Miyamoto International New Zealand Limited v Foster Street Properties Limited
[2016] NZHC 1751
•29 July 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-481 [2016] NZHC 1751
BETWEEN MIYAMOTO INTERNATIONAL
NEW ZEALAND LIMITED Plaintiff
AND
FOSTER STREET PROPERTIES LIMITED
First Defendant
124 CENTRAL LIMITED Second Defendant
Hearing: 25 July 2016 Appearances:
M Freeman for Plaintiff (via audio-visual link) D J Ballantyne for Defendants
Judgment:
29 July 2016
JUDGMENT OF MANDER J
[1] In December last year, Miyamoto International New Zealand Limited (Miyamoto) obtained a freezing order restraining the second defendant, 124 Central Limited (Central), from selling its sole asset, namely a building situated in Peterborough Street, Christchurch (the building).1 Central has now made application to vary the terms of the freezing order to facilitate a sale of the building on the condition the balance of the proceeds of sale (if any) be held on trust pending the finalisation of the litigation between the parties.
Background
[2] In 2013, the first defendant, Foster Street Properties Limited (Foster), entered into a conditional agreement to purchase the building. Miyamoto, which has
expertise in structural design work and earthquake strengthening, was approached by
1 Miyamoto International New Zealand Ltd v Foster Street Properties Ltd [2015] NZHC 3086.
MIYAMOTO INTERNATIONAL NZ LTD v FOSTER STREET PROPERTIES LTD & ANOR [2016] NZHC
1751 [29 July 2016]
the directors of Foster about participating in the purchase and development of the building. Miyamoto alleges the parties agreed Miyamoto would acquire a shareholding in the nominee company which was to take ownership of the building. The building was purchased, however, the company originally intended to own the building, and incorporated for that purpose, was not ultimately nominated as the purchaser. Rather, Central was nominated by Foster as the purchaser. Miyamoto contends that Central is controlled by Foster and its directors, and that in breach of the agreement it has been excluded from a share in the nominee company and thereby from sharing in the sole asset, namely the building which effectively represents the value of the company.
[3] After concluding Miyamoto had a good arguable case and there existed a real risk the value of the company would be significantly reduced if the building was sold and the proceeds distributed, a freezing order was granted. I was satisfied that in the event of a sale neither corporate defendant would be able to meet a prospective judgment for the value of Miyamoto’s claimed shareholding in Central. The worth of any judgment that Miyamoto may subsequently obtain would be rendered partly or wholly unsatisfied in the absence of a freezing order being made. I considered an order was necessary to prevent the disposition of the building to meet these legitimate concerns.
Central’s case for variation
[4] Central maintains it was incorporated to develop the building and secure tenants for the purpose of sale as a going concern. The development was largely completed and the building tenanted in 2014. However, two important pieces of work remain to be completed. The first is the installation of a lift and the second remedial repairs to fix leaking on one side of the building. Central considers this work to be critical to maintain the existing tenancies and rental income stream, and for the property to be saleable.
[5] Notwithstanding the imposition of the freezing order, in late May Central obtained an offer to purchase the building for $3 million from a company identified as “Win Sor 45 Limited and/or nominee”. That offer is subject to due diligence by
the purchaser, the installation of the lift and the completion of the repairs. It is also subject to a guarantee of full rental in respect of the currently vacant mezzanine floor from a related third party, Taurus Group Ltd (Taurus).
[6] Central seeks a variation of the freezing order to allow this sale to proceed. It maintains it will be unable to fund the completion of the necessary capital repairs, including the installation of the lift, in the absence of the sale contract becoming unconditional because the funding can only be drawn down in that event, and on the basis Taurus and its directors provide a guarantee as security for the additional lending.
[7] Furthermore, Central maintains without a variation to the freezing order it is not in a position to meet its ongoing legal costs relating both to the freezing order and the substantive proceeding, nor its ordinary business expenses, of which there are outstanding trade accounts of some $71,000. Central submitted the rationale for the imposition of the freezing order preventing a sale of the building was the concern that in such event it would be likely the sale proceeds would be distributed out of the company. Central submitted this concern can be met by the variation of the orders sought, which would require the balance of the proceeds of sale (if any) be held in trust in Central’s solicitors’ trust account subject to mandatory conditions.
[8] Central has calculated the surplus, once mortgagees are repaid, obligations to trade creditors met, and the cost of the capital works completed, to be $52,482, although there would remain liabilities to Taurus of $29,342 and to other creditors associated with the company of $292,983. Central submitted that both Taurus and the “associated creditors” have agreed to “hold over” their debts to facilitate the sale of the property. Notwithstanding such an undertaking, it is acknowledged that on completion of the sale there may be no surplus funds available to be held on trust.
[9] Based on that arrangement, Central submitted Miyamoto would not be prejudiced if the variation sought was granted. It maintains the financial statements which have been provided show Central’s debt position to be such that there is little to no value in the company, and the company’s financial position will deteriorate further unless the sale occurs.
[10] Finally, Central submitted a freezing order must not prohibit Central from dealing with the building for the purpose of disposing of assets and making payments in the ordinary course of its business, including business expenses incurred in good faith.2 Importantly, it claims it will be unable to pay its legal costs if the sale is not completed and funds made available. In particular, it cannot attend to its discovery obligations which are presently suspended pending the outcome of this application.3
[11] In summary, Central argued the building is its sole asset and it is not in a position to meet the costs it has incurred in the ordinary course of developing the building without a sale, nor able to meet its ongoing legal costs in defending Miyamoto’s claim.
Miyamoto’s opposition
[12] Miyamoto submitted that what is actually being sought is not a variation of the freezing order but effectively its cancellation. It argued the grounds supporting the imposition of the freezing order remain as valid now as they did in December
2015. Miyamoto maintains that, having regard to the background to the dispute, an evaluation of the interests of justice and balancing of the rights of the competing parties requires the freezing order to be maintained at least until Central has complied with its discovery obligations which would allow it to make an informed decision about the company’s financial situation.
[13] Miyamoto submitted that essentially Central was representing that the company was without value and that preventing a sale only worsened the financial position of the company and prejudiced the position of its creditors. Miyamoto does not discount that this may be the position, but maintains it would be premature to allow the sale and therefore deprive the company, in which it has a claimed shareholding, of its only asset. I discern it makes that submission essentially for
three reasons.
2 High Court Rules, r 32.6(3)(c).
3 Miyamoto International New Zealand Ltd v Foster Street Properties Ltd HC Christchurch CIV-
2015-409-000481, 1 June 2016 [Minute of Associate Judge Matthews].
Absence of discovery and limited financial information
[14] Miyamoto does not accept that Central cannot meet its discovery obligations. Miyamoto has complied with its discovery duties, however, Central has not discharged its reciprocal obligations. Discovery was to be completed by 19 April. Miyamoto agreed to an extension to 13 May. Discovery was not completed. At the end of that month, Miyamoto sought directions from the Court. Having been advised by Central that it would be seeking a variation of the freezing order, an order requiring discovery was suspended pending the outcome of this application.
[15] Miyamoto’s contention is that it is entitled to a shareholding in Central and, as such, would be entitled to access the company’s financial information and participate in the decision regarding such a major transaction as the sale of the company’s sole asset. In relation to the financial statements recently supplied, Miyamoto submitted the value of the shares is not entirely dependent on the balance sheet position of the company, but would likely include an assessment of its future income potential, its ability to reduce its debt and the likely appreciation of its commercial asset. No valuation of the shares has been carried out, and Miyamoto maintains that it does not have the information available to it to undertake that exercise itself.
The true identity of the prospective purchaser is unknown
[16] Miyamoto has expressed concern about the true identity of the prospective purchaser. The shareholder of the purchasing company is a trustee company operated by Central’s solicitors. It is therefore unable to assess whether this is a related party transaction. While representations have been made that it is at arm’s length, the beneficial owners of Win Sor 45 Limited are unknown.
Status of retained funds
[17] Miyamoto has questioned the status of the $52,482, described as the anticipated surplus after the sale. Although this is clearly only an indicative figure there may well be no surplus at all. Miyamoto observes the mortgagees will have to
be repaid. The second mortgagee is a private lending trust, in respect of which
Miyamoto has limited information and Taurus holds a third ranking mortgage.
[18] Miyamoto argued that, in the absence of discovery being completed, it cannot independently assess how its claim would be affected by the proposed sale, and that potentially its position will be irreversibly prejudiced.
Decision
[19] Central relies upon the principle that a freezing order should not prohibit the payment of legal expenses, nor the disposal of assets, or the making of payments in the ordinary course of the company’s business, which it says is the development, tenanting and sale of the building. Furthermore, it maintains that by allowing the freezing order to be sustained, and preventing a sale, Miyamoto is effectively being given priority over Central’s other creditors.
[20] I accept that a freezing order is not intended to give a plaintiff priority over assets held by a defendant, and existing creditors are entitled to have their contractual commitments honoured notwithstanding a defendant being subject to a freezing order. The jurisdiction is not intended to give a plaintiff security or priority
in respect of an amount claimed.4 However, in the present case, the nature of
Miyamoto’s claim must be kept in mind. As already observed, Miyamoto’s claim is not as a creditor of either Foster or Central; its claim is that it is a shareholder of Central. Unlike creditors, many of which are associated interested parties, Miyamoto’s claim is far more fundamental going as it does to the ownership of the company itself.
[21] While it is normal to permit a defendant access to assets to cover legal costs to defend the proceeding, this will always be case dependent.5 In the present case there is only one asset and the risk of releasing that asset from the defendant
company’s ownership for the purpose of meeting legal costs needs to be examined
4 Li v Li HC Auckland CIV-2011-404-7393, 2 December 2011 at [10], citing An Ying International
Financial Ltd v Li HC Auckland CIV-2004-404-6952, 6 April 2005 at [81]-[83].
5 TGB Holding Ltd v BFP Trustees No 1 Ltd HC Whangarei CIV-2009-488-566, 8 April 2011.
against the wider circumstances of the company’s financial position. Similarly, as it
relates to payments in the ordinary course of business.
[22] Central maintains that it cannot afford to complete discovery in the absence of the sale of the building. The basis for that assertion appears to be premised on the company being insolvent (although that is denied) in the absence of being allowed to sell the building, and that it has no other course available to it to pay for this discrete piece of legal work. The evidence, however, does not appear to bear that out. The interests associated with the company are prepared to underwrite further borrowing to complete the required lift instalment and other work as part of the sale of the building but do not appear prepared to provide similar support to advance what I consider to be an equally critical precondition to the sale of the building.
[23] The central contention upon which Central’s argument is advanced is that its financial situation is such that Miyamoto has nothing to gain by the company retaining ownership of the asset. It claims that Miyamoto’s position is no better served by preventing the sale. It maintains any residual value in the company will be reflected in the estimated balance of $52,482 which can remain subject to the order.
[24] Miyamoto does not dispute this may be the case but, having regard to the claim for a shareholding in Central, insists it is entitled to be fully informed and that it be provided with all relevant discoverable information which bears on that assessment. In essence, that in the absence of Central discharging its discovery obligations there can be no confidence that Central’s analysis is valid. That is not an onerous requirement in the circumstances.
[25] There is an onus on Central to satisfy me the freezing order should be varied and, in my view, that turns on whether I can be satisfied that it cannot attend to the discovery task in the absence of selling the building.
[26] I do not consider that to be the case. On 5 July, Central renegotiated its credit agreement with its bank. Further advances provided by that facility will fund the capital repairs and the installation of the lift. It is claimed the drawdown of this funding is dependent upon the sale contract with Win Sor 45 Limited becoming
unconditional. Miyamoto challenged that contention, submitting it could find no such condition in the facility agreement, and I have not been directed to any documentation which confirms that requirement.
[27] In one of the schedules to the loan agreement, a facility of $150,000 is listed for the purpose of assisting with the installation of the lift. It provides that the facility must be drawn in full on 15 July 2016. A further facility of $15,000 is provided for working capital purposes. This is an on-demand facility. Neither facility makes reference to a requirement there be an unconditional sale agreement before the funds can be drawn upon. On the face of the documentation, funds were available to be drawn upon for the purpose of the installation of the lift and the other works at the time of the hearing of Central’s application for variation.
[28] Attached to the loan documentation is a director’s certificate attesting to the solvency of the company, namely that it is able to pay its due debts and will not become insolvent as a result of entering into the July 2016 transactions. This appears to conflict with Central’s primary contention that its financial situation is such that it is dependent on the sale of the building for its financial survival which presently, on its own summary of its financial position, depends on the forbearance of related parties.
[29] There is no reason why Central ought not consider Miyamoto’s extant claim to a shareholding as being a similar hurdle to effecting the sale with Win Sor 45
Limited as the provision of a lift and the completion of works to fix the leaks in respect of which it has obtained funding. As matters presently stand, the initial apparent impediment to progressing the litigation is Central’s failure to comply with its discovery duties. Having read the affidavits filed in support of each party’s position and the accompanying exhibits, I am not satisfied Central does not have available to it the means to meet the limited legal costs associated with attending to its discovery obligations.
[30] When Central entered into the sale with “Win Sor 45 Limited and/or nominee” it was fully aware of Miyamoto’s claim and, of course, of the existence of the freezing order, but it chose to proceed. Miyamoto acknowledges and
understands Central’s contention that the value of its shares will not be affected by whether the company retains or sells its only asset. However, its concern is that, as matters presently stand, there is no means by which an informed independent assessment of the position of the company can be completed. As a result, in the absence of being able to undertake that exercise, the original rationale for the freezing order remains undisturbed. Before any decision is made allowing Central to dispose of the company’s only asset to a third party, Central should be required to complete its discovery obligations.
[31] I do not consider that to be an unreasonable position in the present circumstances. Nor, as I have observed earlier, do I consider Central to be without the means to attend to that exercise having regard to its ability to fund the installation of the lift and the capital works necessary to allow the sale to proceed. Central is in receipt of income from rental from the building’s tenants and has demonstrated, as recently as this month, an ability to raise further funds to take the necessary steps to complete the development for the purpose of sale. Attending to its discovery obligations in respect of the present litigation should not be viewed as any less of a priority. Central has chosen to continue to market the building notwithstanding the existence of the freezing order, and it must have done so in the knowledge of its obligations as a party to this litigation.
[32] Because of the competing potential consequences for the parties, in my view, before there is a reconsideration of the present terms of the freezing order Central should complete its discovery obligations. Once discovery has been completed and Miyamoto had the opportunity to consider that information, Central is entitled to have the situation reassessed.
[33] Accordingly, Central’s application to vary the freezing order is declined. Central is to attend to its discovery obligations which have been suspended pending the outcome of this application. It will be necessary to set a short timetable by which Central is to file and serve its affidavit of documents and provide for inspection by Miyamoto. A timeframe will also need to be imposed on Miyamoto to consider its position in light of that discovery, at the end of which Central should be afforded the opportunity to renew its application.
[34] The parties are best placed to assess a realistic timetable, and I require counsel to consult with a view to agreeing appropriate directions. In the absence of such agreement, it will be necessary to convene a telephone conference.
[35] The costs of and incidental to Central’s application for variation of the
freezing order are reserved.
Solicitors:
Thomas Dewar Sziranyi Letts, Lower Hutt
Canterbury Legal, Christchurch
Anderson Creagh Lai, Auckland
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