Latumbo v Pacific Auto Carrier (NZ) Ltd
[2018] NZHC 2773
•25 October 2018
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV 2018-419-45
CIV 2018-419-113 [2018] NZHC 2773
UNDER The Companies Act 1993 IN THE MATTER
Of an application for leave to bring a derivative action
AND
IN THE MATTER
Of an application for summary judgment
BETWEEN
MELANIE ELEANOR LATUMBO Plaintiff
AND
PACIFIC AUTO CARRIER (NZ) LIMITED First Defendant
continued over…
Hearing: 10 May 2018 Appearances:
M D Branch & K Shaw for Plaintiff
J Gurnick for First Defenant
J A MacGillivray & S Jass for Second & Third DefendantsJudgment:
25 October 2018
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 25 October 2018 at 3.30pm
Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
Solicitors:
Harkness Henry, Hamilton
Guernell Harrison Law LtdTompkins Wake
LATUMBO v PACIFIC AUTO CARRIER (NZ) LIMITED [2018] NZHC 2773 [25 October 2018]
continued from previous page…
AND RENATA IMMANUEL KAHUROA
Second Defendant
AND
HOHUA WARREN HEMI Third Defendant
Introduction
[1] Melanie Latumbo is a financial controller employed by a Philippines company, iCOMM International Inc (iCOMM), which provides back-office services to related companies in Japan and New Zealand. Ms Latumbo has commenced two proceedings that raise the issue of whether Ms Latumbo is a director of Pacific Auto Carrier (NZ) Ltd (PAC), one of the companies to which iCOMM provides services.
[2] The first proceeding, filed on 13 February 2018, is an application for leave for Ms Latumbo to bring a derivative action on behalf of PAC against Renata Kahuroa, a director of PAC, and Hohua Hemi, who Ms Latumbo alleges is a deemed director of PAC, in respect of transactions made in the name of PAC which Ms Latumbo alleges were in breach of ss 131 and 134 of the Companies Act 1993. Subsequently,
Ms Latumbo filed an amended draft statement of claim that would join two other defendants, LOFA Trustees Ltd (LOFA) and NPLH (NZ) Ltd (NPLH). Mr Hemi acknowledges that LOFA is his family trust and is the beneficial owner of NPLH.
[3] The second proceeding, filed on 9 April 2018, seeks a declaration by summary judgment that Ms Latumbo is a director of PAC and ancillary orders with respect to
Mr Kahuroa and Mr Hemi.
[4] Notwithstanding the sequence in which the proceedings were filed, it is appropriate to deal first with the application for summary judgment – which was how the hearing proceeded on 10 May 2018. I granted an abridgment of time to enable the summary judgment proceeding to be heard that day.
[5] PAC took no active part in the hearing and indicated it would abide the Court’s decision. Counsel for Mr Kahuroa and Mr Hemi made the case in opposition to the applications by Ms Latumbo.
[6] The issues in both proceedings are relatively confined. However, they need to be understood within the wider business context in which they arise.
Relevant factual background
The Hemi-Stone business enterprise
[7] PAC is one of a number of companies in a business enterprise established by Mr Hemi and Mr Robert Stone approximately 28 years ago in Japan for exporting used Japanese motor vehicles to New Zealand and other countries. Mr Hemi states in his affidavit sworn on 2 April 2018 that the business partnership has been and continues to be very successful. He also says that until around 10 years ago there was a high level of trust between himself and Mr Stone and this was reflected in the fact they have no formal partnership agreement and no shareholder agreements for the entities that make up their business.
[8] The various entities and how they are owned are shown in a corporate structure diagram in an exhibit to Mr Kahuroa’s affidavit sworn on 4 April 2018. Mr Hemi makes extensive reference to the corporate structure diagram in his affidavit. While
Mr Stone, in his affidavit sworn on 23 April 2018, takes issue with aspects of
Mr Hemi’s description of how their business operates or was intended to operate, he does not challenge the accuracy of the corporate structure diagram except in one minor respect concerning the basis on which Mr Stone’s partner in the Philippines, Ms de Sousa Fernandez, holds her interest in one entity in the enterprise, Autoterminal International Ltd (ATI).
[9] The main vehicle through which Mr Hemi and Mr Stone operate their business interests is a company Mr Hemi and Mr Stone incorporated in Japan and whose current name is IBC Japan Co Ltd (IBC). Mr Hemi and Mr Stone each owns 50 per cent of the shares of IBC. Mr Hemi, Mr Hemi’s wife, and Mr Stone are directors of IBC, and Mr Stone is the Representative Director. As Representative Director, Mr Stone is effectively the chief executive officer of IBC.
[10] Mr Stone says that as Representative Director of IBC he has operational control of IBC. However, not all of the entities that make up the enterprise are subsidiaries of or directly connected with IBC. For example, according to the corporate structure diagram, there is no relationship between IBC and ATI except through the ownership interests of Mr Stone and Mr Hemi. Nonetheless, according to the corporate structure
diagram, Mr Hemi and Mr Stone, either directly or through entities or nominees they own or control, control most of the entities within their enterprise on a 50/50 basis. Mr Hemi says this reflected their initial intention that they would be 50/50 partners in everything they did together. Mr Stone emphasises the distinction between his role as Representative Director and Mr Hemi’s interests as a shareholder.
[11] Whatever the formal roles that Mr Stone and Mr Hemi have in relation to IBC and the other entities, it is apparent from the evidence that they both take a close interest in and are closely engaged in the overall business. It is also apparent that while each of them chooses to invoke the formalities of the corporate structure when it suits his purposes, each has a loose regard for that structure in his day to day engagements – as is apparent from Mr Hemi’s involvement with PAC and Mr Stone’s involvement with iCOMM.
Tensions in the enterprise
[12] The structure of the business enterprise appears to have worked well enough as long as relations between Mr Stone and Mr Hemi remained harmonious. However, Mr Hemi and Mr Stone both acknowledge that their relationship has deteriorated to the point they no longer have trust and confidence in each other.
[13] It is not necessary to go into the details but it is relevant to note that:
(a) Mr Hemi has been critical of the way in which Mr Stone has funded his lifestyle when living in the Philippines and says this has had an impact on his own financial situation especially following the Global Financial Crisis in 2008;
(b)Mr Stone, in addition to his complaints relating to PAC, makes unparticularised complaints about Mr Hemi’s involvement in iCOMM’s operations and his behaviour towards iCOMM staff and
Mr Stone. Mr Stone also criticises Mr Hemi for wanting to use their business in New Zealand to finance his expenses in New Zealand. In this respect, Mr Stone’s criticisms echo Mr Hemi’s criticisms of
Mr Stone’s financing arrangements in the Philippines.
[14] Mr Hemi and Mr Stone have each taken actions against the other. Mr Hemi filed a criminal complaint about Mr Stone’s actions with respect to iCOMM to the Filipino authorities. Mr Stone instructed iCOMM staff to deny Mr Hemi access to iCOMM information. Part of the background to these tensions are loans that IBC took out in Japan at the time of the Global Financial Crisis which put IBC’s operations under pressure for a period.
[15] The structure of the business enterprise, with Mr Stone having operational control of IBC but under the direction of a board on which Mr Hemi has the advantage, and with each having an effective 50 per cent ownership interest in IBC and most of the other entities that make up the enterprise, means that each requires the cooperation of the other if they are to resolve their differences or to agree to a separation of their business interests. So far, they have not been able to achieve either.
[16] Mr Hemi says that progress was made towards an agreed dissolution in a mediation held in August 2016, in the context of which he withdrew his criminal complaint in the Philippines, and in direct negotiations held in August 2017. However, no final agreement was reached on a dissolution or in subsequent discussions on formalising a shareholders’ agreement on the future operation of the enterprise if a dissolution could not be agreed. Mr Hemi says these proceedings were commenced a little over a month after the end of negotiations in January 2018.
[17] Mr Stone refutes the allegations in Mr Hemi’s affidavit concerning their dispute and the efforts at resolution through mediation and negotiation. Despite that refutation, Mr Stone offers his own views on matters covered in Mr Hemi’s affidavit, including the August 2016 mediation. Mr Stone does not comment on the reasons for the failure of the mediation or the ensuing negotiations. Mr Stone does not dispute the financial arrangements that apply to his situation in the Philippines but says they were agreed with Mr Hemi and it is too late for Mr Hemi to complain about them now.
The IBC used car export-import business
[18] The present applications concern the business of PAC, which Mr Hemi says he set up in New Zealand in 2012 to import used cars from Japan to New Zealand on a
door to door basis, to supplement but sit alongside IBC’s already established used car importing business.
[19] One of IBC’s businesses involves purchasing used cars in Japan and exporting them to New Zealand on vessels owned or controlled by Mitsui OSK Lines Ltd (Mitsui) for sale in New Zealand. For this business, IBC uses logistics and inspection services provided by Autoterminal Japan Ltd (ATJ), a Japanese company controlled on a 50/50 basis by Mr Hemi and Mr Stone, customs and freight forwarding services provided by Japan Forwarding Agency Services (JFA), a Japanese company wholly owned by ATJ, and shipping agent services provided by ATI, which was incorporated in the British Virgin Islands and is controlled on a 50/50 basis by Mr Hemi and
Mr Stone through various nominee arrangements including, in Mr Hemi’s case, NPLH.
[20] ATI’s director is G. P. Ltd, a company registered in the British Virgin Islands. The authorised representative of G. P. Ltd is David Roberts who is also resident in the British Virgin Islands and who is nominee for Mr Stone’s interests in ATI.
[21] The sale and distribution of the IBC imported used cars in New Zealand is undertaken by Autoterminal New Zealand Ltd (ATNZ), a company incorporated in New Zealand. The sole shareholder and director of ATNZ is Michael Tyler who holds the shares on behalf of Autonet, another company incorporated in the British Virgin Islands and owned 50/50 by interests controlled by Mr Stone and Mr Hemi.
[22] As part of its business operation, IBC also uses the services of Jacanna Holdings Ltd (Jacanna), a car clearance broker based in Auckland which provides customs clearance and delivery services for imported cars. Jacanna is an independent company that is not part of the network of business interests owned or controlled by Mr Hemi and Mr Stone.
[23] iCOMM, which provides back office services to IBC, ATI, PAC and other entities in the IBC group, is incorporated in the Philippines where Mr Stone is occasionally resident. iCOMM is owned 49 per cent by IBC and 51 percent by Autonet. iCOMM’s President is Mr Tyler.
The PAC used car export-import business
[24] PAC is owned 100 per cent by ATI. Its initial directors were Mr Kahuroa, Eileen Lizares (in-house counsel at iCOMM) and Jane Solon (Chief Financial Officer of iCOMM).
[25] Mr Hemi says he set up PAC on 30 May 2012 to take advantage of a business opportunity that arose outside the core IBC car importing business. That was to arrange for cars to be exported from a vendor in Japan to a purchaser in New Zealand on a door to door basis rather than going through IBC ownership. The essence of this opportunity was that PAC would arrange for such non-IBC owned vehicles to be carried to New Zealand on Mitsui vessels, with ATJ preparing the vehicles for export from Japan and providing the necessary inspection and customs clearance services in Japan, and Jacanna acting as ATI’s agent in New Zealand. Jacanna’s services included arranging freight bookings and customs clearances for the door to door cargoes and collecting shipping and insurance charges from customers and remitted those to ATI.
[26] Mr Kahuroa and Mr Hemi say that as part of these arrangements, a management agreement was concluded between ATI and PAC under which PAC would provide management services to ATI in return for a monthly fee of NZ$2,000. The Management Agreement, which was stated to be effective from 1 July 2012, was signed by Mr Hemi as Authorised Signatory of ATI and Mr Kahuroa as director of PAC. Ms Latumbo produced a different version of the management agreement which was to be signed by Mr Roberts on behalf of ATI rather than by Mr Hemi. Signatories apart, however, there is little material difference between the two documents.
Mr Stone says these arrangements were put in place without his knowledge or approval and on the instructions of Mr Hemi who had no authority to act from ATI or IBC.
[27] Mr Hemi says these arrangements were always intended to be separate from the core IBC business and had been put in place with the knowledge and approval of Mr Stone. Mr Hemi’s evidence in this respect is supported by the affidavits of
Ms Lizares and Mrs Solon sworn on 2 and 4 April 2018 respectively. Ms Lizares says it was her understanding that Mr Stone was aware of the incorporation of PAC and the
appointment of herself and Mrs Solon as directors, even though Mr Stone subsequently expressed unhappiness about the company and their appointment as his relationship with Mr Hemi deteriorated. Mrs Solon says there was, in effect, consent by Mr Stone and Mr Hemi to the incorporation of PAC because the shareholder consent form was signed by Mr Roberts as the director of ATI and holder in trust of Mr Stone’s and Mr Hemi’s 50/50 ownership of ATI. Mr Stone says he never agreed to Mr Roberts signing the consent form.
[28] Mr Stone says the shipment of non-IBC cargo is IBC business because it is carried out pursuant to arrangements that IBC put in place and that ATI was only ever intended to be a holding company and was never intended to provide shipping services. He also says he was precluded from taking earlier action with respect to this diversion of what he considers to be IBC’s business because of the ramifications such action could have had for IBC’s situation in Japan.
[29] Regardless of these differences in view, it is apparent that PAC operated successfully for a number of years, including in the period from January 2013 to September 2014 when Ms Latumbo was actively involved as a director of PAC. However, in 2016, as a result of competing instructions from Mr Stone and solicitors acting for NPLH on behalf of Mr Hemi, Jacanna ceased forwarding on to PAC receipts Jacanna had collected on PAC’s behalf, pending a resolution of matters between IBC and PAC. As at April 2017, Jacanna was holding approximately $8.8 million of such receipts.
Application for declaration by summary judgment that Ms Latumbo is a director of PAC and for associated orders
[30] Rule 12.2(1) of the High Court Rules 2016 provides that the Court may give judgment against a defendant if the plaintiff satisfies the Court the defendant has no defence. The principles applicable on summary judgment are summarised in the Court of Appeal’s decision in Krukziener v Hanover Finance Ltd:1
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
(CA) at 3. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as, for example, where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at
341. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).
[31] As the Court of Appeal observed in Jowada Holdings Ltd v Cullen Investments Ltd, once a plaintiff has established a prima facie case, if the defence raises questions of fact on which the Court’s decision may turn, summary judgment will usually be inappropriate.2 On the other hand, where, despite the differences on certain factual matters, the lack of a tenable defence is plain on the material before the Court, summary judgment will in general be entered, even if legal arguments must be ruled on to reach a decision.3
Actions leading to Ms Latumbo’s departure from PAC?
[32] The essential issue in the summary judgment application is whether
Ms Latumbo is still a director of PAC.
[33] Ms Latumbo says in her affidavit of 8 February 2018 that she was appointed a director of PAC on 30 January 2013, the same day that Ms Lizares and Mrs Solon stood down as directors. Ms Latumbo also took over Mrs Solon’s position of Financial Controller of iCOMM which included the oversight of PAC. With Mr Kahuroa, Ms Latumbo had authority to make payments from PAC’s ASB bank account and they each held a token from the bank for that purpose.
[34] Ms Latumbo says that between July and September 2014, issues arose over payments of invoices to PAC which she considered were not properly PAC expenses. However, she was advised by Mr Hemi that the invoices should be paid because the
expenses had been incurred by ATI and PAC could pay for ATI expenses. In his
2 Jowada Holdings Ltd v Cullen Investments Ltd CA248/02, 5 June 2003 at [28].
3 Jowada Holdings Ltd v Cullen Investments Ltd CA248/02, 5 June 2003 at [29].
affidavit, Mr Hemi says that he took that view because PAC existed only for the purposes of managing ATI’s door to door car importation business, which included collecting payments to Jacanna by the door to door customers, money held by PAC was really ATI’s money and could properly be used to meet ATI expenses.
[35] In her affidavit of 8 February 2018, Ms Lutumbo implies, without saying so directly, that her inquiries over these invoices were the cause of the events that led to Mr Hemi concluding that Ms Latumbo had resigned as a director of PAC. Mr Hemi says that Ms Latumbo’s departure was the result of two different but related issues concerning actions taken by Mr Stone and Mr Hemi against each other as part of their on-going differences. Mr Hemi also says that in bringing this proceeding Ms Latumbo is acting at the direction of Mr Stone, who is using the proceeding as a tactical manoeuvre to attempt to pressure Mr Hemi into settling the wider dispute on terms favourable to Mr Stone.
[36] Ms Latumbo disputes Mr Hemi’s account, at least as far as he suggests she is acting at Mr Stone’s direction. In her reply affidavit sworn on 23 April 2018,
Ms Latumbo asserts that as an iCOMM employee, she reports to the President (Mr Tyler) and Chief Operating officer of iCOMM and consults Mr Stone only on matters that affect IBC. Mr Stone also says that he does not manage iCOMM and
Mr Tyler does not take instructions from him. That evidence stands in some contrast to the affidavits of Ms Lizares and Mrs Solon who say that in their time at iCOMM Mr Stone acted as effective President of iCOMM, particularly after Mr Tyler moved
to New Zealand to work with ATNZ.
[37] Whichever of these accounts is accurate, it is common ground between
Ms Latumbo and Mr Hemi that in the first half of September 2014 Ms Latumbo was considering resigning as a director of PAC and that, even though she had not written a letter of resignation, Mr Hemi had arranged with Mr Kahuroa for Ms Latumbo to be removed as a PAC signatory and her ASB token deactivated. However, Ms Latumbo and Mr Hemi then exchanged a series of emails between 12 and 19 September 2014 which culminated in an apparent agreement that Ms Latumbo would not resign and that Mr Hemi would take steps to have her restored as a PAC signatory and her bank token reissued.
[38] Mr Hemi says that after his last email on 19 September 2014, Ms Latumbo ceased communicating with him and he concluded that she had decided to resign after all, even though no formal letter of resignation was received. On 31 October 2014, Mr Kahuroa advised the Companies Office that Ms Latumbo had ceased to be a director of PAC.
[39] It would appear there was no further communication between Ms Latumbo and either Mr Kahuroa or Mr Hemi after 31 October 2014. However, on 1 June 2016,
Ms Latumbo’s solicitors wrote to Mr Kahuroa asserting that Ms Latumbo had never resigned as a director of PAC and requiring Mr Kahuroa either to provide a shareholder resolution removing Ms Latumbo as director or a notice of resignation from
Ms Latumbo, or to notify the Companies Office that Ms Latumbo had been reinstated as a director. The letter said if such steps were not taken within five working days,
Ms Latumbo would take whatever legal steps she considered necessary.
[40] Apparently, no reply to this letter was sent or received. However, another 20 months passed before the current proceedings were filed.
Did Ms Latumbo resign as director of PAC?
[41] Section 157 of the Companies Act 1993 provides:
157 Director ceasing to hold office
(1) The office of director of a company is vacated if the person holding that office—
(a) resigns in accordance with subsection (2); or
(b) is removed from office in accordance with this Act or the constitution of the company; or
(c) becomes disqualified from being a director pursuant to section 151; or
(d) dies; or
(e) otherwise vacates office in accordance with the constitution of the company.
(2) A director of a company may resign office by signing a written notice of resignation and delivering it to the address for service of the
company. The notice is effective when it is received at that address or at a later time specified in the notice.
(3) Notwithstanding the vacation of office, a person who held office as a director remains liable under the provisions of this Act that impose liabilities on directors in relation to acts and omissions and decisions made while that person was a director.
[42] Mr Branch for Ms Latumbo says that s 157(2) provides the only mechanism by which a director may resign from the office of director. He says that because
Ms Latumbo has not signed a written notice of resignation and delivered it to PAC’s address for service, Ms Latumbo has not resigned and is still a director.
[43] Mr MacGillivray for Mr Kahuroa and Mr Hemi says that s 157 is not mandatory or exclusive and that a director may also resign by evincing a clear intention to resign, as found by Williams J in Little v Jull.4 He says that Ms Latumbo evinced such a clear intention by her ceasing communication with Mr Hemi and
Mr Kahuroa after 19 September 2018 and her ceasing to act as a director of PAC.
[44] Mr Branch invites me to find that Little v Jull was wrongly decided and that s 157 should be strictly complied with. In Little v Jull, Williams J stated:
[48] Nonetheless, stepping back and looking more broadly at the provision, I do not think that the list in s 157(1) was intended to be closed. I agree with the authors of Company Law in New Zealand, that it is unlikely that s 157 was intended to prevent a director from resigning by evincing a clear intention to do so (short of written notice to the company) if that communication is also clearly accepted by the company. Any other approach to s 157 would see directors locked in indefinitely where, by their actions and the actions of the company, all relevant parties have shown that that is not the true position. Assistance is perhaps provided by the definition of director in s 2: “any person occupying the position of director.” This suggests directorship is a question of fact. It is certainly the case that even after a formal resignation, an individual can be held to have continued in that role. There is no reason in principle why the reverse should not also apply. The simple point is that the provision says office “is vacated” in one of five ways. It does not say that office is vacated only by one of those five ways.
[49] It follows that if there is clear evidence of an oral resignation that is equally clearly accepted on behalf of the company that, in my view, will be sufficient to amount to resignation as a director.
4 Little v Jull [2013] NZHC 3123.
[45] Mr Branch says that the approach in Little v Jull is not consistent with the approach set out in Tannerdyce Investments Ltd v Commissioner of Inland Revenue where the Supreme Court said courts should no longer attempt to classify procedural requirements as strictly mandatory or only directory and should focus not on literal classification but on the legal consequence of non-compliance with a statutory provision.5
[46] I agree with Mr MacGillivray that Tannerdyce Investments does not assist
Ms Latumbo’s case. Both Tannerdyce Investments and Little v Jull consider the legal consequences of non-compliance with a statutory provision. While I take Mr Branch’s point that compliance with s 157 is not onerous, the legal consequences of insisting on compliance may well be. The legal consequences for a departed director could be severe even if the director had evinced a clear intention to cease being a director and this had been accepted by the company but no steps had been taken to formalise the position. The legal consequences for the company could also be serious if, for example, transactions were entered into by the company that required board approval and the absence of the departed director affected the validity of the company’s decisions. To insist on formal compliance with s 157 could produce results that neither the company nor the director nor possible third parties intended.
[47] For these reasons, I consider Little v Jull to have been correctly decided and in accordance with Tannerdyce Investments. I also agree with Mr MacGillivray that the fact that Little v Jull concerned the application of the Securities Act 1978 does not alter its applicability to the present case. The relevant issue in both cases was the interpretation of s 157 of the Companies Act.
[48] In Little v Jull, Williams J analysed the evidence to determine when Mr Jull had stepped aside from a governance role in order to determine when he had resigned as a director. I consider that is the appropriate approach to take in determining whether Ms Latumbo’s conduct is consistent with her assertion that she has remained a director
throughout the period since her appointment on 30 January 2014.
5 Tannerdyce Investments Ltd v Commissioner of Inland Revenue [2011] NZSC 158, [2012] 2 NZLR
153 at [74].
[49] Mr Kahuroa says in his affidavit of 4 April 2018 that since September 2014, Ms Latumbo had no involvement with PAC and that she had not been consulted and she had not asked to be consulted on anything to do with the business. Mr Hemi also says that from mid-September 2014 until 1 June 2016, Ms Latumbo had nothing to do with PAC and did not try to intervene or inquire about PAC affairs although, as iCOMM’s Financial Controller she had full visibility of PAC’s accounts.
[50] Ms Latumbo does not dispute these accounts except to the extent that she says her initial silence after Mr Hemi’s email of 19 September 2014 was because she was on leave. However, as Mr MacGillivray points out, in her affidavit of 23 April 2018
Ms Latumbo herself says she took her leave between 3 and 10 September 2014 to care for her husband.
[51] This suggests there was a period of at least four but possibly six weeks when Ms Latumbo did not engage with PAC and refused to respond to phone calls and emails from Mr Hemi.
[52] Mr Branch says that the fact Ms Latumbo did not respond to Mr Hemi is of no account because Mr Hemi was not a director of PAC and that even if Mr Hemi is a deemed director as Ms Latumbo alleges, that gives Mr Hemi no rights of direction over Ms Latumbo and imposes no obligation on Ms Latumbo to take calls from Mr Hemi. I consider that to be a rather artificial argument because it does not take account of Ms Latumbo’s evidence in her affidavit of 8 February 2018 that following her appointment as a director of PAC, Ms Latumbo dealt regularly with Mr Hemi. Nor does it take account of the evidence of Ms Lizares and Mrs Solon that when they were directors of PAC, they regularly took instructions from Mr Hemi.
[53] Mr Branch contends that the only period that is relevant for considering whether Ms Latumbo resigned is the period before 31 October 2014 when Mr Kahuroa notified the Companies Office that Ms Latumbo had ceased to be a director. I do not accept that is necessarily so. On Ms Latumbo’s own case, the notification to the Companies Office is not material to her position within the company if she had not resigned. Moreover, just as Williams J in Little v Jull analysed the conduct of the director in that case by reference to the director’s actions across a span of time and not
just the date on which his resignation was notified to the Companies Office, I consider that in the present case, it is relevant to consider Ms Latumbo’s conduct after
31 October 2014 as well as before that date.
[54] Ms Latumbo does not deny that she did not act as a director of PAC for an extended period. She refers at paragraph 8 of her affidavit of 23 April 2018 to her “removal” as a director and, at paragraph 11, notes that she had “ceased to be treated” as a director. She explains her lack of action in response to her removal as a director by reference to the need to obtain the advice of iCOMM management and the directors of other entities in the IBC Group. Whether or not that explains her actions in terms of the dynamic within the IBC Group, Ms Latumbo has provided no evidence of any steps she took in the 20-month period from 31 October 2014 until 1 June 2016 that demonstrated she considered she was a director of PAC.
[55] Based on the evidence in the various affidavits, and regardless of when
Ms Latumbo took leave in September 2014, I consider there is sufficient evidence upon which the Court could conclude either:
(a) that by the end of September 2014 Ms Latumbo had ceased to act as a director of PAC and had evinced an intention not to continue as a director and that the company was entitled to conclude on 31 October
2014 that Ms Latumbo had resigned as a director of PAC; or
(b)that Ms Latumbo’s lack of engagement with the company in her capacity as a director both before 31 October 2014 and subsequently had confirmed her earlier declared intention to resign as a director and that she had effectively resigned and had vacated the office of director.
[56] However, I do not need to reach a final conclusion on whether Ms Latumbo did resign as a director for the purposes of the summary judgment application. Consistently with the principles in Krukziener v Hanover Finance Ltd,6 Ms Latumbo
has the onus of satisfying me that there is no defence to her assertion that she remains
6 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26].
a director of PAC. In terms of that decision, I must be left without any real doubt or uncertainty that Ms Latumbo is a director of PAC.
[57] Ms Latumbo has not discharged that onus. To the contrary, the evidence of
Mr Kahuroa and Mr Hemi, and also of Ms Latumbo herself, raises a real question as to whether Ms Latumbo, by her conduct, had evinced an intention not to continue as a director and had effectively resigned. It follows that I am left with considerable doubt that Ms Latumbo is still a director of PAC. In addition, there are disputed matters of fact about what did and did not occur between 19 September 2014 and 31
October 2014 and after 31 October 2014. Accordingly, it is not appropriate to declare by summary judgment that Ms Latumbo is a director of PAC.
[58] The other orders sought in the summary judgment application are contingent on the Court declaring that Ms Latumbo is a director of PAC because Ms Latumbo only has standing to seek those orders as a director of PAC. Accordingly, it is not necessary for me to deal with those orders or with the related question of whether
Mr Hemi is a deemed director of PAC. These are matters for consideration at any subsequent hearing of Ms Latumbo’s application for a declaration that she remains a director of PAC.
[59] I observe, however, that the orders sought with respect to Mr Hemi appear to be inconsistent with, if not in conflict with, each other. On the one hand, Ms Latumbo asks that the Court declare Mr Hemi to be a deemed director. Given the evidence of
Ms Latumbo, Ms Lizares, Mrs Solon and Mr Hemi himself, I am satisfied that the role performed by Mr Hemi with respect to PAC comes within the meaning of director in s 126 of the Companies Act, in particular s 126(1)(a)(i), being a person in accordance with whose directions Mr Kahuroa and other directors of PAC have been accustomed to act. On the other hand, Ms Latumbo asks that the Court restrain Mr Hemi from having any involvement in the operations of PAC, the company of which, at Ms Latumbo’s application, the Court would have declared Mr Hemi to be a director.
[60] The two proposed orders do not sit comfortably together, particularly when, in the summary judgment application, Ms Latumbo has not asserted that actions taken by Mr Hemi in his capacity as a deemed director are in breach of his obligations as a
director under the Companies Act. The fact of being a deemed director is not itself unlawful; it is only if a person held to be a deemed director fails to comply with his or her duties as a director that any question of unlawfulness arises.
Application for leave to commence derivative action
[61] The proposed derivative action, as set out in Ms Latumbo’s draft amended statement of claim, is to be brought by PAC against Mr Kahuroa, Mr Hemi, LOFA, and NPLH.
[62] The draft amended statement of claim seeks:
(a) A declaration that Mr Hemi is a deemed director of PAC;
(b)A declaration that the removal of Ms Latumbo as a director from the Companies Office register was in breach of the Companies Act and of no effect;
(c) Judgment against Mr Kahuroa, Mr Hemi, LOFA and NPLH for payments that Ms Latumbo says were unauthorised, being:
(i)Payments totalling $432,839.10 made between 23 July 2014 and 5 December 2014 from PAC’s bank accounts without
Ms Latumbo’s authorisation (expenses payments);
(ii)Payments totalling $1,474,371.45 made between 8 July 2015 and 14 October 2014 from PAC’s bank account to its shareholder ATI without Ms Latumbo’s authorisation or any request by ATI or the approval of IBC (shareholder payments), being payments that Ms Latumbo also alleges were improperly transferred by ATI to LOFA at Mr Hemi’s direction and without the requisite ATI approval:
(iii) A payment of $1,680,672.00 made on 6 October 2016 from
PAC’s bank account to NPLH which is said to be an advance in
anticipation of a settlement between Mr Hemi and Mr Stone but which did not eventuate (settlement advance);
(iv)Payments totalling $372,157.80 made between 29 August 2017 and 14 October 2017 from PAC’s bank account in respect of PAC being registered as a motor vehicle trader (MVT), a registration that was not approved by Ms Latumbo, IBC or ATI and without a proper business assessment by PAC (MVT payments).
[63] In the draft amended statement of claim, Ms Latumbo alleges that Mr Hemi is a deemed director of PAC and that he and Mr Kahuroa have acted in breach of their duties as directors by failing to act in good faith and in the best interests of the company by:
(a) Allowing the expenses payments without the authority of Ms Latumbo, IBC or ATI;
(b) Conducting a MTV business without the authority of Ms Latumbo, IBC
or ATI and without any proper investigation into its viability;
(c) Not recovering the shareholder payments or the settlement advance when they knew the payments and advance were made without the authority of Ms Latumbo, IBC or ATI.
[64] Ms Latumbo also seeks judgment against LOFA for the transfer of the shareholder payments made by Mr Hemi and Mr Kahuroa in breach of their fiduciary duties to PAC and without the authorisation of IBC or ATI, and against NPLH for refusing to repay the settlement advance when it knew that the payment was contingent on settlement being achieved between Mr Stone and Mr Hemi and that no settlement has been achieved.
Requirements for leave to bring derivative action
[65] Sections 165(1) and (3) of the Companies Act provide that the Court may grant leave to a director or a shareholder of a company to bring proceedings in the name of the company if the Court is satisfied that the company does not intend to bring the proceedings itself. The latter requirement has been satisfied by a memorandum dated
9 April 2018 in which counsel for PAC advised the Court that PAC does not intend to bring the proceedings proposed by Ms Latumbo.
[66] As Mr Branch says, whether or not Ms Latumbo is a director is the threshold question in the application for leave. Mr Branch also says that if the threshold question is answered in Ms Latumbo’s favour, the draft claim she wishes to bring, in part at least, must succeed. The corollary of that latter proposition is that if Ms Latumbo cannot establish that she is a director of PAC, the claim must fail for want of standing.
[67] In his submissions in reply to Mr MacGillivray, Mr Branch says that because the application under s 165 is an interlocutory application and because the questions of whether Ms Latumbo is a director of PAC and whether Mr Hemi is a deemed director of PAC will be determined at the substantive consideration of the derivative action, it would be wrong to apply the same approach to the s 165 application as is taken in the summary judgment application. Mr Branch later submits, without citing any authority, that on the s 165 application, all Ms Latumbo needs to establish is an arguable case.
[68] I do not accept those submissions as far as the threshold question of whether or not Ms Latumbo is a deemed director is concerned. The requirements of s 165 are clear. The Court has the power to grant leave to bring a derivative action only to a director or shareholder of a company. When granting leave to bring the derivative action, therefore, the Court must be satisfied that the person seeking to bring the action is, in fact, a director or shareholder.7 That is not a matter to be left for subsequent determination on the basis that it is arguable that the applicant is a director or
shareholder.
7 See He v Chen [2014] NZCA 153, [2015] NZAR 437 at [23] – [28].
[69] I have declined to make a declaration stating that Ms Latumbo is a director of
PAC. I did so on the basis that I was left with considerable doubt as to whether
Ms Latumbo is still a director of PAC following an analysis of Ms Latumbo’s conduct in September and October 2014 and subsequently.
[70] I accept that there is a difference in the onus on Ms Latumbo in the summary judgment application, where I must be left in no real doubt or uncertainty that
Ms Latumbo is a director of PAC, and the onus applicable on an application for leave to bring a derivative action. In the latter case, the ordinary civil standard of proof - on the balance of probabilities – needs to be met, at least with regard to the threshold necessary to establish the Court’s jurisdiction to grant the leave sought. It follows that the onus is on Ms Latumbo to satisfy the Court that it is more likely than not that she is a director of PAC.
[71] Ms Latumbo seeks to discharge that onus in two ways:
(a) That she is still a director of PAC because s 157 of the Companies Act prescribes how a director can be removed or can resign and those requirements have not been complied with; or
(b)That she has been improperly removed as a director by Mr Kahuroa as a consequence of inappropriate directions given by Mr Hemi.
[72] I have already rejected the first proposition as being inconsistent with Little v Jull and Tannadyce Investments. Accordingly, for Ms Latumbo to meet the threshold requirement to bring the derivative action, she must satisfy me, on the balance of probabilities, that she was improperly removed as a director by Mr Kahuroa as a consequence of inappropriate directions given by Mr Hemi.
Was Ms Latumbo improperly removed as a director?
[73] In the draft amended statement of claim, Ms Latumbo alleges that her improper removal as a director is established by the following facts:
(a) On 17 September 2014, Mr Hemi emailed another iCOMM employee, Clarissa Limbaga, advising that Ms Latumbo had requested to be removed as a director and Mr Kahuroa was awaiting Ms Latumbo’s letter of resignation and that in the meantime Ms Latumbo’s security device had been cancelled;
(b)On 19 September 2014, Mr Hemi sent an email to Ms Latumbo in which he stated that he was glad to hear that she was not going to resign and that he would arrange with Mr Kahuroa to have Ms Latumbo reinstated as a signatory for PAC and a new security device issued;
(c) Between 19 September 2014 and 31 October 2014, Ms Latumbo did not advise or give notice of her intention to resign and no security device was issued to Ms Latumbo;
(d) On 31 December 2014, Mr Kahuroa notified the Companies Office that
Ms Latumbo had ceased to be a director.
[74] I do not accept that these steps establish, on the balance of probabilities, that
Ms Latumbo was improperly removed as a director, whether on the direction of
Mr Hemi or otherwise.
[75] First, the email to Ms Limbaga, which was copied to Ms Latumbo, stated
Mr Hemi’s understanding of the situation following his discussions with Ms Latumbo. It was sent after an exchange of emails between Ms Latumbo and Mr Hemi in which
Ms Latumbo discussed her resignation as a director. In an email Ms Latumbo sent
Mr Hemi approximately two hours after Mr Hemi’s email to Ms Limbaga on
17 September 2014, Ms Latumbo complained about Mr Hemi not waiting until he had received her letter of resignation before acting, not that he had informed others she was resigning. In other words, those emails indicate that the initiative for
Ms Latumbo’s resignation came from Ms Latumbo rather than from Mr Hemi or
Mr Kahuroa and that she had made the decision to resign even if she had not formalised it.
[76] Secondly, Mr Hemi accepts that following a phone conversation with
Ms Latumbo, he wrote an email to Ms Latumbo on 19 September 2014 saying he was glad to hear she was not going to resign. Ms Latumbo’s allegations, however, omit reference to the fact that following that email, Ms Latumbo failed to respond to any emails or phone calls from Mr Hemi and that she had no further contact with Mr Hemi or Mr Kahuroa before Mr Kahuroa’s notification to the Companies Office on
31 October 2014. There is a real question, therefore, as to whether Ms Latumbo had evinced an intention to resign as a director given her earlier indications of an intention to resign and her radio silence following Mr Hemi’s email of 19 September 2014.
[77] While I am not required, for the purposes of the application for leave to bring the derivative action, to decide whether Ms Latumbo’s actions up to 31 October 2014 amount to evincing an intention to resign, I am not satisfied on the evidence before me that Mr Kahuroa improperly removed Ms Latumbo as a director of PAC. It is at least as arguable that Ms Latumbo had effectively resigned by 31 October 2014 as it is that she was improperly removed. Therefore, I cannot conclude that it was more likely than not that Ms Latumbo was improperly removed.
[78] As a consequence of the above discussion, I am not satisfied that:
(a) Ms Latumbo is a director of PAC; or
(b) Ms Latumbo was improperly removed as a director of PAC.
[79] It follows that Ms Latumbo has not satisfied the threshold question that she is a director of PAC and accordingly there is no basis for me to grant her leave to bring a derivative action on behalf of PAC against Mr Kahuroa, Mr Hemi, LOFA and NPLH.
[80] In case I am wrong on that threshold question, I have also considered whether, if Ms Latumbo is indeed a director of PAC, she should be granted leave to bring the proposed derivative action.
Discretion to grant leave
[81] Under s 165(1), the Court has a discretion to exercise when deciding whether to grant leave to bring a derivative action. Section 165(2) provides that in determining whether to grant leave under s 165(1), 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.
[82] Mr Branch and Mr MacGillivray agree that the established standard to be applied in the consideration of those matters is that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim.8 I consider the claims made by Ms Latumbo with regard to that test and the matters in s 165(2)(a) – (d).
The expense payments
[83] The expense payments comprise some 116 payments ranging in amounts from
$7.04 to $75,013.46, with the large majority being for amounts between $1,000 and
$6,000. In aggregate, the sum claimed is substantial – $432,839.10. That is an amount a prudent business person would seek to recover if the expenses making up that sum had been improperly incurred. However, while Mr Branch took me to some payments that appear to have been personal to Mr Hemi and outside the purposes of PAC and its parent, ATI, most of the expenses appear to be routine and for purposes associated with PAC or ATI. The complaint about those expenses is the alleged technicality – the absence of authority from Ms Latumbo, IBC or ATI. It is doubtful that a prudent business person would seek to recover expenses properly incurred in relation to the
business of the company or its parent just because of that technical irregularity.
8 Vrij v Boyle [1995] 3 NZLR 763, (1995) 7 NZCLC 260,844, (1995) 1 BCSLR 128, (1995) 6 TCLR
621 at 623; He v Chen [2014] NZCA 153 at [30].
[84] As far as the authority of Ms Latumbo is concerned, most of the payments were made after 31 October 2014 in the period when Ms Latumbo had ceased to act as a director or to engage with Mr Kahuroa, the other director, or Mr Hemi, the alleged deemed director. Given Ms Latumbo’s disengagement as a director in circumstances when she was well aware of PAC’s business expenses through her ability to monitor PAC’s accounts, it is doubtful that a derivative action would be appropriate to secure the recovery of those payments purely on the basis they were made without
Ms Latumbo’s authority. That conclusion also applies to the payments that may have been outside the purposes of PAC and ATI.
[85] As for the authority of ATI, Mr Kahuroa and Mr Hemi admit that some payments were for expenses incurred by ATI. Mr Hemi says that is of no consequence because PAC exists only for the purposes of managing ATI’s door to door car importation business so that money held by PAC was really ATI’s money and could properly be used to meet ATI expenses. Furthermore, Mr MacGillivray says that any expenses paid by PAC that should have been paid by ATI can be corrected by appropriate invoicing between the two companies and that the financial position of PAC would be unaffected.
[86] Ms Latumbo’s more general point is that neither Mr Hemi nor Mr Kahuroa had any authority to act on behalf of ATI. To buttress that point, Ms Latumbo sought leave, after the hearing in May, to file an affidavit attaching a document from Mr Roberts, as authorised representative of GP Ltd, ATI’s director, certifying that at a meeting in the Cayman Islands on 23 May 2016, the directors of ATI passed a resolution cancelling any prior authorities given to others to act or sign on behalf of ATI and confirming that all future authorities would be given in writing by the Director. I granted leave on the basis that the adoption of the resolution was a matter that ought to have been known to Mr Hemi and because the adoption of the resolution and its contents were already before the Court in evidence filed by Ms Latumbo and endorsed by Mr Hemi.9
[87] Mr Branch says that the whole case for Mr Hemi and Mr Kahuroa is based on the claimed authority from ATI and that base has been shown to be non-existent.
9 Latumbo v Pacific Auto Carrier (NZ) Ltd [2018] NZHC 2325.
[88] The document from Mr Roberts shows that in formal terms neither Mr Hemi nor Mr Kahuroa had authority to act or sign on behalf of ATI after 23 May 2016 is evidence that, in formal terms, Mr Hemi had no authority to act on behalf of ATI. However, the resolution does not necessarily affect transactions entered into by
Mr Hemi on behalf of ATI before that date bearing in mind that Mr Roberts approved the incorporation of PAC at Mr Hemi’s initiative. More fundamentally, however, if there is an issue over Mr Hemi’s authority to act on behalf of ATI, that cannot be resolved through a derivative action taken by ATI’s subsidiary. Mr Hemi’s authority or lack of authority to act for ATI can only be determined between ATI and Mr Hemi, and not between PAC and Mr Hemi, even if Mr Hemi is a deemed director of PAC.
[89] There is an even more substantial hurdle to Ms Latumbo’s allegation that the expense payments were a breach of the duties of Mr Kahuroa as director and Mr Hemi as a deemed director because the payments were not authorised by IBC. That is, that IBC has no corporate relationship with PAC or ATI so has no authority over PAC or PAC’s directors, including any alleged deemed directors.
[90] Mr Stone alleges that PAC’s door to door business and any revenues from that business are really IBC’s because PAC was set up without his approval as Representative Director and PAC is utilising IBC’s systems and its contract with Mitsui. Mr Stone has adduced no documentary evidence to substantiate those assertions which are not consistent with the separate establishment of PAC and its subsequent operations. Even if the intention was that the door to door business was to be part of IBC’s operation, that is not how it was established. PAC was established as a separate company with no corporate relationship to IBC. Accordingly, IBC has no right to approve payments by PAC. Furthermore, any issue between IBC and PAC is a matter to be resolved between those companies and not by a derivative action by PAC against Mr Kahuroa and Mr Hemi in their capacities as director and deemed director of PAC.
The shareholder payments, the settlement advance and the MTV payments
[91] The claims with respect to the shareholder payments, the settlement advance and the MTV payments raise similar difficulties. Whether or not the shareholder
payments were properly made to ATI is for ATI to address and is not appropriate for determination in a derivative action by ATI’s subsidiary against the subsidiary’s director and alleged deemed director. Even less appropriate for determination in this context is Ms Latumbo’s challenge to ATI’s transfer of those payments to LOFA. Any issues concerning that transfer are between ATI and LOFA and cannot be resolved in proceedings between PAC and its director and deemed director.
[92] Ms Latumbo says the settlement advance was made in anticipation of and contingent upon a settlement between Mr Stone and Mr Hemi. Mr Hemi denies the payment was contingent upon settlement with Mr Stone and says the advance was agreed with Mr Stone and was to balance a similar advance being taken by Mr Stone from elsewhere in the enterprise. Mr Hemi also says the funds were really ATI’s funds rather than PAC’s funds but were paid out by PAC to avoid adverse movement in the exchange rate and that he acknowledges that he has to account to ATI for the advance.
[93] Whether or not Mr Hemi’s account is correct, it is common ground that the advance related to discussions between Mr Hemi and Mr Stone as owners of the overall enterprise. Any issues over that advance are unlikely to be resolved in a derivative action by PAC against Mr Hemi as deemed director of PAC.
[94] Mr Kahuroa says PAC obtained MTV status to be able to arrange for the resale of vehicles imported by IBC and found to be in need of repair on arrival in New Zealand. Mr Hemi says that the MTV payments were to pay for legitimate expenses incurred for a proper purpose and were for IBC’s benefit. Mr Stone does not address the point and so does not dispute Mr Hemi’s account.
[95] If the approval of IBC or ATI was required for these payments, that is a matter between PAC and IBC or PAC and ATI as the case may be. It is not appropriate for resolution in the proposed derivative action that Ms Latumbo seeks leave to bring on behalf of PAC. Ms Latumbo’s allegation that PAC failed to undertake an investigation into the viability of the operation is unsupported by any evidence indicating why such an investigation was warranted. It is hardly the kind of matter likely to warrant the taking of a derivative action.
Overall assessment of proposed claims
[96] The above analysis shows there are substantial difficulties with all the claims Ms Latumbo seeks to bring in her proposed derivative action. The claims based on a lack of authority from Ms Latumbo are premised on the proposition that Ms Latumbo remained a director of PAC throughout the period when the relevant payments were made, notwithstanding Ms Latumbo’s disengagement with PAC in the role as director after 30 September 2014. The other claims are, in substance, claims in relation to ATI or IBC or to the personal battle between Mr Stone and Mr Hemi. Those claims either cannot be resolved or are unlikely to be resolved in the proposed derivative action.
[97] For these reasons, I consider that a prudent business person would be unlikely to bring such claims in the conduct of his or her own affairs given, in particular, the poor prospects of success and the costs of bringing the claims. Even if Ms Latumbo had satisfied me that she is still a director of PAC or had been improperly removed as a director and should be reinstated, therefore, I would have declined to grant leave under s 165(1).
[98] There is a further reason why I would have declined leave. I consider it likely that this claim is being pursued for collateral reasons relating to Mr Stone’s interests and not for the reasons advanced by Ms Latumbo. Despite Ms Latumbo’s assertion that she is not acting at the instruction of Mr Stone in bringing these proceedings, I consider it highly unlikely that Ms Latumbo would have brought these proceedings without Mr Stone’s active support and encouragement, if not direction. In his own affidavit, Mr Stone acknowledges openly that he seeks to put an end to PAC’s door to door arrangements if not PAC itself.
[99] In these respects, Mr Stone is pursuing an objective that is fundamentally at odds with the interests of PAC. The purpose of a derivative action is to protect the interests of the company on whose behalf the proposed action is to be brought. The action that Ms Latumbo seeks to bring, with the encouragement of Mr Stone, is not consistent with that purpose.
Result
[100] The applications for summary judgment and for leave to bring a derivative action are dismissed.
Costs
[101] Mr Kahuroa and Mr Hemi are entitled to costs on a 2B basis. If the parties cannot agree costs, they may submit memoranda of not more than five pages. Any memoranda from Mr Kahuroa and Mr Hemi should be filed by 22 November 2018;
any memorandum from Ms Latumbo should be filed by 13 December 2018.
G J van Bohemen J
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