Kyle v Huapai Enterprises Limited

[2014] NZHC 1981

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-002685 [2014] NZHC 1981

BETWEEN

KYLE KYLE

Plaintiff

AND

HUAPAI ENTERPRISES LIMITED First Defendant

DEAN BARRINGTON BENJAMIN HERRING

Second Defendant

Hearing:	20 August 2014
Appearances:	S H Barter for plaintiff No appearance for defendants
Judgment:	20 August 2014

(ORAL) JUDGMENT OF ANDREWS J [Formal proof]

KYLE v HUAPAI ENTERPRISES LTD & ANOR [2014] NZHC 1981 [20 August 2014]

Introduction

[1]      The plaintiff has applied for judgment by formal proof in his proceeding against the first and second defendants, after the defendants’ statement of defence was struck out after they failed to take any further steps in the proceeding.

[2]      The plaintiff has provided affidavit evidence which establishes the causes of action relied on, and quantifies the damages sought.  Written submissions have been filed on behalf of the plaintiff, and Mr Barter made oral submissions.

Background

[3]      The first defendant company, Huapai Enterprises Ltd (HEL) is a property investment company.

[4]      HEL was established in 1966 by Mr Barrington Herring.   He was the sole shareholder  and  director  until  his  death  in  2009.    Upon  his  death,  HEL  was transferred to his two children, Andrea Herring and Dean Herring (Mr Herring, the second defendant).  In 2011, Andrea Herring transferred her share in the company to her trust, the Andrea Herring Family Trust (the trust)

[5]      Andrea Herring died in April 2012.   The plaintiff, Mr Kyle was appointed executor of her estate and sole trustee of the trust.  As such, Mr Kyle holds 50 per cent of the shares in HEL.   The assets of the company include two commercial properties at 156B and 156F Main Road, Kumeu.

[6]      After becoming a director of HEL, Mr Herring effectively took control of its assets for his own personal benefit.   By way of brief summary, he occupied both properties without accounting to HEL for any rental for that use.   He failed to authorise Mr Kyle as a signatory to the accounts notwithstanding having agreed to do so at a shareholders’ meeting.   He paid himself wages without the consent of Mr Kyle who was also a director of HEL, and he took drawings of $45,300, without justification.

[7]      Finally, Mr Herring sold the property at 156B Main Road, and transferred the property at 156F to himself.  He paid Mr Kyle $725,962.31, being the net proceeds of  the  sale  of  156B.    The  difference  between  the  value  of  the  two  properties,

$96,091.95 is now being held by Mark Harrison, solicitor.

Mr Kyle’s claim

[8]      Mr Kyle claims that  Mr Herring has conducted the affairs of HEL in a manner that is aggressive, unfairly discriminatory, or unfairly prejudicial, such that he is a prejudiced shareholder in terms  174 of the Companies Act 1993.  He seeks an order that Mr Herring pay certain sums to the company, pursuant to subs (2)(b) and an order to liquidate HEL pursuant to subs (2)(g).

[9]      In Latimer Holdings Ltd v SEA Holdings NZ Ltd, the Court of Appeal said of s 174:1

The operative words of the provision express a general principle which is

directed to “an unjust detriment to the interests of a member of the company”

… That test is an objective one.  The provision may be prayed in aid even if

the conduct accords with the company’s constitution, because even then inappropriate  prejudice  may  still  arise.    Relief  can  be  given  even  if  the conduct complained of does not involve a want of good faith or a lack of probity.  The fact that al members are treated uniformly as members will not necessarily make conduct fair.  The reasonable expectations of members are distinctly  relevant  –  though  this  factor  is  not  in  and  of itself  necessarily determinative – and those expectations are not necessarily restricted to purely “internal”, or “formal” expectations.  There are no fixed categories of cases to which s 174 apply. The provision is one of general application.

[10]     A  similar  section  to  s 174  in  the  equivalent  English  statute  has  been interpreted as including the situation where the respondent:2

… had been unscrupulous in his use of the company’s money, that he had indeed used it for his personal benefit and for the benefit of his family and friends, and that his conduct in that respect had been unfairly prejudicial to the interests of the petitioners...

[11]     The plaintiff alleges that Mr Herring has conducted the affairs of HEL in an oppressive, unfairly discriminatory or unfairly prejudicial way by:

1      Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 at [113].

2      Re Elgindata Ltd [1991] BCLC 959 (ChD).

(a)       Failing to keep Mr Kyle informed as to the financial affairs of the company;

(b)      Failing to account to HEL for the units he occupied;

(c)       Failing to account for rental paid by tenants in other units;

(d)      Depriving Mr Kyle of any share of the income from HEL; and

(e)       Using HEL’s funds for his own benefit.

[12]     These claims are supported by affidavit evidence.   I am satisfied that they amount to oppressive or unfairly prejudicial conduct because they involve a director (Mr Herring) taking an unfair share of the money of the business and depriving a substantial shareholder (Mr Kyle) of a fair share of the income of the business.

Quantum of compensation

[13]     Mr Kyle seeks an order that Mr Herring pay a total of $341,973 by way of compensation to HEL. This sum comprises the following:

(a)       Rental for the unit he occupied at 156B Main Road from September

2009 to September 2013: $68,291.

(b)      Rental for his use of the unit at 156F Main Road for the period from

September 2009 to September 2013: $68,749.

(c)       The rental which was not accounted for from other tenants at 156B Main Road: $125,439.

(d)      The unapproved wages paid to Mr Herring: $34,194.

(e)       The unapproved drawings made by Mr Herring: $45,300.

[14]     The  question  in  making  an  order  under  s 174  is  whether  it  is  just  and equitable to do so.3   The Court’s typical response to a claim under s 174 is to require the defendant to buy out the applicant’s shares.  In this case, however, Mr Herring’s actions have significantly devalued HEL.  As such, an order that Mr Herring buy out Mr Kyle’s shares would not adequately resolve the wrong.  An order must be made which repairs the actual harm done – the devaluing of Mr Kyle’s interest in HEL.

[15]     While it might have been reasonable to make an allowance for reasonable wages for Mr Herrings management of the company, there is no basis (such as an employment contract, or other agreement) on which such an order could be made. It is clear that there has been no approval given, and there is no other justification for, the drawings taken by him.  Accordingly. I have concluded that an order should be made that Mr Herring must reimburse those payments.   Further, an order must be made that Mr Herring reimburses HEL for the benefits he has obtained and rental not accounted for.

Additional orders

[16]     Mr Kyle also seeks an order to put HEL into liquidation and to appoint Simon Dalton  and  Matthew  Kemp  as  liquidators.  He  further  seeks  an  order  requiring Mr Harrison, solicitor, to pay the funds he holds on behalf of HEL to the liquidators.

[17]     It is clear that neither Mr Kyle nor Mr Herring wish to continue operating HEL.  Therefore, there is issue with making an order to liquidate HEL, and I will so order.   Further to the order for liquidation, I order that all of HEL’s property be transferred to the liquidators. That will of course include funds held by Mr Harrison.

[18]     At this stage, I order that Mr Herring is to pay compensation to HEL in the sum of $341,973, as follows:

(a)       Rental for 156B Main Road from September 2009 to September 2013:

$68,291.

3      Vujnovich v Vujnovich [1988] 2 NZLR 129 (CA).

(b)      Rental for his use of the unit at 156F Main Road for the period from

September 2009 to September 2013: $68,749.

(c)       The rental which was not accounted for from other tenants at 156B Main Road: $125,439.

(d)      The unapproved wages paid to Mr Herring: $34,194.

(e)       The unapproved drawings made by Mr Herring: $45,300.

[19]     I also make an order that HEL be wound up, and that Simon Dalton and

Matthew  Kemp  be  appointed  liquidators.     This  order  is  timed  at  12 noon  on

20 August 2014.  Any property of HEL held by any other person is to be transferred to the liquidators.

[20]     Costs in the proceeding are sought against Mr Herring, on an indemnity basis.  Mr Barter is to file a memorandum within seven days, setting out both 2B

scale costs and his claim for indemnity costs, together with claimed disbursements.

Andrews  J