Provida Foods Ltd v Foodfirst Ltd
[2012] NZCA 326
•25 July 2012
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA132/2011 [2012] NZCA 326 |
| BETWEEN PROVIDA FOODS LIMITED |
| AND FOODFIRST LIMITED |
| CA364/2011 |
| AND BETWEEN FOODFIRST LIMITED |
| AND PROVIDA FOODS LIMITED |
| Hearing: 15 March 2012 |
| Court: Glazebrook, Arnold and White JJ |
| Counsel: M D Branch and K I Bond for Appellant in CA132/2011 and Respondent in CA364/2011 |
| Judgment: 25 July 2012 at 3.00pm |
JUDGMENT OF THE COURT
A The appeal in CA132/2011 is dismissed.
B The appeal in CA364/2011 is allowed.
CThe order of Associate Judge Faire of 18 May 2011 at [123](c) of his judgment of that date is set aside.
DThe Registrar of the High Court at Auckland is ordered to pay the sum of $363,633.67 together with interest to Foodfirst Limited.
EProvida Foods Limited is to pay the costs of Foodfirst Limited for a standard appeal on a band A basis together with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by White J)
Table of Contents
Para No
Introduction [1]
Provida’s solvency [28]
Provida’s counterclaims [32]
The “best endeavours” claim [33]
The “oppression” claim [55]
The setting aside conditions [73]
Provida’s agreement to disbursement [82]
Result [86]
Introduction
Provida Foods Ltd (Provida) was a member of a food distribution co-operative run by Foodfirst Ltd (Foodfirst). In that capacity Provida incurred a debt to Foodfirst of $977,852.13 for food products purchased from Foodfirst. The debt was incurred shortly before Provida resigned as a member of the cooperative on 31 October 2009 and became a competitor of Foodfirst.
Provida was also, and remains, a shareholder of Foodfirst, which is incorporated under the Companies Act 1993 (the Act) and not registered as a co-operative company under the Co-operative Companies Act 1956.
On 4 November 2009 Foodfirst served a statutory demand on Provida under s 289 of the Act requiring Provida to pay the debt of $977,852.13.
On 16 November 2009 Provida applied to the High Court under s 290(4) of the Act for an order setting aside the statutory demand on the grounds that:
(a)it was solvent and able to pay the debt; and/or
(b)there was a substantial dispute and/or set-off in relation to the debt; and/or
(c)the demand ought to be set aside on other grounds.
In an interim judgment delivered on 29 June 2010 Associate Judge Faire ordered Provida to pay the sum of $977,852.13 into court and Foodfirst to file and serve an affidavit of documents providing particular discovery.[1]
[1] Provida Foods Ltd v Foodfirst Ltd HC Hamilton CIV-2009-419-1581, 29 June 2010.
On 9 July 2010 Provida paid the full amount of the debt into Court.
On 30 September 2010 Provida issued a separate proceeding in the High Court against Foodfirst containing four causes of action (Provida’s counterclaim proceeding).
Central to Provida’s statement of claim are allegations relating to its Retained Discount Account (RDA). We explain the RDA in more detail later.[2] For present purposes it is sufficient to note that Foodfirst’s constitution provides that a share of Foodfirst’s profits for each year is to be allocated to each member. The allocation is not, however, immediately payable. Instead each year’s allocation is held in the member’s RDA until it becomes payable to the member under the constitution. The practice has been for allocations to be paid ten years after the year in which the allocation was made. Accordingly Provida’s 2000 and 2001 RDAs became payable during the course of this litigation.
[2] At [57]–[59].
Provida claims damages of $778,837.00 in respect of each of its first two causes of action in which it alleged:
(a)breach by Foodfirst of an obligation under its constitution to use its best endeavours to collect bad debts from its members; and
(b)breach by Foodfirst of its duty to use reasonable skill and care when managing its business and/or to act in the best interests of its business so as not to jeopardise Provida’s entitlement to receive payment of its RDA.
In its third cause of action, Provida claimed that under Foodfirst’s constitution it may set off the current balance of its RDA (then said to be $406,983) against its debt to Foodfirst.
In its fourth cause of action, Provida alleged that, in terms of s 174 of the Act, the affairs of Foodfirst have been, and are being, or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory or prejudicial to Provida. On this basis Provida seeks orders requiring Foodfirst to purchase its shares and to pay out the balance of its RDA by way of setting that sum off against its debt to Foodfirst.
Provida’s application to set aside Foodfirst’s statutory demand was granted by Associate Judge Faire in a judgment delivered on 21 February 2011.[3] That judgment was recalled to alter the terms of one of the orders made and re-issued on 18 May 2011.[4]
[3] Provida Foods Ltd v Foodfirst Ltd HC Hamilton CIV 2009-419-1581, 21 February 2011.
[4]Provida Foods Ltd v Foodfirst Ltd HC Hamilton CIV 2009-419-1581, 18 May 2011 [the recall judgment]. Unless otherwise indicated, references to Associate Judge Faire’s reasoning are to the recall judgment.
Associate Judge Faire was satisfied that if Provida’s statement of claim disclosed reasonably arguable causes of action, there was enough evidence to support those causes of action to set aside the statutory demand.[5] The Associate Judge assessed whether the pleadings disclosed causes of action sufficient to set aside a statutory demand by determining whether the pleadings would survive a strike-out application.[6]
[5] At [43], [47], [83], [109].
[6]At [5]. As we note at [32], having made the factual findings he did, the use of the strike-out test to assess the legal merits of the claims was appropriate.
Associate Judge Faire decided that:
(a)the first two causes of action in Provida’s counterclaim proceeding would not survive the strike-out test of disclosing a reasonable cause of action;[7]
(b)the third cause of action depended on the outcome of the fourth cause of action;[8] and
(c)there was an arguable case in respect of the fourth cause of action, but the remedy Provida sought, namely an order under s 174 of the Act for payment of its RDA, was unlikely to be granted.[9]
[7] At [43], [46]–[47].
[8] At [49].
[9] At [114].
The Judge recognised, however, that under Foodfirst’s constitution if Foodfirst were liquidated, all the members’ RDAs would become immediately payable.[10] The Judge held that Provida’s claim under its fourth cause of action should be protected from the possibility of Foodfirst’s liquidation pending the substantive hearing of the fourth cause of action.[11] He noted:
[112] If there is a real risk of liquidation, Provida’s RDA entitlement should be secured until the s 174 application has been disposed of or the risk of liquidation otherwise removed.
[10] At [106].
[11] At [111]–[112], [117].
To meet his concerns about the need to protect Provida’s potential claim to its RDA entitlement and shares, the Associate Judge decided to set aside the statutory demand subject to conditions imposed under s 290(7) of the Act. In terms of the Court orders:[12]
(a)The statutory demand was set aside;
(b)The Registrar was directed to pay the sum of $518,303.13 plus interest to Foodfirst; and
(c)The Registrar was directed to hold the sum of $416,983 (being Provida’s RDA of $406,983 plus $10,000 being the agreed value of its shares) until satisfaction of one or other of the following conditions:
(i)a further order of the Court in Provida’s counterclaim proceeding;
(ii)production to the Registrar of a resolution of the board of directors of Foodfirst authorising the redemption of the 4,999 shares held by Provida plus a certificate from the auditors of Foodfirst fixing the price of the 4,999 shares in accordance with the constitution of Foodfirst, plus a solvency certificate which complied with s 70 of the Act. In the event that this part of the conditional order was met and the Registrar was provided with evidence that the shares had been redeemed, the Registrar was to pay the sum as certified by the auditors of Foodfirst to the solicitors for Provida (the sum being the amount held by the Court ($416,983) minus the amount certified by the auditors) to the solicitors for Foodfirst. The interest in respect of those sums was to be apportioned in accordance with the capital payments the Judge directed to be paid.
[12] At [123].
Both parties appealed to this Court against aspects of the Associate Judge’s decision and the orders he made.
Provida claims that the decision was wrong in fact and in law because;
(a)the statutory demand should have been set aside on the grounds that:
(i)Provida was solvent and had paid the debt into Court; and/or
(ii)Provida had established that there was a real basis for the first and fourth causes of action in its counterclaim proceeding. (Provida has not appealed against the Associate Judge’s decision in respect of the second and third causes of action.)
(b)the Judge erred in ordering disbursement of the funds if the conditions he imposed were satisfied, as this denied Provida the opportunity to prove its solvency at a liquidation hearing.
Provida seeks a judgment from this Court setting aside the statutory demand solely on the condition that Provida agree within seven days that the sum held by the High Court remain in Court pending determination of its counterclaim proceeding. If this Court is not prepared to enter judgment in that form, then Provida seeks a judgment that the statutory demand be set aside if Provida agrees within seven days to the disbursement of the funds held in Court on the terms specified by the Court.
Foodfirst’s appeal challenges the conditions imposed by the Associate Judge in respect of the payment out of the sum held in Court (Provida’s RDA and the value of its shares) and those parts of the judgment concerning the fourth cause of action in Provida’s counterclaim proceeding that led to the imposition of those conditions. Foodfirst seeks a judgment from this Court setting aside the conditions and ordering the Registrar to pay Foodfirst the sum held in Court.
On 19 May 2011 Provida applied for a stay of the Associate Judge’s decision of 18 May 2011.
On 7 June 2011 consent orders in relation to the stay were made providing that the sum of $518,303.13 would be paid out to Foodfirst on receipt of a written undertaking to repay if required by the Court as part of the appeal.
On presentation of the orders for sealing, it became apparent that there was a typographical error in Associate Judge Faire’s orders. Paragraph [123](b) should have referred to a sum of $517,303.13, not $518,303.13. The parties agreed informally that $517,303.13 should be paid to Foodfirst.
Foodfirst provided the requisite undertaking and $517,303.13 plus interest of $6,199.78 was paid out to it.
By memorandum dated 29 March 2012, the parties have advised this Court that since the payment pursuant to Foodfirst’s undertaking:
(a)Provida has received the following further payments out from the funds held by the Court:
$43,566.00 in respect of its 2000 RDA
$58,320.63 in respect of its 2001 RDA
(b)The balance of $363,633.67 plus accrued interest that remains in Court is made up as follows:
Balance of Provida’s RDA from 2002 to 2007
(as adjusted for special payments) $346,051.00
Withholding tax difference 2,611.37
Provida’s shares 10,000.00Accrued interest 4,971.30
(c)Following the payments by Foodfirst of Provida’s 2000 and 2001 RDAs, Provida’s debt to Foodfirst is now $875,965.
(d)Provida’s current counterclaims total $1,124,880 made up as follows:[13]
Alleged breach of best endeavours obligation $723,487.00
Alleged oppression – repayment of RDA (2002-2007) $346,051.00[13]The parties did not explain the difference between $1,124,880 and $1,069,538 being the total of the two figures.
The principal issues raised by the appeals are:
(a)Is Provida entitled to have the statutory demand set aside solely on the ground that it is solvent and has paid the debt into Court?
(b)Are either of Provida’s counterclaims, that is the “best endeavours” claim and the claim based on “oppression” under s 174 of the Act, made out in the sense that they would survive a strike-out application with the result that the statutory demand should be set aside pending determination of the counterclaim proceeding?
(c)If Provida is not entitled to have the statutory demand set aside on the basis of (a) or (b), should the disbursement of the funds to Foodfirst be conditional on Foodfirst:
(i)producing a solvency certificate that complies with s 70 of the Act; and
(ii) redeeming Provida’s 4,999 shares in Foodfirst?
(d)If Provida is not entitled to have the statutory demand set aside on the basis of (a) or (b), should the statutory demand be set aside if Provida fails to allow disbursement of the funds by a specified date, which would allow Provida to proceed to a liquidation hearing?
We address each of these issues separately.
Provida’s solvency
In his interim judgment of 29 June 2010 Associate Judge Faire referred to decisions establishing that proof that the debtor company is solvent does not require a statutory demand to be set aside.[14] If the debt is indisputably owing, then it should be paid unless the company has good reason not to do so.[15] It is legitimate to use a statutory demand to obtain payment of a debt from a solvent company.[16]
[14]At [13]–[14].
[15] AMC Construction Ltd v Frews Contracting Ltd (2008) 19 PRNZ 13 (CA) at [7].
[16]Apple Fields Ltd v The Trustees Executors & Agency Co New Zealand Ltd (1999) 8 NZCLC ¶96-808 (HC) at 262,013, (1999) 13 PRNZ 387 at 393.
In the absence of good reason for non-payment of the debt or proof that the statutory demand was issued for some ulterior purpose, the statutory demand should not be set aside simply because the debtor company is solvent.[17] The issue of the solvency of the debtor company may be taken into account at the next stage when the liquidation procedure is invoked on the ground that the company is unable to pay its debts.[18] At that stage the company has the opportunity to prove that, notwithstanding its failure to comply with a statutory demand, it is able to pay its debts.[19]
[17]AMC Construction at [7].
[18] Companies Act 1993, s 241(4)(a).
[19] Section 287(a).
In light of these principles we do not accept the submission for Provida that the statutory demand in this case should be set aside simply on the ground that Provida was solvent and paid the debt into Court. The issue at this stage is not whether Provida is solvent, but rather whether it had good reasons for not paying the debt it had incurred to Foodfirst when the debt itself was undisputed.
The issue whether Provida had good reasons for not paying the debt depends on it being able to establish that it appears to have a counterclaim in terms of s 290(4)(b) of the Act. We therefore turn to the second principal issue on appeal.
Provida’s counterclaims
In order to rely on its counterclaim Provida must demonstrate that there are “clear and persuasive” grounds for the claims.[20] That test requires there to be a real evidential basis for the claim and that as a matter of law the claim amounts to an arguable cause of action. There was, however, no appeal from Associate Judge Faire’s decision on each of the causes of action that sufficient evidence was furnished by Provida to meet the test. Accordingly, like the Associate Judge, we are content to assess whether each cause of action would survive a strike-out. To determine whether the first and/or the fourth causes of action in Provida’s counterclaim proceeding would survive a strike out application, it is necessary to consider whether the claim is clearly untenable.[21] We would emphasise, however, that the strike-out test, under which pleaded facts are assumed to be proved, is not generally appropriate for determining whether to set aside a statutory demand. Section 290 (4)(b) requires the debtor to provide evidence of the claim sufficient to demonstrate that it has a “real basis” for the claimed set-off.[22] If that evidential standard is not met, even if the claim as a matter of law is sound, the statutory demand should not be set aside.
The “best endeavours” claim
[20] Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].
[21]Attorney-General v Prince [1998] 1 NZLR 262 (CA) at 267, approved in Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
[22] Covington Railways Ltd at [11].
In its first cause of action, Provida alleges that Foodfirst breached its obligation under art 3.5 of its constitution to use its “best endeavours” to collect debts from its members. Provida claimed in its statement of claim that had Foodfirst complied with this obligation Provida would have been allocated a greater share of Foodfirst’s profits, amounting to $778,837.
By way of memorandum dated 29 March 2012, Provida has advised this Court that there was an error in its statement of claim and its claim should total $723,487. The claim is calculated on the basis that between 2005 and 2010 Foodfirst would have avoided bad and doubtful debts and legal costs. With adjustments for interest/return on investment, rebates and unallocated losses, Provida’s share of the lost income would have been:
2005$129,763
2006$ 96,185
2007$100,902
2008$174,533
2009$150,817
2010$ 71,287
________
$723,487
=======
In response, Foodfirst disputes the basis for the calculations, claiming that the bad debts and legal costs component is speculative because it assumes that, if best endeavours had been used, Foodfirst would never have incurred any bad debts or legal costs. Foodfirst notes that no contingencies are included in the calculation of quantum. Foodfirst also points out that the calculation contains a large component for interest that is calculated on the basis of all overdue accounts receivable, which is problematic because it fails to allow for accounts receivable that are overdue in the ordinary course of business.
Provida’s claim is based on art 3.5 of Foodfirst’s constitution, which appears under the heading “The Company’s Functions”, and provides:
The Company will use its best endeavours to collect from all members the invoiced price for all merchandise delivered to each member and protect the Company and its members overall from any defaults, inactivity or other malpractices of any individual member.
Associate Judge Faire decided that Provida’s claim based on art 3.5 could not succeed for three reasons:[23]
(a)On the basis of the rule in Foss v Harbottle,[24] art 3.5 did not give a personal action to a shareholder against the company for breach. The remedy for breach of art 3.5 was for the irregularity to be put right by an ordinary majority of shareholders. Any loss from breach of the article was the company’s loss, not the shareholders’ loss.
(b)Article 3.5 did not give a remedy to individual shareholders. If Provida succeeded, all shareholders would have a similar claim. The existence of such a remedy, however, was problematic as pursuit of the remedy by all the shareholders would be pointless. The alleged wrong was that the shareholders’ funds had been depleted, but judgment for that wrong could only be met through recourse to the equity of those same shareholders’ funds. Accordingly, if an individual remedy existed, it would only further exacerbate the alleged wrong.
(c)Provida’s claim for loss was inconsistent with the decision in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[25] because it was merely a reflection of loss to the company, rather than a personal loss to Provida.
[23] At [21]–[41].
[24] Foss v Harbottle (1843) 2 Hare 541 (Ch), 67 ER 189.
[25] Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA) at 222–223.
For Provida, Mr Branch submitted, in reliance on s 171 of the Act, that the obligation in art 3.5 was owed by Foodfirst to the shareholders personally and not by Foodfirst’s directors to Foodfirst. The submission was supported by reference to:
(a) other provisions in Foodfirst’s constitution;
(b)the different standards owed by directors (reasonable competence rather than best endeavours);
(c) commercial common sense;
(d)the absence of any reason why Foodfirst’s obligations should not be owed to the members;
(e)the nature of each member’s RDA (based on each members’ performance rather than the company’s performance so a member’s losses flowing from a breach of the art 3.5 obligation was a reduction in its RDA account); and
(f)the co-operative nature of Foodfirst (so that active shareholders were effectively “outsiders” in terms of their RDA payment).
Mr Branch submitted that it followed that the best endeavours claim related to a member’s rights to the RDA discount scheme (which were personal) and not to dividends (where all shareholders were treated equally).
Mr Branch then submitted that Provida’s claim was not barred by the rule in Foss v Harbottle that the proper plaintiff in an action for a wrong alleged to have been done to a company is (at least on the face of it) the company. The submission was supported by reference to an article by RR Drury “The relative Nature of a Shareholder’s Right to Enforce the Company Contract”,[26] the principles relating to the rule set out in Johnson v Gore Wood & Co[27] and the application of those principles to the facts of the present case.
[26]RR Drury The Relative Nature of a Shareholder’s Right to Enforce the Company Contract [1986] 45 CLJ 219 at 240.
[27]Johnson v Gore Wood & Co [1999] BCC 474 (CA) at 497–498; aff’d [2002] 2 AC 1.
Mr Branch submitted that the Associate Judge’s concern that whatever damages were payable by Foodfirst would reduce the value of each member’s shares by the same amount so that the effect would be neutral was misplaced because Provida, which contributed approximately 25 per cent of Foodfirst’s revenue, would receive more from its claim against Foodfirst than by way of dividend or distribution in relation to its 4,999 shares.
Finally, on this issue, Mr Branch submitted that Foodfirst’s breach of art 3.5 was not an “irregularity” which could or would be cured by a simple majority at a special general meeting. This was particularly so when it was recognised that all members, including those no longer active, received one vote each and not one vote per share and that no meeting ratifying the breach had been held.
For the following reasons, which reflect the decision of Associate Judge Faire and the submissions for Foodfirst, we do not consider that Provida’s first cause of action based on art 3.5 of Foodfirst’s constitution would survive a strike-out application.
Analysis of s 171 of the Act and the relevant common law shows that art 3.5 did not impose a duty on Foodfirst that it owed to Provida, in its capacity as a shareholder, breach of which entitled Provida to bring an action against Foodfirst. Under s 171:
A shareholder of a company may bring an action against the company for breach of a duty owed by a company to him or her as a shareholder.
As the text of this provision makes clear, a shareholder’s right to bring an action against a company is dependent on:
(a) the existence of a duty;
(b) owed by the company;
(c) to the shareholder in that capacity.
Each of these requirements defines and limits the scope of the cause of action.
There must be “a duty”, statutory, contractual, equitable or tortious. A provision in a company’s constitution which does not create or constitute a duty will not suffice.
The duty must be owed by the company. A duty owed by the directors or management of the company will not suffice.
The duty must be owed by the company to the shareholder “as a shareholder”. A duty owed in some other capacity will not suffice.
In the absence of one or more of these requirements, there will be no cause of action under s 171. This interpretation of s 171 is consistent with its purpose, the scheme of the Act and the rule in Foss v Harbottle.
The purpose of s 171, which codifies the common law, is to confer a right of action on a shareholder in limited circumstances.[28] An example of a duty a shareholder could personally enforce against a company is a breach of the duty to allow a shareholder to exercise voting rights.[29] Breach of this duty is a wrong done to an individual shareholder, justifying an individual remedy.[30] Conversely, the proper plaintiff for a wrong done to the company is the company.[31]
[28]Brooker’s Company and Securities Law at [CA171.01] (online looseleaf ed, Brookers); and John Farrar (ed) Companies and Securities Law in New Zealand (Thomson Brookers, Wellington, 2008) at [18.4].
[29] Pender v Lushington (1877) 6 Ch D 70 (Ch) at 80–81.
[30]Farrar above n 28, at [18.4]. Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (LexisNexis, Wellington, 2011) at [20.3.2].
[31] Foss v Harbottle, above n 24.
The limitation of the cause of action to a duty owed by the company to the shareholders rather than by its directors or management to the company is also reinforced by the scheme of the Act. The Act distinguishes between the duties of the company and the obligations of the board of directors and the company’s management. The obligations of directors are also generally owed to the company. Examples of these features of the Act are:
(a)s 128 under which “the business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company”;
(b)s 137 under which directors owe duties of reasonable care and skill to the company (and not to the shareholders);
(c)s 165 under which a shareholder may only bring a derivative action with leave;
(d)s 172 under which a shareholder may apply to the Court for an order requiring the board of the company to take any action that is required to be taken by the constitution or the Act. This provision is an exception to s 171 and requires the Court to be satisfied before an order is made that it is “just and equitable” to do so.
The limitations on the cause of action under s 171 also reflect the rule in Foss v Harbottle that an individual shareholder cannot bring an action in the courts to complain of an irregularity (as distinct from an illegality) in the conduct of the company’s internal affairs if the irregularity is one which can be cured by a vote of the company’s general meeting.[32]
[32]Burland v Earle [1902] AC 83 (PC) at 93.
When s 171 is interpreted and applied in this way, we consider that Provida has no cause of action against Foodfirst for breach of art 3.5 of its constitution because:
(a)The obligation to recover debts and protect the company from any defaults is one that has to be carried out by the internal management of the company at the direction or under the supervision of the company’s directors. This is consistent with the heading to art 3 (“The Company’s Functions”) and art 7.11 of the Foodfirst constitution that confirms that the business is to be run, managed and controlled by the directors. Recovery of bad debts is not an obligation imposed on the company.
(b)Accordingly, failure or negligence on the part of the directors or management to use their best endeavours to recover bad debts might give rise to a claim by the company, but not a personal claim by a shareholder. An aggrieved shareholder would need to proceed under s 165 or s 172 of the Act. The obligation to recover debts and protect the company from defaults can only have been owed to the shareholders as a group. In contrast, for example, to the company refusing to allow a particular shareholder to vote, a breach of the duty alleged by Foodfirst would not affect any shareholder differently to the others.
(d)Provida is not seeking to enforce an obligation owed to it in its capacity as a shareholder. On the contrary, the submissions for Provida make it clear that it is seeking to do so in its capacity as a member of the co-operative with the sole object of increasing its RDA rather than the value of its shareholding.
(e)As noted, the best endeavours obligation is not an obligation owed to shareholders personally. Nor would a breach of the best endeavours obligation be an illegality because the breach does not involve the company exceeding its power. Failure of the directors or management to use best endeavours to collect bad debts would be an irregularity, which would be capable of being ratified at a meeting of shareholders.[33] It is a dispute which could appropriately be determined by an ordinary majority of shareholders. It is not a dispute of the nature referred to in the article by RR Drury relied on by Mr Branch where majority determination might not be considered appropriate.
(f)None of the principles relied on by Provida would prevent the application of the rule in Foss v Harbottle because:
(i)Provida’s claim is against the company not a third party;[34]
(ii)the claim arises through a loss in the company’s equity:[35] any losses suffered are shared by all members when losses flow through to members’ RDA allocations;
(iii)there is no distinct duty owing to Provida or any other individual shareholder;[36] and
(iv)any potential unfairness perpetrated by the majority in ratifying the directors’ conduct would be able to be met by an appropriate order under s 167(d) of the Act, or alternatively by an order under s 174.
[33] Section 177(4).
[34] Compare Christensen v Scott [1996] 1 NZLR 273 (CA).
[35] Compare Prudential Assurance Co Ltd v Newman Industries Ltd(No 2), above n 25.
[36] See at [54](b) above.
We therefore conclude that Provida’s first cause of action is untenable and would not survive a strike out application. We turn to Provida’s next cause of action raised on this appeal.
The “oppression” claim
In its fourth cause of action, Provida alleges that in terms of s 174 of the Act the affairs of Foodfirst have been, and are being, or are likely to be, conducted in a manner that is oppressive, unfairly discriminatory or prejudicial to Provida (the oppression claim). Provida seeks orders requiring Foodfirst to purchase its shares (for $10,000) and to pay out the balance of its RDA ($346,051) by way of setting off that sum against its debt to Foodfirst.
Provida’s claim under s 174 of the Act is based principally on the provisions of Foodfirst’s constitution relating to the payment of members’ RDA and a new rebate scheme called the “Pinnacle Project” (Pinnacle), which was established by Foodfirst after Provida’s resignation. Provida also alleges Foodfirst has acted to restrict its growth and prefer the interests of other members.
The provisions of Foodfirst’s constitution relating to the payment of members’ RDAs are:
VII PROFITS DIVIDENDS AND DISCOUNTS
8.1Each year out of the net tax paid profits of the Company and after making due provision for the running and management of the Company and such other matters as the Board deems advisable the Board shall recommend to the Annual General Meeting the making of the following provision out of the funds available as a result of the last concluded financial year
...
(ii)a discount that shall be carried to the Retained Discount Account, such discount to be calculated in respect of each member who qualifies on the basis of the discount formula
...
8.3The said discounts so earned to the Retained Discount Account shall henceforth each year be supported by a Voucher. The first Voucher shall show the accumulated creditors in that account as well as that year’s discount and each succeeding Voucher shall show the amount of discount in that year allocated to the particular member
8.4The amount allocated to each member in the Retained Discount Account and each Voucher shall be subject to set-off and the entitlement of each member shall be the net figure after taking into account any set-off whether the same arises out of unpaid purchase moneys for merchandise or arising howsoever ... and each member acknowledges under this Constitution that the net figure only is payable out of the Retained Discount Account and by virtue of any Voucher and each Voucher issued by [the Company] shall have endorsed thereon a provision that the discount shown on the face of the Voucher is subject to set-off and [the Company] shall only be liable to pay when the Voucher matures the net amount after taking into account any set-off whenever and howsoever arising and whether or not such set-off is a true set-off at law
8.5Subject as aforesaid Vouchers shall be payable to each member entitled in a manner to be determined by the Board from time to time. Notwithstanding the foregoing the Vouchers shall be immediately due and payable should [the Company] go into liquidation or be placed in receivership
8.6The Board shall, if in doubt, consult the Auditors as to the amount to be credited to any member, the amount of any set-off, the entitlement to payment and the time of payment of any voucher and any matters arising out of or in any way pertaining to the Retained Discount Account and the Vouchers and a certificate from the Auditors on any such matters shall be final and binding and conclusive as between the Company and the member and any person claiming under that member
For present purposes the relevant features of these provisions are:
(a)Each year, on the recommendation of the board, the annual general meeting makes provision out of funds available from Foodfirst’s net tax paid profits a discount calculated for each member on the basis of a formula.
(b)The discount is carried to the RDA for each member and supported by a voucher.
(c)The amount allocated to each member in the RDA and voucher is subject to a set-off for any unpaid purchase moneys for merchandise.
(d)Vouchers are payable to each member “in a manner to be determined by the Board from time to time.”
The amounts in the vouchers have so far been paid out to members ten years after the discounts were carried to the RDA. This practice was based on Foodfirst’s original constitution before cl 8.5 was adopted in 2002 giving the Board a discretion as to the time for payment. As already noted, the practice continued to be followed after amendment of the constitution with the payment out to Provida of its 2000 RDA ($43,566) and 2001 RDA ($58,320.63) from the funds held by the High Court in this proceeding in 2010 and 2011. Foodfirst also accepts that Provida’s 2002 RDA will be paid out this year.
Pinnacle was a new rebate scheme designed to allow Foodfirst to give rebates to members sooner than the ten year RDA voucher scheme. The exact nature of the scheme was, however, unclear on the affidavit evidence before the Associate Judge.[37] Foodfirst’s Chairman deposed that there would be no RDA payments in 2013 and 2014 and that 50 per cent of the profits would go to the new Pinnacle rebate for active members to be paid yearly.[38] Foodfirst’s Financial Controller deposed, however, that the RDA payments would continue to be made and that the funds for the yearly Pinnacle rebate would not come out of profits.[39]
[37] At [71], [86].
[38] At [80].
[39] At [81].
Uncertainty as to the effect of the Pinnacle scheme was not assisted when counsel for Foodfirst suggested that there was a mistake in the long-term cash-flow statements annexed to the Chairman’s affidavit. It was submitted that the accounts were mistaken in showing that, while there would be payments of the Pinnacle rebate in 2013 and 2014, there would be no payments of RDA entitlements to pre-Pinnacle members.[40]
[40] At [78].
Associate Judge Faire noted that if the Pinnacle scheme were carried out as described by Foodfirst’s Chairman it would be in breach of art 8.1 of the constitution, which did not authorise profits to be distributed in that way.[41] On the other hand, if the evidence of Foodfirst’s Financial Controller was accepted, it was arguable that Pinnacle would not be inconsistent with the constitution because Pinnacle members would be paid a rebate on what they were invoiced for their goods thereby reducing the gross profit figure used as the starting point under art 8.1 for the allocation of dividends and the current RDA.[42]
[41] At [82].
[42] At [82].
In view of the uncertain nature and effect of the Pinnacle scheme as described in the affidavit evidence, the Associate Judge accepted Provida’s submissions that it had complaints about its treatment that provided an arguable case for oppression under s 174 of the Act.[43]
[43] At [109].
At the same time, however, the Associate Judge held that, even if a successful claim under s 174 were made out, it was most unlikely that the remedy would be to require Foodfirst to set off Provida’s RDA (for 2002 to 2007) against Provida’s outstanding debt because:[44]
(a)it would be contrary to the historical expectation; and
(b)it would have an unfair effect on remaining shareholders, both active and inactive.
[44] At [114].
For Provida, Mr Branch submitted that the Associate Judge had correctly determined that there was a real basis for the oppression claim, a finding not appealed by Foodfirst, but that the Associate Judge had erred in deciding that there was no real basis for the remedy sought, namely the payment out of Provida’s RDA debt, with forfeiture of Provida’s remaining share and termination of the relationship between the parties, or the liquidation of Foodfirst. As the remedy under s 174 of the Act is entirely at the discretion of the High Court Judge who hears Provida’s counterclaim proceeding, the appropriate remedy in this case ought to be determined after all the relevant evidence has been adduced and tested in cross-examination.
Mr Branch submitted that it may be established that Foodfirst, acting in breach of its constitution, has through Pinnacle siphoned off its profits to current active members of Foodfirst and left insufficient money to pay the RDAs of past members who provided its working capital. The evidence could also establish that Foodfirst suspended or wiped out the 2013 and 2014 RDA payments and has taken other steps designed to limit Provida’s growth. Mr Branch submitted that if those allegations are made out then there is a real possibility that the fair outcome will be to provide for the liquidation of Foodfirst so that the people who are effectively providing the company’s working capital (RDA holders) can receive the money which is theirs. Alternatively, a parting of the ways could be achieved by paying out Provida’s RDA. Contrary to the view of the Associate Judge, payment out of Provida’s RDA need not be all or nothing. Release of some of the RDA may be the appropriate remedy.
While, for Foodfirst, Mr Campbell endeavoured to explain and justify the nature and effect of the Pinnacle scheme, we are not prepared to disturb the finding of the Associate Judge that there is a factual basis for Provida’s unfair prejudice/oppression claim under s 174 of the Act. The unsatisfactory nature of the evidence adduced for Foodfirst made that finding inevitable.
The issue on appeal is whether the Associate Judge was also right to decide that it was highly unlikely that the Court would grant Provida the remedy it sought, namely payment out of its RDA.
We proceed on the assumption that Provida’s claim under s 174 would be successful and that the court would have to consider the question of the appropriate remedy under s 174(2) of the Act, which provides:
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(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
We accept that under s 174(2) the court would have power to make the orders sought by Provida. If the court considered that it was “just and equitable” to do so, the Court could order Foodfirst to pay out compensation equivalent to the whole or part of the RDA under s 174(2)(b) and under s 174(2)(g) the court could make an order putting Foodfirst into liquidation.
We do not accept, however, that a court would make such orders in this case. Our reasons, which reflect the decision of the Associate Judge and the submissions for Foodfirst, are:
(a)Provida could not reasonably expect to receive payment out of its total RDA in acceleration of its entitlement under Foodfirst’s constitution or on the basis of its historical expectation. Under art 8.5 of the constitution the timing of payment out is determined by the Board. The historical expectation was that payment out would be made ten years after the discount was carried into the RDA.
(b)Provida has received payment out of its RDA up to 2001. There is no suggestion that it will not receive its RDA for 2002 this year. It has no entitlement yet to any RDA beyond this year.
(c)Under art 8.4 of the constitution, it is Foodfirst which is entitled to set off Provida’s debt for unpaid merchandise. Provida has no right under the constitution to set off its RDA to which it is not yet entitled against the debt.
(d)Provida is in breach of art 4.6 of the constitution in failing to pay its trading account.
(e)Any payment to Provida would have the effect of preferring Provida over other members and would give Provida a windfall to which it is not entitled.
(f)Any prejudice to Provida and other former members of Foodfirst could be addressed by the Court making orders under s 174(2)(c) or (h) of the Act:
(i)ceasing or regulating Pinnacle; and/or
(ii)requiring payment of aged RDA entitlements (if there is cashflow to do so) to all members; and/or
(iii)requiring Foodfirst to maintain or revert to its former operating practices.
The reasons a remedy of paying out the RDA is not appropriate apply equally to the other allegations of unfair, discriminatory or prejudicial conduct raised by Provida. We therefore conclude that Provida’s fourth cause of action would not lead to any compensatory remedy being granted at this stage and, insofar as it seeks paying out of the RDA, would not survive a strike out application. We turn to the third issue on appeal.
The setting aside conditions
Once it was accepted that Provida’s counterclaim proceeding did not provide any good reason for Provida to avoid paying its debt to Foodfirst, there was no ground for setting aside the statutory demand unless the debt was paid. As Provida had, however, paid the debt into Court, it was open to the Associate Judge to set aside the statutory demand on the payment out to Foodfirst of the full amount of the debt.
Associate Judge Faire was concerned, however, that Provida’s counterclaim proceeding would be under threat if there was a real risk of the liquidation of Foodfirst.[45] He therefore set aside the statutory demand and directed the Registrar to pay the sum of $518,303.13 plus interest to Foodfirst. The Judge also, however, directed the Registrar to hold the balance of $416,983, being Provida’s unpaid RDA of $406,983 and $10,000 for the agreed value of its shares, until further order of the Court in Provida’s counterclaim proceeding or until the production of a Foodfirst Board resolution authorizing the redemption of Provida’s 4,999 shares, together with an auditors’ certificate as to their value, and a solvency certificate complying with s 70 of the Act.[46]
[45] At [112].
[46] At [123].
Foodfirst has appealed against the imposition of the conditions on the payment out of the balance of the funds held in Court. Mr Campbell submitted that there is no statutory basis for having regard to the creditor’s solvency when imposing conditions on the setting aside of a statutory demand under s 290(7) of the Act. He also submitted that the order interferes with the usual operation of Foodfirst’s constitution, which does not entitle non-active members without current trading debts (such as Provida) to set off debts against the RDA. The inability to set off debts against the RDA on Foodfirst’s liquidation is a consequence of Provida’s decision to resign as an active member, which the Court should not interfere with.
Mr Campbell submitted that Foodfirst should not have been ordered to redeem Provida’s shares because under Foodfirst’s constitution redemption of shares is at the discretion of the Board. Foodfirst should not have to undertake the costly exercise of redeeming shares in order to collect a debt that is due and undisputed.
For Provida, Mr Branch submitted that the Associate Judge did not interfere with Foodfirst’s constitution. The Associate Judge correctly found that Foodfirst’s solvency would be likely to impact on the oppression claim. When the issue of Foodfirst’s solvency was uncertain, the Associate Judge generously provided Foodfirst with the opportunity to prove its solvency.
Under s 290(7) of the Act an order setting aside a statutory demand may be made “subject to conditions”. A statutory power to impose conditions should not be construed as permitting the imposition of conditions in an unfettered or open-ended manner, but as authorising conditions which implement the purpose of the particular statutory provision in light of its context. In the context of s 290, conditions imposed should relate to and be for the purpose of ensuring that the order setting aside the statutory demand is appropriately made and implemented in the circumstances of the particular case. For instance, if the order is made on the ground that the Court is satisfied under s 290(4)(b) that the debtor company appears to have a counterclaim, then the Court may impose conditions relating to the payment into Court of the debt and the expeditious determination of the counterclaim.[47] In the present case, then, if Associate Judge Faire had accepted that a Court might, on a successful oppression claim, order immediate payment of Provida’s remaining RDA, the condition as to the retention of $406,903 might have been justified.
[47]See, for example, the cases collated in Brooker’s Company and Securities Law (online looseleaf ed, Brookers) at [CA290.07].
The conditions, however, were imposed to preserve the value of Provida’s claim in the event of Foodfirst’s liquidation, rather than because Foodfirst’s possible insolvency somehow strengthened Provida’s oppression claim. In these circumstances we agree with Mr Campbell that the Associate Judge’s concern about the solvency of Foodfirst, the creditor, did not provide any basis for the imposition of conditions of this nature. If relief by way of immediate payment of unpaid RDA is unlikely to be available on a successful oppression claim, Provida is in no different position to other shareholders if Foodfirst becomes insolvent. In that event, under art8.5 of Foodfirst’s constitution, the RDAs of all shareholders would become immediately due and payable, although by virtue of art 8.4 any payment would be subject to a set off in respect of any indebtedness that a shareholder had to Foodfirst. There is no justification for conferring some special advantage on Provida in that situation. Moreover, apart from having its RDA paid out, Provida did not plead that there was any other basis upon which it should be paid compensation. If there is no possibility of compensation being paid to Provida as a remedy in its s 174 claim, then there is no point in retaining funds in court pending the outcome of the s 174 claim.
We also agree with Mr Campbell that Foodfirst should not have been ordered to redeem Provida’s shares as a condition of the payment out of Provida’s RDA. Under Foodfirst’s constitution redemption of a non-active member’s shares is at the discretion of Foodfirst’s Board, which is given the option of redeeming the shares “if in the opinion of the Directors it is in the best interests of the company”. Although it has been the historical practice for the shares of non-active members to be redeemed, it is not a mandatory requirement. We do not consider that a condition should be imposed requiring Provida’s shares to be redeemed as that would constitute an unwarranted interference with the ordinary operation of Foodfirst’s constitution and the discretionary power of its Board to make the decision in the best interests of the company.
In the absence of a potentially valid counterclaim there is therefore no reason why the debt due to Foodfirst should be withheld from it on account of concerns over its solvency. The imposition of conditions on this ground was not authorised. The appeal by Foodfirst against the imposition of the conditions therefore succeeds.
Provida’s agreement to disbursement
Provida submits that if the Court finds there is no basis for its counterclaims then the Court should order that the statutory demand be set aside so long as Provida agrees to release the funds held in Court to Foodfirst within seven days. Provida says it should have the opportunity to go to a liquidation hearing and prove its solvency. Provida submits that the Judge’s decision to set aside the demand and order disbursement of the funds took away that option and in effect granted judgment and execution on the sum claimed.
Foodfirst counters that Provida knew when it paid its money into Court that if its claim failed the fund would be disbursed to Foodfirst. It points to the interim judgment where Associate Judge Faire said:[48]
The applicant shall, within 10 days of the delivery of this decision, pay to the Registrar of this court the sum of $977,852.13 to be held by the Registrar pending determination by this court of the party entitled to the fund failing which the respondent may make application to put the company into liquidation
[48] At [57](a).
Foodfirst submits that if Provida had wished to prove its solvency it ought to have declined to pay the sum into Court and gone to a liquidation hearing.
We agree with the submissions for Foodfirst. Provida did have an opportunity to prove its solvency through a liquidation hearing; it simply chose not to take it when Associate Judge Faire gave it the option. Provida instead paid the money into Court to pursue its application to set aside the statutory demand. If its application to pursue the statutory demand fails, it should not be allowed to revisit its decision not to go to a liquidation hearing at Foodfirst’s expense.
Result
For the reasons we have given, the appeal by Provida is dismissed and the appeal by Foodfirst is allowed.
The order of Associate Judge Faire of 18 May 2011 at [123](c) of his judgment of that date is set aside.
The Registrar of the High Court at Auckland is ordered to pay the sum of $363,633.67 together with interest to Foodfirst.
As Foodfirst has succeeded, it is not required to repay the sum of $517,303.13 in terms of its undertaking.[49]
[49] See [22]–[24] above.
Provida is to pay the costs of Foodfirst for a standard appeal on a band A basis together with usual disbursements.
Solicitors:
Harkness Henry, Hamilton for Appellant in CA132/2011 and for Respondent in CA364/2011
Kensington Swan, Auckland for Respondent in CA132/2011 and for Appellant in CA364/2011
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