Newman v Lust

[2014] NZHC 1220

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-2749 [2014] NZHC 1220

IN THE MATTER

of the Companies Act 1993

AND IN THE MATTER

of the liquidation of D4 Compression
Limited

BETWEEN

SCOTT JASON NEWMAN and TIMOTHY TERENCE MANNING First Plaintiffs

CHAYLOR MANAGEMENT LIMITED

and ANDREW MUIR STEWART Second Plaintiffs

PETER JOHN SIMUNOVICH Third Plaintiff

CRAIGE ANDREW MAYO, REGINALD MAYO and NADINE MAREE

MILDREN Fourth Plaintiffs

ANTHONY RICHARD POLGLASE Fifth Plaintiff

NICHOLAS GARFIELD LYTTLE and

NEALLA JANE LYTTLE Sixth Plaintiffs

STEPHEN WILLIAM BROWN Seventh Plaintiff

SCOTT NEWMAN, JANIENE NEWMAN, PAUL NEWMAN and JESSICA ASHBRIDGE

Eighth Plaintiffs

ANDREW MUIR STEWART and EMMA RACHEL STEWART

Ninth Plaintiffs

SCOTT NEWMAN Tenth Plaintiff

NEWMAN V LUST [2014] NZHC 1220 [30 May 2014]

ANDMICHAEL JOHN LUST, DAVID ROBERT PEACH and WOLFGANG WRIGHT

First Defendants

D4 COMPRESSION LIMITED Second Defendant

Hearing:	17 March 2014
Appearances:	W A McCartney for Plaintiffs W Wright on behalf of First Defendants
Judgment:	30 May 2014

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on 30 May 2014 at 4.30 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ...................................

Solicitors:           CMS Legal, Auckland Counsel:       W A McCartney, Auckland Copy for:       First Defendants

[1]      The Plaintiffs seek an order to wind up D4 Compression Limited (“D4”), the

Second Defendant.

[2]      The application to wind up is made on the grounds:

(a)      that it is just and equitable that D4 be put into liquidation  – see s 241(4)(d) Companies Act 1993 (“Act”); alternatively

(b)that the affairs of D4 have been or are being or are likely to be conducted in a manner that is oppressive, unfairly discriminatory or unfairly prejudicial to the Second to Tenth Plaintiffs who are share- holders in D4 (“minority shareholders”) – see s 174(1) of the Act.

[3]      Mr Lust and Mr Wright, two of the First Defendants, oppose the making of the order sought.  Mr Peach abides the decision of the Court.

[4]      D4’s Board of Directors are, and have been for some time, at an impasse on one significant issue, namely whether D4 should make demand for repayment of a loan (“loan”) by D4 to Advanced Creative Technologies Limited (“ACTL”).   The First Defendants are shareholders in ACTL, the Plaintiffs are not.   The impasse is clear on the evidence, of considerable duration and is incapable of resolution by the parties.  For these reasons I am satisfied that it is just and equitable to make the order sought.

Parties

[5]      The First Plaintiffs are directors of D4 (“Plaintiff Directors”).

[6]      Mr Lust and Mr Wright are also directors of D4 (“ACTL Directors”).

[7]      Mr Peach has been  an  alternate director of D4.   By memorandum dated

13 March 2014, Mr Peach sought to have these proceedings dismissed in so far as they concerned him, on the ground that he resigned as a director of D4 prior to the commencement of the proceeding.   The Plaintiffs opposed the application on the

ground that Mr Peach resigned after the proceeding was commenced.   I declined

Mr Peach’s application.  Mr Peach abides the decision of the Court.

[8]      Collectively,  the  minority  shareholders  own  or  control  200  of  the  1,000

D4 shares on issue, being 20 per cent.   ACTL owns the remaining 800 shares or

80 per cent.  Mr Wright is ACTL’s sole director.  Mr Lust resigned as a director of

ACTL on 11 November 2013. The First Defendants are each shareholders in ACTL.

[9]      Each of the First Plaintiffs, Mr Wright, Mr Lust and Mr Peach has sworn affidavits,  as  has  Mr Polglase,  a  minority  shareholder.    Mr Polglase’s  evidence concerns the loan and his efforts to obtain information required to prepare financial statements for D4.

[10]     Mr Wright made submissions for himself and, with leave, for Mr Lust.

[11]     The proceeding first came before me in November 2013.   I adjourned the hearing because Plaintiffs had not served their proceedings on ACTL.   Following service, ACTL’s then counsel advised the Court that ACTL wished to be heard in the proceeding.1   ACTL has, however, taken no steps, did not appear when the hearing reconvened and the solicitor on the record for ACTL has informed the Court that he is no longer acting.2

Background

[12]   ACTL owns what is referred to as “data compression technology” (“technology”).

[13]     D4 was incorporated on 28 July 2005 for the purpose of raising capital to develop  the  technology.    A “Capital  Raising  Term  Sheet”  dated  27  May  2005

described the purpose of investment as to:3

1 Memorandum of Counsel for [ACTL] as to Intention to be Heard dated 29 November 2013.

2 Application for Order Declaring Solicitor no Longer on Record dated 7 March 2014; and Affidavit of N J Smith sworn 7 March 2014.

3 Affidavit of S J Newman sworn May 2013, Exhibit SJN1 at 22.

Assist with the commercialization and licensing of the data compression capabilities provided by implementing aspects of [compression technology owned by ACTL].

[14]     D4 issued shares at $1,500 each.   The minority shareholders paid up their shares at the time of D4’s incorporation, making payments totalling $300,000.  The position is unclear regarding ACTL’s payment for its share capital in D4 but no point turns on that for the purposes of this judgment.

[15]     By agreement dated 30 August 2005, ACTL granted a licence to D4 to use the technology within a (defined) territory and for an indefinite term.4

[16]     From the evidence filed for the Plaintiffs it is apparent that the minority shareholders invested in the belief that the technology would be licensed or sold, and that D4 would generate a substantial financial return.   To date no return has eventuated.

Loan from D4 to ACTL

[17]     Between August 2005 and May 2006 D4 advanced $281,966.13 to ACTL, i.e. the loan referred to above.   The terms of the loan are recorded in an agreement between  D4  as  lender  and ACTL as  borrower  (“agreement”).5     Although  dated

30 August  2005,  the  evidence  suggests  that  the  agreement  was  prepared  and executed in 2006.

[18]     The important terms of the loan for present purposes may be summarised as follow:

(a)       the principal advanced was to be $210,000, although by agreement D4 might increase the amount of the loan.6

(b)ACTL was  to  repay the  principal  within  one year  of  the  date  of execution, so on or before 17 August 2006, or such later date as D4

might agree in writing, but not to exceed 365 days after the first

4 At 31.

5 At 24.

repayment date.7   I accept the Plaintiffs’ submission that the effect of these terms was to require ACTL to repay the principal no later than

17 August 2007.

(c)      ACTL was to pay interest at 20 per cent per annum, and at a default rate of 30 per cent per annum.  Notwithstanding this provision, there is a dispute between the parties as to whether ACTL was required to pay interest on the loan.8

[19]     ACTL has not repaid all or any part of the loan and nor has it made any payments of interest to D4.

[20]     In May 2010, ACTL successfully demonstrated features of the technology to personnel at a tertiary institution.   This was significant because it provided independent validation of features of the technology.   On the strength of this development, by letters in May and June 20109  the Directors of ACTL (“ACTL Board”) proposed to the minority shareholders that ACTL should issue shares to them, in return for which D4 would “write off” the loan, surrender its licence to the technology, and be wound up.

[21]     By letter dated 8 June 2010 several minority shareholders and Mr Newman advised that the proposal was not acceptable.  There was then further correspondence from Mr Wright and Mr Lust dated 10 June 2010.10

[22]     There was a meeting of shareholders in D4 on 28 July 2010 and a further proposal from Mr Wright and Mr Lust on 29 July 2010.  Again, no agreement was reached.  Solicitors became involved later in 2010.  D4’s Board has met on occasions since to discuss whether D4 should demand repayment of the loan but no resolution

has been achieved.

7 At 26 and 27.

8 Ibid.

9 At 49 and 51.

[23]     The Plaintiff Directors wish D4 to make demand of ACTL for repayment of the loan and accrued interest.  They have proposed and voted in favour of resolutions to that effect.   Mr Wright and Mr Lust, and Mr Peach when he was sitting, have voted against such resolutions.

[24]     The continuing impasse was apparent at the hearing before me.

[25]     A separate issue arises relating to the preparation of financial statements for D4.   In his affidavit, Mr Polglase refers to a meeting that he attended in 2011 at which Mr Wright and Mr Lust were present.  It appears from Mr Polglase’s affidavit that there was a discussion as to the preparation of financial statements but concern at the cost that would entail.  Mr Polglase’s evidence is that matters were left on the basis that he would prepare accounts subject to provision of the necessary information.

[26]     Mr  Polglase’s  affidavit  is  to  the  effect  that,  despite  several  requests  of

Mr Wright, not all required information has been made available.

[27]     The Plaintiffs’ case is based primarily on the impasse which exists between the Directors of D4 as to whether the company should make demand of ACTL for repayment of the loan.   However, the failure to provide information to enable the preparation of draft financial statements is further evidence of a breakdown in relationships.

“Just and equitable”

[28]     Section 241 of the Act provides:

241     Commencement of liquidation

(1)       A company  may  be  put  into  liquidation  by  the  appointment  as liquidator of a named person or of an Official Assignee for a named district.

(2)      A liquidator may be appointed by—

…

(c)      the Court, on the application of—

…

(ii)      a director; or

(iii)     a shareholder or other entitled person; or

…

(4)      The Court may appoint a liquidator if it is satisfied that—

…

(d)      It  is  just  and  equitable  that  the  company  be  put  into liquidation.

(5)      The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed.

[29]     The “just and equitable” ground is made out in the case of a small company, such as D4, where it is essential that members have confidence in each other and are satisfied that each is acting in good faith.   It is also made out if directors are so opposed  that  an  impasse  is  reached  or  there  is  a  breakdown  in  personal relationships.11

Discussion

[30]     I am satisfied that the Directors of D4 will not be able to resolve the issue of whether D4 should demand repayment of the loan from ACTL.  ACTL was to repay the loan more than six years ago.  I accept the Plaintiffs’ submission that there is a conflict between Mr Wright and Mr Lust’s interests in ACTL and the interest of the other shareholders in D4. The important matter for present purposes is the fact of the longstanding impasse between the Directors of D4, rather than its cause.

[31]     The ACTL Directors acknowledge the existence of the impasse but oppose the making of demand of ACTL as they consider it would not be in the best interests of  either  D4  or  ACTL  to  do  so.    They  oppose  the  Plaintiffs’ application  for liquidation for the same reason.  Instead, the ACTL Directors proposed that I appoint an independent director to the Board of D4.  I do not have jurisdiction to make such

an appointment.

11 See Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 (HL); Re Yenidje Tobacco Company Ltd

[1916] 2 Ch 426 (CA); and Re Gerard Nouvelle Cuisine Ltd (1981) 1 NZCLC 95,016 (HC).

Liquidation

[32]     I am satisfied that it is just and equitable in the circumstances to make the order sought, pursuant to s 241(4)(d) of the Act.

[33]     The  Plaintiffs  sought  the  appointment  of  Mr  Paul  Graham  Sargison  and Mr Simon Dalton as liquidators of D4.   I make an order for their appointment.   I approve the liquidators’ rates of remuneration, and those of their staff, as notified in the  Plaintiffs’ memorandum  dated  18  March  2014.    These  orders  are  timed  at

4.30 pm, 30 May 2014.

Costs

[34]     The Plaintiffs sought an order for costs.  I do not propose to make an order for costs.  First, ACTL should have been a party to the proceeding from the outset. Secondly, although I have concluded that D4 should be wound up, I am not satisfied that the Defendants should bear the cost of the proceeding.

[35]     Costs are to lie where they fall.

..................................................................

M Peters J