Samy Trustee Limited v Pauanui Dream Estate Limited
[2020] NZHC 2118
•21 August 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000069
[2020] NZHC 2118
IN THE MATTER of an application under the Companies Act 1993 section 174 BETWEEN
SAMY TRUSTEE LIMITED
First Plaintiff
JOHN SAMY
Second PlaintiffAND
PAUANUI DREAM ESTATE LIMITED
First Defendant
GREGORY ABE NEEDHAM AND BARBARA BEATE INGRID NEEDHAM
Second Defendants
Hearing: 13 August 2020 Counsel:
D Hayes for First and Second
S O McAnally and N W Coyle for Second Defendants
Judgment:
21 August 2020
JUDGMENT OF MUIR J
This judgment was delivered by me on Friday 21 August 2020 at 3.00 pm Pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:…………………………
Counsel:
D Hayes, Barrister, Auckland
Solicitors:
Hunwick Law Limited, Hamilton Keegan Alexander, Auckland
SAMY TRUSTEE LIMITED v PAUANUI DREAM ESTATE LIMITED [2020] NZHC 2118 [21 August 2020]
Introduction
[1] The second defendants seek that the plaintiffs’ claims be stayed on the basis that they have been assigned to Epsom Woods Limited (EWL) which both funds and controls the litigation. They say that the cause of action is personal and that no such assignment could take place unless EWL had a legitimate and genuine interest in the subject matter, which it does not.
[2] As an alternative and on the assumption that its application for stay is unsuccessful, the second defendants seek an order that EWL provide security for their costs.
Background
[3] The parties have a long, litigious and seemingly irreconcilable history now extending over a period of approximately eight years. I provide as brief a summary as possible.
[4] The first defendant Pauanui Dream Estate Limited (PDEL) was incorporated on 8 March 2012 for the purposes, primarily, of acquiring an undeveloped 62.23 hectare parcel of land located in Pauanui, formerly owned by Pauanui Mountain Estate Limited (PMEL) (the property). The second defendants (the Needhams) had an interest in PMEL.
[5] PDEL is owned as to 60 per cent by the first plaintiff, Samy Trustee Limited (STL). Its sole director is the second plaintiff, Mr Samy. That position was only established after litigation in this Court. Immediately after its incorporation, Mr Needham registered a transfer of 550 shares to himself so as to become the majority shareholder. He then caused himself to be appointed as a director and later (in May 2015) to have a relative Mr Richard Needham likewise appointed.
[6] Both the transfer and the appointments were challenged in proceedings which came before Fogarty J in 2016.1 His Honour held that the merits were “overwhelmingly” in favour of STL and that the defendants’ argument “was
1 Samy Trustee Ltd v Pauanui Dream Estate Ltd [2016] NZHC 569.
hopeless”.2 He ordered that STL had legal title to the 550 shares concerned, that Mr Richard Needham had not been validly appointed as director and that Mr Gregory Needham was validly removed as a director on 9 September 2015. In the result, STL was confirmed as PDL’s 60 per cent shareholder with the balance of the shares held by the Needhams. The decision also confirmed Mr Samy’s position as the sole director.
[7] In the subsequent costs award Fogarty J awarded an uplift of 50 per cent on account of “pursuit of the meritless defence”.3 The ultimate award (joint and severally against Mr Gregory Needham) was $61,390.50 plus disbursements of $8,200.
[8] In the interim, PMEL was put into liquidation by a shareholders’ resolution. Ms Kelera Nayacakalou was appointed as liquidator. In December 2017 she commenced proceedings in the High Court against PDEL, STL and the Needhams alleging that the transfer of the land from PMEL to PDEL was at an undervalue. She also caveated the property concerned alleging a proprietary interest in it. The liquidator’s counsel in respect of the proceedings was Mr Hayes, who is likewise instructed for STL on the present applications.
[9]On 17 July 2018 Mr Hayes emailed Mr Needham to advise that:
The liquidator has been contacted by a company Epsom Limited which wants to buy the property at Pauanui.4 They seem to have done a bit of homework on the whole court case and cross-liabilities obviously form (sic) talking with Samy. Obviously they need to sort out the Needham and Samy interests as part of the deal. Samy will apparently agree.
[10] He then set out the offer which was by way of purchase of 100 per cent of the shares in PDEL for $2,245,000.
[11] This proposal was summarily rejected by Mr Needham in a phone call the same day. Mr Hayes responded with a further email confirming that he acted for the liquidators only, that Mr Needham needed to take independent advice and emphasising
2 Samy Trustee Ld v Pauanui Dream Estate Ltd [2016] NZHC 2393 at [48].
3 At [10].
4 EWL was incorporated on 11 June 2018.
that his interests may not align with those of his wife (who was a creditor of PDEL). The letter continued:
I was explaining to you today that a liquidator can sell a cause of action even to Mr Samy or his friends or to you for that matter. It may get to the stage where the liquidator cannot fund the litigation so anyone could purchase the case.
[12] No further developments occurred until 7 February 2019 when Mr Hayes again emailed Mr Needham saying that:
It seems Mr Samy is now plotting new moves. He wants to apply to the Court to forcibly buy your shares in PDEL out under Companies Act s 174.
[13] On 27 March 2019 he then advised Mr Needham that the liquidator was “getting tired of all this so intends to sell the court case to someone”. He reminded Mr Needham that “the forestry people [EWL] are interested as part of them either buying the forest or Samy’s shares”.
[14] On 25 June 2019 the liquidator of PMEL settled its claims against PDEL, STL and the Needhams on the basis of a payment of $100,000 to her. Mr Needham says that he had earlier received a call from Mr Samy in which the latter said Mr Hayes had already raised the prospect of applying to the High Court for a sale order to enable sale of the Pauanui property.
[15] On 14 August 2019 one of the then directors of EWL wrote directly to Mrs Needham urging her to consider a sale on the terms that it proposed. On 7 September 2019 Mr Samy sent the Needhams a draft sale and purchase agreement apparently prepared by EWL and providing for sale of the property for the sum of
$2,100,000. The draft contained the following clauses:
19.1This agreement is conditional upon the vendor obtaining 75.1 per cent shareholding approval for the sale of this property to the purchaser under this agreement (and taking all reasonable steps to obtain such approval including applying to the High Court for a sale order).
19.2The purchaser will, on behalf of the vendor, make any application to the High Court for a sale order or application for similar purpose at its own cost and full co-operation from the director and any/or either shareholder (Samy Trustee Limited 60% and Barbara Needham and Gregory Needham 40%).
19.3This agreement becomes unconditional upon confirmation of 1 above or a final court order under 2 above.
[16] The Needhams remained unpersuaded that the property should be sold. There then followed a period of negotiation between STL and the Needhams for the latter’s purchase of STL’s shares in PDEL. Mr Needham says that the parties came close to agreement.
[17] However, on 2 November Mr Samy wrote to the Needhams stating that in his capacity as sole director of PDEL and “in no uncertain terms, … it is in our collective interest to proceed with the sale of PDEL’s land asset to Epsom Wood Limited for a purchase price of $2.1 million”. However, the Needham’s could not be persuaded and continued to decline to co-operate in passing the special resolution necessary for sale of the property.
The December 2019 sale agreement
[18] As a result of this impasse, PDEL, acting through its sole director Mr Samy, entered into a conditional agreement to sell the property to EWL in December 2019.5 The sale price is specified as $2,100,000 ($145,000 less than that offered by EWL in July 2018).
[19] Clauses 19.1 and 19.2, which are central to the Needham’s application, provide as follows:
Agreement for Sale and Purchase and subsequent events
19.1 The declaration that this Sale & Purchase Agreement (S&PA) becomes unconditional (as indicated on page 1 of this S&PA) is contingent on the consent or an Order of the High Court being obtained to effect the sale. Such a ruling of the High Court is necessary because the majority (60%) shareholder in PDEL i.e. Samy Trustee Limited (STL), requested but was denied the consent of the minority (40%) shareholder of PDEL i.e. Mr. Gregory Abe Needham and Mrs. Barbara Beatte Ingrid Needham and their Pecunia Posterum Institutum Trust (Needhams/PPIT).
19.2 The Purchaser, acting on behalf of STL will submit an Application to the High Court, this within five (5) working days from the date of the signing of this S&PA. The Purchaser will coordinate with the High Court in regard to the setting of the date for the hearing. Also, the Purchaser shall be responsible
5 No specific date in December is identified on the face of the document. The agreement is signed by Mr Samy as sole director and by Mr Christophe Dosser as authorised signatory of EWL.
for meeting in full all of the costs involved in the preparation of the Application, and for the Court hearing(s) and any related costs.
[20] On 20 January 2020 STL and Mr Samy then commenced the present proceedings under s 174 of the Companies Act 1993 claiming that the affairs of PDEL are likely to be conducted or continued to be conducted in a manner that is oppressive or unfairly prejudicial to the first plaintiff in its capacity as shareholder of the company. The plaintiffs intend imminently to file an amended statement of claim6 particularising the alleged unfair and oppressive conduct in terms:
(a)the company cannot liquidate its asset to pay an overdue mortgage to Mrs Needham;
(b)it is unable to pay its debts as they fall due;
(c)the Needhams are not contributing to the Company’s operations;
(d)STL is being forced to pay funds to the Company to avoid insolvency;
(e)the Needhams’ refusal to participate in a special resolution selling the property is oppressive and unfairly prejudicial in that it requires STL to provide continued funding to the Company without benefit; and
(f)the current “inaction” of the Company risks a GST liability because there is no continuous or regular taxable activity now occurring.
[21] These are the proceedings contemplated in cls 19.1 and 19.2 of the sale and purchase agreement. They are opposed by the Needhams. Although they could contend for liquidation of the Company within the context of the s 174 application, they have chosen instead to bring separate liquidation proceedings. These were filed on 19 February 2020 and are opposed by PDEL. By directions of Associate Judge Andrew on 18 June 2020, the s 174 proceedings and the liquidation proceedings are to be heard and case managed together.
6 A draft was appended to the plaintiffs’ submission.
Application for stay – principles
[22] There is no substantive dispute between the parties about the principles relevantly applied. The courts try to protect against the commercialisation of litigation for fear of it becoming a commodity which can be bought and sold.7 In Waterhouse v Contractors Bonding Ltd the Supreme Court held that:8
… a funding agreement may be an abuse of process where it effectively amounts to an assignment of a cause of action where such an assignment is not permissible.
[23]As such a proceeding may be stayed under r 15.1.
[24] Assignment of personal causes of action (including those in tort and personal claims) are not generally permissible and can constitute an abuse of process.9 This Court has previously held that actions under s 174 of the Companies Act constitute personal claims.10 As such they prima facie fall within the prohibition. Mr Hayes does not argue to the contrary.
[25] There will not, however be an abuse of process where the effective assignment under a funding agreement is in favour of a party with a genuine commercial interest. In Trendtex Trading Corporation v Credit Suisse the English Court of Appeal stated the position as follows:11
… it is sufficient if the maintainer has a legitimate and genuine interest in the subject matter, and the circumstances of such as reasonable to warrant his support of the action or defence: so in an assignment of a shows in action, it is valid if the assignee has a genuine and legitimate interest in the subject matter and the circumstances of such as reasonably to warrant the assignment of it to him.
[26] STL does not contend that EWL has a legitimate commercial interest in the subject matter of its s 174 proceeding. No doubt it has a genuine interest in the outcome of the proceeding, in that this dictates whether its purchase of the property becomes unconditional or not. However, Mr Hayes concedes that the subject matter
7 Frucor Beverages Ltd v Blumberg [2019] NZCA 547 at [55].
8 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [61].
9 At [57].
10 Martin v Martinborough Brewing Company Ltd HC Masterton CIV-2006-435-32, 21 December 2006 at [43].
11 Trendtex Trading Corporation v Credit Suisse [1980] QB 629 at 654 (CA).
of the proceedings is not itself one in which EWL has any involvement or interest. On the basis of that concession I do not consider this issue further.
[27] The argument before me was therefore focused exclusively on whether, by virtue of cl 19.2 of the agreement for sale and purchase, or otherwise, STL had “effectively assigned” its cause of action under s 174. In that context and having regard to the Supreme Court decision in Waterhouse v Contractors Bonding Ltd,12 both parties acknowledge that it is appropriate to look at the terms of the agreement as a whole, including the level of legal control by the funder, the profit share and potentially the role of the acting lawyers. It is not in dispute that Mr Hayes has acted variously for the liquidator of PMEL and for EWL in unrelated litigation.13
Discussion
[28] The first difficulty which the Needhams face is that cls 19.1 and 19.2 occur in the context of an agreement for sale and purchase in respect of which PDL and PWL are the only parties. Self-evidently STL is not. On the face of it therefore cl 19.2 cannot provide for any binding assignment of STL’s cause of action.
[29] Mr McAnally endeavours to meet that argument by saying cl 19.2 amounts to a representation or warranty that EWL has the authority of STL (a non-party to the agreement) to do the things cl 19.2 requires of it and that the only reasonable conclusion is therefore that there is a parallel agreement (likely oral) whereby STL has ceded control of the claims to EWL to an extent that EWL does not simply fund them but effectively “owns” them.
[30] He premises that submission on the proposition it makes “no commercial sense” for EWL to fund the proceedings in circumstances whereby it does not control the ability of STL to discontinue without consent and says that, if STL has made a commitment to that effect, then that is one of the strongest possible indicia of “effective” assignment. He says that the “flesh” on this collateral agreement is provided by cl 19.2 – EWL will bring an application on STL’s behalf, will seek a
12 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] NZLR 91 at [57].
13 The unrelated case cited to me is Epsom Woods Ltd v Waitakere Farms Ltd [2019] NZHC 1374.
hearing date and will meet all attendant costs. Significantly, however, if the “flesh” includes a contractual commitment to see the proceedings to conclusion and not compromise or discontinue them, that is not an element which features in cl 19.2. Mr McAnally says, however, that, viewed through any realistic commercial lens, that has to be what the parties have orally agreed.
[31] Mr Hayes eschews any such collateral agreement. He says that had he been aware of one he would have regarded it as his obligation to bring it before the Court and says Mr Samy will, if necessary, file an additional affidavit confirming the absence of such. I note in that respect that the collateral agreement argument was not one identified in the Needhams’ application nor emphasised in Mr McAnally’s written submissions.14 Moreover, Mr Hayes’ written submissions were premised on what he describes as the “fundamental problem” that the proceedings are by a majority shareholder and director, whereas cl 19.2 arises in a contract between vendor PDL and purchaser EWL. Accordingly, the argument Mr McAnally now advances was not one which could have been fully anticipated in advance of the hearing, at least to the extent now emphasised. I have not, however, considered it necessary to call for any additional affidavit. Mr McAnally says it would take the matter no further and, in the way I approach the case, I agree.
[32]Mr Hayes points to the sworn evidence of Mr Samy that:
The opposition affidavit asserts this matter is being controlled by Epsom Woods Ltd. That is untrue. Whilst they are paying for the lawyer I have approved every step. I do not want to lose control of the process. Epsom Woods are a keen buyer and having them volunteer to pay the fee seems to me to be in the company’s best interests.15
[33]He also refers to the evidence of EWL’s Mr Dossa in terms:
2.I can confirm the company became interested in the Pauanui property and, after discussions with Mr Samy, made an offer. During those discussions the company representative was advised of the issues with the Needham’s (sic). We were also aware of Mr Samy’s reluctance to spend more money on litigation. as (sic) we believe the property is
14 At [14] he submits:
“JS has offered no evidence to the effect that the terms between PDEL and EWL are, in any way, inconsistent with any separate arrangements STL has with EWL”. (emphasis added)
15 Similar observations are made in an affidavit dated 25 June 2020, in the context of the insolvency proceedings.
suitable for land banking we decided to assist with the litigation he needed to take to get our deal approved and over the line.
3.Upon reviewing clause 19.2 in the sale and purchase agreement it has become clear that we as purchaser have not been the one to act on behalf of the first plaintiff, the one to submit the application to the High Court, and neither have we been involved in setting a hearing date. It is my understanding that Mr Samy has procured those matters. We, as noted above, are responsible for paying the legal costs. Since the contract was signed Mr Samy has dealt with the lawyer and any invoices he receives will be passed on to us for payment by us. That is the extent of our involvement.
[34] The position on oath, is therefore, that EWL’s “involvement” is limited to funding.
[35] There is in my view nothing inconsistent with that proposition in cl 19.2. The fact that there is an apparent agency arrangement, viz “the Purchaser, acting on behalf of STL will…” does not establish an assignment. Indeed if anything it points in the opposite direction. On its face the clause simply sets out a mechanism by which the litigation anticipated in cl 19.1 (successful conclusion of which is required for the contract to become unconditional) will be funded. Arrangements for a purchaser to fund vendor litigation to remove an impediment to sale (typically in the form of a caveat) are themselves unexceptional.
[36] As acknowledged by both counsel, the central question on the application is therefore whether, contrary to the evidence of Mr Dossa, I should assume the existence of a legally binding commitment on the part of STL to cede substantial control of the litigation to EWL on account of Mr McAnally’s suggested commercial imperatives. I am unable to come to that conclusion on the balance of probabilities.
[37] Significantly, EWL’s initial offer for the property was at a level $145,000 greater than the sum specified under the agreement for sale and purchase. That provided it with a substantial commercial buffer. Having undertaken comprehensive due diligence about Mr Samy and the Needhams’ litigious history, it was no doubt well aware that Mr Samy was a frustrated majority shareholder highly motivated to want a sale of the properly and, who, in the absence of the Needhams’ willingness to enter into a special resolution, saw his only realistic options as being orders obtained on a s 174 application, alternatively, or liquidation of the company. It would have been
well aware of the diminution in value potentially associated with liquidation and thus what was likely to be Mr Samy’s commitment to seeing the s 174 proceedings through to conclusion.
[38] In that context EWL could well have come to the conclusion – without in any way straining the limits of commercial credulity – that it did not need to seek specific controls over the litigation, which it could expect would naturally follow its course. And especially so in the context of the $145,000 nominal saving it was making.
[39] So, viewed in the wider context of these specific parties, and in particular Mr Samy’s long history of frustration and litigation with the Needhams, a bare funding agreement without associated assignment of the personal cause of action becomes not only plausible but in my view more likely than not.
[40] Moreover, such position accords with the sworn statements of Mr Samy and Mr Dossa. The “extent of [EWL]’s involvement” is stated to be payment of accounts and despite the provisions of cl 19.2, EWL has not “act[ed] on behalf” of STL in any material way. Mr Samy’s stated position is that he does not wish to lose control of the process. That is understandable. Both he and his company have a prima facie liability to the Needhams in costs if the s 174 application fails. Nor does he have any prima facie right to indemnity from EWL because there is no contract between them.16 Mr McAnally says that such exposure is more notional than real because Mr Needham already owes a substantial sum in damages and costs to STL so that a set off would apply. But it is real money nonetheless and if the sum sought by way of security on the Needhams’ secondary application ($45,649) is any measure, the costs exposure is one which would of itself well justify Mr Samy’s desire “not to lose control”.
[41] Ultimately therefore I am not satisfied, either as a matter of direct evidence or necessary inference, that there has been an agreement on the part of STL “effectively” to assign its cause of action to EWL. The arrangements are unusual because although it is STL and Mr Samy who bring the s 174 application, EWL agrees to fund the same in a contract to which STL and Mr Samy are not parties. Nevertheless, that funding obligation is enforceable by PDL. There is nothing “commercially inexplicable” in
16 Neither counsel addressed me in respect of possible contract privity arguments.
STL and Mr Samy having thought this was all that was necessary, and the absence of any agreement written or oral between STL/Mr Samy and EWL is itself readily explicable in that context. The more so in view of Mr Samy’s assumed commitment to the s 174 cause. And even if I was to conclude that there must have been some form of binding agreement between STL/Mr Samy and EWL, it goes further than is required to in turn say that it must amount to an “effective assignment”. Again the same presumed commitment to the s 174 cause could well have been sufficient from EWL’s perspective.
[42] So although Mr McAnally places significant emphasis on the history between the parties, it is in my view ultimately that history which belies the premise on which his argument is based.
[43] In my view the Needhams’ case therefore fails at the evidentiary threshold. The fact that Mr Hayes has acted for EWL and acts for STL on the s 174 application, although potentially relevant (as the Supreme Court recognised in Waterhouse v Contractors Bonding Ltd),17 cannot, in my view, get the Needhams to a point which the evidence does not. On the balance of probabilities I conclude that the arrangement is exactly what it purports to be – a funding commitment without an “effective” assignment.
The application for security
[44] Mr McAnally acknowledges this is an unusual application because STL and Mr Samy have a prima facie liability in costs if unsuccessful in their claim and there is no basis to suggest they would be unable to meet such liability. Indeed he acknowledges that his clients themselves have a liability to STL for damages and costs in the order of $250,000 so that a set off would simply apply. His argument for security ultimately rests on a proposition no less descriptive for its informality – namely that if the arrangements involving EWL did not amount to an assignment, nevertheless they were sufficiently “wiffy” that this Court should require EWL to provide security for costs.
17 Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91.
[45] Mr McAnally submits that although orders for security against non-party funders have typically been made in the context of representative proceedings, the principles established in Saunders v Houghton18 are not so limited, contrary to the views expressed by Davison J in Oxygen Air Ltd v LG Electronics Australia Pty Ltd.19
[46] Although an award of security for costs is in the Court’s discretion,20 there are jurisdictional preconditions. Either the plaintiff must be resident or incorporated out of New Zealand or there must be “reason to believe the plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding”.21
[47] Representative proceedings will frequently engage the second limb. It is unsurprising in that context that a funder, who has no personal right at stake will “in most cases”22 be required to provide security. But that is not the case here. No issue arises in terms of the plaintiffs’ ability to pay costs if unsuccessful. Accordingly there is in my view no jurisdiction to award security.
[48] In that context I do not need to address the parties’ further submissions about the merits of the s 174 claim other than to say that in both McClintock v Quinn23 and Latimer Holdings Ltd v Sea Holdings Ltd24 New Zealand Courts have recognised that the concept of the “affairs of the company” is to be broadly interpreted and that there are no fixed categories of cases to which s 174 applies.
Result
[49]I dismiss the applications.
18 Saunders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at 343.
19 Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 2504, [2018] NZAR 1699.
20 High Court Rule 5.45(2).
21 High Court Rule 5.45(1).
22 Saunders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at 343.
23 McClintock v Quinn [2012] NZHC 16.
24 Latimer Holdings Ltd v Sea Holdings Ltd [2005] 2 NZLR 328.
Costs
[50] I award costs to the plaintiffs on a 2B basis, quantum to be settled by the Registrar in the absence of agreement.
Muir J
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