Mines v Lindsay
[2022] NZHC 3613
•21 December 2022
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2022-409-607
[2022] NZHC 3613
UNDER the Companies Act 1993 IN THE MATTER OF
applications under s 174 of the Act
BETWEEN
STANLEY EDWARD MINES AND LYNETTE MARY MINES
Plaintiffs
AND
TERESA LEE LINDSAY
First Defendant
NIGEL BERNARD FROST
Second DefendantNZ4U2U LIMITED
Third DefendantSERENDIPITY HOMES LIMITED
Fourth Defendant
Hearing: 21 December 2022 Counsel:
S C Cowan for Plaintiffs
No appearance by or for the Defendants
Date:
21 December 2022
JUDGMENT OF OSBORNE J
Applications
[1] I have before me an urgent application without notice for an interim injunction. The plaintiffs are each 25 per cent shareholders in a company, NZ4U2U Ltd (NZ4U2U), and a related entity, Serendipity Homes Ltd (Serendipity). The plaintiffs
MINES v LINDSAY [2022] NZHC 3613 [21 December 2022]
are husband and wife. The first and second defendants are the other equal shareholders in the companies. The first defendant is the daughter of the plaintiffs, the second defendant is her estranged partner. All four of them are directors of the companies.
Background
[2] The business of NZ4U2U has been in tiny homes. The company has both produced and held tiny homes as a rental pool let out to customers and has also produced tiny homes for custom-built sales.
[3] The plaintiffs and the first and second defendants have been involved in the business of NZ4U2U to varying extents. Recently, the parties have had discussions about the future of the business, culminating in a meeting in November 2022. The plaintiffs say that, at the meeting of the parties as directors of both NZ4U2U and Serendipity on 8 November 2022, it was agreed the directors’ previous decision to retrench the rental side of the business was to remain in place, meaning that:
(a)no new tiny homes would be constructed for the rental pool until further notice; and
(b)the companies would refinance with a mainstream lender to allow the shareholders to withdraw some of their capital contributions from the businesses and that the businesses would focus on custom-built rather than building tiny homes for NZ4U2U’s rental pool.
The focus of the requested injunctions
[4] The plaintiffs seek the Court’s intervention by way of interim injunction because of developments that have occurred since that meeting. The developments are the subject of a detailed affidavit of the first-named plaintiff, Stanley Mines. He refers to the history of the business, the circumstances in which the 8 November meeting came about and the content of that meeting, including discussions as to the plaintiffs’ proposed exit from the business. He refers to events of which the plaintiffs have become aware since the November meeting which have caused them to commence this proceeding.
[5] The plaintiffs seek a range of interim interim injunctive relief to prevent steps being taken to dispose of assets of the business and to make payments out of the business to either the first or second defendant. The more detailed aspects of the proposed interim injunction will be clear when I come to make orders shortly.
The evidence
[6] Mr Mines identifies a number of particular concerns about the conduct of one or other, or both, of the first and second defendants. The evidence establishes at least to an arguable level that the defendants have been taking steps without resolutions of the company’s board to:
(a)repay themselves current account debt;
(b)order in and/or pay for further inventory and goods, which would be explicable were the company continuing to construct further tiny houses for a rental pool; and
(c)transfer tiny houses to themselves.
[7] The latter transaction, as the plaintiffs understand it, has taken the form of a purported sale at a price described as “NBV” (understood to be “net book value”) presumably a reference to a notional valuation placed on assets within the company’s financial statements rather than based on any market valuation. Mr Mines has responsibly produced in his detailed affidavit as much detail as he and his wife have been able to obtain without full access to the company records — they have had their access to the company’s Xero accounting software removed and, for the time being, largely rely on the bank statements to which they do still have access.
[8] The plaintiffs’ concerns involve both the resulting inability of the business to meet its tax liabilities as they fall due in coming weeks, and the fact that the defendants are obtaining unauthorised repayment of current account debt ahead of the plaintiffs.
[9] The plaintiffs’ case, as succinctly pleaded in the statement of claim urgently drafted, is that the first and second defendants have been acting in breach of their
duties as directors under s 169 Companies Act 1993. In particular, that the defendants have not been acting in good faith and in the best interests of NZ4U2U. Secondly, their statement of claim pursues relief as prejudiced shareholders under s 174 of the Act. On the first cause of action the plaintiffs seek an inquiry into damages. On the second cause of action the plaintiffs seek orders under s 174 requiring the defendants to purchase the plaintiffs’ shares in NZ4U2U for fair value and to pay compensation for losses. Lastly the plaintiffs seek an order setting aside the defendants’ sale of NZ4U2U’s tiny homes to themselves.
Discussion
[10] Under s 164 of the Act on which the plaintiffs rely for their interim relief, the Court may make an order restraining a company that, or a director of a company who, proposes to engage in conduct that would contravene the constitution of the company or the Act from engaging that conduct. I am satisfied that it is clearly arguable that the conduct which Mr Mines details in his affidavit is conduct that has not been carried out in good faith in the interests of the company but has rather been conduct that has been carried out by the first and second defendants in their individual capacities in pursuit of their own interests or the interest of at least one of them. Under s 164(2) any application for such injunctive relief may be made by a director or shareholder of a company — the plaintiffs clearly fall into those categories.
[11] The approach which Mr Cowan, counsel for the plaintiffs, submits should appropriately be taken by reference to the approach taken under the High Court Rules 2016 (the Rules), and in particular rr 7.53 and 7.54, is to award relief if there is a serious question to be tried and the balance of convenience is in favour of the granting of relief. I then must stand back and assess the overall justice of the position as a final check.
[12] The relief sought by the plaintiffs has been drafted with appropriate specificity to achieve a holding position pending an on-notice application in relation to activities which might be undertaken by the first and second defendants other than in the best interests of the company.
[13] Mr Cowan has confirmed, as indicated in the memorandum that was filed with the proceedings, that the proceedings have been brought to the attention of the first and second defendants on a Pickwick basis. He has also from the bar explained to me the content of discussions that he has subsequently had with the first and second defendants respectively. The contact has been in the form of direct contact from Mr Frost and email contact from Ms Lindsay. Mr Cowan has appropriately explained to me that Mr Frost has identified in the particular forms of injunction drafted that paragraphs (d) to (g) are orders with which he “cannot agree”. Mr Cowan has identified that Ms Lindsay has stated that she “cannot agree” with the orders identified in paragraphs (e) to (g).
[14] None of the orders sought would undo any of the financial transactions already undertaken on the plaintiffs’ evidence by either the first or second defendant. All are in the nature of prohibitions or restraints on the repetition of such conduct or entry into similar conduct from this point on.
[15] It is appropriate that these orders be made on a without notice basis (albeit adopting a Pickwick procedure). The legitimate interests of both the plaintiffs and the companies might otherwise be irreparably damaged by a requirement to first proceed to a full on-notice hearing.
[16] This is clearly a case in which the balance of convenience favours the plaintiffs. The defendants will have their opportunity through an on-notice hearing to challenge any of the interim orders upon the basis of such evidence as they consider relevant to the issues before the Court. For now, I am satisfied that the prohibitions sought by the plaintiffs are necessary in the interests of NZ4U2U and of all its shareholders considered together. I will therefore make the orders sought. There are no aspects of overall justice that cut across the appropriateness of the orders.
Orders
[17]The orders of the Court are:
(a)The first and second defendants are restrained from authorising or making any payments from the bank accounts or credit cards of
NZ4U2U Limited or Serendipity Homes Limited to themselves or to any other person other than in accordance with a resolution passed by the board in accordance with Schedule 3 of the Companies Act 1993.
(b)The defendants are restrained from incurring any expenses for or on behalf of NZ4U2U Limited or Serendipity Homes Limited other than in accordance with a resolution passed by the board in accordance with Schedule 3 of the Companies Act 1993.
(c)The defendants are restrained from selling any assets of NZ4U2U Limited other than in accordance with a resolution passed by the board in accordance with Schedule 3 of the Companies Act 1993.
(d)The defendants are restrained from dissipating, utilising or dealing with any product or inventory held by NZ4U2U Limited.
(e)The first and second defendants are restrained from dissipating, or causing the dissipation of, any of the funds they have withdrawn or paid to themselves or any entity related to them from the bank accounts of NZ4U2U Limited or Serendipity Homes Limited since 1 November 2022.
(f)The first and second defendants are restrained from selling or disposing of, or causing the sale or disposal of, any of the tiny home assets they have acquired from NZ4U2U Limited.
(g)The first and second defendants are restrained from dissipating any proceeds, or causing the dissipation of any such proceeds, they have received from the sale of any of the tiny home assets they have acquired from NZ4U2U Limited.
[18]I make further orders as follows:
(a)Leave is reserved to the parties to apply to vary these orders on five working days’ notice.
(b)The plaintiffs are to effect service of the proceedings upon each of the defendants without delay.
[19] For case management purposes, I allocate a first call date of the hearing of the plaintiffs’ on-notice application at 12.30 pm on 15 February 2023 (by telephone) (set down before Associate Judge Paulsen).
Undertaking as to damages
[20] It has not escaped my attention in delivering this judgment that, while Mr and Mrs Mines have filed their undertaking as to damages, the affidavit of Mr Mines does not detail the ability of the plaintiffs to support that undertaking in financial terms. In the context of the urgency of this application that omission is understandable. I accept that it may reasonably be assumed in this context that the plaintiffs themselves have an interest in the company which remains of financial value, just as the first and second defendants have apparently viewed themselves as having such an interest through the financial steps they have apparently been taking.
[21] That said, I direct that the plaintiffs are by 20 January 2023 to file and serve any supplementary evidence in support of their on-notice application, with that supplementary evidence to include properly detailed evidence in support of the undertaking as to damages.
Costs
[22]The costs of the without notice application are reserved.
Osborne J
Solicitor:
Cavell Leitch, Christchurch
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