Pounamu International Limited v Lehen
[2014] NZHC 3394
•22 December 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-3307 [2014] NZHC 3394
UNDER the Companies Act 1993 BETWEEN
POUNAMU INTERNATIONAL LIMITED
First Plaintiff
LOWIE RECRUITMENT LIMITED Second Plaintiff
AND
RACHEL LEHEN First Respondent
LOWIE FATIGUE MANAGEMENT LIMITED
Second Respondent
MILLION DOLLAR IDEAS LIMITED Third Respondent
Hearing: 19 December 2014 Appearances:
F Cuncannon for the Plaintiffs
R Parmenter for the RespondentsJudgment
22 December 2014
JUDGMENT OF ELLIS J
This judgment was delivered by me on 22 December 2014 at 10.30 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Counsel/Solicitors:
F Cuncannon, Meredith Connell, Auckland
R Parmenter, Barrister, Auckland
POUNAMU INTERNATIONAL LIMITED v LEHEN [2014] NZHC 3394 [22 December 2014]
[1] On Thursday 18 December the plaintiffs sought, on a without notice basis, a freezing order over the bank account of the second respondent, Lowie Fatigue Management Limited (LFML), and related orders for interim relief under s 174 of the Companies Act 1993. All the orders sought relate to the alleged actions of the first respondent Ms Lehen in relation to the operation and management of LFML. Ms Lehen is presently the sole director of LFML and her company, Million Dollar Ideas Limited (MDIL) (the third respondent), is a 50 per cent shareholder.
[2] The first applicant, Pounamu International Limited (PIL), is the other 50 per cent shareholder of LFML, having acquired its shares from Lowie Recruitment Limited (LRL) in July 2014. PIL’s owners and directors are Mr Graham Lowe and Mr Chalmers. It seems LFML was established essentially to operate some type of joint venture between MDIL and LRL, the precise terms of which are now in dispute.
[3] In essence, however, it seems an arrangement was reached whereby for the first year or so of LFML’s operation it was granted the use of LRL’s support services and facilities free of charge. As well, the company would have the benefit of the business contacts. The idea was that once LFML got on its feet it would be charged for the services it received. During this establishment phase Ms Lehen was also employed by LRL. Initially, Mr Lowe and Ms Lehen were both directors of LFML.
[4] The relationship between LRL/PIL and Ms Lehen took a turn for the worse when attempts were made to invoice LFML for the services it was receiving. Ms Lehen has declined to pay these invoices and, indeed, contends that they were issued only for tax purposes. Personal difficulties also developed between Ms Lehen and Mr Chalmers.
[5] Then, due to ill health, Mr Lowe resigned his directorship midway through this year. He says that the understanding was that Mr Chalmers would then become a director in his stead and steps were taken to formalise this. But because Ms Lehen’s company, MDIL was a 50 per cent shareholder, Ms Lehen was able to block his appointment, which she did. Mr Chalmers’ joint authority over LFML’s bank account was later removed by Ms Lehen.
[6] Mr Lowe and Mr Chalmers are of the view that since (at least) August this year the affairs of LFML have been conducted by Ms Lehen in a way that is prejudicial to PIL. As well as pointing to Ms Lehen’s actions in seizing control of the company (by blocking the appointment of Mr Chalmers) PIL alleges that:
(a) She subsequently failed to comply with requests for information made by PIL under s 178 of the Companies Act;
(b) She has set up another company that now operates in competition with
LFML.
[7] It may be observed at this point that the last of these allegations would, if true, put Ms Lehen in clear breach of her Director’s duties and would put her in jeopardy of a subsequent derivative action by PIL. Regardless of the outcome of the present application she is therefore clearly on notice of that prospect.
[8] Because it had been possible to serve the respondents during late Thursday morning I conducted a brief and Pickwickian hearing by telephone that afternoon. Shortly before the hearing Mr Parmenter had been briefed by the respondents but had not had the opportunity to get up to speed. But on the basis of the (necessarily one-sided) material that was before the Court I was satisfied that grounds for a freezing order had been made out. More particularly, there appeared to have been a clear breach of s 178 and, in terms of the alleged breaches of s 174:
(a) the existence of a disputed debt owed to LRL; and
(b) Ms Lehen’s refusal to provide the information to which PIL was
entitled; and
(c) her apparent blocking of Mr Chalmers’ appointment and his access to
LFML’s account; and
(d)the apparent establishment by Ms Lehen of a new and similar company;
all gave rise to a strong and reasonable inference that there was a risk of dissipation.
I made a freezing order over LFML’s account (on standard terms) accordingly.
[9] At that point I also indicated my hope that Ms Lehen would be able to supply the s 178 material overnight in order that a better informed determination of the other orders sought could be made. I directed that there be a further telephone conference with me on Friday 19 December. That took place at 2.15 pm that day.
[10] In the intervening period Ms Lehen swore an affidavit supplying the s 178 information. That information shows that the account that had been frozen by me now has only about $2,000 in it. By contrast, on 21 October 2014 it contained approximately $121,000.
[11] As a result of this disclosure:
(a) it was agreed (for what it is worth) that the freezing order should continue;
(b) PIL no longer requires an interim order in terms of Ms Lehen’s former
non-compliance with s 178; and
(c) the interim order sought in relation to restoring Mr Chalmers’
authority over the bank account is also not required.
[12] The only remaining issue was whether I should also make an interim order appointing Mr Chalmers (or Mr Lowe) as a Director of LFML.
[13] It is clear that where prima facie evidence of unfair prejudice exists interim orders can be made under s 174. While it seems that receivers and liquidators are quite commonly appointed on an interim basis under the Australian and English
equivalents of s 174, the practice seems less common here.1 Moreover, Ms
1English examples include Wilton-Davies v Kirk [1998] 1 BCLC 274 Re Premier Electronics (GB) Ltd [2002] 2 BCLC 634 and Re Ravenhart Service (Holdings) Ltd [2004] 2 BCLC 376. Australian examples include South Downs Packers Pty Ltd v Beaver (1984) 8 ACLR 990 (at
1001-2); Re Nerang Investments Ltd (1985) 9 ACLR 646 (at 648-9); Re Bike World
(Wholesale) Ltd (1992) 6 ACSR 681 (at 684-5).
Cuncannon was not able to point me to any other case in which an interim order appointing a Director had been made.2 Indeed, my own research suggests that there is a case in which such an appointment was declined on the grounds that it was essentially a mandatory form of relief.3
[14] Be all that as it may, it seems that an application for interim relief under s 174 falls to be considered under the traditional two-stage test of whether there is a serious question to be tried and where the balance of convenience lies.4
Consideration of the first limb requires consideration of the strength of the plaintiffs’
claim for relief under s 174 of the Act.
[15] Section 174provides:
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
(2) If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) Requiring the company or any other person to acquire the shareholder's shares; or
(b) Requiring the company or any other person to pay compensation to a person; or
(c) Regulating the future conduct of the company's affairs; or
(d) Altering or adding to the company's constitution; or
(e) Appointing a receiver of the company; or
(f) Directing the rectification of the records of the company; or
(g) Putting the company into liquidation; or
2 The appointment of receivers is one of the specific forms of relief referred to in s 174.
3 Doyle v Doyle HC Wellington CP9/02, 24 April 2002.
4 See for example Coleman v Lambie Assets Ltd [2013] NZHC 244 (a case in which the appointment of an interim receiver was declined). The two stage test to which the Judge referred is a reference to Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.
(h) Setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.
[16] In order to succeed in its substantive claim under s 174, PIL must show past, present, or likely future conduct in relation to the affairs of LFML which is oppressive, unfairly discriminatory, or unfairly prejudicial to them in their capacity as shareholders. The conduct must be of a kind that is in breach of a claiming shareholder’s legal rights or of recognised equitable principles restraining the
exercise of majority powers.5 PIL must demonstrate, to the level of establishing that
there is a serious question to be tried, the likelihood of such conduct.
[17] As well, it will not be sufficient, to found a claim for relief under s 174, for the applicants to demonstrate a lack of confidence in the management. Nor will it be sufficient for the plaintiffs to assert that the way in which the company is being managed may expose the company, as distinct from the shareholders, to risk or loss. Relief under s 174 is dependent on the conduct being oppressive, unfairly discriminatory, or unfairly prejudicial to the shareholders, not on its being detrimental to the company. As the decision of the Court of Appeal in Latimer Holdings Ltd v SEA Holdings NZ Ltd makes clear, errors of judgment by management, inefficiencies and poor business management without distinct elements
of bad faith or self-interest, cannot amount to oppression.6
[18] The difficulty in the present case is that to the extent the applicants’ concerns are that the company is being mismanaged (in the sense of its business not being pursued because Ms Lehen has set up another company in competition) that does not appear to be qualifying conduct. Moreover all shareholders would, presumably, be equally prejudiced by it. And it is perhaps relevant that MDIL itself only owns 50 per cent of the LFML shares, so the present is not an orthodox minority shareholder case. To the extent that Ms Lehen needs majority support for any decisions she
wishes to make on behalf of the company, she does not have it.
5 M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 at [54].
6 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [70].
[19] I am prepared to assume for the purposes of this decision that, in the particular circumstances of this case, the blocking by Ms Lehen/MDIL of the appointment of a “PIL” Director might constitute conduct that is unfairly prejudicial to PIL. I have not had the benefit of any real argument on the point. But as a matter of fact that is certainly what appears to have occurred.
[20] Even on that assumption, however, I do not consider that the balance of convenience favours the grant of interim relief. Ordering either Mr Lowe or Mr Chalmers be appointed as a director is unlikely to achieve anything at all. Mr Lowe is unwell and any appointment would no doubt be stressful for him. And the relationship between Ms Lehen and Mr Chalmers seems particularly acrimonious. The prospect of them being able to work together to advance the company’s interest is most unlikely. Neither “side” has majority shareholder support. It is difficult not to conclude that they would immediately arrive at a personal and corporate impasse.
[21] The above concerns are merely underscored by the fact that the Christmas and New Year period is now upon us. To the extent that Mr Chalmers would be able to repair any damage that (the applicants say) has been done to the company’s business such repair is unlikely to be effected in the early weeks of 2015.
[22] In my view, therefore, the appropriate course is to consider the substantive s 174 application on its merits as soon as possible when the Court reopens in February. In the meantime, Ms Lehen is on very clear notice that she potentially faces legal action for breach of her duties as the Director of LFML in the event that she has, as the applicants contend, set up a separate business in competition with that company.
[23] In summary:
(a) The freezing order made by me on 18 December 2014 will continue until further order of the Court;
(b) The applications for interim relief under s 174 of the Companies Act
1993 are either not pursued or are declined.
[24] The matter is to be called in the Duty Judge list in the week commencing
2 February 2015.
[25] Costs are reserved.
Rebecca Ellis J
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