Mirza v Singh

[2021] NZHC 2081

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-1236

[2021] NZHC 2081

UNDER

Part 18 of the High Court Rules 2016

AND UNDER

Section 174 of the Companies Act 1993

IN THE MATTERS

of 1974 Limited and Victoria Station Limited

BETWEEN

AREEB BAIG MIRZA

Plaintiff

AND

HARMANPREET SINGH and ANGELA GEETA SURESH GAIKWAD

Defendants

Hearing:

28 July 2021

Appearances:

B P Rooney for the Plaintiff

B J Norling and A Cherkashina for the Defendants

Judgment:

11 August 2021

JUDGMENT OF HARLAND J

This judgment was delivered by me on 11 August 2021 at 4:00 pm Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar  Date:………………………..

Counsel/Solicitors:

B P Rooney, Barrister, Auckland  [email protected]
T Hibbitt, Lovegroves, Auckland  [email protected]

B Norling, Norling Law, Auckland  [email protected] A Cherkashina, Norling Law, Auckland  [email protected]

MIRZA v SINGH and GAIKWAD [2021] NZHC 2081 [11 August 2021]

Introduction

[1]    The parties  are  the  three  directors  and  shareholders  of  1947  Limited  (the company); however, they have fallen out as a result of the plaintiff raising issues to do with discrepancies between the cash takings generated by the business between November 2016 and April 2021 and that which has been banked. In the substantive proceeding, the plaintiff alleges that the defendants have engaged in an oppressive or unfairly discriminatory/prejudicial conduct as it is outlined in s 174 of the Companies Act 1993 (the Act).

[2]    The defendants, who are husband and wife, have given notice to convene a shareholders meeting, the purpose of which is to resolve to remove the plaintiff as a director. The plaintiff seeks an interim order restraining them from doing so, which the defendants oppose. 1

[3]    I have decided to grant the plaintiffs application. This judgment sets out my reasons for that decision.

Background

[4]The parties have, since recently, been good friends and business partners.

[5]    In 2016 they decided to open an Indian restaurant together. The company was incorporated, and they purchased an existing restaurant business with the plan to undertake renovations later. The restaurant opened for business in 2017.

[6]    Initially the shareholding in the company was allocated 50 percent to the plaintiff and 50 percent to Mr Singh, with both appointed as directors. The Companies Office extract annexed to Mr Singh’s affidavit however shows that on 8 March 2017, 9 and 27 April 2017, Ms Gaikwad presented to that office amended share allocations, the last of which showed the plaintiff holding 37 percent of the shares, Mr Singh holding 32 percent and which Ms Gaikwad holding 31 percent. Although in each party’s affidavit, they accepted the shareholding as it is revealed in the Companies

1      Fitzgerald J, as Duty Judge, made an order on 12 July 2021 that pending further order of the Court, the plaintiff is not to be removed as a director of the Company.

Office extract, the plaintiff now contends that he did not sign a share transfer and that the originally 50 percent shareholding allocated to him is accurate. The parties agreed given the factual dispute about this, it was an argument for another day.

[7]    As all three parties are the directors of the company, the responsibilities that flow from this apply equally to them all.

[8]    The plaintiff and the defendants each work for the benefit of the company in different roles. These have not changed much over time. The defendants have the day- to-day responsibility for the management and administration of the company, including on-site supervision, banking of any cash receipts from sales in the restaurant and all financial and staff administration matters. The plaintiff’s role in the company is to attend to IT and marketing matters. Both defendants receive a salary from the company and in addition, the plaintiff and the defendants receive a shareholder salary.

[9]    The restaurant business operated by the company has been very successful. Although COVID-19 had an impact, by the end of last year, the business had recovered and appeared to the plaintiff to be thriving. He was therefore surprised when Mr Singh told him at the beginning of this year that the shareholders payments would have to cease because things were very tight.

[10]   The plaintiff decided to investigate the company’s financial situation. He asked the company’s accountant, Mr Khan, for a profit and loss account. This showed a large loss for the year, some of which the plaintiff accepts was attributable to coding and other such errors, however, Mr Khan’s examination of the company’s financial position also revealed that there were discrepancies between the takings recorded in the point of sale system (POS system) and the takings that had been banked.

[11]The plaintiff became concerned that cash sales were not being banked.

[12]   Two directors’  meetings  followed,  one  on  20 April 2021  and  another  on 7 May 2021. Explanations were given for the various discrepancies, but they did not satisfy the plaintiff. Inevitably the parties’ relationship deteriorated.

[13]   The plaintiff decided to instruct Mr Kemp, an independent forensic accountant, to provide a report. He also withdrew $100,000 from the company’s bank account on 16 June 2021, which he said was to pay for the forensic accountant and legal services. This was not approved by the board of directors.

[14]   The plaintiff then discovered that since 17 June 2021, the defendants had withdrawn $233,250 from the company’s bank account mostly under the narration “mortgage” even though the company does not have a mortgage. This was not approved by the board of directors.

[15]   On 25 June 2021, the plaintiff withdrew a further sum of $9,156.87 from the company’s bank account without the consent of the Board, but these funds were repaid to the company on 29 June 2021.

[16]   The defendants say the plaintiff also blocked their access to the company’s Xero account, social media, web domain and email accounts, which he denies.

[17]Lawyers became involved.

[18]   On 29 June 2021, Mr Singh sent the plaintiff a notice of a special general meeting of shareholders to be held on 14 July 2021, the only business of which was to remove the plaintiff as a director. At that stage the plaintiff considered he was a minority shareholder and that the defendants would vote to remove him as a director.

[19]   These proceedings were filed. In their notice of opposition the defendants seek orders against the plaintiff including asking the Court to remove him immediately as a director.

[20]   On 12 July 2021, Fitzgerald J made an interim order that the plaintiff not be removed as a director until further order of the Court and that the balance of the

$100,000 funds be deposited in the plaintiff’s solicitors trust account and remain there undispersed until further order of the Court. Counsel confirmed this has been done. The sum of just over $77,000 is held undispersed as ordered in the plaintiff’s solicitors trust account.

[21]   The defendants have since removed funds from the company’s bank account and placed them into the bank account of another company that may have been removed from the companies register. The defendants say they have done this to prevent further unauthorised withdrawals by the plaintiff, which they say at least in relation to the $100,00 has put the company in a difficult position in relation to the payment of monies owed to the IRD. They say that they place funds from this account into the company’s bank account to pay the company’s bills when they arise. This means the company’s bank account is operating at the limit of its overdraft.

[22]   The plaintiff counters this by claiming that the gross takings from the business for the month of May 2021 were the best yet and for the month of June, the takings were significantly more than for the same month last year. He submits that the dispute between the parties is having no impact on its financial health.

[23]   After the hearing before me on 27 July 2021, I intimated to the parties that I did not consider the application to be as urgent as had initially been thought, but that I would give the decision priority.

[24]   On 4 August 2021, counsel for the defendants sought to file a further affidavit from Ms Gaikwad alleging that the plaintiff had deducted $5,902.20 from the company’s account to purchase a computer on 2 August 2021 without the authority of the Board, having given the defendants very short notice (a matter of minutes) that he was going to do so. It was provided as “of an updating nature only.”

[25]   The plaintiff opposes admission of this additional evidence, which in any event requires leave.2 In the absence of a proper application or consent to admit the affidavit by the plaintiff, I decline to do so.

Approach to interim orders

[26]The application is for interim orders under r 7.53 of the High Court Rules 2016.

2      Section 98 Evidence Act 2016.

[27]   The general principles that apply are well established. The Court must consider whether there is a serious issue to be tried and if there is, whether the balance of convenience favours the granting of the interim relief sought. Finally, the Court must consider where the overall justice of the case lies.3

[28]   In this case, the application is supported by the affidavits from the plaintiff,4 an affidavit from the company’s accountant Mr Khan,5 an affidavit from Mr Shah, an employee of the restaurant since 2017 and it’s the restaurant manager from March 2020 until he resigned on 22 June 2021,6 and an affidavit from Mr Kemp, the forensic accountant referred to above.7

[29]   The defendants’ case was supported by affidavits from each of the defendants and Mr Giroti, the assistant restaurant manager.8

[30]    The affidavit evidence reveals factual disputes, including in relation to the parties’ respective shareholding in the company, their financial contributions to the company and importantly, the reasons for the discrepancies between the takings and the banking.

[31]   As has been said before, the Court’s approach to interim relief does not extend to resolving conflicts of evidence apparent on the affidavits even though such matters may be relevant and important to the claims of the parties.9 I bear this statement of principle in mind when I assess the evidence that applies to each of the considerations I am required to address.

Is there a serious question to be tried?

[32]   The defendants accept there is a serious question to be tried in relation to s 174, however they submit the plaintiff has failed to establish it in relation to his allegations

3      Klisser’s Farmhouse Bakeries Limited v Harvest Bakeries Limited [1985] 2 NZLR 129 (CA), at [142].

4      Dated 7, 8 and 14 July 2021.

5      Dated 8 July 2021.

6      Dated 7 July 2021.

7      Dated 5 July 2021.

8      Dated 22 July 2021.

9      Van der Fluit v O’Neill [2021] NZHC 1615.

because he has produced evidence that is incomplete and he has failed to demonstrate that his removal as a director is done for an improper purpose as outlined in s 174 of the Act.

[33]   The substantive proceeding comprises an allegation by the plaintiff that the defendants have failed to account for cash takings generated by the company’s business between November 2016 and April 2021.10 Because of this, the plaintiff claims that the affairs of the company have been and are being conducted by the defendants in a manner that is unfairly prejudicial to him in his capacity as a shareholder and in breach of the duties the defendants owe to the company as directors. The plaintiff seeks orders directing the defendants to account to the company, co- operate in all respects in any enquiries into the affairs of the company, and that they transfer their shares in the company to him.

[34]   As outlined by Cooke J in Bi v Westcoast Mining Limited and others,11 the approach to s 174 is well established. The leading case is Thomas v H W Thomas Limited12 and Latimer Holdings Limited v SEA Holdings NZ Limited,13 Cooke J said:14

Section 174 concerns oppressive, unfair discriminatory, or unfairly prejudicial conduct towards a member of the company. What is involved is an assessment of the full circumstances giving rise to the issue before the Court in light of the overall scheme and purpose of the relevant provisions of the Act. In essence, this section is directed to abuse of power, or a visible departure from the standards of fair dealing. Whether there has been an abuse is considered objectively. The fact that the conduct complained of is within the powers of a defendant does not mean it is permitted if it involves such an abuse.

[35]   The plaintiffs claim for interim relief is supported by Mr Khan and Mr Kemp. Both have examined the till records and bank statements provided to them by the plaintiff.

[36]   Mr Khan deposed that from November 2016 to April 2021, $466,962.47 which was recorded as having been paid into the restaurant’s tills in cash was not banked. He

10 The substantive proceeding also makes similar allegations against the defendants in relation to Victoria Station Limited in which the plaintiff is a former shareholder in and former director, however, this part of the proceeding is not relevant to the interim orders sought by the plaintiff.

11     Bi v Westcoast Mining Limited and others [2019] NZHC 860.

12     Thomas v H W Thomas Limited [1984] 1 NZLR 686 (CA).

13     Latimer Holdings Limited v SEA Holdings NZ Limited [2005] 2 NZLR 328 (CA).

14 At [11].

has observed the cash-up process followed at the end of each day and notes that the banking is done exclusively by the defendants. He expressed the opinion that there is no innocent explanation for this scale of discrepancy.

[37]   Mr Kemp’s affidavit attaches his report dated 1 July 2021. It provides a preliminary opinion based on the information made available to him, the idea being that the next stage would involve a more thorough forensic analysis of the business operations, cash takings and potential losses sustained by the company and would require further information, particularly for the period before August 2019 when the new POS system was installed. Despite this, the report concludes that between 20 August 2019 to 25 April 2021 an amount of $105,897.28 of cash is unaccounted for without considering whether sales and receipt of funds have occurred outside of the POS system. The report recommends that further investigation be undertaken in relation to that issue as part of the next stage of engagement.

[38]   Mr Shah’s affidavit provides a summary of the cash-up procedure undertaken at the end of each day, a system he described as fool-proof.

[39]   The defendants say that the plaintiff’s claim amounts to an allegation of misappropriation of funds from the company by them, which they strenuously deny. They say that the accusations arise because the plaintiff does not understand the sales recording and reporting systems. They say that the allegations are based purely on limited POS system reports, namely the expected sales reports, but there are other reports, the actual sales reports from the POS system and the manual cash up record sheets, that need to be included in the analysis.

[40]    The defendants say that all the relevant information was not provided to Mr Kemp and therefore his preliminary opinion is flawed. Other reasons are advanced to challenge Mr Kemp’s opinion; however, these are less compelling. Overall, the defendants submit that Mr Kemp’s evidence falls short of establishing misappropriation, rather it only highlights discrepancies and for considerably lower amounts than those claimed by the plaintiff.

[41]   In relation to Mr Khan, the defendants’ approach has been to say that he does not have the competence, knowledge or experience to resolve the discrepancies, he is not a chartered accountant, he has regularly acted unprofessionally, is conflicted and is acting in the best interests of the plaintiff and not the company. They wish to replace him with a firm in which a friend of theirs is one of the senior accountants. This firm has sent notice to uplift the files from Mr Khan, however the plaintiff says that this change was not discussed or agreed by the directors.

[42]   The defendants highlight the unauthorised withdrawal of funds by the plaintiff from the company’s accounts and contend that he has restricted their access to the company’s Xero accounts, social media, web domain and email accounts. All these things they say mean that the plaintiff does not come to the court with clean hands and favours their counterclaim that he should be removed as a director as he is not acing in the best interests of the company.

[43]   The plaintiff counters this by claiming he has not restricted any access to any accounts (and provides evidence to support this) and he refers to the withdrawal of funds from the company’s accounts by the defendants.

[44]   Although the actions of the plaintiff in removing the $100,000 are concerning, a matter noted by Fitzgerald J, her order has ensured that the balance of the funds remains undispersed in the plaintiff’s solicitors trust account. Ordinarily the withdrawal would militate against the granting of an interim injunction, however the defendants may also have removed funds from the company’s accounts without following proper processes.

[45]   All the above is set out to indicate the level and extent of the dispute between the parties, which cannot be resolved on an application such as this. I am satisfied that there is a serious question to be tried in the substantive proceedings and that the steps taken by the defendants to convene a meeting to remove him as a director in the context of this company and the factual scenario are related to it.

[46]This part of the test has been met by the plaintiff.

Balance of convenience

[47]   I next consider whether the balance of convenience favours the making of the order sought or not.

[48]   The plaintiff submits he needs the order to obtain information and to recover the money he alleges is missing. The defendants submit that as a shareholder he can access the information he needs and, in any event, because litigation has commenced, he will be entitled to discovery. Counsel for the defendant highlighted that the cause of actions relates to the plaintiff’s rights as a shareholder not as a director. Furthermore, they say that he could be adequately compensated if he succeeds with an award of damages.

[49]   As to the prejudice to them and to the company, the defendants submit the plaintiff’s actions have resulted in the company being unable to pay its debts and losing engagement on social accounts. Any losses attributable to the latter were said to be difficult to value. They also question the strength of the plaintiff’s undertaking as to damages, which they submitted did not provide any details about his financial position, against a background where they allege at least at the time the business started, the plaintiff’s financial position meant that he could not contribute his agreed share of the capital needed to establish the business. This they say was the reason his shareholding in the company was reduced from 50 per cent to 37 per cent.

[50]   The plaintiff on the other hand submits that the orders are sought to preserve the status quo pending resolution of the underlying issues, that an award of damages will not be capable of compensating him if he is removed as a director, and more importantly that he would not be entitled to the kind of information needed to further investigate the reasons for the discrepancies the independent investigations have revealed in the financial affairs of the company.

[51]   The defendants did not support the contention that the company was in financial difficulty by providing copies of any financial information. Neither did they provide a satisfactory answer to the current operation of the company’s bank account. Although the plaintiff would be entitled to some financial information as a shareholder, he would not be privy to the same amount of information as a director.

I am not satisfied in the context of the current allegations that an award of damages would compensate the plaintiff if he is removed as a director.

[52]   I am satisfied that the balance of convenience favours the status quo until a proper investigation into the company’s financial affairs can be undertaken by an independent expert. Mr Kemp is well placed to provide the level of detail required and could independently and fairly assess and take into account the claims by the defendants in relation to the POS system and cash-up process which they say explains the discrepancies. Arranging for an independent opinion about what has occurred and making recommendations about how the company can be better managed in the future would not be difficult to achieve.

Overall justice

[53]   I have carefully considered the defendants submissions that the plaintiff did not come to the Court with clean hands because of his actions in relation to the

$100,000. The plaintiff has, however, also raised concerns about the defendants’ use of company funds which also warrant further investigation.

[54]   I have carefully considered whether the degree of conflict between the parties means that they are unable to fulfil their duties as directors to act in the best interests of the company. This is important because the company employs 25 people, but as I have already observed, despite the conflict between the parties, the business appears to be thriving. A considered approach by both parties to their role as directors coupled with advice about their rights and duties as directors would, in my view, provide a way through the current impasse.

[55]   I am satisfied that the overall justice of the case requires the maintenance of the status quo.

Result

[56]   The plaintiff’s application is granted. The orders of Fitzgerald J are continued until further of the Court, both in relation to holding any shareholders meeting to

remove the plaintiff as a director and in relation to the company funds held in the solicitors trust account.

[57]   The substantive proceeding, however, needs to be closely timetabled to a hearing. I invite counsel for the parties to propose a timetable to address the proceedings to be called in the Duty Judge List on 19 August 2021, at 10:00 am for review. If a timetable can be agreed, it can be dealt with on the papers.

Costs

The plaintiff is entitled to costs. The plaintiff is to file any memorandum as to costs within five working days (page limit of five pages to apply) and the defendants are to file any memorandum in reply within a further five working days (page limit of five pages to apply).

Harland J