Morris v AEL Bloodstock Ltd HC Hamilton CIV 2010-419-205

[2010] NZHC 1719

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV 2010-419-205

UNDER  sections 174 and 241 of the Companies Act

1993

IN THE MATTER OF     an application to put AEL Bloodstock Ltd into liquidation or alternatively for an order requiring purchase of the plaintiffs' shares

BETWEEN  K P MORRIS AND ORS Plaintiffs

ANDAEL BLOODSTOCK LTD AND ORS Defendants

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY  CIV 2010-404-5860

AND BETWEEN            AEL BLOODSTOCK LTD Plaintiff

ANDKEVIN PETER MORRIS Defendant

Hearing:         22 September 2010

Counsel:         T M Braun and K I Bond for Applicants

M J Fisher for Respondents

Judgment:      22 September 2010

(ORAL) JUDGMENT OF HEATH J

Solicitors:

Harkness Henry, Private Bag 3077, Hamilton
Claymore Partners Ltd, PO Box 1382, Shortland Street, Auckland

Counsel:

M J Fisher, PO Box 3236, Shortland Street, Auckland

MORRIS AND ORS V AEL BLOODSTOCK LTD AND ORS HC HAM CIV 2010-419-205  22 September

2010

Introduction

[1]      The Cleland and Morris family interests each own (respectively) 50% of the share capital of AEL Bloodstock Ltd (AEL).  Mr and Mrs Cleland and Mr Morris are the directors of the company.

[2]      There are proceedings in both the Hamilton[1] and Auckland[2] Registries of this Court arising out of disagreements that have arisen between the two groupings.   I refer to those proceedings as the Hamilton and Auckland proceedings, respectively.

[1] CIV 2010-419-205.

[2] CIV 2010-404-5860.

[3]      In the Auckland proceeding, AEL, at the direction of Mr and Mrs Cleland, has issued proceedings against Mr Morris, in which damages in a sum in excess of

$2,500,000 are claimed.  They are alleged to have been caused through unauthorised foreign currency transactions into which Mr Morris entered, while a director of AEL. Those transactions arose as part of AEL’s livestock exporting business.

[4]      In the Hamilton proceeding, Mr Morris and the trustees of the K P Morris Trust seek, alternatively, to put AEL into liquidation or to require the purchase of their shares in the company by the Cleland interests.

[5]      The Hamilton proceeding has been set down for hearing over two days commencing  on  2  December  2010.    AEL seeks  an  order  staying  the  Hamilton proceeding or, alternatively, consolidating it with or requiring joint or consecutive hearings of it with the Auckland proceeding.[3]    That is the application with which I am dealing today.

Background

[3] High Court Rules, r 10.12.

[6]      AEL alleges that, from 2006, Mr Morris engaged in unauthorised foreign exchange swaps transactions that proved costly to AEL because the market moved

against Mr Morris’ beliefs.  The swap transactions came to light in July 2007 during an investigation undertaken by AEL’s accountants in anticipation of a proposed sale of AEL’s business.

[7]      AEL alleged that Mr Morris acknowledged fault and agreed to make good losses.   However, AEL alleges that despite an agreement to operate on terms excluding the ability to trade in foreign currency in the manner that had occurred before, two things changed in 2009 that justified reconsideration of that position.

[8]      The first allegation is that Mr Morris made statements about PGG Wrightson, without authorisation from the Board of AEL, that led to the threat of defamation proceedings against AEL.

[9]      The second is that he engaged in further unauthorised foreign exchange transactions without approval of the Board.  In this context the term “Board” means Mr and Mrs Cleland and Mr Morris, all of whom were directors of AEL at the material time.

[10]     A meeting of directors was held on 10 March 2010.  Despite notice having been given, Mr Morris did not attend.  Mr and Mrs Cleland authorised steps to be taken to investigate Mr Morris’ conduct.   A report was obtained from a company involved in forensic financial investigation.  That report indicated a loss in excess of

$2,000,000.  As a result, the Auckland proceeding was issued.

[11]     On the other hand, the Hamilton proceeding is primarily directed to obtaining an early liquidation of AEL.  Mr Morris’ objective seems to be the substitution of an independent liquidator for Mr and Mrs Cleland as the persons who are entitled to determine whether and how the Auckland proceeding against Mr Morris should continue.

Analysis

[12]     The issues on a liquidation application will be relatively narrow and will involve balancing of competing considerations to determine whether the discretion to

order liquidation should be exercised or not.[4]   On the one hand, the Morris interests will contend that because the Clelands are not prepared to buy out their interests at this time, it is appropriate to put the company into liquidation immediately.  Because of the deadlock, Mr Morris’ ability to act as an effective director, while the proceedings are underway is compromised; meaning there is a need to have an independent person determine whether the proceedings against Mr Morris should continue.

[4] In the context of a “deadlock” claim, see Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC).

[13]     When argument began today, I understood from Mr Cleland’s affidavit that the business of AEL was to continue meantime, so that any profit earned could be offset against tax  losses, to the benefit of the  shareholders of AEL.   However, counsel for AEL have indicated to me that the likelihood is that the business will not be carried on meantime.  Indeed, apart from one legacy transaction, no business has been carried on by the company for some time.

[14]     In short, AEL’s position will be that it is entirely appropriate for Mr and Mrs Cleland to control the action brought against Mr Morris and that it would be inappropriate to put the company into liquidation at this stage, due to the ability to use tax losses for the benefit of those involved in the company.

[15]     An added proposition is that it is not possible for the Cleland interests to make a commitment to buying out the Morris interests’ shares until they know whether a judgment has been obtained against Mr Morris and the quantum of that judgment.   As that will become a debt of the company to be recovered before moneys are distributed to shareholders, that issue assumes some importance in the minds of the Cleland interests.

[16]     It seems to me that there is merit in letting the Morris interests continue with their liquidation application.  However, I consider the second cause of action in their Statement of Claim is likely to expand issues unduly and would be better dealt with, if a foundation for the  claim still remained, after completion of the proceeding against Mr Morris.

[17]     For that reason, I have come to the view that the appropriate course of action is to allow the first cause of action in the Hamilton proceeding, seeking liquidation of AEL, to proceed on 2 December 2010, with the second cause of action and the Auckland proceeding being the subject of an order for consecutive hearings to take place next year, if necessary.

[18]     I am of the view that such an order can be made under r 10.12 of the High Court Rules.  A broad discretion is conferred to do what is in the interests of justice in that regard.  I adopt the approach to the exercise of the r 10.12 discretion that was articulated by Rodney Hansen J, in Medlab Hamilton Ltd v Waikato District Health

Board.[5]

[5] Medlab Hamilton Ltd v Waikato District Health Board (2007) 18 PRNZ 517 (HC).

[19]     The  factors  to  which  r 10.12(b)(ii)-(vi)  are  no  more  than  guides.    Rule

10.12(c) enables the Court to make any order it considers desirable to meet the interests of justice.

[20]     The primary relief sought by AEL is a stay of the liquidation and s 174 proceedings.  I decline that application.

[21]     However,  as  I  have  indicated,  I  consider  that  an  order  for  consecutive hearings is required in respect of the second cause of action and the Auckland proceeding.   As the liquidation application will proceed in Hamilton and as it is desirable to ensure that both proceedings are case managed together, I intend to make an order transferring the Auckland proceeding to the Hamilton Registry so that may occur.

Result

[22]     For the reasons given, I make the following orders:

a)        The first cause of action in the Second Amended Statement of Claim brought in the Hamilton proceeding shall be heard on 2 December

2010, as currently scheduled.

b)        The Auckland proceeding is transferred to the Hamilton Registry.

c)       The  Auckland  proceeding  and  the  second  cause  of  action  in  the Hamilton proceeding shall be heard consecutively in Hamilton, at a time to be fixed by the Registrar.

d)The two proceedings shall be case managed in tandem.  To that end further directions can be made by the Judge who hears the first cause of action in the Hamilton proceeding on 2 December 2010.  Counsel should be in a position to address the Judge on timetabling issues at the conclusion of that hearing, whether or not a liquidation order is made.

[23]     Costs in respect of the present application are reserved.  They are to be dealt with as part of the liquidation application on 2 December 2010.   My reason for deferring resolution of costs until that time is because, while Mr Fisher for the Morris interests was partially successful in retaining the December hearing date for the liquidation proceeding, if that proceeding were not to succeed, there may be room for orders as to costs to be assessed in light of both applications that are dealt with.

[24]   Timetabling orders are already in place with regard to the liquidation application.  Having regard to matters discussed today, counsel for AEL may wish to consider whether to file and serve additional affidavits in which Mr Cleland makes a clear election as to his position with regard to buying the shares of the Morris interests.  In addition, an affidavit would probably be helpful on the contention that any recovery from Mr Morris in the Auckland proceedings could be offset against tax losses that the company enjoys.

[25]     To facilitate the likelihood of additional affidavits being filed to deal with those topics, the orders made by Judge Faire on 17 August 2010 in relation to affidavit evidence are adjusted as follows:

a)       Affidavit evidence explaining Mr Cleland’s position in regard to the acquisition by the Cleland interests of shares held by the Morris interests, shall be filed and served by 30 September 2010.

b)Any additional affidavit evidence on behalf of the Morris interests shall be filed and served on or before 7 October 2010.

[26]     The remaining orders in respect of additional affidavit evidence in opposition and reply affidavits remain intact.

[27]     I thank counsel for their assistance.

P R Heath J