Stewart v Stewart
[2023] NZHC 1889
•19 July 2023
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2023-470-59
[2023] NZHC 1889
UNDER Part 18 of the High Court Rules 2016 and section 174 of the Companies Act 1993 IN THE MATTER
of removal of a director
BETWEEN
PETER DAVID STEWART
Plaintiff
AND
LIJIA STEWART
Defendant
Hearing: 18 July 2023 Appearances:
A T J Morris for Plaintiff
L Stewart, Defendant in person
Judgment:
19 July 2023
JUDGMENT OF HARVEY J
This judgment was delivered by me on 19 July 2023 at 4 pm pursuant to r 11.5 of the High Court Rules.
Date: …………………..
(Deputy) Registrar
Solicitors: Morris Legal, Auckland
Counsel: Zane Kennedy, Barrister, Auckland And to:
The Defendant
STEWART v STEWART [2023] NZHC 1889 [19 July 2023]
Introduction
[1] Peter Stewart and his former spouse Lijia Stewart (also known as Luwina/Lijia Guo) are directors and shareholders of a company called Peter Stewart Holdings Limited (PSHL).1 According to Mr Stewart, PSHL was incorporated in 2006 and operates kiwifruit and avocado orchards near Katikati in the Western Bay of Plenty. By his affidavit in support sworn on 2 June 2023, Mr Stewart says he met Ms Stewart in 2005 and that she was made a director of PSHL in 2008. PSHL’s shareholders are Mr Stewart, Ms Stewart and the trustees of the P & L Stewart Family Trust (Mr Stewart, Ms Stewart and Bountiful Ventures No 16 Ltd).
[2] On 2 June 2023 Mr Stewart applied for an interim injunction requiring Ms Stewart to, effectively, act in the best interests of the company by adhering to her directors’ duties; by cooperating with him over the payment of staff, creditors and the Inland Revenue Department in the normal course of business; and by approving the appointment of an independent accountant to complete PSHL’s accounts. He also seeks orders retraining Ms Stewart from obstructing the company’s ordinary trading activities.
[3] Mr Stewart seeks these orders because he asserts that Ms Stewart’s ongoing failure to cooperate is affecting PSHL’s reputation and its ongoing viability which in turn erodes shareholder value. Overall, Mr Stewart argues Ms Stewart’s conduct is placing PSHL at risk. Mr Stewart’s substantive proceedings claim, in summary, that Ms Stewart has been improperly taking money from PSHL during the time of their marriage amounting to hundreds of thousands of dollars while denying him an appropriate manager’s salary for his role.2 Post separation, he claims that Ms Stewart has been obstructive to the proper and ongoing operation of PSHL to the detriment of the company, contrary to her duties as a director.
[4] At the case management conference before me on 18 July 2023, Mr Stewart sought “interim interim” orders effectively granting the injunctive orders as sought until the application could be heard in full.
1 For convenience, I will refer to the parties as Mr Stewart and Ms Stewart respectively.
2 The statement of claim seeks orders under s 174 of the Companies Act 1993, or in the alternative orders requiring Ms Stewart to act.
[5] Ms Stewart opposes the application and the orders now sought. She argued that it should be Mr Stewart who is removed as a director for his own misconduct. She denied Mr Stewart’s allegations and claimed that she had offered to act responsibly on certain conditions but that this had been refused. Ms Stewart also highlighted that there were ongoing proceedings in the Family Court and the District Court as a result of Mr Stewart’s conduct, for which she needed to take advice. This required funds from the company which Mr Stewart had refused. Ms Stewart also opposed the appointment of the proposed independent accountant because she claimed he was conflicted. She then sought an adjournment which I declined.
[6] Bruce Lee is the sole director of Bountiful Ventures No 16 Ltd. On 15 June 2023, Associate Judge Sussock directed that Bountiful Ventures No 16 Ltd be served with proceedings (as trustee of the P & L Family Trust), to be effected by service on Mr Lee.3 He is also the accountant for PSHL and the P & L Stewart Family Trust.
[7] After hearing from Mr Morris, and Ms Stewart along with Mr Lee in person, I granted the application for an “interim interim” injunction with reasons to follow. I now provide those reasons.
Should the application for an injunction be granted?
Plaintiff ’s submissions
[8] Mr Morris submitted that the plaintiff is the managing director of the company, and that the defendant is his former wife. Due to her uncooperative behaviour, he contended, the company is behind in payment of wages, creditors and tax to the Inland Revenue in excess of $300,000. Much of those costs have been paid either personally by Mr Stewart, according to counsel, or via advances through the Duckpond Partnership he maintains with his mother. Mr Morris underscored that some $600,000 had been advanced from the partnership to the company to date but that this was no longer possible.
3 Companies Act 1993, s 387(1)(a).
[9] It is also important, he argued, that an independent accountant be appointed to complete the company’s accounts urgently, as this was highly relevant to its tax position, and despite the ongoing opposition of the defendant over assertions of conflict. Mr Morris submitted that the proposed accountant had already completed work for the company and moreover had been recommended by the company’s bank.
[10] Counsel highlighted that the Court should consider that there is a serious question to be tried and that the balance of convenience clearly favours the plaintiff. He underscored that the balance of convenience is more pertinent in this case because the company needed to ensure that its obligations were being met including to its employees, creditors, bankers and the IRD. Ms Stewart’s ongoing intransigence and uncooperativeness was damaging to the company, and therefore all parties, and is why the “interim interim” injunction was necessary and had to be issued immediately, in Mr Morris’ submission. He referred to Zhou v Lu where similar orders were made.4
[11] In response to Ms Stewart’s submissions, Mr Morris rejected the assertion that the plaintiff had used a protection order improperly. He also pointed out that the water consent proceedings raised by Ms Stewart related directly to the company’s dysfunction as a result of her refusal to co-operate.
[12] In short, Mr Morris submitted that an “interim interim” injunction was appropriate in order to preserve the company, its assets and its ability to continue to operation successfully. Counsel also pointed out that Ms Stewart had failed to file a notice of opposition. Regarding the issue of whether the trust beneficiaries should be served, namely the plaintiff, the defendant and their children who are minors, Mr Morris argued that this was unnecessary.
[13]Counsel opposed the adjournment as sought by the defendant.
Ms Stewart’s submissions
[14] Ms Stewart, who is unrepresented, submitted that it is the plaintiff who should be removed as a director and not her. She asserted that counsel had applied case law
4 Zhou v Lu [2016] NZHC 1865.
incorrectly but more importantly, that she argued that she needed time to consider other relevant case law, and to get advice. Ms Stewart contended that she was unable to do so without any advances from the company to which she felt she was entitled. She also pointed out that there were other proceedings on foot including before the Family Court and in the District Court about the company taking water without a resource consent. Ms Stewart asserted that the company was insolvent.
[15] In addition, Ms Stewart submitted that she has complied with her duties as a director, she has concerns over the plaintiff’s management and she has raised the issues numerous times. It is those concerns, she asserted, that led to the present application. As mentioned, Ms Stewart highlighted that there are current proceedings under the Property (Relationships) Act 1976 and Family Proceeding Act 1980 which address these and related issues. As to her personal circumstances, Ms Stewart submitted that she lives on a benefit and cannot afford counsel because Mr Stewart had “cut off my credit cards twice without a valid reason” and that she received no income from the trust.5 She claimed that this was unlike the plaintiff, who “has all his daily cost [sic] met by our company's bank account.”
[16] She also said that her proposals for an independent accountant were simply ignored by the plaintiff. She claimed to have been willing to attend on the company at its premises to take steps to resolve the issues regarding for example, the resource consent, but that this had been refused because of the protection order that the plaintiff had secured. Ms Stewart then claimed that company was insolvent and that Mr Stewart had been transferring company assets for his own use. She also opposed the plaintiff’s payment of a salary through PSHL by not authorising its payment.
[17] In addition, Ms Stewart requested an adjournment so that she could obtain legal advice and repeated that she needed funds for that purpose. She contended that her current lawyer in the Family Court was not available or suitable for the present proceedings and cannot help.
5 Email from Ms Stewart to the Deputy Registrar, Rotorua High Court dated 12 July 2023.
Legal principles
[18] Sections 164 and 170 of the Companies Act 1993 enable the Court to make orders to prohibit and require, respectively, action by a director:
164 Injunctions
(1) The court may, on an application under this section, make an order restraining a company that, or a director of a company who, proposes to engage in conduct that would contravene the constitution of the company or this Act from engaging in that conduct.
(2) An application may be made by—
(a) the company; or
(b) a director or shareholder of the company; or
(c) an entitled person.
(3) If the court makes an order under subsection (1), it may also grant such consequential relief as it thinks fit.
(4) An order may not be made under this section in relation to conduct or a course of conduct that has been completed.
(5) The court may, at any time before the final determination of an application under subsection (1), make, as an interim order, any order that it is empowered to make under that subsection.
170 Actions by shareholders to require directors to act
Notwithstanding section 169, the court may, on the application of a shareholder of a company, if it is satisfied it is just and equitable to do so, make an order requiring a director of the company to take any action that is required to be taken by the directors under the constitution of the company or this Act and, on making the order, the court may grant such other consequential relief as it thinks fit.
[19] The s 164 jurisdiction is independent and is not confined to the usual considerations in equity for injunction applications.6 It should be exercised to achieve the purposes of the Act; however, the usual considerations of the balance of convenience and whether there is a serious question to be tried are relevant, as does the overall interests of justice.7 The s 170 jurisdiction enables to Court to make orders where it would be “just and equitable” to do so.
6 JJ International Ltd v Streetsmart Ltd (2005) 9 NZCLC 263,784 (HC) at [19].
7 At [20].
[20] As Palmer J set out in Zhou v Lu & Ors as cited by counsel, an interim injunction under s 164 is prohibitory and cannot apply to past conduct.8 In addition, Palmer J emphasised that the s 164 power provides a remedy where the integrity of a company is or is likely to be compromised.
[21] As set out in s 164(5), the Court may make interim orders before a final determination of the s 164 application. I am satisfied that s 170 can also be exercised in an interim manner.9 In relation to “interim interim” orders Palmer J noted:10
[18] There is no magic in an “interim interim” injunction that makes it qualitatively different from an interim injunction. The difference will usually be that an interim interim injunction is likely to be in force for a shorter period of time than an interim injunction. And the balance of convenience may be a more important consideration than the strength of the underlying cases, since an interim interim injunction will usually be based on less evidence.
Discussion
[22] It is well settled that the directors are obliged to act in the company’s best interests.11 This must include payment of staff, trade creditors and tax obligations as and when they fall due. They must also act responsibly. This will include responding to litigation that may have been initiated by any relevant enforcement authorities. Directors are also required to make decisions on company financial stability and solvency, its working capital position in parallel with income and expenditure and over its future operations. In the present climate of allegation and counter allegation against a backdrop of marriage dissolution, adherence with these obligations can become challenging.
[23] The parties’ marriage broke down some time ago, as their separation in February 2021 confirms. While I acknowledge that Ms Stewart says she has proceedings on foot in the Family Court, and that like Mr Stewart, she makes a number of serious allegations and claims regarding PSHL, based on the current positions, a solution by agreement appears remote. Resolving their former relationship will inevitably take time. PSHL should be shielded from that unravelling of matrimonial
8 Zhou v Lu, above n 4; and JJ International Ltd v Streetsmart Ltd (2005) 9 NZCLC 263.
9 See Zhou v Lu, above n 4.
10 At [18].
11 Companies Act 1993, s 131.
interests so that value is preserved for the benefit of all its shareholders. That includes the plaintiff and defendant. In short, I accept that the present circumstances that PSHL finds itself in are fraught and untenable – the status quo cannot continue. I agree with the submission that the current state of affairs is likely to threaten the company’s reputation and viability.
[24] In these circumstances I am satisfied it is appropriate to grant the “interim interim” orders. The balance of convenience favours it, especially in light of the undertaking as to damages provided by Mr Stewart. Regarding the orders relying on s 170 it is just and equitable that Ms Stewart be required to authorise payments that are properly payable.
[25] On reflection, however, I am not satisfied that, at this stage of the proceedings, it is critical that Mr Stewart be paid the proposed salary he is seeking, given the background. It does not appear that PSHL’s position will become even more dire if Mr Stewart’s salary is not paid in the intervening period between now and the interim application or substantive proceedings hearing. This issue of Mr Stewart’s role and employment arrangements are clearly a point of strong contention between the parties and Ms Stewart should have the opportunity to challenge its terms, at either the interim application hearing or substantive hearing.
[26] That said, some allowance for his ongoing work for the company should be considered, notwithstanding Ms Stewart’s assertion that Mr Stewart is having his costs met from PSHL in any event. I accept that an interim allowance of fifty percent of the proposed salary should be payable until the matter returns to Court or until the parties reach their own agreements, whichever occurs first.
Decision
[27] Pursuant to ss 164 and 170 of the Companies Act 1993, pending resolution of the interim injunction application in these proceedings, orders are now issued that:
(a)Lijia Stewart must:
(i)authorise the appointment of Tim Mayston of Mayston Partners Ltd as the Peter Stewart Holdings Limited (PSHL) accountant;
(ii)authorise payment of all supplier invoices within 72 hours of receiving advice in writing from or on behalf of Peter Stewart that the invoices are properly payable;
(iii)authorise payment of employee wages and contractor invoices to PSHL within 72 hours of receiving:
(1)advice by or on behalf of the plaintiff that the wages and invoices are properly payable;
(2)a copy of the corresponding timesheets, where relevant; and
(3)advice (which can be contained in a bank batch report) as to the sums to be paid;
(iv)authorise payment of fifty per cent of the plaintiff’s salary as orchard manager and managing director of PSHL in the sum of
$196,000 per annum on an interim basis until further order of the Court; and
(v)act jointly with the plaintiff in exercising her powers as director in the best interests of PSHL.
(b)Ms Stewart is restrained from:
(i)acting in breach of her director’s duties under ss 131, 133 and 137 of the Companies Act 1993; and
(ii)interfering in the day-to-day management of PSHL and/or the management decisions of the plaintiff in respect of PSHL.
(c)Leave is reserved to any of the parties to apply to vary these orders on two working days’ notice.
[28]Costs are reserved.
Harvey J