Stewart v Stewart

[2023] NZHC 3585

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE

CIV-2023-470-000059

[2023] NZHC 3585

UNDER

Part 18 of the High Court Rules 2016,

sections 170 and 174 of the Companies Act 1993

IN THE MATTER OF

the removal of a director

BETWEEN

PETER DAVID STEWART

Plaintiff

AND

LIJIA STEWART

Defendant

Hearing:	5 December 2023
Appearances:	Z Kennedy for the Plaintiff M Beech for the Defendant
Judgment:	8 December 2023

JUDGMENT OF HARVEY J

This judgment was delivered by me on 8 December 2023 at 4 pm pursuant to r 11.5 of the High Court Rules.

Date: …………………..

(Deputy) Registrar

Solicitors/Counsel:

Morris Legal, Auckland

Zane Kennedy, Barrister, Auckland Sharp Tudhope Lawyers, Tauranga M B Beech, Barrister, Tauranga

STEWART v STEWART [2023] NZHC 3585 [8 December 2023]

Introduction

[1]    Peter Stewart and his former spouse Lijia Stewart are directors and shareholders of Peter Stewart Holdings Limited (PSHL), a company that was incorporated in 2006 and operates kiwifruit and avocado orchards near Katikati. Its shareholders are Mr Stewart and Ms Stewart, who hold 40.1 and 0.1 per cent respectively, and the trustees of the P & L Stewart Family Trust (Mr Stewart, Ms Stewart and Bountiful Ventures No 16 Ltd), who hold the remaining 59.8 per cent.

[2]    On 2 June 2023, Mr Stewart filed proceedings against Ms Stewart including an application for an interim injunction. Then on 19 July 2023, I issued interim interim orders to facilitate the day-to-day management of PSHL until the substantive proceedings could be heard.

[3]    Mr Stewart filed a contempt of court application on 22 August 2023, two affidavits sworn on 22 August and 11 October 2023, and memoranda underscoring Mr Stewart’s frustration with the apparent delays being caused he claimed by Ms Stewart’s failure to comply with the 19 July 2023 orders. A memorandum seeking a priority fixture for the contempt application was also filed on or about 11 October 2023. Then on 8 November 2023, Mr Stewart sought a formal proof fixture.

[4]Mr Stewart also seeks a variation to the 19 July 2023 orders to enable him to:

(a)instruct the proposed company accountant, Tim Mayston, to, inter alia, prepare overdue tax returns;

(b)attend to payment of trade creditors as and when they fall due;

(c)authorise payment of his salary that had been approved on 19 July 2023; and

(d)obtain reimbursement of funds he has advanced personally to support the company’s trading activities.

[5]    Ms Stewart opposes both the contempt application and the proposed variation of the 19 July 2023 orders and filed a notice to that effect on or about 28 August 2023.

She argues that there was no contempt and that she continues to comply with the Court’s orders, to the best of her ability. For example, Mr Beech highlighted that there was no timeframe regarding payment of Mr Stewart’s salary. Regarding payment of trade creditors, Ms Stewart questioned whether particular invoices were in fact properly incurred by the company, referring to a valuation that appeared to relate to the parties’ matrimonial property proceedings rather than being a proper expense of the company.

[6]    Mr Beech also underscored that his client was in effect a supplicant because Mr Stewart controlled the company’s assets and the matrimonial property. In contrast, counsel submitted that Ms Stewart was of very limited means and her financial position was strained compared to Mr Stewart who clearly had access to resources to fund the litigation.

[7]    The issues for determination are firstly, whether the variations to the 19 July 2023 orders as sought should be made; secondly, whether the contempt application should proceed and thirdly, whether the matter should be set down for formal proof.

Background

[8]    The background to this matter is set out in summary in my decision of 19 July 2023.1 This judgment need not be encumbered with that detail, suffice to say that the parties’ relationship as directors and shareholders of the company is fraught. This has inevitably affected the company and its operations.

Should the proposed variations to the 19 July 2023 order be made?

Applicant’s submissions

[9]    In summary, Mr Kennedy submitted that a variation to the 19 July 2023 orders was necessary because Ms Stewart continually failed or refused to act in accordance with the orders. He contended that Ms Stewart refused to authorise trade creditor payments as and when they fell due and that this caused difficulties for the company.

1      Stewart v Stewart [2023] NZHC 1889.

As mentioned, Mr Kennedy also referred to Ms Stewart’s refusal to authorise payment of Mr Stewart’s salary even though there was an express order to that effect.

[10]   In addition, counsel argued that Ms Stewart refused to properly authorise the engagement of an accountant for the company, Mr Mayston, by deleting many of the standard terms of engagement including the disclaimer for liability for example. The result of this refusal was that the company’s tax returns could not be prepared. This then resulted in the company being on the verge of defaulting on its tax obligations, but for Mr Stewart’s payment through personal funds of $200,000 in an effort to meet those tax obligations. As well as attempting to remove standard terms of engagement for Mr Mayston, Ms Stewart also suggested that some of the accounting work could instead be completed by herself and for which the company should then pay her. This was opposed by Mr Stewart.

[11]   Further, in the context of authorising trade creditor payments, Mr Kennedy submitted that Ms Stewart had intimated that she would only make approvals if there was some personal benefit to herself. For example, Ms Stewart confirmed that she would only authorise payment to Mr Stewart on condition that she received an equivalent or greater payment.

[12]   Ms Stewart, counsel submitted, continued to refuse to act in the best interests of the company, contrary to  her  duties  as  a  director.  For  all  of  these  reasons, Mr Kennedy argued that a variation to the earlier orders was essential if the reputation of the company and its viability and value were to be maintained for the benefit of all its shareholders.

Respondent’s submissions

[13]   Mr Beech submitted that Ms Stewart was entitled to remuneration as a director, but Mr Stewart had simply refused to countenance such a payment. As a director, counsel contended, Ms Stewart was also entitled to question and challenge invoices if she considered that they needed questioning. More to the point, Mr Beech contended that Ms Stewart was simply asking for clarification from time to time. This was in the

interests of transparency, and she was entitled to make those inquiries of Mr Stewart as a director.

[14]   Counsel also argued that Ms Stewart was entitled to oppose the proposed variation. Mr Beech submitted  that  a  formal  application  should  be  made,  and Ms Stewart be given an opportunity to oppose that application and file evidence.

[15]   In addition, counsel contended that the interim interim orders are silent as to the level of remuneration that should be paid to Ms Stewart from PSHL. Mr Stewart’s stance that Ms Stewart is not entitled to payment from the company is plainly unreasonable, given his control of the company’s assets and the parties’ relationship property assets. Accordingly, Mr Beech submitted that Ms Stewart intends to seek a variation to the interim interim orders so that she is paid for her duties as a director of PSHL and needs time to do so.

Discussion

[16]   Plainly it is in the interests of both parties that the company continue to trade, comply with all of its legal obligations including taxation and employment law, enhance its profitability and provide returns to its shareholders. Any act or omission that in some way might impair or tarnish the company’s trading activities and its reputation must be avoided. At the risk of belabouring the point, I reiterate that it is not in the interests of Mr Stewart or Ms Stewart for the company to suffer diminution of its reputation and profitability.

[17]   I appreciate that Ms Stewart has, until relatively recently, attempted to engage with the proceedings as a lay person. This has caused some complications in terms of, for example, filing dates for a statement of defence and related matters. Doubtless, Ms Stewart’s financial position is precarious—she said so at a hearing before me on the original application by Mr Stewart. Having representation will assist her in engaging with the proceedings. I also appreciate that her ability to fund the litigation is compromised to an extent by the ongoing dispute between the parties. As I intimated, some accommodation on an interim basis must be appropriate, notwithstanding the suggestion that Ms Stewart’s parents are holding assets that may belong to the company or are matrimonial property.

[18]   Further, I accept the argument that as a director Ms Stewart is entitled to remuneration. What that should be will of course depend on the assets and liabilities of the company, its income and expenditure along with any other relevant factors. What I do not accept is that this should be anything like the salary paid to Mr Stewart as effectively fulltime company managing director. Equally, the assertion that Ms Stewart should get nothing is also misconceived. Counsel should try and reach agreement on this issue as soon as possible and failing that can file memoranda within 10 days.

[19]   Regarding the appointment of the company accountant, Ms Stewart was not entitled to delete the standard terms of engagement. Mr Mayston will be engaged as the company accountant, not Mr Stewart’s personal accountant. Mr Mayston will have his own obligations and duties as a professional. Liability for his fees are properly a matter for the company rather than the directors individually, unless they have seriously misconducted themselves in the exercise of their duties. In other words, the appointment of Mr Mayston should have been a simple matter to attend to. That Ms Stewart appears to be displaying “micromanagement” behaviours in this context is counterproductive. I accept that this preliminary impression is based only on Mr Stewart’s evidence and not that of Ms Stewart who will eventually have her own version of events to recount.

[20]   Rather than engaging in further communication between the parties, given the lapse of time, and the position the company now finds itself in regarding tax, I consider that it is appropriate for the 19 July 2023 orders to be varied to enable Mr Stewart to engage Mr Mayston without reference to Ms Stewart. That is not to say that all of the usual engagement between the directors and Mr Mayston should discontinue. It is simply to enable Mr Mayston to be properly appointed and paid and for him to complete the tax returns as a matter of urgency.

[21]   To avoid doubt, he should provide Ms Stewart with copies of all relevant reports and statements as are prepared in the normal course of business, but this should not be seen as an opportunity for Ms Stewart to seek to litigate every transaction with Mr Mayston. Certainly, she can record her concerns and any objections and provided they are tabled with him in a timely way, Mr Mayston should give those matters due

consideration. But ultimately, his role as accountant will be to get the company’s tax and related affairs in order urgently.

[22]   Mr Stewart’s salary was authorised by me on 19 July 2023. Again, I see no benefit in further exchanges between the parties over if and when it should be paid. With respect to Ms Stewart, I also consider it disingenuous for her to suggest that there was no timeframe on the 19 July 2023 order regarding this payment. Read in the totality of the judgment, it ought to have been obvious that payment was to be immediate to Mr Stewart. I therefore authorise Mr Stewart to make that salary payment to himself as originally ordered and on an ongoing basis pending settlement of the issues between the parties.

[23]   As to the issue of reimbursement of advances made by Mr Stewart to support the company’s activities, while I agree in principle this is appropriate, in fairness,  Ms Stewart should be given opportunity to review that reimbursement request and seek clarity on any matters that may be of relevance. If he has not done so already, Mr Stewart should file a summary of the reimbursement he seeks along with relevant supporting documents. Once in receipt of same, Ms Stewart will have 10 working days to file any objections should any queries remain unresolved.

[24]   In short, the variations sought by Mr Stewart should be granted to, primarily, protect the interests of the company. In this context, I appreciate Ms Stewart’s concern that the issue should be ventilated fully before any further orders are made, including to vary the original orders. However, I consider that the evidence filed to date supports and variations as sought by Mr Stewart. I should stress that this is on an interim basis only, pending a full hearing of the substantive issues as between the parties. It is intended simply to deal with the immediate challenges that have been identified in the evidence.

Should the application for contempt proceed?

Applicant’s submissions

[25]   Mr Kennedy submitted that the contempt application was entirely proper given Ms Stewart’s failure, or refusal, or both, to comply with the Court’s 19 July 2023

judgment. Despite repeated requests for her to do so, according to counsel, Ms Stewart has continued to obstruct the company’s activities by her conduct which is a contempt. He asked that a half day fixture be allocated as soon as possible followed by a formal proof hearing date.

Respondent’s submissions

[26]   Mr Beech argued that the contempt application was unnecessary and that his client opposed it along with any suggestion she should be ordered to pay a fine. In any event, counsel proposed a timetable for the setting down and hearing of that application.

Discussion

[27]   It is trite to record that Mr Stewart is entitled to bring the contempt application just as Ms Stewart is equally permitted to take steps to oppose it. Counsels’ proposed timetables seems sensible, subject to amendment.

Should the plaintiff’s claim be set down for formal proof?

[28]   I acknowledge Ms Stewart is well overdue for filing her statement of defence to Mr Stewart’s 2 June 2023 claim. However, in light of the fact she has recently retained representation, I do not consider it appropriate that the matter is set down for formal proof. Indeed, if it were, it would be likely an application for leave to file a statement of defence would be made and granted, which would make the present application redundant. It is a far better course for the defendant to belatedly file her statement of defence.

[29]   Under r 1.19, I extend the date for filing a statement of defence to the 2 June 2023 claim to 24 January 2024. The plaintiff’s application for formal proof is stayed.

Decision

[30]Mr Stewart is authorised to:

(a)engage Mr Mayston as company accountant on standard terms and conditions.

(b)pay trade creditors as and when they fall due. Mr Stewart is to provide a schedule of proposed payments to Ms Stewart 48 hours before they are to be paid. Ms Stewart is entitled to query or object to any payments and any such query or objection is to be recorded by Mr Mayston as company accountant.

(c)authorise payment of his salary as contemplated in the 19 July 2023 orders.

(d)make payment of an appropriate director’s fee and reimbursement of actual and reasonable expenses incurred by Ms Stewart acting as a director of the company.

[31]Directions are now issued as follows:

(a)The defendant is to file and serve an affidavit in support of notice of opposition to the contempt of court application by 26 January 2024.

(b)The plaintiff and defendant are to file and serve their respective applications and any further affidavits in support to vary the 19 July 2023 orders by       26 January 2024.

(c)Notices of opposition and affidavits in support in respect of the applications to vary the 19 July 2023 orders are to be filed and served by 9 February 2024 with affidavits in reply to be filed and served by 16 February 2024.

(d)A hearing to determine the contempt of court application should be set down on the first available date following 16 February 2024.

(e)The defendant must file her statement of defence to the 2 June 2023 claim by

24 January 2024.

[32]Costs are reserved.

Harvey J