  the  company entered  into.    I  consider that  this  concession  was properly made, because the wording of the section suggests that any conduct of the type referred to in the section creates an irrebuttable presumption.  I accept, however, that whether or not Mr Kim expressly consented that the transaction is relevant to the issue of whether or not to grant relief and if relief is granted, the form of that relief.  I therefore need to issue the address the issue of whether or not Mr Kim expressly consented to Mr Han receiving all of the proceeds of sale.

Did Mr Kim expressly consent to Mr Han receiving all of the proceeds of sale?

[33]     Apart from the evidence given by Mr Han himself on this point, the strongest support for his claim comes from Mr Wiltshire.  He was under the clear impression, based on what he was told at the meeting, that Mr Han would be receiving all of the sale proceeds.  That impression needs to be viewed, however, in light of the fact that Mr Kim speaks no English.   As a result, he was not in a position to speak to Mr Wiltshire about his understanding of the arrangement.  Mr Wiltshire must therefore

have gained his impression from what he was told by Mr Han or Mansung, both of whom spoke reasonable English.

[34]     Mr Han had an obvious interest in ensuring that Mr Wiltshire understood that the sale proceeds were to be paid to him.  Mansung, on the other hand, had no real interest in that particular issue.  How the purchase price was to be paid was not a matter that concerned him in any way directly.  For this reason I consider that it is much more likely that Mr Wiltshire’s impression regarding this issue must have had its source primarily in what he was told by Mr Han, for whom he had been acting from the outset.

[35]     My conclusion on this point is strengthened by the fact that the effect of the transaction was that the company divested itself of all of its assets with no net return to Mr Kim.  The question that immediately arises is why Mr Kim would consent to that occurring.

[36]     Mr Kim was certainly in a different position to that of Mr Han so far as his current account with the company was concerned.  As at 31 March 2009, Mr Kim’s current account was overdrawn in the sum of $25,678, whereas Mr Han’s current account was in credit to the tune of $22,105.  That fact does not of itself, however, explain why Mr Kim would have been prepared to see the entire net proceeds of the sale of all of the company’s assets paid to Mr Han.

[37]     I consider that it is far more likely that, as he said in his evidence, Mr Kim had an expectation that, although the proceeds were to be paid initially to Mr Han, he (Mr Kim) would eventually receive an appropriate share of them.   Unfortunately, that has proved not to be the case.  I therefore find that Mr Kim did not expressly consent to Mr Han retaining for his own benefit all of the proceeds of sale.  I need to bear that factual finding in mind when I consider the issue of relief.

[38]     The issue that now needs to be determined, given the fact that Mr Kim has succeeded in establishing unfairly prejudicial conduct, is what, if any, the relief the Court should grant.

What relief is appropriate?

[39]     Section 174(2) of the Act provides the Court with a wide discretion to grant relief.  It provides as follows:

(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.

[40]     Counsel have referred me in this context to a judgment of Morris J in Jordan v Chemical Specialties Ltd & Anor HC Auckland M.1371/96 December 1998 in which His Honour referred with apparent approval to the principles under which the Court should act set out in Morrison Company & Securities Law at para 37.9.  In the case  before  him  Morris  J  considered  that  he  needed  to  take  into  account  the following factors:

1.     The purpose of the remedial relief is not punitive but remedial;

2.Any order should be directed clearly to provide a remedy of an appropriate character;

3.The Court should be wary of intervening in the management of the company to any extent greater than is strictly necessary to provide the appropriate remedy;

4.The Court has a very broad discretion to select the remedy appropriate to the situation before it and to not hesitate to be creative and flexible in fashioning a remedy to fit the case.

[41]     In the present case, counsel for Mr Kim’s primary submission was that the Court should exercise its power under s 174(2)(b) to require Mr Han to pay Mr Kim the sum of $25,000, being one half of the value of the sale proceeds that Mr Han received.   He submits that that would take account of the expectations of both parties, and that the company should then be left to its own devices.  He submitted that it was not necessary for the Court to go any further than that in tailoring the orders that it should make under s 174.

[42]     In my view, this is a solution that is far too simplistic.  It also ignores the fact that,  as  at  31  March  2009,  Mr  Kim’s  current  account  in  the  company  was significantly overdrawn whilst Mr Han’s current account was significantly in credit. In my view, the remedy suggested on behalf of Mr Kim would run the very real risk of providing Mr Kim with a significant windfall to which he would not otherwise have  been  entitled  under  the  usual  principles  applicable  when  the  assets  of  a company are distributed after it ceases to trade.

[43]     The reality in the present case is, however, that Mr Han has acted in a manner that has put his own interests above that of the company.  It became clear during his evidence that he had no appreciation whatsoever of the duties that he owed to Pink Nails as its sole director.  It is equally clear that his focus throughout this transaction was based solely on his desire to obtain the sum of $50,000 for his shares in the company.  Notwithstanding the fact that he has received all of the sale proceeds, he has taken no steps since 1 August 2009 either to resign as a director or to transfer his shares to Mr Kim.

[44]     Moreover, Mr Han appears to have had no concern at all about the fact that the transaction meant that the company was divesting itself of almost its entire asset base.  He viewed the documentation regarding the sale of the company’s assets as being matters of form only, and he considered that the substance of the transaction related solely to the sale of his shares to Mr Kim.

[45]     In the present case I consider that the most appropriate form of remedial relief is to make an order under  s 174(2)(g) placing the company in liquidation. That

will have a number of benefits for both parties. Moreover, unless such an order is made there is no way that the company’s affairs will ever be placed in order.

[46]     One obvious benefit for Mr Han is that the liquidator can investigate the propriety of the sale to Mansung Company Limited further if he wishes that to be done.  From Mr Han’s perspective liquidation will also enable the liquidator to take steps to recover Mr Kim’s overdrawn current account.  On the other side of the coin, Mr Kim may benefit from steps that the liquidator may take to recoup the sale proceeds from Mr Han.  Thereafter the liquidator will be able to meet all outstanding debts and distribute any balance to Mr Kim and Mr Han in their respective capacities as shareholders.

[47]     The reality of the position, however, may be very different.  If the parties take time to consider the likely effect that liquidation will have for them, they may reach the conclusion that resolution of all outstanding issues between them may be better served by a solution other than liquidation.  This is particularly the case given the fact that I have been informed from the bar that Mr Han has been obliged to meet rental that the company was obliged to pay in respect of one of the shops after Mansung Company Limited vacated it a short time after taking occupation.  It may be that the amount of rental that Mr Han has paid on the company’s behalf will offset entirely the value of the sale proceeds that he received when Pink Nails sold its businesses.

[48]     I consider that I need to tailor my order to give the parties some time to consider their respective positions before the order placing the company into liquidation takes effect.

Result

[49]     The  application  is  granted.    I  make  an  order  under  s  174(2)(g)  of  the Companies Act 1993 placing the company into liquidation.  The Official Assignee is appointed liquidator.   That order is to lie in Court and is not to take effect until Friday 20 August 2010 at 12 noon.

[50]     If counsel file a joint memorandum prior to that time seeking alternative orders by consent, I will vacate the order placing the company in liquidation and make those orders by consent.

Costs

[51]     Counsel for Mr Kim seeks costs on the basis that his client has succeeded in large part.  Counsel for Mr Han opposes this and submits that costs should lie where they fall because many of the pleaded matters have been abandoned and overall the parties may well be in a neutral position.

[52]     I take the view that Mr Kim has succeeded in establishing his primary cause of action and has also persuaded the Court that relief should be granted.   For that reason I award costs to Mr Kim on a Category 2B basis together with disbursements as fixed by the Registrar.

Lang J