McVitty v Waewaepa Station 2002 Limited

[2016] NZHC 765

IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY

CIV-2015-435-000021 [2016] NZHC 765

UNDER	the Companies Act 1993
IN THE MATTER	of an application under section 179 of the Act for an investigation of records
BETWEEN	JAMES ROBERT MCVITTY Plaintiff
AND	WAEWAEPA STATION 2002 LIMITED Defendant

Hearing:	21 April 2016
Counsel:	J W Maassen and M W G Riordan for Plaintiff M J Neill for Defendant
Judgment:	22 April 2016

JUDGMENT OF COLLINS J

Introduction

[1]      James McVitty is a director and shareholder of Waewaepa Station 2002 Ltd (Waewaepa).  He has applied under s 179 of the Companies Act 1993 (the Act) for orders appointing an auditor to audit the accounts of Waewaepa for the financial years ending 30 June 2012, 2013, 2014 and 2015.   He also seeks a full livestock reconciliation.

[2]      Section 179(1) of the Act provides:

179     Investigation of records

(1)       The Court may, on the application of a shareholder or creditor of a company, make an order authorising a person named in the order at a time specified in the order, to inspect and to make copies of, or take extracts from, the records or other documents of the company, or

MCVITTY v WAEWAEPA STATION 2002 LIMITED [2016] NZHC 765 [22 April 2016]

such of the records or documents of the company as are specified in the  order,  and  may  make  such  ancillary  order  as  it  thinks  fit, including an order that the accounts of the company be audited by that person.

...

[3]      Under s 179(2) of the Act, I can only exercise my discretion to make the orders sought by James McVitty if I am satisfied that the application is made in good faith, the proposed inspection is made for a proper purpose, and the person to be appointed is a proper person for the task.

Background

[4]      Waewaepa   owns   and   operates   a   sheep   and   beef   farm   comprising approximately 2,500 hectares in the Wairarapa.

[5]      Waewaepa was incorporated in March 2002 as a joint venture between the McVitty and the Currie families.   There are two million shares in Waewaepa, of which one million are held by four representatives of the McVitty family and the other one million shares are held by four representatives of the Currie family.  There are currently four directors, namely James McVitty and William McVitty, who are brothers, and Cameron Currie and his father, Shaun Currie.

[6]      Shaun  Currie is  the farm  manager  and  is  responsible for the  day-to-day operations of Waewaepa.  James and William McVitty live and work in the United States.

[7]      In  his  affidavit  in  support  of  the  application,  James  McVitty says  he  is concerned the “Currie interests have being taking advantage of the McVitty interests’ isolation  from  the  day-to-day  operations  of  Waewaepa  and  are  exploiting  the company for their own personal benefit”.1

[8]      James McVitty says the relationship between the McVitty and the Currie families has deteriorated over time.   Part of that deterioration has, according to

James McVitty, related to the management of another family company, Te Rimu

Station Ltd (Te Rimu).

[9]     In his affidavit, James McVitty says the following matters warrant the appointment of an auditor of Waewaepa under s 179 of the Act:

(1)Unauthorised  use  of  Waewaepa  funds  by  members  of  the  Currie family to pay Te Rimu accounts.

(2)       Significant unauthorised increases in Shaun Currie’s salary.

(3)Unapproved  and  unbudgeted  personal  drawings  from  Waewaepa made by members of the Currie family.

(4)       The transfer of over 2,000 sheep from Te Rimu to Waewaepa in late

2012.  James McVitty says this led the Bank of New Zealand Ltd (the BNZ)  to  place  Te  Rimu  into  receivership  and  issue  proceedings against Waewaepa.   Summary judgment was obtained by the BNZ against Waewaepa on 12 December 2013 for a sum close to $90,000 as damages for conversion.2

(5)The loss of the McVitty family’s investment of approximately $1.5 million in Te Rimu.

[10]     James McVitty says that despite the efforts of his brother and himself, the relationship between the McVitty and Currie families has deteriorated to the point where the Board of Waewaepa does not function effectively.

[11]     An example of the escalation of the conflict between the McVitty and Currie families can be seen in one aspect of the current litigation.  Waewaepa has opposed the application under s 179 of the Act.  It has done so because Shaun Currie and his family believe the appointment is unnecessary.   Waewaepa has instructed lawyers, filed a notice of opposition and filed affidavits in opposition without obtaining a

directors’ resolution or seeking an order from the Court under s 165 of the Act.  In response, James McVitty has filed an application to strike out the steps taken by Waewaepa in opposition to the application under s 179 of the Act.

[12]     Recognising  the  procedural  pitfalls  to  which  they  may  have  unwittingly strayed, Shaun and Cameron Currie have now applied for leave to intervene “on behalf of the company”.   In my assessment, the proper course is for Shaun and Cameron Currie to intervene in their capacity as directors and shareholders of Waewaepa.  While this means that Waewaepa is not itself represented, the interests of the company are able to be fully considered through the position advanced by Shaun and Cameron Currie.

[13]     Cameron Currie, agrees that “the McVitty and the Currie families do not have a good relationship”.3    He attributes the breakdown in the relationship of the respective families to what he describes as “unprofessional” conduct on the part of members of the McVitty family.4   Cameron Currie believes members of the McVitty family are not acting in the best interests of Waewaepa.

[14]     Cameron Currie says James and William McVitty “have full access to the records and accounts, and have not been denied access to information about the management of Waewaepa”.5    He further says, the scope of the audit sought by the McVitty interests is an attempt to impose unnecessary costs on Waewaepa.

[15]     Cameron Currie says the application to appoint an auditor has not been made in good faith.   He cites a number of examples of matters he says support this assessment. The examples he refers to include:

(1)After the failure of Te Rimu the directors of Waewaepa agreed to appoint Dr Lockhart, a member of the faculty of the Business School at Massey University to help implement a new governance structure for Waewaepa.  Cameron Currie says the McVitty interests frustrated

the appointment of Dr Lockhart and the initiatives which he wished to

3 Affidavit of C S Currie, 11 March 2016 at [10].

4 At [11].

5 At [12].

implement.  Dr Lockhart has filed an affidavit in which he criticises the conduct of members of the McVitty family and generally supports the stance taken by the Currie family.

(2)The McVitty interests have consistently refused to approve budgets and financial statements.   Cameron Currie says this has had the consequence of stymieing the ability of Waewaepa to function effectively.

(3)No apparent concerns were raised by the McVitty representatives at Board meetings in 2012, 2013 or 2014 about the absence of an audit of the company accounts.   Cameron Currie says that had concerns been raised at that time then an auditor could have been appointed to audit the Waewaepa accounts for those years.

(4)According  to  Cameron  Currie  the  McVitty  representatives  have refused to discuss with the Currie representatives concerns about the costs associated with an audit spanning all years from June 2012.

[16]     It is not possible for me to determine at this juncture who has caused the breakdown in the relationship between the two families’ interests in Waewaepa. Suffice to say that both sides of the dispute recognise that the Board of Waewaepa is not functioning in the way it should.

[17]     Despite  the  profound  differences  between  the  McVitty  and  the  Currie interests in Waewaepa, there is a substantial degree of agreement about the issues raised by the application before me.

[18]     Cameron Currie says in his affidavit that the Currie interests have never opposed the appointment of an auditor.  Their only issue concerns the scope of the audit sought by the McVitty interests.   Cameron Currie says he is “willing for an audit to take place if the scope is reasonable and budgeted for, and the auditor is

independent”.6

6 Affidavit of C S Currie, above n 3, at [39].

[19]     There  is  also  agreement  about  who  should  conduct  the  audit,  namely Grant Thornton.     Cameron  Currie  also  says  he  has  no  issue  with  a  stock reconciliation being undertaken in June 2016, which is the most convenient time for that exercise to be carried out.

Is the application made in good faith?

[20]   The natural and ordinary meaning of the phrase “good faith” carries a connotation  that  those  making  the  application  must  be  assessed  to  be  acting honestly,7  without impropriety and not attempting to misuse or abuse the powers conferred by s 179 of the Act.

[21]     To determine if an application is made in good faith it is necessary to have regard to the whole of the context in which the application under s 179 of the Act is made.

[22]     In Re Mega-Merger Housing Ltd, Heath J explained: 8

… The need to show good faith and proper purpose [under s 179 of the Act] requires proof that the applicant is seeking, honestly, to inspect documents for a purpose linked to his or her status as either shareholder or creditor.  In turn,  that  suggests  the  purpose  of  the  inspection  must  be  to  obtain information to enable the shareholder or creditor to make a decision in the capacity in which it applies.

[23]     I am concerned that the McVitty interests have not first formally applied under s 178 of the Act for the information they seek.   In Mega-Merger, Heath J recorded that:9

When a shareholder wishes to obtain information, generally the first method which ought to be employed is s 178.

Heath J said that while it is possible for a shareholder to proceed directly to an

application under s 179, that course is “the exception rather than the rule”.10

7      Jonathan Law Oxford Dictionary of Law (3th ed, Oxford University Press, Wellington, 2015). “Good faith” is defined as “[h]onesty.   An act carried out in good faith is one carried out honestly.”

8      Re Mega-Merger Housing Ltd (2005) 9 NZCLC 263,727 (HC) at [27(b)].

9      At [31(a)].

10     At [31(a)].

[24]     Notwithstanding this concern, I am satisfied that in this case the application under s 179 of the Act has been made in good faith in the context of an unfortunate deadlock between the directors and shareholders of Waewaepa, which has led to the Board being unlikely to function in the best interests of Waewaepa.

[25]     There are a number of issues about the way in which Waewaepa has been managed which cannot be resolved at this juncture.   For present purposes, it is sufficient for me to record that I am satisfied that the application has been brought honestly, and that the McVitty interests are not attempting to misuse or abuse the powers contained in s 179 of the Act.  On the contrary, I am satisfied the McVitty interests have brought their application for two legitimate purposes, namely:

(1)to determine if there is any basis for their concern that Waewaepa has been financially mismanaged; and

(2)to  provide  information  that  will  assist  the  McVitty  shareholders determine what, if any steps they should take to protect their interests.

Is there a proper purpose to the proposed audit?

[26]     Parliament has given no guidance in s 179 of the Act as to what it had in mind when it specified that the Court must be satisfied that an order under s 179 must be made for a proper purpose.  The absence of legislative prescription suggests the Court is given wide powers when determining if there is a “proper purpose” for an order under s 179 of the Act.

[27]     In  R  v  Coppel;  ex  parte  Viney  Industries  Pty  Ltd,11   a  full  Court  of  the Supreme Court of Victoria considered s 148 of that State’s Companies Act 1958, which concerned the powers of an inspector to investigate and report on the affairs of a company.  The statutory provisions considered by the Supreme Court of Victoria included the requirement that an investigator only be appointed if it was established that  “it  [was]  necessary  for  the  protection  of  the  public  or  the  shareholders  or

creditors”.12

11     R v Coppel; ex parte Viney Industries Pty Ltd [1962] VR 630.

12     At 632.

[28]     In the course of its judgment the Supreme Court said that the purpose of an investigation was to enable those “… who may be legitimately interested, to obtain by means of the report, … information as to the affairs of the company and the conduct of those associated with it, so that it may be determined what, if any, future action should be taken.13

[29]     The legislative provisions at the heart of the judgment of the Supreme Court of Victoria  are  narrower  than  the  “proper  purpose”  provisions  of  s  179  of  the New Zealand Act.  Nevertheless, I have found the observations of the Supreme Court of Victoria to be helpful.  In my assessment, a proper purpose is established under s 179 of the Act if the application is brought to enable a shareholder or creditor to obtain information about the affairs of the company so as to enable him or her to make an informed decision as to what, if any, further action should be taken to protect his or her interests.  This approach is consistent with that taken by Heath J in Mega-Merger when he explained the purposes of s 179.

[30]     I am satisfied the orders sought have a proper purpose because there is a realistic prospect they will achieve two objectives:

(1)An audit for the financial years ending 30 June 2012 to 30 June 2015 undertaken pursuant to s 179 of the Act should determine if there is any foundation to the McVitty interests’ deeply held concerns that Waewaepa has been financially mismanaged during the periods to be covered by the audit.

(2)An audit for the financial years ending 30 June 2012 to 30 June 2015 should allow the McVitty interests to determine what, if any action they should take to protect their interests.

[31]     For completeness, I record it is not necessary for me to engage in the McVitty family’s submission that a report under s 179 is necessary to ensure Waewaepa complies with its constitutional obligations to have its financial statements audited.

In my assessment, the application under s 179 is best dealt with by focusing upon the

13     R v Coppel; ex parte Viney Industries Pty Ltd, above n 11, at 639.

motives and purposes of the audit sought by the McVitty family interests, which I

have summarised in paragraphs [25] and [30].

Is the person to be appointed a proper person for the task?

[32]     There is no doubt that any of auditors nominated by the parties is a proper entity to undertake the task sought by the application.

Scope of the investigation

[33]     In view of the fact that the dispute primarily dates back to the period when Te Rimu  was  in  its  final  stages  of  operation,  it  is  appropriate  for  the  audit  to encompass the financial years ending 30 June 2012 to 30 June 2015.  The fact the BNZ obtained summary judgment against Waewaepa for conversion in 2012 raises legitimate issues about the management of Waewaepa from that period onwards.

Residual discretion

[34]     Before reaching my decision I have reflected on whether or not this case justifies the Court exercising its discretion under s 179 of the Act in favour of the plaintiff.  In my assessment, the orders I propose making are appropriate to assist in breaking an unfortunate deadlock between the McVitty and Currie families’ interests in Waewaepa.

Representation

[35]     My decision renders it unnecessary to resolve whether or not Waewaepa has acted properly in engaging lawyers to oppose the application without first obtaining a resolution of the Board of Directors, or an order under s 165 of the Act.   I will therefore not engage with that aspect of the dispute.

Terms of the order

[36]     I order the appointment of Grant Thornton to undertake audits of Waewaepa for the financial  years ending 30 June 2012 to 30 June 2015  inclusive.   Grant Thornton is also to provide a stock reconciliation, which is to be undertaken by a

suitably qualified person in June 2016.  The parties are granted leave to apply for further directions and orders if required.

Costs

[37]     Costs are reserved until the audit reports are obtained.  At that stage, counsel are to file memoranda on the issue of costs if no agreement is reached.

D B Collins J

Solicitors:

Cooper Rapley Lawyers, Palmerston North for Plaintiff

Kensington Swan, Wellington for Defendant