SARAH LEIGH KYLE, ANDREW ROBERT WILLIAM KYLE and HARRY STEWART SETON KYLE as trustees and executors of the Estate of Robert Herbert Seton Kyle s AND KYDELL DOWNS LIMITED
[2024] NZHC 2849
•1 October 2024
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2022-406-005
[2024] NZHC 2849
UNDER the Companies Act 1993 IN THE MATTER
of an application for the liquidation of Kydell Downs Limited
BETWEEN
SARAH LEIGH KYLE, ANDREW ROBERT WILLIAM KYLE and HARRY
STEWART SETON KYLE as trustees and executors of the Estate of Robert Herbert Seton Kyle
Plaintiffs
AND
KYDELL DOWNS LIMITED
Defendant
Hearing: 27 September 2024 Appearances:
S M Bevin and E L Pearce for Plaintiffs P A Cowey and V A Reid for Defendant
Judgment:
1 October 2024
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 1 October 2024 at 4.15 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:
KYLE v KYDELL DOWNS LIMITED [2024] NZHC 2849 [1 October 2024]
[1] The defendant company (the company) was incorporated by Robert Kyle and his long-term partner, Judith Hurndell. Mr Kyle has died. The plaintiffs are his children, the executors of his estate and the trustees of his family trust.
[2] In this proceeding the plaintiffs are seeking an order putting the company into liquidation on the bases the company is unable to pay its debts,1 and that it is just and equitable that an order for liquidation be made.2
[3]However, the applications presently before me are made by the company for:
(a)a stay of the proceeding pending determination of another proceeding brought by Ms Hurndell seeking provision from Mr Kyle’s estate under the Family Protection Act 1955; and
(b)for an account-taker or expert to be appointed by the Court to inquire into the state of Mr Kyle’s and Ms Hurndell’s shareholder current accounts in the company.
[4] These applications are opposed by the plaintiffs. They say there are no grounds for granting a stay of the proceeding and the making of an order for the appointment of an account-taker or expert is not appropriate and will serve no useful purpose.
Background
[5] Mr Kyle and Ms Hurndell were in a long-term personal relationship from 1995 until Mr Kyle’s death on 15 December 2019.
[6] The company was incorporated in 2006. Mr Kyle and Ms Hurndell were both directors. Following Mr Kyle’s death, Ms Hurndell remains the sole director. Each owned one of the 100 shares in the company with their respective family trusts each owning 49 shares.
1 Companies Act 1993, s 241(4)(a).
2 Section 241(4)(d).
[7] Mr Kyle’s estate includes his one share in the company and an amount owing in his shareholder current account. According to the financial statements of the company to 31 March 2018, Mr Kyle’s shareholder current account was in credit for
$2,760,703. Following Mr Kyle’s death, Ms Hurndell had the current accounts adjusted over several years. The adjustments in the main involved debiting sums to Mr Kyle’s current account and crediting those sums to Ms Hurndell’s current account. The financial statements to 31 March 2024 show Mr Kyle’s current account adjusted downwards to $674,986. It appears further adjustments may be made in the future.
[8] The plaintiffs do not accept the adjustments, which they contend were not lawful and were made without their knowledge or consent. They also say that Ms Hurndell has resisted having another director appointed and, as I understand it, they have had no involvement in the management or operation of the company.
[9] Separately, in July 2021, Ms Hurndell commenced a proceeding in the Family Court seeking provision from Mr Kyle’s estate under the Family Protection Act 1955. That claim is defended. By consent, on 29 May 2024 it was transferred to the High Court for hearing although it has not been advanced since then.
[10] On 1 February 2022 the plaintiffs served a statutory demand upon the company for the sum of $975,112. The sum demanded was the amount of Mr Kyle’s current account as set out in the financial statements of the company to 31 March 2021. The demand noted a further $1,837,332 had been removed from the current account which was disputed.
[11] The company did not comply with the statutory demand, nor did it apply to set aside the demand. The plaintiffs commenced this proceeding to liquidate the company. The statement of claim sought an order for liquidation on the ground that the company was unable to pay its debts.
[12] Following service, the company did not apply under r 31.11 of the High Court Rules 2016 (the Rules) to stay the proceeding or to restrain advertising. The proceeding was advertised with a hearing date of 27 May 2022. It was not until late April 2022 that the company instructed counsel.
[13] On 15 September 2023 the plaintiffs made an application to file an amended statement of claim to add a cause of action seeking liquidation upon the just and equitable ground under s 241(4)(d) of the Companies Act 1993. The company opposed that application and it was set down for hearing before Associate Judge Skelton on 1 November 2023. Ultimately the company consented to the filing of the amended statement of claim adding the additional cause of action.
[14] Following an unsuccessful mediation in April 2024, the company’s counsel raised by memorandum that the proceeding should be stayed pending determination of Ms Hurndell’s Family Protection Act claim, and for the appointment of an account- taker under pt 16 of the Rules to determine the value of the shareholder current accounts. This application followed.
The company’s submissions on stay
[15] The application for stay is made in reliance upon r 7.44, which is a general provision that does not deal specifically with the grant of a stay, and the inherent jurisdiction of the Court.3 The company does not rely upon r 31.11 and counsel made no reference to r 15.1. The company advances several matters in support of its application for stay.
[16] First, counsel argues in written submissions that it is a prerequisite to resolving both the Family Protection Act claim and “the debt in [this] liquidation proceeding” that the value of Mr Kyle’s current account be calculated using “orthodox accounting practice”. The company says should a stay not be granted the efficacy of the Family Protection Act proceeding will be seriously undermined. Further, it argues that once the Family Protection Act claim has been heard any relief granted to Ms Hurndell must be first deducted from Mr Kyle’s shareholder current account and only then any balance remaining paid to Mr Kyle’s estate.
[17] The company relies upon Cowan v Sand Dune Ltd, where an application for liquidation of a company on the just and equitable ground was stayed pending
3 Cowan v Sand Dune Ltd [2013] NZHC 1378, [2013] NZFLR 696.
relationship property proceedings between the shareholders.4 I will return to this decision.
[18] Next, the company says this proceeding should be stayed because it is common ground that it is solvent, and while it failed to respond to the plaintiffs’ statutory demand the presumption of insolvency has been rebutted.5
[19] The company then argues the plaintiffs cannot succeed on the just and equitable ground as they hold just one share in the company, and this is not therefore a case akin to the breakdown of what is in reality a partnership between shareholders or a deadlock that impedes the operation of the company.
[20] The company also contends that what the plaintiffs want is payment of Mr Kyle’s shareholder current account which is “an accounting dispute”. The company says it has provided explanations for all the adjustments made to Mr Kyle’s current account, which the plaintiffs have failed to review or adequately respond to in their statement in reply to the company’s statement of defence.
[21] It is also submitted that as this proceeding was filed after Ms Hurndell had issued her Family Protection Act claim it is a “tactic to gain a collateral advantage”, to which the grant of a stay is an appropriate response.
[22] Finally, the company submits that liquidation would prejudice its ongoing farming operations. On the other hand, it says the granting of a stay would not cause the plaintiffs any prejudice.
My analysis on the stay application
[23] This Court may stay a liquidation proceeding which is an abuse of its process. In Taxi Trucks Ltd v Nicholson, the Court of Appeal said:6
It has long been settled that the Court may under its inherent jurisdiction restrain or stay winding-up proceedings that are an abuse of the Court’s process. The abuse consists of using the winding-up procedure, involving as
4 Cowan v Sand Dune Ltd, above n 3.
5 Companies Act, s 287(a).
6 Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 at 299.
it does the advertising of the petition with the likely consequence of serious commercial damage to the company, as a means of obtaining payment of a genuinely disputed debt. For in general, a winding-up order will not be made where there is a genuine dispute. This is not an inflexible rule, as was stated in and illustrated by Bateman Television Ltd v Coleridge Finance Co Ltd ... and in this respect the law in New Zealand differs somewhat from that in England, which is more unbending. The principles to be applied appear succinctly in this passage of the judgment of this Court in Exchange Finance Co Ltd v Lemmington Holdings Ltd ... which follows a reference to the judgments in the Bateman case:
“Obviously the jurisdiction to restrain winding-up proceedings has to be exercised with that settled New Zealand law in mind. We think that the governing consideration can only be whether presenting or proceeding with a petition savours of unfairness or undue pressure. Whether that stigma attaches to a petition must depend on the particular facts. In many cases where there appears to be a genuine and substantial dispute about the present existence of a debt it will be right to grant an injunction. But there will be cases sufficiently out of the ordinary to justify a Judge in holding his hand.”
[24]Mr Cowey also took me to another relevant passage from the judgment in the
Taxi Trucks case, where Hardie Boys J said:7
A dispute as to the amount of a debt is not appropriate for resolution on the hearing of a winding-up application … [T]he issue on such a hearing is different: it is whether the company is insolvent. If it is, and a winding-up order is made, the amount properly payable to a creditor is determined in the course of the liquidation.
[25] I do not accept the company’s submissions that determining the value of Mr Kyle’s current account is a prerequisite to resolving this proceeding or that this proceeding is no more than an accounting dispute. There is a dispute as to the amount owing in the shareholders’ current accounts but, as Hardie Boys J made clear in the Taxi Trucks case and I understood Mr Cowey to accept, the plaintiffs do not need to prove the exact amount owing to them. There is no doubt the plaintiffs are creditors of the company for a substantial sum, with standing to apply for an order liquidating the company.8 To obtain an order they must prove either that the company is insolvent or that it is just and equitable it be put into liquidation for the reasons advanced in the amended statement of claim.
7 At 302.
8 Companies Act, s 241(2)(c)(iii) and (iv).
[26] Nor do I accept that the company does not have to pay Mr Kyle’s current account because Ms Hurndell may obtain relief on her Family Protection Act claim. The company has no interest in Ms Hurndell’s claim. She is, in effect, using her position as the director of the company to provide security for payment of her unproven claim.
[27] The company relies on Cowan v Sand Dune Ltd, which concerned a dispute between shareholders of several companies who had been in a personal relationship.9 Mr Cowan applied to liquidate the companies on the just and equitable ground on the basis that was necessary for him to realise the value of his shares in the companies. Collins J ordered a stay of the proceeding and said:
[20] In my assessment, the High Court should not consider Mr Cowan’s application to liquidate the companies until the Family Court has determined the key issues relating to the nature of the parties’ relationship and their respective interests in any relationship property they may have.
[21] The Family Court proceedings provide the most effective and fairest mechanism for the parties to determine exactly what interest Mr Cowan has in the companies, and whether his interest in the parties’ relationship property can be satisfied without it being necessary to liquidate the companies. Liquidation on just and equitable grounds should only be pursued as a last resort, and Mr Cowan is yet to exhaust potential remedies available to him.
[22] If the companies were liquidated the efficacy of the Family Court proceedings would be seriously undermined. It would, in a strict legal sense, be an abuse of process for the High Court to totally undermine the Family Court proceedings in circumstances where that Court is seized of the lis between the parties.
(footnotes omitted)
[28] Cowan is distinguishable from this case. First, there the just and equitable ground was the only basis relied upon for the application to liquidate the companies. Second, as Collins J noted, the proceedings between the shareholders under the Property (Relationships) Act 1976 would determine not only what interest Mr Cowan in fact had in the companies but also how the parties’ interests in the companies could be satisfied without the need to liquidate them. Here there is no dispute as to the nature of the parties’ interests in the company, and the Family Protection Act claim will not resolve the issues that must be determined in this proceeding as to whether the
9 Cowan v Sand Dune Ltd, above n 3.
company is insolvent or should be otherwise liquidated on the just and equitable ground.
[29] Mr Cowey relies upon Collins J’s comments that it has been suggested the appropriate threshold for making an order for liquidation on the just and equitable ground is the irreversible breakdown of the company’s ability to carry on business or a total deadlock that impedes the continued operation of company.10 He argues here there is no deadlock, and the company is well managed and not insolvent.
[30] Collins J’s dicta does not cover the field of situations where an order for liquidation on this ground may be made. While the decision whether to order the liquidation of a company must be exercised judicially, there are no restrictions as to the types of circumstances in which that may be appropriate.11 Also, while it is correct the plaintiffs hold just one share in the company in their capacity as executors and trustees of the estate, that overlooks the reality that this litigation is a contest between the shareholders representing the interests of both the Kyle family and Ms Hurndell.
[31] It is also not the case that there is no dispute the company is solvent. The plaintiffs’ position is that the company is insolvent. They also do not accept that the company is well managed. They rely upon the presumption of insolvency, the non-payment of the current account and aspects of the financial statements of the company. This is a trial issue.
[32] I do not accept the submission that this proceeding is a tactic or was otherwise commenced to gain some collateral advantage. It would be quite possible to view the Family Protection Act claim and the withholding of payment of even the undisputed amount in Mr Kyle’s current account in the same way. I do not think this submission advances the company’s application.
[33] There is no evidence about the interruption of the company’s farming operations, but I accept the plaintiffs’ submission that a stay may prejudice them in circumstances where they regard the company as insolvent, the company is not paying
10 At 19.
11 Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC).
any portion of Mr Kyle’s current account, they have no say in the management of the company, and it has been signalled further adjustments to the current accounts may be made.
[34] There are several other factors that would suggest the Court should not order a stay in the exercise of its discretion. First, there has been substantial delay in the company applying for a stay. It could have done so following service of the proceeding but did not. It has now been two and half years since the proceeding was commenced. Second, while the company now argues that the plaintiffs cannot succeed on the just and equitable ground, it consented to the filing of the plaintiffs’ amended statement of claim adding that cause of action. Third, while the company complains about delays in this proceeding, the Family Protection Act claim has been before the Court for longer. I do not consider that the delays that have occurred in this proceeding were solely the responsibility of either party.
[35] I do not accept that there are grounds to stay this proceeding for any of the reasons advanced by the company.
Taking of an account.
[36] Consistent with its view that this litigation is an accounting dispute, the company applies for the appointment of an account-taker to report upon the adjustments made to Mr Kyle’s current account because until that occurs there is “no sum certain” payable to the plaintiffs.
[37]The application is made under pt 16 of the Rules, which provides:
16.2 Orders for accounts and inquiries
The court may, on the application of any party, before, at, or after the trial of a proceeding, order an account or an inquiry, whether or not it has been claimed in that party’s pleading.
[38] McGechan on Procedure describes the nature of the process of taking an account as follows:12
The process of account is neither a cause of action nor a remedy, but rather a preliminary exercise by which a claimant can establish an evidentiary basis for the imposition of some form of liability on a defendant: Nicholls v Nicholls [2020] NZCA 346 at [76]. The jurisdiction requires the Court to first be satisfied that there is a liability to account in a variety of circumstances, for example, breaches of fiduciary duties and of duties of confidence and infringements of intellectual property rights as well as obligations among co- owners of property: King v Library Covers (NZ) Ltd at 134; Nicholls v Nicholls (above) at [76].
[39] King v Library Covers (NZ) Ltd concerned a claim by an employee for commission on contracts obtained for advertisements on library covers published by the defendant.13 The plaintiff had received irregular payments over a period of years but was unable to say what amount was owing to him. He sought an order for the taking of accounts. Stanton J ordered an account saying:14
No doubt the Court would require to be satisfied that there was a liability to account before it would make an order under the Rule, but, in the present case, the plaintiff has such a right It may be that in strictness the plaintiff should
have alleged that he did not know, and could not ascertain, what amount he was entitled to, and it would appear that possibly he could have had the information necessary to ascertain that amount, but his claim has been supplemented by his evidence, and it would, I think, be a denial of justice to refuse him an order for an account.
[40] The authorities make clear the taking of an account is not a means of establishing liability. The Court must first be satisfied that a liability to account has been established. The company’s position is that it has no liability in respect to any of the adjustments made to the current accounts. Until liability is established there is no basis for the taking of an account.
[41] Further, the taking of an account would serve no purpose. While Mr Cowey referred to there being a “muddle of entries” that wrongly attributed contributions to the company made by Ms Hurndell to Mr Kyle, there does not appear to be any doubt about what adjustments were made, when they were made, the sums involved, and the
12 Jessica Gorman and others McGechan on Procedure (online ed, Thomson Reuters) at [HRPt16.01(1)].
13 King v Library Covers (NZ) Ltd [1951] NZLR 133 (SC).
14 At 134.
justification the company advances for them. The adjustments are relatively few in number and are identified by the company’s accountant in his affidavit.
[42] The company submits that in the alternative the Court might appoint an expert under r 9.36. That rule provides as follows:
9.36 Appointment of court expert
(1)In a proceeding that is to be tried by Judge alone and in which a question for an expert witness arises, the court may at any time, on its own initiative or on the application of a party, appoint an independent expert, or, if more than 1 such question arises, 2 or more such experts, to inquire into and report upon any question of fact or opinion not involving questions of law or of construction.
(2)An expert appointed under subclause (1) is referred to in this rule and in rules 9.37 to 9.42 as a court expert.
(3)A court expert in a proceeding must, if possible, be a person agreed upon by the parties and, failing agreement, the court must appoint the court expert from persons named by the parties.
(4)A person appointed as an independent expert in a proceeding under rule 9.44(3) may not be appointed as a court expert unless the parties agree.
(5)In this rule, expert, in relation to a question arising in a proceeding, means a person who has the knowledge or experience of, or in connection with, that question that makes that person’s opinion on it admissible in evidence.
[43] The company says that an expert appointed by the Court could report on the adjustments to the current accounts, report on the current accounts as recorded in the company’s 2024 accounts and answer the question of whether the accounting treatment of the shareholders’ current accounts reflects accepted accounting practice.
[44] It is also said that the company’s accountant has attempted to engage with the plaintiffs’ accountant to resolve the accounting differences, but the plaintiffs’ accountant has provided only a preliminary assessment. On that basis it is said it is prudent for there to be an expert accountant appointed.
[45] In Theatrelight Electronic Control & Audio Systems Ltd v Angliss, Paterson J said the matters to be considered by the Court in deciding whether or not to appoint an expert were:15
(a)Is a report from an expert likely to resolve an important question in the proceeding? If not, there would appear to be no reason to incur the expense of appointing such an expert; and
(b)Does the expert have the necessary specialised knowledge or skill gained from study, training or experience to enquire and report upon the proposed questions of fact or opinion?
[46] Recently, in Purucker v Huebler the plaintiff sought to recover from the defendant large sums the defendant was said to have fraudulently misappropriated while undertaking book-keeping services for the plaintiff’s business.16 Isac J refused the defendant’s application to appoint an expert bookkeeper. His reasons included that the defendant was well able to address the factual issues she wished to advance in her defence, and:
[14] Moreover, I am not satisfied that the appointment of a court expert is likely to resolve the central issue. It seems clear that Ms Huebler does not accept that she misappropriated the plaintiff’s funds. She has given no indication that she would accept the views of an independent expert were they to conclude that the moneys in issue had indeed been misappropriated.
[47] As I have already noted, the adjustments made to the current accounts are clearly identified. To the extent they consider it necessary, each party is well able to call its own expert evidence to comment on those adjustments. Both parties have engaged experts already.
[48] However, the appointment of an expert by the Court is also not appropriate because the question the company proposes the expert inquires into and reports upon is not likely to assist it to resolve this proceeding. The question proposed assumes that the plaintiffs must establish the actual amount that is owing in Mr Kyle’s current account. That is not correct.
15 Theatrelight Electronic Control & Audio Systems Ltd v Angliss (1997) 10 PRNZ 422 (HC).
16 Purucker v Huebler [2023] NZHC 981.
[49] In addition, whether the adjustments to the current account were correctly made cannot be determined by reference only to “accepted accounting practice” but will require consideration of legal and factual issues which I understand the company acknowledges an expert cannot decide. The factual issues will include, for instance, what Mr Kyle and Ms Hurndell agreed at the time the original entries were made in the financial statements, the reasons for that and what instructions were given to the company’s accountants at that time. The legal issues are said to include Mr Kyle’s interest in contributions now said to have been made to the company by Ms Hurndell under the Property (Relationships) Act.
[50] It was only at the hearing that Mr Cowey identified a person to be appointed as the expert. The plaintiffs had no opportunity to consider whether that person was appropriate for appointment in the event the Court was minded to do so. For that reason, the second consideration in Theatrelight Electronic Control cannot be considered.17
[51] The plaintiffs argue that a liquidator is best placed to determine and resolve the issues concerning the state of the current accounts, exercising the full powers available to a liquidator under the Companies Act which go beyond those available to an account-taker or court-appointed expert.18 As I find that neither an account-taker nor an expert should be appointed, I do not need to consider that submission.
Result
[52]The company’s application is dismissed.
[53] I am not aware of any reason why the plaintiffs would not be entitled to costs on a 2B basis plus disbursements. If there is any disagreement about that, counsel may file memoranda within 10 working days and I will decide the matter on the papers.
[54] Counsel shall confer and also within 10 working days file a memorandum of proposed directions to take the case to trial. I can offer counsel a hearing on
17 Theatrelight Electronic Control & Audio Systems Ltd v Angliss, above n 15.
18 Commercial Factors Ltd v Scenic Hotel Group Ltd [2020] NZHC 1868 at [37].
2 December 2024 and they might wish to propose a timetable working backwards from that date if it is suitable or liaise with the Registry for alternative dates if it is not.
O G Paulsen Associate Judge
Solicitors:
Cavell Leitch, Christchurch
Parry Field Lawyers, Christchurch
0
4
0