Singh v Buttar
[2023] NZHC 243
•21 February 2023
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV 2021-470-26
[2023] NZHC 243
UNDER section 165 of the Companies Act 1993 BETWEEN
JASWINDER SINGH
Applicant
AND
DALJEET SINGH BUTTAR
First Respondent
KIWI JOINT LIMITED
Second Respondent
Hearing: 9 February 2022 Appearances:
D P Weaver and A G Needham for Applicant B Murray for First Respondent
Judgment:
21 February 2023
JUDGMENT OF DUFFY J
This judgment was delivered by me on 21 February 2022 at 2.00 pm pursuant to
Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar
Solicitors:
Holland Beckett, Tauranga
Vallant Hooker & Partners, Tauranga
SINGH v BUTTAR & KIWI JOINT LTD [2023] NZHC 243 [21 February 2023]
[1] The applicant, Mr Singh, seeks leave to bring a proceeding by way of derivative action in the name of Kiwi Joint Ltd (Kiwi Joint) against the first respondent, Mr Buttar. Kiwi Joint is itself the second respondent.
[2] The application is made pursuant to s 165 of the Companies Act 1993 (the Act). If leave is granted, Mr Singh also seeks an order under s 166 of the Act that Kiwi Joint pay the reasonable costs of the proceeding.
Background
[3] Kiwi Joint is a kiwifruit contracting business in the Bay of Plenty. The first respondent, Mr Buttar, is a 50 per cent shareholder of Kiwi Joint and one of its two directors. The applicant, Mr Singh, is its other director. He holds 30 percent of Kiwi Joint’s shares. The third and final shareholder is Mr Singh’s wife, who holds 20 per cent of Kiwi Joint’s shares.
[4] On 24 March 2021, Mr Singh made the originating application under s 165 of the Act for leave to bring a derivative action in the name of Kiwi Joint against Mr Buttar (the application). Mr Singh claimed various breaches of directors’ duties, breach of fiduciary duty and equitable fraud by Mr Buttar.
[5] Simultaneously, Mr Singh (in the name of Kiwi Joint) made an interlocutory application for leave to issue charging orders before judgment, as well as freezing and ancillary orders. The hearing for that interlocutory application was set down for 22 June 2021. On 18 June 2021, the respondent undertook not to dispose of assets and to provide relevant information. The 22 June hearing was vacated as a result.
[6] After deliberations between the parties, counsel by joint memorandum dated 4 November 2021 confirmed that the applicant intended to withdraw the interlocutory application. They cited the respondent’s undertaking as the reason for withdrawal. Importantly, however, Gardiner AJ had also questioned Mr Singh’s standing to bring that interlocutory application in Kiwi Joint’s name without orders regarding his derivative action application.1 Her Honour had directed counsel for the appellant to
1 Singh v Buttar HC Tauranga CIV-2021-470-26, 20 September 2021 at [6].
file memoranda addressing this issue of standing.2 Counsel did not do so before withdrawing the interlocutory application.
The proposed claims
[7]The draft statement of claim alleges five causes of action.
[8] The first three proposed causes of action allege breaches of directors’ duties in ss 131, 133 and 137 of the Act. The fourth proposed cause of action alleges breach of the general fiduciary duty owed by Mr Buttar as director to Kiwi Joint. The last alleges equitable fraud.
[9]Broadly, the applicant alleges:
(a)Mr Buttar has full power and control over Kiwi Joint’s financial accounts. Mr Singh was not given access to those accounts until December 2020.
(b)From at least January 2018 until 11 December 2020, Mr Buttar made unauthorised advances from Kiwi Joint to himself, persons associated with himself and companies of which he was a director and/or shareholder (the associated companies).
(c)From at least January 2018 until 11 December 2020, Mr Buttar applied or assumed those advanced funds for his own use or benefit and/or the use or benefit of the associated companies.
(d)These advances caused loss to Kiwi Joint.
(e)Mr Buttar directed or permitted Kiwi Joint to provide loans to third parties without formal documentation or record (the unauthorised loans), and those loans caused loss to Kiwi Joint.
2 At [6]; and Singh v Buttar HC Tauranga CIV-2021-470-26, 28 October 2021 at [4].
(f)In 2019, Mr Buttar directed or permitted the preparation of misleading or inaccurate financial statements for Kiwi Joint by Bay Accounting & Financial Services Limited. These financial statements inaccurately recorded transactions and failed to record any of the unauthorised loans.
(g)Since November 2020, Mr Buttar has used Workaholic — another kiwifruit contracting company in which Mr Singh has no interest — to operate Kiwi Joint’s business. Workaholic has utilised Kiwi Joint’s assets, machinery and employees to undertake its business.
The Law – Derivative Actions
[10] The issue for the Court is whether it should exercise its discretion under s 165(1) of the Act to grant leave to Mr Singh.
[11] Section 165(3) provides a threshold requirement for the Court’s exercise of its discretion. It must be satisfied that the company does not intend itself to bring the proceeding,3 or that it is in the interests of the company that the conduct of the proceedings is not left to the directors or shareholders.4
[12] Counsel for the applicant in their submissions claim that both grounds are met. Mr Murray’s submissions for Mr Buttar do not dispute this.
[13] Accordingly, the sole issue for the Court is whether it should exercise its discretion to grant leave per s 165(1). Section 162(2) provides that in deciding whether to exercise its discretion, 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; and
3 Section 165(3)(a).
4 Section 165(3)(b).
(d)the interests of the company in the proceedings being commenced, continued, defended or discontinued.
[14] In Vrij v Boyle, Fisher J found the appropriate test in considering the likelihood of the proceeding succeeding is whether a prudent businessperson would, in conducting their own affairs, decide to bring the claim.5 In doing so the applicant need only produce sufficient evidence to support an arguable claim.6 This test also informs the Court’s assessment of the remaining three criteria.7
Submissions
[15] The parties’ submissions largely focus on the merits of the proposed causes of action (s 162(2)(a)). It is accepted that if a company has a justified claim, it will be in the company’s interest to pursue it.8 Thus the s 162(2)(d) considerations were simply touched on as were the s 162(2)(b) considerations. The s 162(2)(c) considerations were not in issue, as Kiwi Joint has not yet taken any action to obtain relief. Thus, the determination of this application predominantly turns on the merits of the proposed claim and the likely relief.
The applicant’s submissions
[16] The applicant’s submissions focus primarily on the non-contentious transactions involved in the allegations. Importantly, Mr Singh maintains that he had no control over, or access to, the finances of Kiwi Joint. Instead, he claims that Mr Buttar had full power over Kiwi Joint’s financial accounts, and that the applicant had no oversight or control over Mr Buttar’s actions in this respect.
[17] Most of the evidence concerning the transactions is drawn from an affidavit of Mr Ruby, an independent forensic accountant. Mr Ruby has spent nine years working as a detective for the New Zealand Police, including in fraud and organised criminal activity, in particular bank skimming schemes. He also worked for 10 years as a specialist investigator for the Inland Revenue Department (IRD) where he investigated
5 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765, as cited in He v Chen [2014] NZCA 153 at [30].
6 He v Chen [2014] NZCA 153 at [38].
7 At [30].
8 At [31].
tax compliance with a major focus on tax evasion and fraud. This involved investigating a $50 million tax evasion in the horticultural industry in the Bay of Plenty and Hawkes Bay regions.
[18] Mr Ruby was regional representative for the IRD in the Combined Law Agency Group which is organised by the New Zealand Police and requires NZSIS secret security clearance to attend. He was the only investigator to be seconded to the Group Tax Council’s office of IRD to review and approve the department’s policies around the New Zealand Bill of Rights, interviewing and search power use. He was a subject matter expert in the IRD on criminal prosecutions, interviewing and search power use. He has been a member of the Association of Certified Fraud Examiners since April 2012 and currently holds the designation of certified fraud examiner. He also holds a Bachelor of Accountancy from Massey University which was awarded to him on 26 April 2017. He has now worked in public practice for Matley Ltd since July 2016 dealing with small to medium enterprise businesses and tax compliance, business advisory and other general accounting functions.
[19] In this affidavit Mr Ruby identifies sums of money that are still owing to Kiwi Joint, and transactions to which Mr Buttar has admitted. Put shortly Mr Ruby’s evidence is that as at March 2021 there was $1,381,197 unaccounted for from Kiwi Joint’s accounts. Further, Mr Buttar in his personal capacity owes Kiwi Joint approximately $551,109.10.9 Conversely, Mr Singh is owed $323,779.48 by Kiwi Joint.10
[20] The applicant contends that all the advances made by Kiwi Joint and authorised by Mr Buttar have been for Mr Buttar’s benefit and to Kiwi Joint’s detriment. Further, Mr Buttar did not formalise any of the loans he authorised, nor did he secure them.
[21] Overall, Mr Buttar is alleged to have committed a number of wrongs and has financially mismanaged Kiwi Joint to the company’s detriment. The applicant submits that such conduct is clearly a breach of directors’ duties under the Act and of Mr
9 Affidavit in Reply of Mr Ruby, 15 December 2021 at [47].
10 At [47].
Buttar’s fiduciary duty as director of Kiwi Joint. Accordingly, the applicant submits that the proceeding has a more than reasonable likelihood of success if leave is granted.
[22] Further, in light of Mr Ruby’s evidence that $1,381,197 of Kiwi Joint’s funds are unaccounted for, and that Mr Buttar should be liable to the company for approximately $551,109.10, the applicant submits that the value of the claim is highly likely to outweigh the cost of the proceeding.
The respondent’s submissions
[23] The respondent does not deny that the transactions took place. The respondent in fact admits he authorised some of them.
[24] Instead, the respondent contends that Mr Singh had more knowledge, access to and control over Kiwi Joint’s finances than he has claimed. The respondent claims Mr Singh had full access to, and one person signing authority on, the company bank account. In this regard the respondent claims that Mr Singh was not restricted in engaging the company’s external accountants who prepared the financial statements in question.
[25] Further, the respondent claims that Mr Singh had full knowledge of many of the transactions. For example, in the transaction involving one of the associated companies, Gold Star 2019 Ltd, and its purchase of an orchard in Pukehina, Mr Singh claimed he had no knowledge of payments totalling $95,000 to Gold Star. Mr Singh was also unsure from where Mr Buttar had sourced his share of the deposit. Mr Buttar claims the reality was very different, and that Mr Singh was fully involved in the purchase of the Pukehina orchard. He also notes that $75,000 of Mr Singh’s share of the purchase price came from Kiwi Joint’s accounts. Mr Singh admits to this in his reply affidavit dated 4 June 2021, but says that Mr Buttar had consented.11
[26] Regarding other allegations, the respondent submits that Mr Singh had full knowledge of the subject transactions and gave approval. About the 2019 accounts that Mr Singh claims the respondent directed and/or permitted Kiwi Joint’s
11 Affidavit in Reply of Mr Singh, 4 June 2021 at [16]–[17].
accountants to prepare misleadingly or inaccurately, for example, the respondent submits that Mr Singh himself had signed approval of those accounts, along with associated documents.
[27] The respondent further submits that the applicant himself committed breaches of director’s duties. For example, after learning about the alleged transactions, Mr Singh retaliated by advising Kiwi Joint’s bank and obtaining a freezing of the company’s accounts. As a result, Kiwi Joint could not pay the applicant, the respondent, its employees, contractors or any trade creditors, let alone bank liabilities. This freezing of the company’s accounts forced Mr Buttar to continue operating the business through Workaholic.
[28] Another alleged breach of director’s duty by the applicant occurred, submits Mr Buttar, when he began working for and “appear[ed] to have become employed by, another business”.
[29] Finally, a large part of the respondent’s submissions provide that the leave application should be declined because a derivative proceeding will not address the “real” issue at hand. That “real” issue is, broadly, to finalise Kiwi Joint’s accounts and thus determine the amount owed by Mr Buttar to the company; and determination of Kiwi Joint’s share value in order for Mr Buttar and Mr Singh to address the breakdown of their working relationship.
[30] Mr Buttar submits that the real issue arose as a result of discord between him and Mr Singh sometime during 2020. Mr Singh was not performing his duties for Kiwi Joint to a sufficient standard. He claimed that he had family problems. Mr Buttar suggested that Mr Singh sell his share of Kiwi Joint to Mr Buttar, or that Mr Singh buy out Mr Buttar’s shareholding. Mr Singh, who wanted to continue working with Mr Buttar at Kiwi Joint, denied both options. Mr Buttar was unwilling to continue working with Mr Singh, who he deemed unreliable.
[31] Mr Buttar claims that these events are the real cause of the present litigation. Accordingly, he opposes the necessity of a derivative action proceeding. Such a proceeding, he submits, even if successful, will not solve the underlying issues.
[32] Further, he submits that an application for an order under s 174 of the Act (the section dealing with redress for prejudiced shareholders) would sufficiently address all outstanding issues. Finally, the respondent claims that he is ready and willing to account to the company for any moneys proved on finalised accounts to be payable by him to the company.
Analysis
[33] Breach of directors’ duties and fiduciary duties owed to a company are grounds for granting leave to an applicant to bring a derivative action.12 In cases of alleged breach of fiduciary duty, only a suspicion of the breach is required for it to be appropriate to grant an application to bring a derivative action.13
[34] Justice Venning, citing earlier High Court decisions, noted in Needham v EBT Worldwide Ltd that breach of fiduciary duty might be a powerful factor in determining the worthiness of a claim (and consequently whether to grant leave).14 In delivering that judgment, Venning J distinguished Needham from other recovery proceedings (which might reasonably be taken by a liquidator) on the basis that Needham involved a breach of fiduciary duty. That is the case here.
[35] Also in Needham, Venning J noted that disputes concerning directors of small private companies are almost always disputes between shareholders.15 That does not necessarily preclude the bringing of a derivative action.
[36] Further, it is of course in the company’s best interests that the proceeding be brought, as the money allegedly owing is owed to it, not to Mr Singh. That is the basis of the derivative proceeding. Further, the alleged breaches of fiduciary duty are breaches of duties owed to the company, not to its shareholders. Thus, while Mr Buttar asserts that the underlying dispute is between himself and Mr Singh as shareholders, it is still the case that if the applicant’s claims are meritorious, the company has a vested interest in pursuing it.
12 See, for example, N M Tobin Orthodontics Ltd v Tobin [2013] NZHC 463.
13 Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC).
14 Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 (HC) at [64], citing Cooper J in Wright v Baker HC Auckland CIV 2003-488-0000042.
15 At [63].
[37] As to the merits of the claim, much is in dispute. Most of the alleged breaches are founded on the evidence of the independent forensic accountant Mr Ruby. The respondent is dismissive of much of Mr Ruby’s evidence, submitting that Mr Ruby has made a whole range of assumptions and allegations based on suspicion. It is true that Mr Ruby has only analysed the Kiwi Joint’s accounts from an outside perspective; but that is the nature of forensic accounting. However, Mr Buttar has offered no explanations to show the actions Mr Ruby identifies as suspect were in fact genuinely done for the benefit of Kiwi Joint.
[38] Further, Mr Ruby’s evidence is detailed. He identifies and outlines each of the many suspect transactions and he annexes to his affidavit the raw documentary evidence on which he has based his expert opinion. From my close reading of his affidavit and the documents attached to it I am satisfied that he has provided a reliable and credible account of the suspect transactions and dealings conducted by Mr Buttar. The first hand evidence Mr Singh gives of the involvement he has with Kiwi Joint supports the conclusions drawn by Mr Ruby that various unauthorised actions were made by Mr Buttar which has resulted in unauthorised drawings by him from Kiwi Joint’s bank accounts to the benefit of persons other than the company.
[39] The respondent does not deny many of the transactions outlined by Mr Singh and opined on by Mr Ruby. Rather Mr Buttar deposes that Mr Singh had the same level of access to company accounts as did Mr Buttar. Mr Singh denies that, but even if it were so Mr Ruby’s careful analysis of Kiwi Joint’s accounts and records has not shown that Mr Singh used the company’s funds in the same way that Mr Buttar has.
[40] From my close reading of the applicant’s evidence I am satisfied that both Mr Singh and Mr Ruby have provided reliable and credible accounts of multiple unauthorised transactions and dealings conducted by Mr Buttar. Mr Buttar has not denied the existence of such matters or that he was instrumental in their happening.
[41] There were no applications to cross-examine the deponents of the affidavit evidence filed in this proceeding. However, there was no need for Mr Singh’s counsel to cross-examine Mr Buttar as his evidence did not offer a counter-narrative to that given by the applicant. Thus it did not need to be challenged. On the other hand the
failure of Mr Buttar’s counsel to cross-examine Mr Singh or Mr Ruby leaves that evidence unchallenged.
[42] There is considerable evidence showing the improperly documented, unilateral and unauthorised removal of funds from the company for the benefit of either Mr Buttar or third parties associated with him. It is no excuse for Mr Buttar to say that Mr Singh had the same opportunity to access the company’s funds. The short point is that company directors cannot unilaterally and without proper authorisation or documentation remove funds from a company, particularly when such withdrawals are not for the benefit of that company.
[43] Further, insofar as Mr Buttar contends that Mr Singh has also enjoyed the opportunity to act as Mr Buttar has done, Mr Ruby’s examination of the company’s accounts and records have not shown Mr Singh to have acted in this way. To the contrary Mr Singh contends that the advances he has received were agreed by Mr Buttar. Also, in terms of the two parties’ shareholder accounts Mr Ruby’s analysis shows that the inequality between the drawings of Mr Singh and Mr Buttar is extreme. To equalise the drawings Mr Singh is entitled to draw down $323,779.48 whereas Mr Buttar is obliged to repay to the company $551,109.10. These figures are approximations based on the access to records available to Mr Ruby. However, Mr Buttar has not disputed these amounts. Nor has he provided company records or accounts that would show Mr Ruby to be wrong.
[44] To the extent that Mr Buttar contends the real dispute is one between himself and Mr Singh as shareholders this is no explanation for actions on the part of Mr Buttar vis-à-vis Kiwi Joint that show him to be in breach of the fiduciary duties and statutory duties he owes to that company. Nor is the availability of an application under s 174 of the Act reason to deny an application under s 165, if the grounds for granting the latter exist. In Catley v Waipa Corporation Ltd & Ors this Court refused to grant an application under s 165 because, inter alia, there was an extant application under s
174.16 Here there is no s 174 application. I can see no reason to dismiss the present
application simply because Mr Singh could bring an application under s 174. I am
16 Catley v Waipa Corporation Ltd & Ors HC Auckland CIV-2008-404-007975.
satisfied there is utility in the present application. The various unilateral and unauthorised withdrawals should be rectified. Once the company is properly in funds the parties will be better able to resolve any dispute between them as shareholders.
[45] I consider the sums involved make litigation on the company’s behalf to recover the alleged unlawful withdrawals worthwhile.
[46] I reject the suggestions in Mr Buttar’s evidence, and the submissions made in opposition to this application, that Mr Singh’s conduct disqualifies him from bringing the application. There is nothing in the accounts Mr Buttar gives of Mr Singh’s conduct that suggests to me Mr Singh is not a proper person to bring the application. In this regard I also note that Mr Ruby, who is giving evidence as an independent expert subject to the Code of Conduct imposed by r 9.43 of the High Court Rules, has not identified any conduct on the part of Mr Singh to suggest that he has acted in a way that breaches his fiduciary and statutory duties to the company.
[47] Accordingly, I am satisfied the evidence before me warrants me granting the application to bring a derivative action.17 I find that Mr Singh has met the requisite legal threshold.
Result
[48]Mr Singh’s application pursuant to s 165 of the Companies Act 1993 is granted.
[49]The parties have leave to file memoranda on costs.
Duffy J
17 See [33] herein citing Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC).
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