Sayegh v Fermit NZ Limited

[2019] NZHC 703

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-002639

[2019] NZHC 703

IN THE MATTER OF

an application under HCR 19.5 and s 178(7) of the Companies Act 1993

BETWEEN

RUDOLF SAYEGH

Applicant

AND

FERMIT NZ LIMITED

Respondent

Hearing:

4 April 2019

Appearances:

J Zwi for Applicant

P Kennelly for Respondent

Judgment:

4 April 2019

ORAL JUDGMENT OF VENNING J

Solicitors:           Vinci Law, Auckland

Kennelly Law, Orewa

Copy to:            J Zwi, Auckland

SAYEGH v FERMIT NZ LIMITED [2019] NZHC 703 [4 April 2019]

[1]                  This is an application by Rudolph Sayegh, a 20 per cent shareholder in Fermit NZ Ltd for information under s 178 of the Companies Act 1993. The remaining 80 per cent shareholding is held by Edward Smith who is also the sole director of the company.

[2]                  Mr Sayegh was married to Mr Smith’s daughter but the parties are now separated. Fermit NZ Ltd was incorporated in 2013. Mr Sayegh is a German national and a plumber and web designer. Fermit is a product used by plumbers in Europe.

[3]                  Mr Sayegh came to New Zealand and married Mr Smith’s daughter in 2006. He discussed the product Fermit with Mr Smith and proposed importing and distributing it in New Zealand. Mr Smith established a relationship with Fermit GmbH in Germany following an introduction by Mr Sayegh. Mr Smith then established the original business of Fermit NZ Ltd. That company’s name was subsequently changed.

[4]                  After he suffered an accident in 2010 Mr Smith apparently transferred the distribution rights to a third party. Then in 2013 on Mr Smith’s evidence he got the distribution rights for Fermit back and Fermit NZ Ltd, the company in issue, was incorporated.

[5]                  For some time Mr Sayegh has been trying to obtain information about the company, apparently in an attempt to value his shares in it, or to determine whether it is worthwhile him pursuing an application under s 174 of the Companies Act or some such relief.

[6]                  Mr Sayegh instructed solicitors and on 5 October 2018 they wrote to Mr Smith. Mr Smith replied immediately to the effect that the company was effectively a subsidiary of another company that he operated Fire and Light NZ Ltd and was run with that company and also another company Shorai NZ Ltd. He said he could not value the shares in the company.

[7]                  The response was not satisfactory. Further correspondence followed. Mr Sayegh was still not satisfied with the responses of Mr Smith and brought this application. He seeks orders under s 178 requiring the respondent company to provide the following information:

(i)the length of time Fermit NZ Ltd, the company, has been trading under the sole directorship of Edward James Smith;

(ii)the company’s turnover for the financial years ended 31 March 2018, 31 March 2017 and 31 March 2016;

(iii)the drawings and salaries paid out of the company for the financial years mentioned above;

(iv)the company’s annual financial reports for the years ended 31 March 2018 and 31 March 2017; and

(v)the sales figures for all products sold by the company including all relevant invoices.

In addition an order for costs is sought.

[8]The application was accompanied by three affidavits by Mr Sayegh.

[9]Section 178 provides:

178     Information for shareholders

(1)A shareholder may at any time make a written request to a company for information held by the company.

(2)The request must specify the information sought in sufficient detail to enable it to be identified.

(3)Within 10 working days of receiving a request under subsection (1), the company must either—

(a)provide the information; or

(b)agree to provide the information within a specified period; or

(c)agree to provide the information within a specified period if the shareholder pays a reasonable charge to the company (which must be specified and explained) to meet the cost of providing the information; or

(d)refuse to provide the information specifying the reasons for the refusal.

(4)Without limiting the reasons for which a company may refuse to provide information under this section, a company may refuse to provide information if—

(a)the disclosure of the information would or would be likely to prejudice the commercial position of the company; or

(b)the disclosure of the information would or would be likely to prejudice the commercial position of any other person, whether or not that person supplied the information to the company; or

(c)the request for the information is frivolous or vexatious.

(5)If the company requires the shareholder to pay a charge for the information, the shareholder may withdraw the request, and is deemed to have done so unless, within 10 working days of receiving notification of the charge, the shareholder informs the company—

(a)that the shareholder will pay the charge; or

(b)that the shareholder considers the charge to be unreasonable.

(6)The court may, on the application of a person who has made a request for information, if it is satisfied that—

(a)the period specified for providing the information is unreasonable; or

(b)the charge set by the company is unreasonable,—

as the case may be, make an order requiring the company to supply the information within such time or on payment of such charge as the court thinks fit.

(7)The court may, on the application of a person who has made a request for information, if it is satisfied that—

(a)the company does not have sufficient reason to refuse to supply the information; or

(b)the company has sufficient reason to refuse to supply the information but that other reasons exist that outweigh the refusal,—

make an order requiring the company to supply the information.

(8)Where the court makes an order under subsection (7), it may specify the use that may be made of the information and the persons to whom it may be disclosed.

(9)On an application for an order under this section, the court may make such order for the payment of costs as it thinks fit.

[10]              In the decision of Ayyildiz v Casablanca Sylvia Park Ltd Associate Judge Bell observed:1

The purpose of s 178 is to ensure that those in control of a company, the directors and management, are accountable to shareholders. Accountability is enhanced by allowing shareholders access to company information.  Under   s 178, there is a wide range of reasons for refusing disclosure of information to shareholders. Some of them are noted in subsection (4) but they are not the only ones. If a company does not co-operate or if it refuses to provide information, the shareholder can come to court to seek orders under s 178(7). On such an application, the court considers whether there are outweighing reasons to justify a refusal of information to a shareholder.

[11]              The application has been called before the Court on previous occasions. Mr Smith initially purported to represent the company. However, given his conflicted position that was not appropriate. Justice Fitzgerald confirmed that in a minute of 21 February. The Judge confirmed that Mr Smith was not granted leave to file submissions and was not to appear on the company’s behalf. The application was allocated a hearing for today.

[12]              At the eleventh hour the company has instructed counsel, Mr Kennelly. An opposition had been filed but more relevantly a substantive affidavit has now been filed by Mr Smith which responds to the application.

[13]In light of that affidavit Mr Zwi accepted that the information sought at [7](i),

(iii) and (iv) above had been supplied but he confirmed his instructions were to pursue orders in relation to the information at items [7](ii) and (v) above, namely the company’s turnover for the relevant years and its sales figures for all products sold by the company.

[14]              Counsel for the applicant submits s 178 has a wide scope. The section is concerned with information held by the company and is not restricted to documents or

1      Ayyildiz v Casablanca Sylvia Park Ltd [2018] NZHC 2782.

records, both of which are terms used frequently in the Companies Act. While information is not defined in the Act its ordinary meaning is broad. Mr Zwi submitted that was consistent with the broad powers given to the Court by s 178, and in particular emphasised the need for the information in the present case in light of the documents annexed to Mr Sayegh’s affidavit which suggested that Fermit NZ Ltd was still trading.

[15]              Mr Zwi referred to exhibits to Mr Sayegh’s affidavit showing remittance advices from Mico NZ Ltd addressed to Fermit NZ Ltd in September 2018 and more recently purchase orders from O’Briens Plumbing and Bathroomware, Harrison Bloy, Humes, and Oakleys addressed to Fermit NZ Ltd at Fermit NZ Ltd’s registered office of 10 Tauranga Place, Orewa. He also referred to documents from Fermit GmbH addressed to Fermit NZ Ltd, and noted that all these recent documents were generated in March 2019.

[16]              On that basis Mr Zwi submitted the Court could be satisfied that Fermit NZ Ltd was continuing to trade and the orders sought under s 178 should be made.

[17]              Against that there is the evidence of Mr Smith in his recent affidavit. In that affidavit he explains that, following the registration of Fermit NZ Ltd in 2013 he arranged with his accounting firm to register Fermit NZ Ltd with the Inland Revenue Department (IRD) under Fire and Light NZ Ltd for accounting, tax and GST purposes. The intention was in effect to run everything as one company, including another company Mr Smith operated, Shorai NZ Ltd.

[18]              While that may seem an unusual business structure Mr Smith says the IRD accepted this arrangement. In relation to that and to support that evidence Mr Smith produced an income tax summary for Fermit NZ Ltd for that year together with draft financial statements. He has also produced financial statements for Fermit NZ Ltd with figures obtained from the IRD regarding the 2015/16 financial year which showed a loss of $14,184.53. The IRD recently confirmed on 19 March 2019 that was accepted and IRD recorded the loss was carried forward to the year of 31 March 2017.

[19]              Mr Smith goes on to say that he has filed declarations confirming that the company was non-active for the years ended March 2017 and March 2018 and has provided copies of those declarations. Mr Kennelly has also drawn the Court’s attention to a document from Mico Wakefield addressed to Fire and Light NZ Ltd which records a number of invoices issued by that company for the same regular amount of $212.75, which is exactly the same figure in the remittance advice relied on by Mr Sayegh in relation to the transactions with Mico New Zealand Ltd to support his argument Fermit NZ was still trading. Further, the bank account reference in both cases is the same Kiwibank bank account reference for Fire and Light NZ Ltd.

[20]              Mr Smith goes on to depose that he has been the sole director since the company’s incorporation. The company has the loss carried forward for 31 March 2016 I have referred to above. Mr Smith has confirmed that on advice from the IRD he has filed an IR315, an application for company cessation and has annexed a copy of that. He has also filed non-active company declarations form IR433 for the years ended March 2017 and 2018 which have also been produced to the Court.

[21]              Mr Smith has confirmed there are no drawings or salaries paid by the defendant company to him so there were no documents relating to that that he can provide. He says the company has not filed annual returns for 31 March 2018 and 31 March 2017 so cannot provide that information.

[22]              Finally, he says there are no invoices apart from the years that he filed a tax return in the March 2016 year which resulted in the loss referred to above.

[23]              Counsel for the applicant does not accept that Mr Smith’s affidavit answers the application for the balance of the information under s 178 before the Court in relation to [7](ii) and (v). But as I discussed with counsel the information that the Court may direct the company to provide under s 178 can be broad. Whether an order is made under s 178 or not is a matter of discretion for the Court in light of all the relevant information before the Court at the time.

[24]              Essentially the applicant is still suspicious that Mr Smith is not telling the truth and that Fermit NZ Ltd is being traded. Against that I have the affidavit of Mr Smith

in which he deposes quite clearly to the contrary. Mr Smith has, albeit belatedly, produced documents which support that explanation. There is also, as Mr Kennelly pointed out, an explanation for the order documents in the name of Fermit NZ on the basis that companies dealing with Fire and Light NZ Ltd mistakenly refer to Fermit NZ Ltd.

[25]              The position is not satisfactory, but I do not consider that it is now necessary or appropriate to make the orders sought, given the affidavit of Mr Smith and the information contained in that affidavit. If the Court were to make the orders sought by the applicant in relation to turnover or sales figures that information would be provided by requiring the company through Mr Smith, its director, to provide that information. Mr Smith has effectively responded to that request for information in his affidavit. He has deposed that the company has not traded in March 2017/2018 and confirmed that by his declarations filed with the IRD. Similarly in relation to the request for invoices and sales figures he has confirmed there are no invoices apart from the last years that the tax return was filed for namely the year ended March 2016.

[26]              In light of that evidence the Court is not minded to make orders which would effectively require Mr Smith to depose to the same matters again.

[27]The application for orders under s 178 is declined.

[28]That leaves the issue of costs.

Costs

[29]              Even though the application has been unsuccessful as I have noted I consider that the company’s original response through its director Mr Smith was not satisfactory. It has only been with the recent involvement of Mr Kennelly entering on record for the company and the most recent affidavit that the information which was reasonably sought was provided. The delay in providing that information has no doubt added to the suspicion or concern on behalf of the applicant.

[30]              In the circumstances even though the application is unsuccessful the applicant is to have costs on a 2B basis for all steps taken in relation to the application together

with the costs of today’s hearing. That is an order for costs against the respondent company.

Venning J