Sareen v Oberoi
[2021] NZHC 2884
•28 October 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-002224
[2021] NZHC 2884
UNDER Companies Act 1993 IN THE MATTER OF
An application for leave to bring derivative action pursuant to s 165 of the Act
BETWEEN
DHEERAJ SAREEN
Applicant
AND
JAGPREET SINGH OBEROI
First Respondent
165 RUSSELL ROAD LIMITED
Second Respondent
Hearing: 12 October 2021 Appearances:
R J Connell for Applicant S Raju for Respondents
Judgment:
28 October 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 28 October 2021 at 2.00 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar
Date ………………………………
SAREEN v OBEROI & OR [2021] NZHC 2884 [28 October 2021]
Introduction
[1] 165 Russell Road Ltd1 was incorporated in September 2020 as a joint venture to purchase and develop the property at 165 Russell Road, Manurewa.2 Mr Sareen and Mr Oberoi are its shareholders and directors. They cannot agree on the future of the company. It is deadlocked.
[2] The registered proprietor of the property is Jasraj Investments Ltd.3 That company is owned by Mr Oberoi and his wife. In an agreement for sale and purchase4 of September 2020, JIL, as vendor, agreed to sell the property to RRL for $690,000.5 The ASP was subject to finance.
[3] In the present application, Mr Sareen seeks leave to bring a shareholder’s derivative action pursuant to s 165 of the Companies Act 1993. He contends that Mr Oberoi, in breach of his fiduciary duties as a director, improperly thwarted the sale of the property to RRL. Mr Sareen alleges that Mr Oberoi, who signed the ASP as both vendor and purchaser, had a change of heart when he realised the significant value of the property. Mr Sareen says that Mr Oberoi sought to exclude him from any share of a substantial capital gain.
[4] Mr Sareen seeks leave to bring an action by RRL against JIL for specific performance, requiring it to perform the ASP and therefore transfer the property to RRL. He also seeks, in the name of RRL, an award of damages against Mr Oberoi for breach of fiduciary duty.
[5] Opposing the application, Mr Oberoi contends that the proposed proceedings have no reasonable prospect of success and that it is not in the interests of the company, RRL, for leave to be granted. Those are the two critical issues I must address.
1 RRL.
2 The property.
3 JIL.
4 The ASP.
5 Standard ADLS 10th edition 2019(2).
Factual background
[6] The property was purchased by JIL in May 2020. It was previously owned by Eon Development Ltd.6
[7] In December 2019, Eon Development, as vendor, agreed to sell the property to Jasraj Properties Ltd, another company owned by Mr Oberoi, for $690,000. Mr Oberoi subsequently nominated JIL to be the purchaser.
[8] The adjoining property at 167 Russell Road is owned by a company controlled by a mutual business colleague, Mr Mohan Bhatia.
[9] Mr Sareen says that between October 2019 and May 2020, he had numerous discussions with Mr Oberoi about a joint development of the property between them. They also discussed the possibility of developing the two properties together, namely 165 and 167 Russell Road, with a mutual driveway.
[10] Mr Sareen says that in February 2020 he provided Mr Oberoi with a contribution to the deposit for the property in the sum of $15,000. The 10 per cent deposit of $69,000 was due for payment the following day.
[11] Mr Sareen says that he advanced a further $40,000 to Mr Oberoi for the purchase of the property in April 2020.
[12] On 28 May 2020, the property transferred from Eon Development to JIL. It is subject to a registered mortgage to Westpac New Zealand Ltd.
[13] On 9 September 2020, JIL entered into the ASP. RRL had not yet been incorporated. The purchaser was described as “165 Russell Road Ltd (in)corporation”. The purchase price of $690,000 was the same price which JIL had paid for the property. The ASP was signed by Mr Oberoi as the director for both the vendor and the purchaser. It was also signed by Mr Sareen as director.
6 Eon Development.
[14] The ASP was subject to finance, “10 working days from date of agreement”, which was 24 September 2020.
[15] RIL was incorporated on 14 September 2020. Mr Oberoi had signed the necessary company documentation the previous day.
[16] In late September 2020, there were market appraisals of the property by real estate agents. The appraisals suggested a valuation in excess of $1 million.
[17] Mr Oberoi says that on about 2 October 2020, he advised Mr Sareen that the ASP was at an end because of a failure to obtain finance.
[18] On 5 October 2020, the solicitors for Mr Sareen wrote to Mr Oberoi contending that Mr Sareen had earlier sent documents from Squirrel Mortgage Brokers to Mr Oberoi in order to obtain second-tier lending to complete the purchase of the property. The letter also noted that Mr Sareen had funds of his own available to advance to RRL to complete the purchase. The letter refers to an understanding that the settlement for the sale of the property was to take place on 14 October 2020.
[19] The letter also outlined three options for the property: develop the property as originally intended; re-sell the property on the open market; or hold the property for future development.
[20] On 3 November 2020, the solicitors for Mr Oberoi responded to the letter of 5 October 2020. The letter was written on behalf of both Mr Oberoi and JIL. The letter stated that the vendor (that is, JIL) “maintains that the agreement is at an end for non-fulfilment of the finance condition”.
[21] By letter dated 22 March 2021, the solicitors for Mr Oberoi and JIL wrote to the solicitors for Mr Sareen and stated, relevantly:
3.Strictly for the avoidance of doubt, Jasraj Investments Ltd (as vendor) hereby and pursuant to cl 9.10(5) of the General Terms of the Agreement avoids the Agreement for non-fulfilment of the finance condition.
4.The Agreement is at an end.
Legal framework
[22]Section 165 of the Companies Act 1993 provides, as relevant:
165 Derivative actions
(1)Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to –
(a)bring proceedings in the name and on behalf of the company or any related company; or
(b)intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2)Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to –
(a)the likelihood of the proceedings succeeding:
(b)the costs of the proceedings in relation to the relief likely to be obtained:
(c)any action already taken by the company or related company to obtain relief:
(d)the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either –
(a)the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b)it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
…
[23]In He v Chen, the Court of Appeal in observed:7
7 He v Chen [2014] NZCA 153, [2015] NZAR 437; recently confirmed by the Court of Appeal in
Parkinson v O’Brien [2021] NZCA 309 at [34].
[30] [Section 165(2)] requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim.”8 It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s 165(2)(a).9 It has also consistently informed the Court’s assessment of the remaining three criteria.10 While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.
[24] It is not the function of the Court on an application under s 165 to determine the ultimate merits of the claim.11 Nor is its role to conduct an interim trial.12
The parties’ positions
[25] The only two statutory criteria at issue are the likelihood of the proceedings succeeding and whether it is in the interests of the company that the proposed proceedings be commenced. It is appropriate to address these two criteria together. The respondents accept that the criteria under s 165(3) are satisfied and that there is no issue that the costs of the proceedings would be disproportionate to the relief sought.
[26] RRL’s proposed claims are set out in a draft statement of claim. As Mr Connell, for Mr Sareen, submitted, that document is a guide and does not necessarily disclose all possible causes of action or how they will be finally pleaded. The primary proposed causes of actions are orders for specific performance of the ASP, and a claim against Mr Oberoi for breach of fiduciary duties. It is contended that despite the earlier joint venture arrangements agreed between Mr Sareen and Mr Oberoi, that Mr Oberoi declined to sign the finance application documents or cooperate in fulfilling the finance condition, in breach of his fiduciary duties as a director of RRL. It is also
8 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765.
9 The High Court has adopted this test on at least 30 occasions: see Christopher Hare “Shareholder remedies: personal rights, corporate rights and the derivative action” in Peter Watts, Neil Campbell and Christopher Hare (eds) Company Law in New Zealand (LexisNexis, Wellington, 2011) 677 at 736, n 360. See also Lynne Taylor “Derivative Action” in John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) 569 at 575– 576, n 43.
10 A sample of cases using the test in such a way appears in Taylor, above n 9, at 576, n 48.
11 He v Chen, above n 5, at [38]; Parkinson v O’Brien, above n 5, at [35].
12 Vrij v Boyle, above n 6, affirmed recently in Parkinson v O’Brien, above n 5, at [35].
alleged that Mr Oberoi was in further breach of his fiduciary duties by failing to act in the best interests of RRL and to ensure that RRL obtain the benefit of the ASP. By way of relief for the fiduciary duty claim, RRL would seek the difference between the value of the property at the time of judgment and $690,000 (less what would have been net holding costs). There is also a proposed third cause of action against Mr Oberoi for breach of the Fair Trading Act 1986, alleging he intended and actively thwarted the ASP for the purposes of his own company, JIL (the proposed first defendant in the substantive claim).
[27] In contending that the proposed proceedings are not reasonably likely to succeed, Mr Raju, for the respondents, focused on Mr Sareen’s proposed claim for specific performance. He made no formal concession as such, but acknowledged Mr Sareen’s proposed second cause of action, breach of fiduciary duty, had greater prospects of success.
[28] Mr Raju contended that the ASP was specifically and intentionally subject to a finance condition for the benefit of RRL as purchaser. The ASP was void by reason of failure to fulfil that condition. Accordingly, the claim for specific performance accordingly has a low prospect of success. Mr Raju emphasised the following factors:
(a)The vendor, JIL, retained and exercised an express right of cancellation under the ASP;
(b)JIL is independent of the purchaser, RRL; and
(c)It is clear that Mr Sareen and Mr Oberoi are at complete odds with respect to advancing any joint venture between them, including the terms of that joint venture.
[29] The respondents further argue that any loss suffered by Mr Sareen is purely financial and so his losses, if any and proven, can be addressed through leave being confined to the fiduciary duty cause of action. It is unnecessary and not in the interests of RRL for the proposed cause of action for specific performance to proceed.
[30] Mr Sareen says that he and Mr Oberoi intended to undertake a joint venture. He claims that Mr Oberoi left it to him to obtain the necessary finance and he did so. Mr Sareen challenges Mr Oberoi’s claim to have cancelled the ASP. He says that Mr Oberoi changed his mind after receiving valuation appraisals and then purported to cancel the agreement for failure to arrange finance.
[31] There is a significant conflict in the evidence on the critical issue of cancellation:
(a)Mr Oberoi says that he made it abundantly clear from the outset that he would only accept first-tier lending; and
(b)That he and Mr Sareen never discussed the immediate on-sale of the property by the joint venture company, RRL.
Analysis
[32] In addressing the key issue of likelihood of success, it is important to recall that a leave application under s 165 is not a mini-trial on the merits.13 I obviously cannot resolve questions of credibility but must determine whether the threshold of a reasonably arguable claim has been met.
[33] I find that RRL has reasonably arguable claims against JIL and Mr Oberoi for specific performance and breach of fiduciary duties. There is probative evidence to support Mr Sareen’s allegations that Mr Oberoi had a change of heart and thwarted Mr Sareen in his genuine endeavours to obtain finance and to meet the finance condition. It is reasonably arguable that, as director of RRL, Mr Oberoi breached duties owed to RRL. My reasons follow.
[34] The transcripts of the recorded conversations between Mr Sareen and Mr Oberoi and some of the critical documentation, including the property valuation appraisals obtained in September 2020, support Mr Sareen’s account about the nature of the joint venture that was contemplated. It is clearly arguable there were discussions
13 Parkinson v O’Brien, above n 5, at [35].
between the parties, which included their business colleague, Mr Bhatia, in April and May 2020. These arguably involved the purchase of the property and its development in conjunction with the development of the adjoining property at 167 Russell Road. As noted, it appears this involved a proposal for a common driveway to service both properties.
[35] There was an unusual transferring of funds back and forth between Mr Sareen and Mr Oberoi in the first half of 2020. The significance of those transactions will be a matter for trial. However, at this stage it is clearly arguable that Mr Sareen did provide some of the funds for the purchase of the property by JIL with the intention that it be developed by the parties as a joint venture.
[36] Although RRL was incorporated after the ASP was signed on 9 September 2020, both parties accept that nothing turns on that. It is relatively common practice for property developments to proceed in this way, by nominating the subsequently incorporated company as the purchaser.
[37] The transcripts of their recorded conversations provide clear support for Mr Sareen’s contention that the parties expressly contemplated second-tier lending. They also support Mr Sareen’s claims that he was able to secure the necessary second- tier finance within the 10-day time period. Those conversations and the property valuation appraisals further suggest that the parties did discuss and contemplate an immediate on-sale of the property following its acquisition by RRL. The fact that the purchase price of $690,000 was the same as the price for which JIL acquired the property from Eon Development supports Mr Sareen’s contention that RRL was a joint venture company, with both parties to benefit from either the development or an on- sale. That evidence is also consistent with the allegation that Mr Sareen had already provided finance to JIL for the purchase of the property.
[38] There is good reason to doubt Mr Oberoi’s evidence that on 2 October 2020, he advised Mr Sareen that the ASP was at an end because of a failure to obtain finance. It is not in dispute that the parties met on the following day to open a bank account in the name of RRL. Such a meeting would make no sense if the ASP was at an end and RRL therefore had no purpose. Furthermore, the letter from Mr Sareen’s solicitors to
Mr Oberoi of 5 October 2020 suggests that the parties were still contemplating the completion of the purchase. I also note that letter makes express reference to second- tier lending from Squirrel Mortgage Brokers. If it was expressly contemplated there would be an immediate on-sale of the property, then there would have been good reason to obtain second-tier lending. Trading banks tend to be less interested in short- term loans that an immediate on-sale would require.
[39] All of this evidence supports Mr Sareen’s contentions that he was doing all he could to complete the ASP and bring about a settlement. This includes, as his solicitor’s letter of 5 October points out, a range of options including development (“as originally intended”) or reselling.
[40] Mr Oberoi says that he was upset with Mr Sareen’s solicitor’s letter of 5 October. However, as Mr Connell submitted, it was a reasonable letter (it contained a number of options) and arguably would not have provoked cancellation.
[41] The finance condition in the ASP makes no reference to the type of lending (whether first or second tier) that was contemplated. Clause 9.10 of the ASP provides that if a condition is not fulfilled by the date of fulfilment either party may avoid the agreement by giving notice to the other. However, no written notice was given in this case until arguably, Mr Oberoi’s solicitor’s letter of 2 November 2020 – and again, the reasons given in that letter for terminating the ASP are arguably spurious. Mr Sareen’s solicitor’s letter of 5 October 2020 makes no reference to any interest rate for a proposed mortgage. Nor does Mr Oberoi’s solicitor’s letter in response raise any issue with second-tier lending. Furthermore, Mr Oberoi’s own solicitor must have had some doubts about whether the agreement had been validly cancelled. That is apparent from his letter to Mr Sareen’s solicitors dated 22 March 2021. That letter was the first time that Mr Oberoi had expressly invoked cl 9.10(5) of the ASP and communicated that in writing to Mr Sareen. That letter was of course sent after these proceedings had been commenced.
[42] In all these circumstances it is reasonably arguable that JIL was in breach of its obligations under the ASP and is entitled to an order for specific performance. The finance condition was arguably met within the 10-day working period agreed and it
was Mr Oberoi, a director of the purchaser, RRL (the party required to obtain finance), who actively took steps to prevent fulfilment of the conditions.
[43] I accept JIL as the vendor under the ASP is a separate legal entity. However, that provides no defence for Mr Oberoi to say that he owed no obligations to RRL or was entitled, as its director, to act contrary to its interests and in favour of the vendor.
[44] I reject Mr Raju’s contention that leave allowing Mr Sareen to bring a derivative action should be restricted to the proposed fiduciary duty cause of action. I acknowledge that specific performance is a discretionary equitable remedy and that a Court might ultimately conclude that RRL should be restricted to a damages remedy. However, those are matters for trial. Furthermore, there are options available to the parties in the event that the property is transferred to RRL, which might resolve any ongoing impasse. These include liquidation and a possible order for sale under the Property Law Act 2007.
Conclusion
[45] I find that there is a reasonable likelihood of the proceedings succeeding and I am satisfied it is arguably in the company’s interests to allow Mr Sareen to bring a derivative action. All statutory criteria for granting leave are met and there are no other discretionary factors which suggest that I should refuse leave.
Result
[46] I grant Mr Sareen’s application to bring a derivative action in the name of 165 Russell Road Ltd pursuant to s 165 of the Companies Act 1993. For clarity, I grant leave in respect of all three proposed causes of action in the draft statement of claim.
[47] In accordance with s 166 of the Companies Act 1993, the company, RRL, is to meet the costs of the proceedings. On the material before me there is no basis to determine that it would be unjust or inequitable for the company to bear those costs.14
14 I acknowledge that Mr Sareen is prepared to fund the derivative proceedings. The practical arrangements are of course for the parties to resolve. The reservation of leave will allow them to seek further directions on these issues should that be relevant.
[48]I also reserve leave to the parties to apply for further directions.
[49] As to costs, I am of the preliminary view that, having succeeded in his application, Mr Sareen is entitled to costs and disbursements on a 2B basis. If the parties cannot agree costs, however, then memoranda (no more than three pages) are to be filed and served within 14 days.
Associate Judge P J Andrew
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