Soma v Nath

[2019] NZHC 1088

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-1647

[2019] NZHC 1088

BETWEEN

HERA SOMA

Plaintiff

AND

SUNIL RAMENDRA NATH

First Defendant

A1 CARS 2014 LTD

Second Defendant

Hearing:

25 and 26 March 2019

Counsel:

D Jaques for Plaintiff

D Rooke for First Defendant
No appearance on behalf of Second Defendant

Judgment:

17 May 2019

JUDGMENT OF BREWER J

This judgment was delivered by me on 17 May 2019 at 2:00 pm pursuant to Rule 11.5 High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Legal Associates (Auckland) for Plaintiff

David Rooke Law (Auckland) for First Defendant

SOMA v NATH [2019] NZHC 1088 [17 May 2019]

Introduction

[1]                 From 2013 to 2017 a car sales business operated from premises at 717 Great South Road, Papatoetoe. The business was owned, legally if not in practice, by the second defendant, A1 Cars 2014 Ltd.

[2]                 The second defendant  was  incorporated  on  4 July  2013.  The  plaintiff,  Mr Soma, was registered as shareholder of half its shares and the first  defendant,  Mr Nath, was registered as shareholder of the other half. Both men were directors. They were the only directors.

[3]                 The second defendant ceased trading in 2017. Thereafter Mr Nath used the premises to sell cars under the auspices of Sameera Cars Ltd, a company which he incorporated for that purpose.

[4]                 Mr Soma’s case is that he and Mr Nath each bought half the car sales business from Mr Nand. Together he and Mr Nath incorporated the second defendant and transferred ownership of the business to it. The business consisted of accepting vehicles for sale on behalf of their owners in return for a commission. Mr Nath ran the business on a day to day basis and Mr Soma “would support the business in other ways”.

[5]                 Mr Soma pleads that Mr Nath in his capacity as director did not cause the second defendant to keep proper records, operated the business for his own benefit in breach of his obligations to the second defendant and unilaterally transferred the business of the second defendant to his new company, Sameera Cars Ltd, without consideration and in breach of the major transaction requirements.1 Mr Soma puts the loss suffered because of this at $800,000.2 He seeks relief in his first cause of action partly against the second defendant and partly against Mr Nath.

[6]                 Mr Soma’s second cause of action against the second defendant is that he advanced to it three loans totalling $106,553.50 which have not been repaid despite demand being made. He seeks damages.

1      Companies Act 1993, s 129.

2      There are some complexities in the way this loss is pleaded, which I will come to.

[7]                 Mr Soma’s third cause of action against the second defendant is for recovery of a HiAce van he left at the car sales premises for sale on his behalf. He alleges the second defendant, through Mr Nath, has refused to return it. Alternatively, he seeks damages of $24,000.

[8]                 Mr Soma also claims against Mr Nath personally for recovery of the amount of the loans totalling $106,553.50. He pleads Mr Nath, in breach of the Fair Trading Act 1986, failed to identify the true nature of the transaction and the parties involved. He adds that the loans “were in fact a loan to [Mr Nath]” and are repayable by him.

[9]                 Mr Nath’s case is the complete opposite of Mr Soma’s. His evidence is that he operated a used car sales business with Mr Nand under a profit sharing arrangement before Mr Nand ceased trading from and vacated the premises. Mr Nath then incorporated the second defendant in order to run his own business there. Mr Soma’s involvement was nominal. He was a customer who brought vehicles to the premises for “sale on behalf”. Mr Soma was appointed as a director in the registering of the second defendant, but only received shares through an error made by the accountant incorporating the company. Mr Nath did not realise Mr Soma was a shareholder and submits Mr Soma holds the shares as a bare trustee on his behalf.3

[10]             Mr Nath does not plead to the causes of action against the second defendant in relation to the claimed loans and the HiAce van.

[11]As to the claim against him relating to the alleged loans, Mr Nath pleads denial.

[12]             By way of affirmative defence, Mr Nath pleads that if Mr Soma were a beneficial shareholder and a director then he can claim no remedies under the Companies Act 1993 because he took no steps as director to remedy the defaults of which he now complains.

[13]             Mr Nath also pleads by way of affirmative defence that any breach of director duties caused no loss to the plaintiff, on the basis that the plaintiff never made any

3      At points in his evidence Mr Nath also contended there was an agreement to this effect.

financial investment in the company (such as paying for his shares) and that the company never declared any dividend on shares.

[14]             Mr Nath pleads there was no transfer of the second defendant’s business to Sameera Cars Ltd. Mr Soma caused the second defendant’s banks to freeze its accounts. It could not continue to trade and ceased trading. It had no business to transfer because its business was to expose vehicles for sale on behalf of their owners with Mr Nath doing the actual selling. Sameera Cars Ltd simply started using the premises for the same purpose.

[15]             Mr Nath counterclaims against Mr Soma. He pleads Mr Soma, in breach of his statutory and fiduciary duties as a director, caused the second defendant to cease trading. This resulted in Mr Nath losing the value of his shareholding.

[16]             An alternative counterclaim is that even if Mr Soma did not breach his duties as director his actions amounted to an unlawful interference in the business of the second defendant, which caused Mr Nath to lose the value of his shareholding.

[17]             Mr Nath does not quantify the lost value of his shareholding. He seeks an inquiry to determine the quantum of his loss.

[18]             The second defendant has not filed any documents or taken any part in the proceeding.

[19]             The High Court Rules 2016 have as their objective “to secure the just, speedy, and inexpensive determination of any proceeding or interlocutory application”.4 “Speedy” and “inexpensive” are relative terms. The procedures mandated by the Rules are almost never carried out in an objectively speedy way and in all my years involved in litigation I have never heard parties celebrate them as inexpensive. The Rules work best when, in a case where there is a lot of money at stake, the parties are unemotional about the context, want judicial determination of the issues between them, and have given their lawyers full instructions on the facts to enable them to define the issues and call the evidence relevant to them. This is not such a case.

4      High Court Rules 2016, r 1.2.

[20]             First, there is not a lot of money involved. I acknowledge Mr Soma’s highest claim is for $800,000. But, as I will come to, that is a pleading based more on speculation than evidence.

[21]             Second, the dispute is founded on emotion. Mr Soma and Mr Nath had a business relationship. They fell out. Mr Soma caused the second defendant to lose access to its bank accounts. He invaded the office at the premises and seized, at least, a diary used by Mr Nath to record business dealings. Mr Nath issued a trespass notice against Mr Soma and ran the business thereafter on his own account using Sameera Cars Ltd. Mr Soma issued this proceeding.

[22]             Third, the lawyers, within the constraints of the Rules and a limited budget, had to translate their instructions into pleadings and evidence as best they could. I consider I heard at best partial truths from Mr Soma, Mr Nath and Mr Nand. Each told me what they thought they had to tell me to assist their case (for Mr Nand that was Mr Soma’s case). This phenomenon was particularly evident in Mr Nath’s evidence.

[23]             I was left with the overall view that the car sales business carried on from the premises was taken over from Mr Nand by Mr Soma and Mr Nath. I do not know what the financial arrangement was with Mr Nand. I am sure that the second defendant had no life of its own. Any life described in the returns made on its behalf to the Inland Revenue Department was fictional. Mr Nath ran the business as a cash business, deposited in the second defendant’s bank accounts only those sums he had to (such as payments from finance companies) and took as much cash for himself as he could. I do not know on what basis Mr Soma took money from the business. I know he exhibited cars to be sold on his behalf. I know he was paid largely in cash. Beyond that, I am unsure.

[24]             I would probably have been helped by evidence from accountants. Both sides intended to call accountants. Both failed to persuade their witnesses to attend. I am left with the competing claims made by the parties themselves.

[25]             Accordingly, in this judgment I will adopt the narrow approach of taking the crucial pleadings of fact, applying the onus of proof, and holding the result up to the law.

The first cause of action

[26]             The first cause of action is against the second defendant.5 However, there are also allegations against and relief sought from Mr Nath.

[27]The pleaded allegations are:

(a)The second defendant breached s 194 of the Companies Act 1993 by failing to keep accounting records that correctly record the transactions of the company.

(b)While trading the second defendant made an annual gross profit of approximately $400,000 and had a net operating profit of approximately $320,000 per annum.

(c)Mr Nath failed to hold board meetings or involve Mr Soma in the running of the company in breach of Mr Soma’s rights and responsibilities as a director of the second defendant.

(d)Mr Nath failed to act in good faith or make decisions in the best interests of the company, essentially by operating a cash business and not accounting for the cash sales.6

(e)Mr Nath further caused the second defendant to breach its obligations to Mr Soma by causing the car sales business to be transferred to his company, Sameera Cars Ltd, without consideration and without obtaining approval as a major transaction by special resolution.7

5      Under Companies Act 1993, s 174(1).

6      In breach of Companies Act 1993, s 131.

7      In breach of s129.

(f)Overall, the manner in which the affairs of the second defendant have been conducted are oppressive, unfairly discriminatory or unfairly prejudicial to the plaintiff.8

[28]The relief sought by Mr Soma under the first cause of action is:

(a)The second defendant is required to acquire the shares of Mr Soma in the company;9 and

(b)Mr Nath must pay the second defendant the sum of $800,000 being the best estimate of the loss of profit Mr Soma has sustained arising from the breach.10

Discussion

[29]             Mr Soma proved, on the balance of probabilities, that he and Mr Nath went into business together selling cars on behalf of their owners from the premises. I am satisfied to the same standard that Mr Nand came to some arrangement with Mr Soma and Mr Nath that meant they took over the premises from him. I am  not satisfied  Mr Nand sold his business to them on the basis to which he and Mr Soma attested:

(a)There is no written agreement.

(b)The alleged sale is not commercially credible. There is no evidential basis for the fixing of the alleged purchase price of $100,000. Mr Nand and Mr Soma said Mr Soma acquired half the business for $50,000, paid by offsetting an investment by Mr Soma in another of Mr Nand’s businesses. Mr Nand said Mr Nath agreed to buy the other half of the business for $50,000 to be paid at the rate of $100 for each car sold. Mr Nand said Mr Nath made only one payment of $100. Mr Nath denied any such arrangement or payment. There is no evidence of the value of Mr Nand’s business.

8      Companies Act 1993, s 174(1).

9      Under s 174(2)(a).

10     Under s 174(2)(b).

(c)Mr Nath’s business diary does not record any debt to Mr Nand.

(d)Mr Nand took Mr Soma and Mr Nath to his accountant to incorporate the second defendant. There is no evidence the accountant was instructed to record the purchase of the business on the alleged terms or any others, and no evidence of instructions to the accountant as to the basis on which the second defendant was to acquire the business.

[30]             Mr Soma has satisfied me that he and Mr Nath incorporated the second defendant to be the legal owner of their car sales business. I disbelieve Mr Nath’s evidence that it was his idea to incorporate the second defendant and that Mr Soma’s shareholding was a mistake by the accountant which went unnoticed by Mr Nath until this dispute arose:

(a)Mr Nand had something to do with the establishment of the business. He went with Mr Soma and Mr Nath to his, Mr Nand’s, accountants when the incorporation instructions were given. Necessarily, those instructions would have included the shareholding.

(b)An equal shareholding fits the picture of some  sort of transfer by    Mr Nand of his business to Mr Soma as a supplier of vehicles and   Mr Nath as the seller of vehicles. Mr Nath had no credible reason for making Mr Soma, who he said  was  only  a  customer,  a  director.  Mr Soma was listed as a director and played a role in acquiring the business. I am satisfied that Mr Soma’s shareholding was not accidental or purely nominal.

[31]             There is no evidence the second  defendant  acquired  from  Mr Soma  and Mr Nath whatever business interests of Mr Nand they had acquired. The second defendant did not even lease the premises. The premises were occupied under an oral month by month arrangement negotiated with the owner by Mr Nath.

[32]             So, Mr Soma and Mr Nath went into business together using the second defendant as the legal owner of the business. However, that was largely a fiction.

[33]             The business was run, as much as possible, as a cash business. The only money that went into the second defendant’s bank accounts was money that unavoidably had to go there. For example, and prominently, money from car finance companies.

[34]             Mr Nath’s diary, although it is incomplete and there are difficulties interpreting it, makes the cash basis of the business clear. Mr Soma relied on it to construct a calculation that the business had an annual gross profit of approximately $400,000 and a net operating profit of approximately $320,000 per annum. Mr Soma has not satisfied me those figures are more likely than not to be accurate. The diary is too incomplete a record.

[35]             I am satisfied that Mr Nath simply took cash from the business. He was not even an employee of the second defendant (or, to put it another way, the second defendant did not pay PAYE for his services). I do not believe his evidence that all profits went to the company’s bank account. He contradicts himself in his later evidence about cash transactions appearing in the diary.

[36]             The second defendant’s annual returns to the Inland Revenue Department were based on the record of the bank accounts. They did not address the cash portion of the business. I cannot say how great that portion of the business was. I am satisfied it was significant. There is no direct evidence Mr Soma took cash other than as profit on the sale of the cars he exhibited for sale at the premises, but I think it a reasonable possibility he did given the profit sharing agreement.

[37]             There is no accounting evidence to assist. Mr Nath probably owes the second defendant quite a lot of money. For example, he admitted withdrawing from the company’s account for his own purposes in 2016 and 2017 the sums of $43,000,

$17,123.30 and $22,000. I cannot say more.

[38]             Neither Mr Soma nor Mr Nath made any attempt to perform their duties as directors of the second defendant. The second defendant was simply legal cover for the business, which they, between them, ran for personal profit. I accept Mr Nath had the day to day running of the business. He did not keep accounting records correctly recording the transactions of the company. But neither did Mr Soma make any attempt

to ensure records were kept. There were no board meetings and neither director attempted to convene any.

[39]             When Mr Soma and Mr Nath fell out Mr Soma caused the banks to freeze the second defendant’s bank accounts. The evidence is there was little money in them. Mr Nath responded by ceasing to trade the business under the legal umbrella of the second defendant, instead using the legal umbrella of Sameera Cars Ltd. There is no evidence Mr Nath transferred the business of the second defendant to Sameera Cars Ltd. He did not need to. There is no evidence the second defendant had any assets of value other than the frozen accounts. It did not even lease the operating premises. Its business was Mr Nath’s sales activities.

[40]             Against this background, particularly Mr Soma’s complicit failure to discharge his duties as a director, Mr Soma cannot claim that Mr Nath, who likewise failed in his duties, caused the affairs of the second defendant to be conducted oppressively or with unfair discrimination or prejudice.

[41]The first cause of action does not succeed.

The second cause of action against the second defendant and first cause of action against Mr Nath

[42]             In the second cause of action Mr Soma alleges he lent money to the second defendant on three occasions, namely:

·31 July 2013:              $21,553.50

·August 2016:              $25,000

·December 2016:         $60,000

[43]             In his oral evidence Mr Soma acknowledged that the sum of $21,553.50 was in fact advanced to the predecessor company owned by Mr Nand. I do not need to consider this pleading further.

[44]             I accept Mr Soma handed cash on two occasions to Mr Nath for the purchase of vehicles to be exposed as part of the business. The first amount was $25,000 and the second amount was $60,000. The evidence was there was also a cheque for

$60,000 paid into the account of the second defendant in June 2016, but Mr Soma was adamant there was a separate amount of $60,000 in cash handed to Mr Nath.

[45]             Mr Soma’s evidence is that on each occasion he advanced cash to Mr Nath it was in response to requests by Mr Nath for money to use to import cars. Mr Soma said the cars never appeared and the money was not repaid.

[46]             The second defendant’s bank accounts do not show receipt of $25,000 in the period Mr Soma said it was advanced. I accept Mr Soma’s point that because the advance was in cash it would not go into the accounts. The same can be said of the December 2016 advance of $60,000.

[47]             Mr Nath denied receiving the cash advances. He points to the second defendant’s ANZ account recording receipt of $60,000 on 30 June 2016, about six months before Mr Soma says he advanced the same amount in cash. Mr Nath said Mr Soma telephoned him to say he had made the deposit and instructed him to order cars from Japan. He did. The money was paid to the supplier. It was not a loan because the cars were for Mr Soma. Mr Nath did not say what cars were ordered, whether they arrived and, if they did, what happened to them.

[48]             Mr Soma gave evidence of his financial agreement with Mr Nath in relation to the two advances in question. He said, “I was just giving him cash, he was getting cars and we were going halves in the cars, in the profits and he was taking the rent out”. I accept the evidence because I am satisfied this was a business where large sums of cash changed hands and Mr Nath’s role was to sell vehicles for a profit of which he was to get half. The evidence relevant to the third cause of action involving the purchase of HiAce vans is illustrative.

[49]             Further, Mr Soma gains some credibility in this area by the ready way in which he accepted he was mistaken about the $21,553.50. He had given the cash to Mr Nath but at a time when Mr Nand was the owner of the business. However, I think Mr Soma

is mistaken about the sum being in cash. It is a very specific sum and Mr Nath’s diary recorded it as being paid by bank cheque.

[50]             The $60,000 paid to the second defendant’s bank account in June 2016 was, Mr Soma says, separate from the later two cash advances.  While I do not accept   Mr Soma’s evidence on other issues, I do not find he would make up completely fictitious claims.

[51]             The business of the second defendant was to expose cars for sale on behalf of their owners. I am satisfied that the advances to Mr Nath in August 2016 of $25,000 and in December 2016 of $60,000 were not loans to the second defendant. They were for the purpose of acquiring vehicles for Mr Soma which he could then expose for sale as part of the second defendant’s business. Mr Nath received the money on his own behalf and did not account for it to Mr Soma.

[52]The claim against the second defendant does not succeed.

[53]             However, Mr Soma also sues Mr Nath personally for the total of the advances set out in the second cause of action against the second defendant. The claim is brought under the Fair Trading Act 1986 but the final pleading is:

As the Loans were not for a legitimate Company purpose, they were in fact a loan to the First Defendant, and the First Defendant is liable to repay the Loans on demand.

[54]             I do not see the relevance of the Fair Trading Act, but on the evidence I have found I accept the advance of monies to Mr Nath can be characterised as loans or monies advanced for a purpose and I accept they were not repaid. There will be judgment in favour of Mr Soma against Mr Nath for $85,000.

The third cause of action

[55]             The third cause of action is also against the second defendant for breach of contract in relation to the purchase and exposure for sale of a HiAce van.

[56]             It is common ground (although there are disputes as to the financial arrangements) that Mr Soma purchased two HiAce vans and Mr Nath had the

responsibility for selling them. The first was duly sold and the sale proceeds accounted for in part by money and in part by Mr Soma taking a BMW motor vehicle.

[57]Mr Soma’s evidence was that he purchased both HiAce vans, in cash, for

$20,000 each. He said his deal with Mr Nath was that Mr Nath would sell them from the premises and the profit would be split equally between them. Mr Nath was present when Mr Soma bought the vans.

[58]             Mr Soma claims the return of the second van or the sum of $24,000 in damages. However, in the  evidence both  parties  accept  Mr Nath  sold  the  van.  Mr Soma said it was sold “for about $22,000, $24,000, could be wrong”.

[59]             Mr Nath said the second HiAce van was bought for $18,000 with Mr Soma paying $9,000 and himself paying $9,000.  The van was stolen from the  yard and  Mr Soma insisted he be compensated for its loss. This led to the falling out between them. The van was recovered unharmed and Mr Nath sold it; because of the falling out he did not account to Mr Soma for his share of the sale.

[60]             Mr Nath did not say for what price he sold the second HiAce van. He was not cross-examined on the point.

[61]             Mr Soma has the onus of proof. He is relying on memory since he apparently kept no records and dealt in cash. Mr Nath’s credibility suffers from obvious lies he told (such as his evidence that this was not a cash business and all proceeds were banked). However, he accepted there was a second HiAce van and that he did not account to Mr Soma for the sale price.

[62]             Mr Soma has not proved it is more likely than not his account is accurate. I will adopt the evidential picture least favourable to him. Accordingly, I find the second HiAce van was bought for $18,000 with both men contributing $9,000 in cash. It was exhibited for sale as part of the second defendant’s business and sold for $22,000. Mr Soma is entitled to be paid $11,000, being the $9,000 he contributed plus half of the $4,000 profit. In reality, the deal was between Mr Soma and Mr Nath. But, legally,

the business was the second defendant’s and the claim is pleaded against the second defendant. There will be judgment against the second defendant in the sum of $11,000.

Counterclaim

[63]             Mr Nath, by way of counterclaim, claims against Mr Soma for breach of duties as a director and  interference  with  contractual  relations.  The  allegation  is  that Mr Soma caused the second defendant’s banker to freeze its accounts so that it ceased trading. Mr Nath complains that as a result he lost the value of his beneficial shareholding and other interests in the company. He seeks an order directing an inquiry to be held to determine the value of what he lost.

[64]             The use of the second defendant was largely a sham. There is no credible evidence Mr Nath paid anything for his shares in the second defendant, or that the company had any assets of value at all. Mr Nath’s evidence is that when the second defendant’s accounts were frozen he simply carried on the business under another corporate entity which he established.

[65]             In short, there is no evidence Mr Nath lost anything, nor was there anything to lose. The counterclaim does not succeed.

Result

[66]             Mr Soma does not succeed on the first and second causes of action against the second defendant.

[67]             On the first cause of action against Mr Nath, I give judgment for Mr Soma in the sum of $85,000 plus interest.

[68]             On the third cause of action against the second defendant, I give judgment for Mr Soma in the sum of $11,000 plus interest.

[69]Mr Nath’s counterclaim against Mr Soma is dismissed.

[70]Memoranda on costs are to be filed no later than 14 June 2019.

Addendum

[71]             I record I have directed the registry to forward a copy of this judgment to the Commissioner of Inland Revenue.

Brewer J