Sirocco Trustees Tainui Limited v Clifden Holdings Limited
[2021] NZHC 3540
•17 December 2021
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2020-409-406
[2021] NZHC 3540
UNDER section 174 of the Companies Act 1993 BETWEEN
SIROCCO TRUSTEES TAINUI LIMITED
Plaintiff
AND
CLIFDEN HOLDINGS LIMITED
First Defendant
JAMES PATRICK HICKEY
Second Defendant
CIV-2020-409-533 UNDER
section 241 of the Companies Act 1993
IN THE MATTER OF
the liquidation of Sirocco Trustees Tainui Limited
BETWEEN
JAMES PATRICK HICKEY
Plaintiff
AND
SIROCCO TRUSTEES TAINUI LIMITED
Defendant
Hearing: Memoranda: 10, 11 and 24 November 2021
17 November 2021 – Sirocco Trustees Tainui Ltd
22 November 2021 – J P Hickey and Clifden Holdings LtdAppearances:
J Mahuta-Coyle for Sirocco Trustees Ltd
B Walker for Clifden Holdings Ltd and J P Hickey
Judgment:
17 December 2021
JUDGMENT OF GENDALL J
SIROCCO TRUSTEES TAINUI LTD v CLIFDEN HOLDINGS LTD [2021] NZHC 3540 [17 December 2021]
This judgment was delivered by me on 17 December 2021 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules 2016
Registrar/Deputy Registrar Date: .
Introduction
[1] This judgment relates to a hearing on 10, 11 and 24 November 2021 with respect to two proceedings.
[2] The first of these proceedings, CIV-2020-409-406 (the s 174 proceeding), involves a claim by the plaintiff, Sirocco Trustees Tainui Ltd (Sirocco), under s 174 of the Companies Act 1993 for relief in its capacity as a 50 per cent shareholder of the first defendant company, Clifden Holdings Ltd (Clifden).
[3] In the second proceeding CIV-2020-409-533 (the liquidation proceeding), the plaintiff, James Patrick Hickey (Mr Hickey) seeks an order for liquidation of Sirocco.
[4] At the trial of these matters, Mr Mahuta-Coyle appeared as counsel for Sirocco, which is a trustee company for a trust knows as the Matlor Trust, the assets of which are held largely for Murray Ian Withers (Mr Withers), a major player in this proceeding, and his family. Mr Walker appeared as counsel for Mr Hickey and also it seems broadly for Clifden.
Preliminary matters
[5] Initially, Mr Hickey through his counsel, Mr Walker, contended that there were two insurmountable hurdles which the plaintiff, Sirocco faced, insofar as the s 174 proceeding is concerned before its application for relief relating to Clifden could be considered. I will turn to consider briefly these two preliminary matters which, as transpires, I will dismiss.
[6] The first is the contention from Mr Walker that Sirocco has no standing to bring the s 174 proceeding at all because of Mr Withers’ status as a banned director and company manager. It is true that Mr Withers was banned by the Companies Office for two years from 1 July 2020 from acting as a director or taking part in the management of any company. What is important to note in this case however, is that the s 174 application is one brought by Sirocco which is the entity which alleges prejudice here. Mr Withers personally is not a party to this proceeding.
[7] On this question of Mr Withers standing to give instructions on behalf of Sirocco, submissions from Mr Walker for Mr Hickey are that the evidence given by Mr Withers in this matter, and particularly when under cross-examination, establishes that, although he should not be doing so, he is effectively running the present proceeding. As such, Mr Walker complains that these actions must comprise an act of management relating to Sirocco which he explains Mr Withers is prohibited from undertaking.
[8] For present purposes however, I am prepared largely to set to one side this contention advanced on behalf of Mr Hickey. A little over one year ago Mr Withers ceased to be a director of Sirocco and was replaced by David de Joux Austin (Mr Austin).
[9] An affidavit is before the Court from Mr Austin dated 21 October 2021. This confirms that he has known Mr Withers for over 20 years and, further, that he was appointed a director of Sirocco on 19 August 2020. He confirms that, as a director, he is content for the company to continue its s 174 proceeding on the basis originally advanced and following instructions by its then director Mr Withers.
[10] Sirocco is a separate company entity. Mr Austin is its present director. Effectively, he confirms that the s 174 proceeding is properly brought and is to continue.
[11] Although Mr Austin himself has provided virtually nothing by way of specific evidence to assist the Court relating to the s 174 claim, again, for pragmatic reasons, I will proceed on the basis of the evidence before the Court from Mr Withers relating to company matters, notwithstanding his present prohibition from acting as a director or in the management of any company.
[12] That, however, is a concession. As I see it, there is an element of substance in the argument advanced by Mr Walker as to the standing of Sirocco in proceeding with this s 174 application, because of Mr Withers’ banned status. Nevertheless, as I have already noted, I place this issue on one side. I do so on the basis that Sirocco is able
to bring the s 174 proceeding. As will appear later, in any event, this makes little difference to the ultimate outcome in this proceeding.
[13] As to the second preliminary matter, this relates to the liquidation proceeding brought by Mr Hickey against Sirocco under proceeding CIV-2020-409-533, seeking that the company be wound up. The basis of the application is that Sirocco ought to be liquidated because it has failed to comply with a statutory demand properly issued against it by Mr Hickey. That statutory demand was issued for an unpaid award of
$5,462 costs in favour of Mr Hickey, made against Sirocco by this Court on 7 December 2018. The statutory demand was served on Sirocco on 28 August 2020. It met with no response. No application to set aside the statutory demand was made.
[14] Subsequently, the liquidation proceeding was filed in this Court on 30 October 2020. A statement of defence to the liquidation proceeding was filed on 23 November 2020 by Mr Withers, claiming to do so on behalf of Sirocco as the defendant in that proceeding. Effectively, however, Mr Withers was filing the statement of defence purely in his capacity as a shareholder of Sirocco. Some months earlier he had ceased to be a director of Sirocco.
[15] The upshot of Sirocco’s defence was simply that it had paid into its solicitor’s trust account the outstanding costs of $5,462, with a firm direction that this amount was to be paid to the plaintiff, Mr Hickey, when an appropriate order from this Court was made requiring the costs award to be paid .
[16] Accordingly, Sirocco’s position is that, as it has no other liabilities of any kind and is purely a trustee company incorporated for the purpose of being a trustee of Mr Withers’ trust, it has satisfied the solvency test and no grounds exist for it to be liquidated.
[17] Although there is an attempt by Mr Hickey to dispute these matters, I am left in the position where an amount for payment of the costs due to him from Sirocco is effectively secured in the trust account of Sirocco’s solicitors with an irrevocable undertaking for this amount to paid to him if ordered by the Court. I accept that as a starting point there can be no argument here that the $5462 costs award against Sirocco
is due and owing and has not been paid to Mr Hickey as the party entitled to these costs. As I note, no steps were taken by Sirocco to set aside the statutory demand. Given that this demand was left unanswered, Mr Hickey, as the party to whom the debt is owed, is entitled to bring winding up proceedings.1 I accept too that it could not be said, given this undisputed debt remains outstanding, that the liquidation proceedings brought against Sirocco constitute an abuse of using the company winding up procedure improperly. And, so far as any counterclaim by Sirocco is concerned, for this to be available by way of set-off, the company must have a real basis for that claim. I am satisfied as to this that, on the material before me, a set-off or counterclaim has not been unequivocally made out.
[18] I turn now to the issue of Sirocco’s solvency. The starting point obviously is that the unsatisfied statutory demand provides evidence that the company is insolvent. Other than evidence provided by Mr Withers purporting to be for Sirocco, that the amount in question has been paid into his solicitor’s trust account, there is no evidence from any other source either to confirm this, or to indicate otherwise as to Sirocco’s solvency. All these matters to some extent support the argument advanced for Mr Hickey that Sirocco is insolvent and should be placed into liquidation.
[19] Notwithstanding this, and again for present purposes only, I am not prepared here to make an order placing Sirocco into liquidation. Such an order would obviously, at this point, bring to an end Sirocco’s present s 174 application. My refusal of the liquidation order sought here largely arises because there does not seem to be any real dispute that first, the $5,462 outstanding costs award has been secured by a payment by or on behalf of Sirocco to their solicitors for settlement of the costs debt and secondly, the company appears to have no other debts.
[20] In those circumstances, at this point it is appropriate in my view for the application by Mr Hickey for an order placing Sirocco into liquidation to be refused.
[21] The s 241 liquidation application, under proceeding 533, is therefore dismissed.
1 F V Aluminium 2011 Limited v Firma Construction Limited [2020] NZHC 1358.
[22] This effectively deals with the preliminary arguments advanced on behalf of Mr Hickey that Sirocco has no standing to bring the s 174 proceeding. I dismiss those arguments on the basis outlined above.
[23] I turn now to the remaining and more significant matter which is before the Court, being the s 174 application. Before addressing this, some detail of the rather complicated factual background to this matter is necessary.
Factual background
[24] As I have noted, Sirocco is a trustee company holding the 50 per cent shareholding it does in Clifden as a bare trustee for the Matlor Trust. Mr Withers and his family are principal beneficiaries of the Matlor Trust.
[25] The other 50 per cent shareholder in Clifden is Clonbunny Trustees Ltd, Mr Hickey and Mr Withers jointly. These three parties hold that remaining 50 per cent share interest jointly as trustees of a trust for Mr Hickey, the Clonbunny Trust. That trust holds its shareholding in Clifden on trust for the principal beneficiary of their Trust who is Mr Hickey.
[26] Clifden was incorporated on 21 February 2000. It is agreed the purpose in forming Clifden was to provide a vehicle for property development ventures that Mr Hickey, Mr Withers and a former associate, Mr Ed Post (Mr Post) wished to undertake. At the time, Mr Withers was a practising solicitor, Mr Post an accountant and Mr Hickey, although a blocklayer by trade, had become by then an experienced property developer. Initially, Mr Post was a shareholder in Clifden but he withdrew and he was bought out of the company at some stage prior to 2007. The present dispute then developed between Mr Hickey and Mr Withers and their respective interests.
Events up to 2010
(a)Rolleston land purchase
[27] In the early 2000s, Clifden purchased a 60 hectare area of land at Rolleston near Christchurch. The purpose of this purchase was to subdivide and develop the land into individual residential sections. It seems however, that the process of
converting the land into subdivided and saleable properties was reasonably slow. Before me, Mr Withers has given evidence that much of the profit in this development was eaten up by high-rate interest incurred as a cost of holding the land while it was developed and before it was sold. I will return further to this development.
(b)Taylor’s Mistake Road land purchase
[28] In July 2007, Clifden purchased a number of adjoining sections at 89 Taylor’s Mistake Road, Scarborough, Christchurch. This purchase proceeded by way of a loan provided to Clifden from the Canterbury Building Society of approximately
$1,050,000, together with a loan from the vendor of the property, Mrs Shirley Marshall (Mrs Marshall). Mrs Marshall, at the time of this purchase, was a client of Mr Withers’ solicitor’s practice.
(c)Formation of Brookside Holdings Ltd
[29] Returning now to the Rolleston land and its purchase in the early 2000s, eventually, by late 2010, after intervening lot sales, Clifden’s Rolleston development was left with only one remaining section. This was lot 17 on Deposited Plan 370470 (lot 17), which had an area of about 4760 m2. Although this was a large section, Clifden only had consent to develop one dwelling on the land because lot 17, it seems, only had one route of access. If this access was to be improved the property could be subdivided into about nine sections, which Mr Withers says would have an enhanced development value of some $1.8 million. It is Mr Withers’ contention that this access issue was important given that the Rolleston development had realised very little in overall return to Clifden up to that point. This, he says, was as a result of the slow pace of the subdivision and the high interest and holding costs incurred in the meantime.
[30] To remedy this problem, Mr Withers and Mr Hickey incorporated a new company relating to lot 17, Brookside Holdings Ltd (Brookside). Their respective interests held the Brookside shareholding equally, each as 50 per cent shareholders. Brookside then proceeded to purchase three properties immediately adjacent to Clifden’s lot 17. The intention of this was to increase access rights into lot 17, thus enabling its subdivision into an increased number of sections.
[31] Lot 17 itself was transferred to Brookside then, and that company became the registered proprietor of lot 17. It seems to be agreed by all parties that the transfer of lot 17 from Clifden to Brookside took place with the agreement of both Mr Withers and Mr Hickey, it occurred without consideration, but it is acknowledged no prejudice was caused to anyone as Brookside at that time was owned effectively on a 50/50 basis.
Events between 2010 and 2014
Taylor’s Mistake Road default and refinancing
[32] In 2008, some five years before lot 17 at Rolleston had been transferred to Brookside, Clifden had defaulted on its obligations under the vendor mortgage loan from Mrs Marshall over the Taylors Mistake Road land. Negotiations between Clifden and Mrs Marshall carried on at the time until 2009. Later, in 2010 and 2011, the significant Christchurch earthquake sequence occurred. As a result, Mr Withers maintains that hillside sections in Christchurch such as those being developed by Clifden at Taylor’s Mistake Road became almost impossible to sell. This, of course, could not have been foreseen at the time of the 2007 purchase from Mrs Marshall of the land at Taylor’s Mistake Road, but nevertheless contributed to a substantial increase in the amount of time those sections took to sell.
[33] Nevertheless, by 2012 Clifden had succeeded in subdividing Taylor’s Mistake Road into eight sections and in selling four of those sections. The remaining sections at Taylor’s Mistake Road it held were lots 1, 2, 3 and 7.
[34] Then, for reasons which seem to be unclear, Mr Withers and Mr Hickey agreed that legal ownership of lots 1, 2, 3 and 7 at Taylor’s Mistake Road should be transferred to Mr Hickey, who would then become the registered proprietor but, according to Mr Withers, he would hold the properties on a bare trust for Clifden. It is said the motive for this transaction was to ensure that any subsequent sale of those four lots did not become subject to GST or other potential tax liabilities. Mr Hickey in an affidavit dated 15 November 2018 before me, confirms that he was holding two of those lots (lots 2 and 3) on bare trust for Clifden but on the condition that he would be
indemnified for any lending costs incurred in relation to those lots. I address this point further below.
[35] Mr Withers, I note again as outlined at [26] above was still a practicing solicitor at the time. As such, he acted for both Clifden and Mrs Marshall on the July 2007 acquisition of the Taylor’s Mistake Road land. Around 2012–2013 however, this came to the attention of the New Zealand Law Society (the NZLS) and at that stage a related complaint was made to the NZLS against Mr Withers by the Christchurch City Council (the Council). In that complaint the Council allege that Mr Withers had breached a solicitor’s undertaking given by him to the Council to apply the proceeds of sale from one of a number of subdivided lots that Clifden had effected within the original Taylor’s Mistake Road subdivision to an unpaid and outstanding development contribution levy lawfully imposed by the Council.
[36] Disciplinary processes then ensued under the Lawyers and Conveyancers’ Act 2006 which culminated in Mr Withers being struck off by the NZLS from the role of barristers and solicitors. The decision of the NZLS Disputes Tribunal was given in December 2013. Mr Withers advanced an appeal to the High Court against this striking off which was unsuccessful in a judgment of this Court given on 28 March 2014. At that point his work and income as a solicitor, he says, came to an end.
[37] Notwithstanding this, Clifden’s development at Taylor’s Mistake Road required refinancing. This was because of the pressure to do so not only from Ms Marshall but also from the prior mortgagee, the Canterbury Building Society.
[38] What followed was a relatively complicated series of transactions undertaken by the parties.
[39] First, it seems a total of around $700,000 was needed to be raised by way of finance to resolve issues with the Canterbury Building Society and Mrs Marshall. This, it appears, was achieved in the following way:
(a)A $100,000 loan was obtained by Mr Withers from Quick Finance, a mezzanine lender. This loan was secured against a property owned by
Mr Withers’ interests through another family trust of his, a trust known as the Williams Trust.
(b)A loan was arranged for $451,000 from Fico Finance (Fico), also a mezzanine lender. The evidence before me establishes that Fico recorded this as loan no 14037. Three properties were provided as security for this lending — these were first, the two lots at Taylor’s Mistake Road known as lots 1 and 7, which were among the properties Clifden still owned at that stage, and secondly, Mr Withers’ family home, held by the Williams Trust, at 32 Aylsham Lane, Casebrook, Christchurch.
(c)A loan of about $310,000 from Layburn Hodgins, a private lender was arranged, this loan being made to Mr Hickey or his nominee, secured by way of a mortgage over lots 2 and 3 of the land held by Clifden at Taylor’s Mistake Road.
[40] Mr Withers has given evidence that he and Mr Hickey as between themselves clearly understood at the time that the remaining lots 1, 2, 3 and 7 at Taylor’s Mistake Road needed to be sold urgently in order to meet Clifden’s lending obligations in respect of that Taylor’s Mistake Road development. He suggested the reasons for this were obvious given that Mr Withers at that point was no longer able to practice law as a barrister and solicitor and, accordingly, had suffered what he said was a severe fall in income. As a result, Mr Withers says he was not in a position to advance Clifden funding in the event that interest or principal payments needed to be made that Clifden itself could not meet. Mr Withers maintains too that, at the time obviously this had also put his own residential home at Aylsham Lane in jeopardy in the event there was default in the Fico loan.
Events which occurred in 2015
[41] In 2015, the Fico loan no 14037 under which about $451,000 was owing fell into default. This prompted Fico to issue notices under the Property Law Act 2007 of its intention to realise its securities by way of mortgagee sale. Mr Withers, in his evidence, says that he was able to persuade Fico to sell lots 1 and 7 at Taylor’s Mistake
Road first. This was in order to remedy the lending default before Fico was to turn on Mr Withers’ family home at Aylsham Lane. He says Fico agreed to this approach.
[42]Lot 1 at Taylor’s Mistake Road was sold in about April 2015 for approximately
$132,950, and this was applied in part repayment of the Fico loan. When Fico turned to sell lot 7 at Taylor’s Mistake Road however, Mr Withers says that Mr Hickey paid to Fico $50,000, drawing on what he presumed to be resources associated with Mr Hickey rather than from Clifden’s own funds. This was done, Mr Withers says, to persuade Fico to halt its mortgagee sale proceedings on lot 7.
[43] Two further events of some relevance occurred around this time. First, Mr Withers sought agreement from Mr Hickey to construct a dwelling on the unsold lot 3 at Taylor’s Mistake Road that could then be sold. In his evidence, Mr Withers says that Mr Hickey did not agree to this course of action, thereby preventing it taking place. Mr Hickey’s evidence on this point, however, is that it was not a question of him saying no at the time, rather that there was no realistic finance available then to support any residential dwelling being built.
[44] The second matter of relevance at that time, according to Mr Withers, is his claim that he had organised funds to enable development of the Rolleston/Brookside properties to be completed and therefore to effect subdivision of that land into saleable titles. Mr Withers’ evidence is that Mr Hickey again opposed this course of action. On this point, Mr Hickey says that Heartland Bank, who held a mortgage at the time over the Rolleston/Brookside properties, would not have permitted any further borrowing in relation to a development there. Mr Withers’ response is that Mr Hickey’s approach by that stage was effectively controlled by Heartland Back because Mr Hickey had leveraged the Rolleston/Brookside land (now held by Mr Hickey’s company Deans Avenue Development Ltd (DADL)) to enable DADL to undertake its own separate developments elsewhere. If true, this meant, Mr Withers says, that DADL needed the existing securities to remain in place (even those which were beneficially owned by Clifden) until DADL had completed its separate developments, sold them and was able to deleverage.
Events which occurred in 2016
[45] In 2016, relevant developments occurred both in relation to the Taylor’s Mistake Road land and the Rolleston land:
(a) Mr Hickey restructures financing with Fico Finance
[46] In 2016, through his family trust interests, Mr Hickey obtained a loan from Fico Finance. This loan, arranged on 18 April 2016, was recorded by Fico as loan 16037. The amount advanced under this loan was $702,000. Mr Hickey’s residential home, then held by the Clonbunny Trust, being 160A Rose Street, Summerfield, Christchurch, was provided as security, together with lot 7 at Taylor’s Mistake Road. This lot 7, as I have noted above, was said to be one of the three properties within the Taylor’s Mistake Road development that Clifden still effectively owned.
[47] Mr Withers says in his evidence that some $350,000 of this $702,000 Fico loan 16037 was immediately applied to the repayment of the existing first mortgage against the Rose Street property with Westpac (a mortgage which had been advanced to Mr Hickey’s interests through the Clonbunny Trust). Mr Withers assumes this amounted to a complete repayment of the Westpac first mortgage borrowing by the Clonbunny Trust for which that Rose Street property had acted as security.
[48] Mr Withers then says that after paying Westpac the $350,000, which was for the benefit of Mr Hickey’s personal interests, it seems the original intention had been to apply the balance towards Clifden’s interests. He maintains, however, it is quite unclear what those balance funds were actually used for.
[49] Mr Hickey’s response to these suggestions, given major lending defaults from the parties at the time with only Mr Hickey appearing to be able to provide some debt servicing is a little difficult to discern. What does appear clear is that at various times this resulted in a quagmire of financial dealings and arrangements being made largely to preserve Clifden’s assets in the main, all with varying degrees of desperation.
Brookside liquidation and land transfers to DADL
[50] As part of these events, in 2016 Brookside encountered severe cash flow difficulties. Mr Withers says the reason for this was that it had sold one of the three properties that Brookside had originally purchased in order to improve the access to lot 17 on the Rolleston land. This sale was to another property developer. Mr Withers notes this sale transaction was entered into on the basis that the property developer purchaser either was or would become GST registered. The effect of this would be that the parties would be able to treat the transaction as a zero-rated one (being the transfer of a going concern) for GST purposes. However, contrary to what is said to be the agreement between the parties, the purchaser of this lot claimed the GST input credit on the transaction. The response from IRD was to audit Brookside and to impose a GST output debit on Brookside. The sum at issue was approximately
$130,000. Brookside did not have the funds on hand to pay this, although it did have other properties in its name at that point. The previously earned sale proceeds of about
$550,000 (arising from sale of the three properties Brookside had originally purchased), it seems on Mr Hickey’s evidence before me, had been applied earlier to repayment of Sirocco’s loan with the Canterbury Building Society held in relation to the Taylor’s Mistake Road development.
[51] On all of this Mr Withers contends that it was Mr Hickey’s mismanagement that was the cause of Brookside subsequently entering into liquidation. Mr Hickey disputes this. He gives evidence that negotiations with IRD occurred through his own solicitor, Mr Currie, for a proposal to settle the $130,000 GST debt, but it appears this proposal was rejected and IRD proceeded to pursue liquidation proceedings against Brookside.
[52] Shortly before Brookside went into liquidation, Mr Currie it seems registered the transfer of all of the land for which Brookside was the registered proprietor, being lot 17 of the Rolleston development and the remaining Brookside land, into the name of DADL. Mr Hickey accepts that such transfers occurred. Mr Hickey contends however that this step was justified for two reasons — first, he asserts that DADL was a 98 per cent shareholder in Brookside and, secondly, he says it was he and DADL who were liable to Heartland Bank for all the lending for which the
Brookside/Rolleston lands functioned as mortgage security. Mr Hickey maintains the value of such debt to Heartland Bank well exceeded the value of the land transferred. It does not seem to be disputed however that no consideration was paid by DADL to Brookside for this transfer.
[53] So far as DADL is concerned, Mr Hickey is a director of that company. He is also a 50 per cent shareholder in DADL, along with another shareholder group who can properly be described as a third party in the context of these proceedings. These shares it seems are owned by Deans Avenue Services Ltd whose shareholders are David Dunes and Ed Post, the latter of whom featured earlier as an original shareholder of Clifden.
Events which occurred in 2017
Mr Hickey refinances with Fico and develops Taylor’s Mistake lot 7
[54] In early March 2017, Mr Hickey sold his residential home at Rose Street and repaid loan 16037 to FICO entirely. He then proceeded to obtain a new loan from Fico, this being loan 17015.
[55] The loan amount under loan 17015 was $650,000. Ostensibly, it seems the evidence from Mr Hickey was that this loan was obtained for the purpose of building a residential home on lot 7 at Taylor’s Mistake. Both parties appear to regard lot 7 as being the most valuable tract of land that Clifden has subdivided. Mr Withers contends that analysis of the loan statement from Fico for loan 16037 suggests that approximately $100,000 of this loan at an early stage was applied to some unknown transactions. In any event, it seems that the Clonbunny Trust and Mr Hickey were the borrowers from Fico so they had complete control as to the drawdown of this loan and its application.
[56] Turning now to the Fico statements before the Court in relation to this loan 17015. It does seem from material before the Court that entries in the comments column of their statements assist in possibly tracing the next series of relevant events. The statements appear to have been prepared by Fico itself. The statements disclose ongoing advances being paid to DADL for work it was undertaking at Mr Hickey’s
instructions for the construction and development of the new dwelling on lot 7. The relevant transactions seem to imply that an invoice had been rendered by DADL. Prior to paying the invoices a deduction was made by Fico for interest accruing elsewhere on another loan (loan 14037, the Williams Trust loan) and also against this loan (17015) itself. From an addition of what appear to be construct invoices for the new dwelling at lot 7, it seems that this cost totalled approximately $671,000 plus the value of any interest deductions made against those invoices.
[57]These payments, it seems, caused the balance of loan 17015 to accrue to some
$933,221.78 by 3 September 2018. It is suggested by Mr Withers that this dwelling was likely to have been completed by around early September 2018.
[58] On 4 December 2018, a transfer of the remaining balance of the Williams Trust loan 14037 was also effected in the amount of $139,328.29, effectively consolidating the two loans together, totalling now $1,098,374.
[59] It seems that around this time Mr Hickey moved into the new dwelling constructed on lot 7.
[60] Interest on loan 17015 however continued to balloon in the absence of payments so that by 17 September 2019 $1,265,000 was owed. At that time a payment of $50,000 was made and subsequent repayments totalling $45,000 were made up to 23 March 2020.
[61] Even accounting for those payments, however, the total balance of the loan rose to some $1,342,000 as at 31 October 2020. That was an increase of some
$140,000 from the date after which the new residential home at lot 7 had been completed. Mr Withers evidence too is that Mr Hickey has lived in and enjoyed the benefit of lot 7 at Taylor’s Mistake throughout all this time.
[62] It seems also that around November 2020 lot 7 was sold and was due for settlement at a sale price of some $1.5 million, which would enable the entire Fico loan 17015 to be repaid. Mr Hickey, in his evidence, appears to confirm this and he
asserts also that, as the transaction will attract GST of some $195,000, there will be no profit left from the sale of lot 7. This GST issue however is queried.
[63] The final position appeared to be that Mr Hickey asserted that DADL is both the legal and beneficial owner of the remaining land at the Rolleston development, being the balance of the lot 17 subdivided properties and Brookside properties. His evidence, Mr Withers says however, does not disclose what amount is owed to Heartland Bank nor what any amounts borrowed have been applied towards.
[64] The last draft financial statements prepared for Clifden on Mr Hickey’s instruction appears to be for the year ending 31 March 2021. They are before the Court and, although disputed by Mr Withers, seem to assert that the company owns no property from either the Rolleston or Taylor’s Mistake developments. Its only assets are shown as “work in progress”. Its liabilities far exceed its assets from these draft accounts and the company would seem to be insolvent. Mr Hickey indeed confirms that in his view Clifden is insolvent. Mr Withers however does not agree, insofar as any insolvency, if it does arise, it does so only from a refusal by Mr Hickey to recognise that Clifden remains the beneficial owner of a range of properties.
The law on s 174
[65]Section 174 of the Companies Act provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
(c)regulating the future conduct of the company’s affairs; or
(d)altering or adding to the company’s constitution; or
(e)appointing a receiver of the company; or
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[66]In the recent past, s 174 has been described as:2
A wide-ranging power to grant relief where the shareholder has been subjected to conduct that is “oppressive, unfairly discriminatory, or unfairly prejudicial.” The courts have resisted attempts to put limits on this power and a large number of proceedings have been brought under this section since it was enacted.
[67] The scope of s 174 clearly is not limited to applications from only minority shareholders.3 A majority shareholder can apply if it lacks effective control (for instance, because a minority has a right of veto).
[68] Situations of oppressive or unfairly prejudicial conduct may apply to activities such as a one-off act, and to past, present and future conduct. “Sins of omission” may justify relief under the Act.4
[69] A leading statement on the meaning of “oppression” in the statutory test was given by Richardson J in Thomas v H W Thomas Ltd.5 This was subsequently approved by the Court of Appeal more recently in Latimer Holdings Ltd v Sea
2 Blanchard and Alderton Shareholders Toolbox: Unlocking the Breakdown of Shareholder Relationships, 24 August 2017 (unpublished Auckland District Law Society CPD Seminar) p 4.
3 Sturgess v Dunphy [2014] NZCA 266 at [135].
4 At [139].
5 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 at 693.
Holdings NZ Ltd6 and also in Sturgess v Dunphy.7 Richardson J in Thomas v H W Thomas Ltd set this out in this way:
In employing the words “oppressive, unfairly discriminatory or unfairly prejudicial” Parliament has afforded petitioners a wider base on which to found a complaint. Taking the ordinary dictionary definition of the words from The Shorter Oxford English Dictionary: oppressive is “unjustly burdensome”; unfair is “not fair or equitable; unjust”; discriminate is “to make or constitute a difference in or between; to differentiate”; and prejudicial, “causing prejudice, detrimental, damaging (to rights, interests, etc)”. I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under [s 74]. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.
[70] Clearly, the test is an objective one concentrating on the effect of the conduct on the plaintiff. Often it will depend also on weighing conflicting interests of different groups within the company.8
[71] The authorities establish there are no fixed categories of cases to which a claim under s 174 can apply. This section can come into play whenever there is a “visible departure from the standards of fair dealing”.9
[72] Section 174, however, does not apply where matters complained of essentially concern mere allegations of bad business decisions or management. Pure errors in business judgement without something more are generally outside the scope of the section.10
[73] It is clear too that a reasonable offer to purchase some minority shares can neutralise what would otherwise be shareholder prejudice, particularly when the
6 Latimer Holdings Ltd v Sea Holdings NZ Ltd [2005] 2 NZLR 328.
7 Sturgess v Dunphy, above n 3, at [135].
8 Thomas v H W Thomas Ltd, above n 5, at [694].
9 Thomas v H W Thomas Ltd, above n 5, at [695].
10 Latimer Holdings Ltd v Sea Holdings NZ Ltd, above n 6, at [70]–[71].
allegations concern exclusion of a shareholder from the management of the company.11
[74] Again, relief does not automatically follow if there is a finding of prejudice. It will only be granted if it is “just and equitable” to do so.
[75] In determining what is appropriate relief, the remedy adopted by the Court under s 174 is required to be “a just and equitable one”.
[76] Illustrations of what is an appropriate remedy where prejudice has been established are set out in Jordan v Chemical Specialties Ltd & Anor.12
Sirocco’s s 174 claims
[77] Sirocco’s case here is that the affairs of Clifden have been conducted in a manner that is oppressive or prejudicial to Sirocco’s interests as a shareholder. In saying this, Sirocco points to seven categories or instances where it contends it is prejudiced such that this justifies the Court’s intervention:
(a)Refusing to allow Clifden to develop lot 3 on the Taylor’s Mistake land or complete sale of the subdivided properties from lot 17 of the Rolleston land in 2015.
(b)Delaying the sale of lot 7 at Taylor’s Mistake after completion of a dwelling there for a period of two years, thus incurring what is alleged to be an additional $240,000 in holding costs. Allied with this is what is claimed as Mr Hickey’s sense of entitlement that led him to occupy this property, to the detriment of Clifden, without accounting to the company for a market rental as occupation value it should have received.
11 Fong v Wong [2010] NZSC 152.
12 Jordan v Chemical Specialties Ltd [1998] 8 NZCLC 261,839; and Martin v Martinborough Brewing Co Limited, HC Wellington CIV-2006-435-032, 19 August 2010, unreported judgment, per Mallon J.
(c)Asserting that Mr Hickey and/or his company, DADL, is now the beneficial owner of any remaining lots in respect of the Taylor’s Mistake land and the Rolleston/Brookside land, and refusing to account to Clifden for the value of those lands.
(d)Utilising lands for which Clifden remained the beneficial owner, but for which Mr Hickey’s company, DADL, or Mr Hickey personally were the registered proprietors, in order to fund developments outside of Clifden for the separate benefit of Mr Hickey and/or his company and its shareholders.
(e)Failing to account for approximately $100,000 in lending advances from Fico on Loan 17015.
(f)Refusing to have Clifden recognise the $100,000 in lending provided by Mr Withers during the 2016 refinancing of the Taylor’s Mistake development, by obtaining borrowings secured against Mr Withers’ personal property, and thus intentionally exposing Mr Withers’ personal assets to mortgagee sale.
(g)Allowing an ongoing complete deadlock to occur between the two shareholder groups in Clifden as to how the interests of the company should be conducted moving forward.
[78] Mr Mahuta-Coyle for Sirocco, in his submissions before me, acknowledged that Clifden in terms of its shareholdings is now irretrievably deadlocked. He suggests that both parties here have what he describes as “negative control over the other”. Sirocco complains too that the transfer of property from Brookside which at that point held Lot 17 at Rolleston on trust for Clifden, to Mr Hickey’s third-party company DADL constituted a major transaction for which the proper steps were not carried out. Not only did this transaction therefore require the consent of both shareholder groups, but Sirocco says it was patently a below value transaction if, as Mr Hickey contends, the beneficial interest in the Lot 17 land was transferred to DADL at the same time as well.
[79] As a result of this and the many other complaints from Sirocco outlined above, it seems clear that the parties simply cannot remain in business together.
[80] Turning now to the specific named remedies which are sought by Sirocco and Mr Withers here, first, it is tentatively suggested that this Court might make an order for an inquiry into these matters or alternatively that Clifden, Mr Hickey and his company DADL account for assets they have acquired to the prejudice of Clifden.
[81] Secondly, and linked to this, is Sirocco’s suggestion that the Court might order Sirocco’s shares in Clifden are to be the subject of a buy-out by Mr Hickey or his interests or that some other exit arrangements for a fair value be ordered.
[82] But, despite these options as suggested possible remedies, Sirocco and Mr Withers predominant proposal advanced before me was somewhat different. On this Mr Withers proposed by way of relief that Mr Hickey, either in his personal capacity or in his capacity as director of DADL or Clifden, is ordered to pay to Sirocco or Mr Withers (drawing on whatever assets he wished including those of Clifden) the sum of $500,000. In explanation, Mr Withers in his evidence before me endeavoured to explain how he has reached this $500,000 sum. He says it represents the value of contributions directly made by him to Clifden after its refinancing in 2014. In response, Mr Hickey suggests this Court should instead at the most carry out a comparison of what contributions Mr Hickey and his interests may have made to Clifden with those made by Mr Withers. Mr Withers however insists this is inappropriate. This is the case he says because when Mr Hickey makes this $500,000 payment, in return he and his interests will of course acquire all the shares in Clifden and thereby have access to all the company’s assets, assets which Mr Withers contends have been used improperly by Mr Hickey in the past for his separate profit and benefit. As part of this suggested buy-out arrangement, Mr Withers confirms he would arrange the necessary share transfers and any resolutions required. All the shares Sirocco holds in Clifden would then pass directly to Mr Hickey and/or his nominee and Mr Withers would immediately resign and relinquish any offices he or his appointees might have held in Clifden.
[83] In response to these contentions from Sirocco, the position of Mr Hickey and his interests here is that all the claims advanced by Sirocco and Mr Withers are without merit and the suggestion of a $500,000 buy-out requested by Mr Withers is simply fanciful.
[84] Mr Hickey’s broad argument is that, when Mr Withers was struck off as a barrister and solicitor and then prevented from acting as a director or in the management of any company, Mr Hickey was in effect “left holding the baby” for major developments Clifden and its related entities intended or were enmeshed in. At that point, huge third tier lending had been acquired which Clifden was simply unable to service. The only sources of financing or servicing for these, Mr Hickey maintains in his evidence, were from his own resources and funds he personally provided. Nothing was available or forthcoming from Mr Withers.
[85] Accordingly, the debts of Clifden and its related entities continued to climb. To avoid threatened mortgagee sales of various properties, Mr Hickey says that he had no choice but hurriedly to make refinancing arrangements sometimes involving transfer of an asset, and to commit his own outside assets to servicing Clifden’s debts and holding costs. What he describes as a dysfunctional mess ensued. This he claims hampered the proper management and administration of Clifden’s affairs and importantly, the purposes for which it was incorporated could no longer be furthered.
[86] Mr Hickey has placed before the Court draft financial statements for Clifden for the year ending 31 March 2021, completed by Mr Allott, an independent chartered accountant. It is true that in a disclaimer attached to those accounts Mr Allott states:
“I have compiled these financial statements based on information provided which has not been subject to an audit or review engagement. Accordingly I do not accept any responsibility for the reliability, accuracy or completeness of the compiled financial information contained in the financial statements
…”.
[87] The information for these accounts it seems was provided by Mr Hickey alone. Before me he confirmed that to the best of his knowledge the accounts were accurate. This is strongly disputed by Mr Withers who claims the information in the financial
statements is simply wrong and unsubstantiated and effectively therefore the accounts are worthless.
[88] Notwithstanding this, a number of things seem to appear from these draft accounts:
(a)from the company’s balance sheet at 31 March 2021, its assets are said to total almost $760,000 whereas its total liabilities come to some $1.34 million. Liabilities therefore exceed assets by over $580,000;
(b)a schedule of shareholders current accounts with the company is attached to its balance sheet. This shows the Matlor Trust, Mr Withers’ Trust, is owed by Clifden approximately $137,000 by way of a shareholders’ loan;
Also from that same schedule of shareholders’ current accounts, Mr Hickey’s shareholding interests through the Glenmore Trust are said to owe a shareholder’s debt to Clifden of some $106,300, as at that balance date.
(c)The Clifden balance sheet records liabilities owing by the company to include a large sum of $515,400 owing to Mr Hickey by way of advances he has personally made to the company as a related party. Mr Withers similarly is shown as having a related party advance but only amounting to some $12,300, owing to him by Clifden.
(d)Significantly, further current liabilities are showing in the Clifden draft balance sheet. These include sums owing to the Inland Revenue Department first for GST payable of $219,578.61, and secondly for income tax of $134,471.42 outstanding. These amounts it seems increased from amounts said to be showing in draft accounts for Clifden to 31 March 2020 of $184,534.10 for GST and $9,252.00 for income tax. What does seem clear is that significant current liabilities of
Clifden are owing to the Inland Revenue Department according to these accounts.
(e)Also in Clifden’s draft balance sheet to 31 March 2021 are non-current liabilities shown as loans, which would seem to be secured mortgage loans, totalling $415,000.
(f)So far as matters relating to Clifden’s assets are concerned, there is major disagreement between Mr Withers and Mr Hickey over what properties and other assets may be represented by these. Mr Hickey it seems indicated in his evidence that, as he shouldered all debt servicing for Clifden at critical times, then any properties which may have been transferred to him or to his interests, but for his efforts would otherwise have been lost by way of imminent mortgagee sales. Also he contends in any event that the true value of all these properties was far exceeded by the debt servicing he had met.
[89] I do note again on this aspect that the accounting and financial statements for Clifden before the Court are the subject of a major dispute between Mr Withers and Mr Hickey. Little resolution can be reached about the true financial position of the company however without a detailed investigation and accounting exercise being undertaken.
[90] Similarly, there seems to be little agreement between Mr Withers and Mr Hickey now over the history and any other matters affecting Clifden in the past. It does seem no formal jointly approved financial accounts for Clifden have been completed for some years.
Analysis
[91] As to the evidence before me in this case, what evidence there was came largely from Mr Withers and Mr Hickey. They both gave evidence and were cross-examined. Little other evidence was provided and no other witnesses cross-examined. Matters of credibility were difficult to determine. What became clear in my view is that both parties in this case have some responsibility with respect to what has developed for
Clifden and the related entities. This can only be described as a major current dysfunction in the partnership-type arrangements they had set in place leading to the unfortunate deadlock that has arisen between them over Clifden and other entities. It is difficult to escape the conclusion, that to an extent, there is a degree of fault on both sides with respect to the conduct of their various company entities, and in particular, Clifden.
[92] On all this I am satisfied that s 174(1) of the Companies Act has clearly been triggered because of this clear deadlock and the dysfunction relating to Clifden. Issues over the solvency of Clifden in my view also loom large here.
[93] With this in mind I reach a point which has entertained courts in the past whereby liquidation orders have been made under s 174 where there has been an irretrievable breakdown of relationships within a company.
[94] Section 174(2) gives a Court full discretion to grant relief in the event oppression is established. If considered just and equitable the Court may make such orders as it thinks fit including an order placing the company in question into liquidation.
[95] As to “just and equitable” considerations in deciding to liquidate a company, the authors of Company Law in New Zealand13 noted:
“In Jenkins v Subscaf Ltd Heath J stressed that there was no fetter upon the Court’s discretion either in relation to the factors that might justify the making of a liquidation order, or that might justify its refusal, and that a court should therefore balance all relevant factors and information available to it for consideration at the time of the hearing. Similarly, Associate Judge Osborne in Commissioner of Inland Revenue v Erueruiti Investments Ltd has recently described the jurisdiction to liquidate a company on the “just and equitable” ground as “unfettered”.
(Citations omitted) and
“ … there is one particular situation in which the “just and equitable” ground has been invoked successfully on a number of occasions to justify liquidating a company, namely where the basis of the corporators’ association has
13 Peter Watts, Neil Campbell and Christopher Hare, Company Law in New Zealand, second edition, 2016 at 21.2.2.
effectively failed. In O’Neill v Phillips [1999] 1 WLR 1092 (HC) Lord Hoffman drew an analogy between this category of case and cases where a contract is held to have been frustrated …”
and
“In a similar vein, Associate Judge Bell in Sea Management Singapore Pte Ltd v Professional Service Brokers Ltd [2012] NZHC 13 at [3] indicated that:
“(t)he essential basis for the courts to give relief (on just and equitable grounds) is frustration by internal discord”.
[96] It is true however that, in this liquidation area, the courts have required an elevated standard as to whether trust and confidence in a company has so irretrievably broken down before liquidation can be ordered. “… Mere disagreement or a falling out may not be sufficient to invoke the winding up remedy arising under the just and equitable test.”14
And it is useful to bear in mind too that, in addition to this “just and equitable” ground for liquidating a company, the most common basis for liquidation application to this Court is that in terms of s 241(4)(a) it is simply unable to pay its debts and therefore is seen as insolvent.
[97] As I have noted, Mr Mahuta Coyle for Sirocco contends that Clifden’s assets here have been misapplied by Mr Hickey for his own benefit through his company DADL or otherwise. On this aspect no doubt he relies upon comments in Morison’s Company and Securities Law15 at [31.8.3]:
“By its very nature, the misapplication of a company’s assets by those in control of its affairs for their own benefit or the benefit of family or friends is unfairly prejudicial to the interests of minority shareholders.”
(Citation omitted).
But, as I see it, this claim, strongly disputed by Mr Hickey, is not properly made out by Sirocco on the confused and limited evidence before me to the required standard in this case. What is clear to me however is that events here have put an end to the basis upon which Mr Withers and Mr Hickey entered into association with each other.
14 Per Warwick Gendall J in Orthodontic Centre Ltd v M D Courtney Orthodontics HC Palmerston North, CIV-2006-343-238, 14 September 2007 at (33)–(34).
15 Morison’s Company and Securities Law, Looseleaf edition, LexisNexis, 2019.
[98] Having reached those various conclusions however, some examination of the affairs of Clifden and what may have happened with its assets and liabilities both in the past and now is clearly required. What evidence there is before me as I note is entirely equivocal on this. Mr Withers’ claims are also heavily disputed. Clear issues of credibility also arise in this case. In my view, the appointment of an independent liquidator to carry out the detailed and proper enquiries that may be required to reach a full analysis of Clifden’s actual position is needed. On the face of it too it may be that Clifden is insolvent and should be liquidated on that basis in any event, rather than being left to trade on and potentially incur more debt. I leave that aspect on one side here, however.
[99] As I see the position although it is an “extreme” form of relief which the authorities have stated should be available only in exceptional cases, I take the view that an order placing Clifden into liquidation here is the appropriate way forward. It will have the benefit of introducing an independent third party to properly consider the claims and counterclaims which have been made to get to the bottom of what is the company’s true position.
[100] It is clear that in the Vujnovich decision16, it was acknowledged that an order for liquidation is one only to be made in exceptional cases. I am satisfied that this is such an exceptional case. A full accounting exercise is needed, as I have noted, given that the draft 31 March 2021 accounts which Mr Hickey has put before the Court and an accurate record, indicate that Clifden’s liabilities far exceed its assets. The company too, according to those accounts, seems to be quite unable to pay income tax and GST debts which indeed are long overdue for payment. On this basis the company would be insolvent under both tests.
Result
[101] I conclude here that the proceeding brought by Sirocco relating to its shareholding in Clifden in terms of the grounds advanced for relief, cannot be seen as having succeeded. To that extent this application and the remedies Siroco seeks are notionally dismissed.
16 Vujnovich v Vujnovich [1989] 3 NZLR 513 (CA).
[102] Notwithstanding this, I am satisfied that s 174(1) of the Companies Act and the inherent jurisdiction of this Court is activated in this case. I reach that position on the basis there has been at least an irretrievable breakdown of relationships within the company, and also, following from this, that Mr Withers and Mr Hickey’s association as corporators of Clifden has effectively failed And therefore that it is just and equitable here to put Clifden into liquidation.
[103] I note too this remedy of placing the company into liquidation, although generally seen as being a last resort, is one permitted under s 174(2)(g). Despite it being an exceptional remedy, it is an appropriate one here. This will mean that a proper investigation and analysis of Clifden’s actual position, and what may have occurred with its assets and liabilities in the past can be properly undertaken by an independent party.
Orders
[104]That said, an order is now made placing Clifden into liquidation.
[105]The Official Assignee is appointed liquidator.
[106] Leave is reserved for any party with either the approval of the Official Assignee or following further orders of this Court, to nominate an appropriately independent and qualified replacement liquidator to replace the Official Assignee and to seek an order for such replacement liquidator.
[107]This order is timed at 3.00 pm today, 17 December 2021.
Costs
[108] As to costs, no specific submissions on costs were advanced at the hearing before me. Costs therefore are reserved.
[109] Counsel are encouraged to liaise with a view to settling between the parties any issues of costs that arise.
[110] In the event that costs remain in issue and cannot be settled directly, counsel may file sequentially memoranda on costs (5 pages maximum each) which are to be referred to me, and I will decide the costs question on the basis of the memoranda filed and all the other material before me.
Gendall J
Solicitors:
Corcoran Legal, Christchurch Currie Lawyers, Christchurch
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