McGehan v Te Hoe Dairies Limited
[2021] NZHC 1796
•22 July 2021
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2020-419-000335
[2021] NZHC 1796
UNDER The Companies Act 1993 BETWEEN
MICHAEL BRUCE JAMES McGEHAN and CHARYS SIAN McGEHAN
Plaintiffs
AND
TE HOE DAIRIES LIMITED
First Defendant
JEFFREY CLARKE and TANIA CLARKE
Second Defendants
Hearing: 8 July 2021 Appearances:
P Cornegé and C Oback for Plaintiffs
T M Braun and L Hunt for Second Defendants
Judgment:
22 July 2021
Reissued:
30 July 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 22 July 2021 at 3.00 pm
and re-issued 30 July 2021 at 3.00 pm pursuant to r 11.5 of the High Court Rules
Registrar / Deputy Registrar Date ……………………..
McGEHAN v TE HOE DAIRIES LTD [2021] NZHC 1796 [22 July 2021]
Introduction
[1] The plaintiffs, Michael and Charys McGehan,1 jointly own Te Hoe Dairies Ltd2 with the second defendants, Jeffrey and Tania Clarke.3 Each family holds a 50 per cent shareholding. Mr McGehan and Mr Clarke are the two directors of the Company.
[2] The Company carries on business as a dairy farm. Its principal asset is a property in Te Hoe, Waikato, from which the dairy farming business operates.
[3] It is not disputed the parties’ relationship has broken down. The McGehans say the parties and the company are in deadlock and apply to liquidate the company on the just and equitable grounds under s 241(4)(b) of the Companies Act 1993.
[4] To determine the ultimate issue of whether it is just and equitable to make orders liquidating the Company, a matter of discretion, I must resolve two issues:
(a)Has the relationship between the parties deteriorated to the point that there is a serious deadlock imperilling the continued operation of the Company?
(b)If so, are there other realistic alternatives to the impasse, other than liquidation?
Background facts
[5] The Company was incorporated on 28 June 2017. The McGehans hold 250 shares and the Clarkes do likewise.
[6] Mr McGehan and Mr Clarke were associates. Mr McGehan was originally Mr Clarke’s bank manager. The primary purpose for incorporating the Company was the acquisition of the farm, with the goal of both parties being able to hold and run the farm until such time as it could be sold for a profit. The parties agreed, effectively, on a two-stage plan: part of the farm would be subdivided off into sections, and those
1 The McGehans.
2 The Company.
3 The Clarkes.
sections sold. Following that, the remaining property would then be re-marketed and sold.
[7] There is no shareholders’ agreement and most of the arrangements between the parties were oral.
[8] In March 2018, Waikato District Council granted resource consent for the subdivision of three rural lifestyle sections. Mr McGehan and Mr Clarke could not agree on marketing by Bayleys Waikato, whose services the parties engaged to sell the sections.
[9] The relationship between Mr McGehan and Mr Clarke began to sour over farm machinery that they each had lent to the Company. In July 2018, there was an alleged physical confrontation between Mr McGehan and Mr Clarke over repairs to a tractor. Mr McGehan was arrested and issued with a pre-charge warning.
[10] The sections were eventually sold, as intended.4 However, the remaining farm has not been sold. It is now a 35-hectare run-off dairy unit.
[11] Mr Clarke leased the farm from the Company from August 2018 until 31 May 2019. The lease was not renewed but the Clarkes have been holding over. The McGehans say that since April 2020, the Clarkes have not been paying rent on the lease. They also say that the Clarkes have rented out the farmhouse but have retained the rental income.
[12] On 31 May 2019, Mr McGehan was trespassed by the Clarkes from the farm. The Clarkes remain in possession of the farm and the McGehans say they are farming it for their own benefit.
[13] A company owned by the Clarkes, Kainui Jerseys Ltd,5 has purchased the neighbouring property. Capital works have been carried out to join up the farm with the neighbouring property. The McGehans say this was done without their approval.
4 Settlement took place in January 2020.
5 Kainui Jerseys.
[14] Both parties have made offers to buy each other out but have not reached agreement about the appropriate value of the farm or what each is owed or owes the Company.
Relevant legal principles
[15] The words “just and equitable” are words of “the widest significance”.6 They do not limit the jurisdiction of the Court to any case.7 Each case must be considered on its facts.
[16] As Bell AJ held in Sea Management Singapore Pte Ltd v Professional Service Brokers, “Because there is no limit to the kinds of cases where it may be just and equitable to order a liquidation, categorisation has been deprecated.”8 However, orders liquidating a company on the just and equitable ground may be justified in cases where serious deadlock has arisen between directors.9
[17] The deadlock must be impeding the operation of the company; the “essential basis” for the Court’s relief is “frustration by internal discord”.10 If the Court is satisfied there is no other means out of the impasse, it may exercise its discretion and order liquidation.11
Analysis and decision
Issue (a) – Has the relationship between the parties deteriorated to the point that there is a serious deadlock imperilling the continued operation of the company?
[18] In Re F Hall & Sons Ltd the Court of Appeal set out the Court’s approach to assessing contended deadlocks:12
6 Re Bleriot Manufacturing Aircraft Co Ltd (1916) 32 TLR 253,255. See also Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL) 374 and Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC) at [93]–[99] and [109]–[114].
7 Jenkins v Supscaf Ltd, above n 6, at [93]–[99].
8 Sea Management Singapore Pte Ltd v Professional Service Brokers HC Auckland CIV-2011-404- 5313, 25 January 2012 at [3].
9 Re Yenidje Tobacco Co Ltd [1916] 2 Ch Chancery 426 (CA).
10 Sea Management Singapore Pte Ltd v Professional Service Brokers, above n 8, at [3].
11 Sea Management Singapore Pte Ltd v Professional Service Brokers, above n 8, at [3]; Strachan v Denbigh Property Ltd (2011) 10 NZCLC 264,813 (HC); Vujnovich v Vujnovich [1989] 3 NZLR 513 (PC) 518.
12 Re F Hall & Sons Ltd [1939] NZLR 408 (CA) at 418.
As to whether there was a deadlock is a question of fact and, if there was, the question as to whether it was sufficient to justify a winding-up order depends upon the manner in which it arose and its effect upon the various parties interested. It is necessary therefore to examine the circumstances leading up to the alleged deadlock and the petition for winding-up.
[19] If the plaintiff is solely responsible for the deadlock, the Court may dismiss the application in its discretion.13 That is the corollary of the clean hands principle, as Lord Cross described in Ebrahimi v Galleries Ltd:14
A petitioner who relies on the ‘just and equitable’ clause must come to court with clean hands, and if the breakdown in confidence between him and the other parties to the dispute appears to have been due to his misconduct he cannot insist on the company being wound up if they wish it to continue.
[20] The parties agree there has been a deterioration in their relationship. However, on behalf of the Clarkes, Mr Braun contended the Company is not at a deadlock; the farm is still functioning and operational and that it was Mr McGehan who has caused the relationship breakdown. The Clarkes say they have taken sole responsibility for the upkeep of the farm and for the operation of the Company’s business interests. The Clarkes have sunk a large amount of their own personal funds into ensuring the Company’s survival.
[21] The Clarkes may have good reason to complain about the conduct of Mr McGehan. However, there are a significant number of disputed factual allegations which I am in no position to determine. It is not possible to resolve these credibility issues on the papers. Both parties accuse each other of acting in their own interests and to the detriment of the Company and the other party. It is not disputed that Mr McGehan was arrested and issued with a pre-charge warning. But in the context of this case, that provides no real guidance as to the cause of the relationship breakdown; although it tends to suggest that such breakdown has been a serious one.
[22] I find this is a case where there is no clear-cut apportionment of blame. In such cases the real determinant for granting relief is the existence of the breakdown, not the cause of it.15
13 Sea Management Singapore Pte Ltd v Professional Service Brokers, above n 8, at [4]. Bell AJ noted the Court of Appeal did so in Re F Hall & Sons, above n 12.
14 Ebrahimi v Westbourne Galleries Ltd, above n 6, at 387G.
15 Re Rongo-Ma-Tane Farms Ltd (1987) 3 NZCLC 100,145 (HC) at 100,151.
[23] I also find there is a serious deadlock in the Company which is imperilling its continued operation.
[24] It is no answer to the question of whether there is a deadlock to say the farm is still operational and performing well. It is the affairs of the Company, here in disarray, that are relevant. In any event, the McGehans are effectively locked out of the property and therefore are not well placed to verify how it is being farmed.
[25] The parties agree the farm should be sold. However, there is clearly a significant and intractable dispute as to how and when it should be sold, and how the “wash-up” is to be determined. The dispute has been ongoing for two years. The lease to the Clarkes has expired and all the revenue from the farm is being paid to the Clarkes. The Company is not trading and has no income; the Clarkes stopped paying rent in 2020, and the farmhouse on the farm has been tenanted but the Clarkes are retaining the rental income.
[26] Both parties say that they are providing funds to the Company to help meet its outgoings, including mortgage payments. As Mr Cornegé, for the McGehans, submitted, at the very least the company is cashflow insolvent.
[27] There is no shareholders’ agreement and no other written contractual arrangements which might provide a way of resolving the impasse. As noted, the Clarkes say that they are carrying out capital works to maintain the value of the farm and will be seeking a set-off. However, there is no agreement from the McGehans about those capital works or how any set-off might be calculated.
[28] In these circumstances, I find that the falling-out between the parties and the complete lack of trust between them has given rise to a serious deadlock, which is frustrating the operations of the Company.
Issue (b) – Are there realistic alternatives to the impasse, other than liquidation?
[29] The Clarkes say they have invested all of their wealth in the Company and the adjacent property owned by Kainui Jerseys and are very concerned that if the Company is placed in liquidation, there will be a “fire sale” of the farm with significant
financial detriment to them. In support of their opposition, they have filed an affidavit from Mr Deane, a real estate agent. In Mr Deane’s view, under a liquidation or forced sale there could be more opportunistic bidding and the directors of the Company may struggle to maximise their return. He also considers that selling the adjacent property owned by Kainui Jerseys in conjunction with the farm, as opposed to separately, would increase interest and, likely, the value of the properties.
[30] Mr Braun submitted the “just and equitable” liquidation route is a last resort remedy. He noted that there has been no attempt at mediation, although there have been some limited without prejudice communications. He contended there are realistic alternatives to liquidation, including applying under s 174 of the Companies Act for orders or agreement that one party buys the other party out.
[31] I understand the concerns expressed by the Clarkes. However, in my view the risks of a sale by a liquidator at under-value have been exaggerated. As Heath J held in Jenkins v Supscaf Ltd, the duty of a liquidator is to obtain the best possible price for assets of a Company so proceeds may be paid to creditors and, if any surplus, to shareholders.16 A liquidator is given power, to the extent necessary for the liquidation, to carry on the business of the company.17 A competent liquidator would, in a case such as this, understand the importance of a sale in the Spring, which the parties agree is the best time. He would also recognise that the best way to maximise any sale price for the farm may be to cooperate with the Clarkes’ company, Kainui Jerseys, to see if the properties could be sold together. There is no suggestion on the evidence before me that that would be impossible or impractical.
[32] As to the question of whether there are viable and realistic alternatives to liquidation, I doubt there are any. It is troubling there has been no mediation, but that is perhaps a reflection of the fact that the relationship between the parties has completely broken down. The absence of a shareholders’ agreement and any other written contractual arrangements between the parties gives rise to considerable uncertainty and challenge for any party-driven resolution. The prospect of s 174 proceedings is not an attractive one. The litigation would likely be hard-fought and the
16 Jenkins v Supscaf Ltd, above n 6, at [145].
17 Companies Act 1993, Schedule 6, cls (c) and (b).
accounting issues complex; particularly where one party, the Clarkes, have expended money on the farm without authorisation from the McGehans.
[33] In my view, this case is similar to the circumstances of Strachan v Denbigh Property Ltd, where this Court held an independent examination by a liquidator would be of great assistance to the parties in resolving their disputes and impasse.18 In that case there was a complete collapse in the relationship between the equal shareholder parties and real concern about the accounting for rent of the principal asset of the company. The Court concluded that in the bitter, acrimonious and uncertain circumstances of the company, orders for one party to acquire the other party’s shares19 was not a viable alternative to liquidation.20
[34] I acknowledge the relationship breakdown in Strachan was rather an extreme one, but the breakdown here is not, in substance, materially different: there is a serious deadlock and a complete absence of trust between the parties. In the present circumstances, requiring one party to acquire the other party’s shares is not a realistic alternative remedy, and the introduction of an independent third-party liquidator to ultimately sell the Company’s asset and to provide “judicious untangling of the company’s affairs” is the most sensible outcome.21 That would include a thorough and independent investigation of the Company’s affairs to ensure that any “wash-up” could be achieved in a cost-effective manner and result in the necessary finality of all outstanding disputes.
[35] For all these reasons, therefore, I find that issue (b) should be answered “no”. There are no realistic alternatives to the impasse, other than liquidation.
Conclusion
[36] The relationship between the parties has deteriorated to the point that there is a serious deadlock and the parties are not able to work together in any way for the benefit of the Company. There are no other realistic alternatives to the impasse, except
18 Strachan v Denbigh Property Ltd, above n 11.
19 Under s 174(2)(a) of the Companies Act 1993.
20 Strachan v Denbigh Property Ltd, above n 11, at [60].
21 Strachan v Denbigh Property Ltd, above n 11, at [62].
liquidation, and no other factors going to justice and equity suggesting I should not exercise my discretion and place the Company into liquidation.
Result
I make the following orders and directions:
(a)The first defendant, Te Hoe Dairies Ltd, is placed into liquidation pursuant to s 241(4)(b) of the Companies Act 1993. It is just and equitable to do so.
(b)I appoint Mr Dennis Clifford Parsons, licenced insolvency practitioner, as the liquidator. The terms and conditions of his appointment, and his rates of remuneration are as set out in his consent to act of 5 July 2021.
(c)Advertising is to be dispensed with.
[38]My orders are timed at 3.00 pm on 22 July 2021.
[39] As to costs, I am of the preliminary view that having succeeded, the plaintiffs are entitled to costs plus disbursements, and on a 2B basis.
[40] If the parties cannot agree on costs, then memoranda (no more than three pages’ length) are to be filed and served within 14 days.
Associate Judge P J Andrew
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