Strachan v Denbigh Property Limited HC Palmerston North CIV 2010-454-232
[2010] NZHC 1637
•25 August 2010
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2010-454-232
IN THE MATTER OF the Companies Act 1993
BETWEEN ELIZABETH GRACE STRACHAN Plaintiff
ANDDENBIGH PROPERTY LIMITED Defendant
Hearing: 12 August 2010
Appearances: P.B. Churchman - Counsel for the Plaintiff
R.A. Moodie - Counsel for Mrs S.P. Moodie
Judgment: 25 August 2010 at 4.00 pm
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by me
on 25 August 2010 at
4.00 pm pursuant to r 11.5 of the High Court Rules.
Solicitors: Rainey Collins, Solicitors, PO Box 689, Wellington
Moodie & Co, Lawyers, PO Box 376, Feilding
EG STRACHAN V DENBIGH PROPERTY LIMITED HC PMN CIV-2010-454-232 25 August 2010
Introduction
[1] This proceeding involves an application by the plaintiff, Elizabeth Grace Strachan (“Ms Strachan”) for an order that the defendant company, Denbigh Property Limited (“the company”) be placed into liquidation in reliance on the just and equitable ground contained in s 241(4)(d) Companies Act 1993. Suzanne Patricia Moodie (“Ms Moodie”) is a shareholder in the company (jointly with her husband) and on 30 April 2010 she filed an application first, to restrain publication of advertising and secondly, to stay any further proceeding in relation to the liquidation application. It was this application which came before me for hearing on 12 August
2010.
[2] The application by Ms Moodie is opposed by Ms Strachan.
Background Facts
[3] The company, Denbigh Property Limited, has two equal shareholders: (a) Ms Strachan as to a 50% interest;
(b)Ms Moodie and her husband Robert Alexander Moodie (“Mr Moodie”) jointly as trustees of the Moodie Family Trust – as to the other 50% interest.
[4] The company has two directors, Ms Strachan and Mr Moodie.
[5] The only asset of the company excluding its bank account would appear to be a property located at 2B Denbigh Square, Feilding (“the property”). This property was purchased in September 2005 for $195,000.00 and the purchase price was made available to the company by equal contributions from the 50% shareholders. It appears that certain alterations and repairs to the property were subsequently carried out again with funds provided by the shareholders.
[6] Ms Strachan maintains based on calculations which, as I understand it, have been undertaken by the Moodies, that her share of the contribution to these additional property repairs and alterations totals some $27,254.89.
[7] Some time after their purchase in 2005 a significant portion of the premises on the property were leased by the company to Moodie & Co, a law firm of which Mr Moodie is the principal. (At the time Ms Strachan worked as an “Associate” for or with Moodie & Co, but on some basis that the parties have been unable to agree upon since.) A Deed of Lease was prepared, signed and witnessed around the time of the purchase. This document, although incomplete, appears to show that part of the premises including two car parks were leased to Moodie & Co (Mr Moodie) for a term which probably commenced on 20 October 2005 at an annual rental of $30,000.00 per annum plus GST. This rental was to be paid monthly in advance by payments stipulated in the lease of $2,500.00 per month for rent plus $278.00 for GST. These monthly rent payments were stipulated to commence on 20 October 2005 and made monthly thereafter.
[8] The Deed of Lease document, however, did not provide for a term of the lease, any rights of renewal, a final expiry date, or insurance or outgoings details.
[9] Nevertheless, Mr Moodie, through his firm Moodie & Co appeared to occupy that part of the premises from some time after October 2005 up to the present time. Whether or not rent was paid for all this period appears to be a matter of some dispute. There is a suggestion that at one point a variation of the lease arrangement was entered into whereby Moodie & Co would cease to pay rental for its share of the premises during a period when Ms Strachan occupied rent-free another portion of the premises as a residential flat. This arrangement, however, appeared to come to an end sometime in late 2007 or early 2008.
[10] Towards the end of 2009 or early in 2010 it appears that Mr Moodie without reference to Ms Strachan arranged a tenancy for the company of that portion of the premises which were not occupied by his firm Moodie & Co. This tenancy is with Live Properties Limited, a real estate agency.
[11] That Live Properties Limited tenancy commenced early in 2010 and continues to run but it appears that the rental which has been paid since then by the tenant has not been deposited into the company bank account. Rather, in his submissions before me, Mr Moodie indicated that he had arranged a separate bank account under his
control in the name of “Denbigh Property” into which this rent has been paid. He indicated this was because the company’s bank account had effectively become “frozen” due to the dispute between Ms Strachan and the Moodies.
[12] Two additional matters need to be mentioned at this point. The first is that in
2009 Ms Strachan brought a claim in the Employment Court against Moodie & Co and/or their various entities. That proceeding was the subject of a lengthy hearing at the Employment Court which finished in May 2010 with the decision of that Court reserved. The decision is apparently still awaited.
[13] Secondly, Mr Moodie has brought a claim in this Court against Ms Strachan and others in defamation, these proceedings being filed in 2007. A substantive hearing of these defamation proceedings is yet to take place.
[14] Finally, Ms Strachan complains that in her words the Moodies have evidenced an intention to bring further civil or criminal claims against her and/or to make further complaints about her to the New Zealand Law Society. All this emanates from a relationship which Ms Strachan formed with the Moodies from about 2005 when the property was purchased and Ms Strachan worked as a lawyer in some form as either an employee, an “Associate” or otherwise with Moodie & Co up to about December
2006. There seems to be little doubt that this relationship ended in acrimony.
Counsel’s Arguments and My Decision
[15] As I have noted above, the opposed application for consideration before the Court here is one brought by Ms Moodie seeking leave and for orders first, restraining advertising of Ms Strachan’s application to place the company into liquidation and secondly, staying those liquidation proceedings.
[16] The application is made pursuant to r 31.11 High Court Rules which states:
31.11 Power to stay liquidation proceedings
(1) If an application for putting a company into liquidation is made under rule 31.3, the defendant company, or, with the leave of the court, any creditor or shareholder of that company or the Registrar of Companies, may, within 5 working days after the date of the service
of the statement of claim on the defendant company, apply to the court—
(a) for an order restraining publication of an advertisement required by rule 31.9 or any other information relating to that statement of claim; and
(b) for an order staying any further proceedings in relation to the liquidation.
(2)The court must treat an application under subclause (1) as if it were an application for an interim injunction and, if it makes the order sought, it may do so on whatever terms the court thinks just.
(3) The inherent jurisdiction of the court is not limited by this rule.
[17] The general principles to be applied in considering applications under r 31.11 are noted in McGechan on Procedure at para HR31.11.02 as follows:
HR31.11.02 Applicable principles
......................................
In Nemesis Holdings Ltd v North Harbour Industrial Holdings Ltd (1989) 1 PRNZ
379, at p 385, Wallace J provided a classic summary of the principles:
(a) The Court has an inherent jurisdiction to stay winding-up proceedings where the debt upon which such proceedings are founded is the subject of genuine dispute. In those circumstances the plaintiff cannot show it has the status of a creditor or that there has been neglect by the company to pay.
(b) The jurisdiction is an inherent one to prevent abuse of process. There is no inflexible rule.
(c) The governing consideration is whether the proceedings suggest unfairness or undue pressure.
(d)It is a serious matter to stay winding-up proceedings, so the decision to do so is never made lightly. The onus is on the applicant and it is normally necessary to demonstrate “something more” than the balance of convenience considerations which are usually considered on an application for interim injunction. If the defendant company has had an opportunity to file appropriate affidavits, such defendant is required to establish a strong prima facie case of the existence of a genuine dispute on substantial grounds, or show that there are clear and persuasive grounds for a stay.
The power to restrain advertising may be exercised separately from the power to stay the proceeding: Walls v Arbor Real Ltd (1994) 8 PRNZ 61; 7 NZCLC
260,553.
[18] And, in applications such as the present where the winding-up order sought is based on a break down in the relationship between shareholders in a company, McGechan on Procedure at para HR31.11.03 goes on to note:
HR31.11.03 Abuse of process
Where the application for winding up is based on a breakdown in the relationship between persons involved in the company, there may be little point in staying the matter pending a striking-out application. The best course of action may be to resolve the issue on full evidence: Seapark Group Ltd v Convertech Group Ltd (1991) 5 NZCLC 66,975. See also Automatic Parking Coupons Ltd v Time Ticket International Ltd (1997) 10 PRNZ 600, where advertising was stayed in a complex proceeding being litigated in tandem with a substantive claim.
[19] But it is also clear that an order for stay and to restrain advertising may be granted under r 31.11 where the Court finds that the liquidation proceeding has been instituted for a collateral purpose – see BNZ v Manor Inns Group Ltd HC, Auckland,
30 November 1992, Master Kennedy Grant M146/92.
[20] The present application under r 31.11 is brought by Mrs Moodie in her capacity as a shareholder of the company. Rule 31.11 notes that, with the leave of the Court, any creditor or shareholder of the company may bring such an application. Here, Mrs Moodie is simply one of the joint owners as a bare trustee of a 50% shareholding in the company, that shareholding being held by the Moodie Family Trust. Strictly speaking the present application should therefore have been brought in the names of both trustees, Mrs Moodie and Mr Moodie, who together as trustees of the Family Trust jointly hold this 50% shareholding. Nevertheless, under the circumstances here, I am prepared for present purposes to proceed on the basis that the present application is properly brought and now grant leave pursuant to r 31.11(1) for that application to proceed.
[21] One further preliminary matter needs to be mentioned. This is the comment noted at para HR31.11.13 of McGechan on Procedure that in proceedings such as the present, which involve allegations of shareholder oppression and thus are akin to proceedings under s 174 Companies Act 1993, there appears to be something of a lacuna in r 31.11 in that it does not provide for the restraint of advertising of proceedings under this section. Notwithstanding this, McGechan at HR31.11.13 does go on to note that:
The Court nevertheless has the inherent jurisdiction to make such an order and, when such a claim is linked with an application for liquidation, may exercise the powers under r 31.11 in respect of the entire proceeding: Walls v Arbor Real Limited (1994) 8 PRNZ61 .... .
[22] Turning now to the substantive liquidation proceedings which Ms Moodie seeks to stay, as I have noted above, the present application by Ms Strachan to place the company into liquidation is brought under “just and equitable” grounds in terms of s 241(4)(d) Companies Act 1993. Brookers Company & Securities Law at para CA241.03(4) addresses these grounds and provides (in part):
“(4) Just and Equitable Grounds
Section 241(4)(d) empowers the Court to appoint a liquidator on just and equitable grounds. Ebrahimi v Westbourne Galleries Ltd [1973] AC 360; [1972] 2 All ER 492 (HL) established influential guidelines. Lord Wilberforce emphasised that the Court should not be too timorous in giving full force to the words of the provision. His Lordship commented (at p 379; p
500) that a company is more than a legal entity and that the rights, expectations, and obligations of individuals within the company should be recognised:
“The ‘just and equitable’ provision does not … entitle one party to disregard the obligation he assumes by entering a company, nor the court to dispense him from it. It does, as equity always does, enable the court to subject the exercise of legal rights to equitable considerations; considerations, that is, of a personal character arising between one individual and another, which may make it unjust, or inequitable, to insist on legal rights, or to exercise them in a particular way.”
In Jenkins v Supscaf Ltd 26/4/06, Heath J, HC Auckland CIV-2005-404-
5222, Heath J conducted a review of case law relevant to the application of s
241(4)(d) (in the context of a small joint venture company where one party had lost trust and confidence in the other) and held that s 241(4)(d) places no fetter upon the discretion of the Court, either in relation to the factors justifying an order, or in relation to the circumstances where an order must be refused. The Court proceeded on the basis that it must balance all relevant factors available for consideration at the time the order was sought. In West v Shaftspry Ltd 3/4/09, Associate Judge Sargisson, HC Auckland, CIV-2008-
404-921, the Court ordered the company into liquidation following evidence of the “collapse of the relationship between the two shareholders and the contentious manner in which the company has transacted its business affairs since” and noted that there was no real benefit in delaying the company’s winding up.
A party who wishes to rely on the “just and equitable” provision must come to Court with clean hands. Thus, if the breakdown in trust or the deadlock is caused by the conduct of the petitioner, he or she will not be able to rely on s
241(4)(d). In Vujnovich v Vujnovich [1989] 3 NZLR 513; (1989) 4 NZCLC
65,186 (PC), Lord Oliver pointed out that this rule applied where the misconduct was the cause of the breakdown in confidence and not merely where it is a symptom of the breakdown. Where there is no clear cut apportionment of blame, the real determinant for granting relief should be the existence of the breakdown, not the cause of it: Re Rongo-ma-tane Farms Ltd (1987) 3 NZCLC 100,145.
In the past, if the Courts believed a remedy other than liquidation was reasonably available to the applicants, it would decline to order liquidation: s
220(2) unamended 1955 Act; Re Gerard Nouvelle Cuisine Ltd (1981) 1
NZCLC 95,016. Although this is no longer a requirement under the Act, it is likely that the Courts will regard the question of whether the applicants are acting unreasonably in seeking liquidation rather than another remedy, as a
factor in evaluating whether liquidation would be just and equitable. In Cornes v Taylor (t/a Kawerau Hotel (1994) Ltd) (1999) 8 NZCLC 261,815, the Court held that neither justice nor equity to the plaintiff required liquidation of the defendant company while his position could be satisfactorily protected by the making of orders under s 174. The more recent case of The Orthodontic Centre Ltd v M D Courtney Orthodontics Ltd
14/9/07, Gendall J, HC Palmerston North CIV-2006-454-238; CIV-2006-
454-365; CIV-2007-454-419, came to the same result. Gendall J quoted the observations of Regan J in Marryatt v PC Home Hire Ltd [2002] 9 NZCLC
263,033 with approval: “[A]n order for the liquidation of a company [on just and equitable grounds] is seen as something of a last resort and if it is more appropriate that an order under s 174 requiring the purchase of shares because it is just and equitable to do so, then it is to be preferred.”
[23] It is clear there is no fetter upon the Court’s discretion when considering applications under s. 241(4)(d) of the Act in relation to the factors justifying an order for liquidation – Jenkins v Subscaf Limited. Orders for liquidation under these “just and equitable” grounds have been made where a serious deadlock has arisen between directors and shareholders of a company. A breakdown in personal relations between those parties has also been seen to justify the making of a liquidation order – Re Gerard Nouvelle Cuisine Limited and Re Rongo-ma-Tane Farms Limited.
[24] Deadlocks may also arise when the principal shareholders of a company are not able to work together in any way for the benefit of the company – Jaycue Investments Limited (in liquidation) v J Fox Developments Limited, 2 April 1996, HC Auckland, Tompkins J, M952/95 and West v Shaftspry Limited.
[25] Similarly if there is a justifiable loss of confidence in the conduct and management of a company the Court may find it is just and equitable to appoint a liquidator – Morgan Roche Limited v Registrar of Companies [1987] 3NZCLC
100,189.
[26] Turning now to the substantive claim before the Court, at the outset I need to say that on its face the evidence which is currently before me would appear to show that a serious deadlock has arisen between the directors and shareholders of the company, that the relationship between the shareholders has totally collapsed and it would be quite unrealistic to advance any argument for a continuing business involvement between the parties. There is also some suggestion in my view reasonably made here, that the manner in which the company and its directors have
transacted its business since 2005, on further enquiry, may prove to be somewhat contentious and require further investigation.
[27] I say this bearing in mind the following matters relating to the breakdown in the relationship between the shareholders:
(a)The outstanding and obviously acrimonious claim noted at para [12] above brought in the Employment Court by Ms Strachan against Moodie & Co which concluded in May 2010 and a decision on which is still awaited.
(b)The defamation action brought by Mr Moodie against Ms Strachan in this Court in 2007 noted at para [13] above.
(c)The numerous and detailed accusations on both sides in the many affidavits filed in this and other proceedings relating to allegations bordering on dishonesty, fraud, theft and the like, made by one party against the other.
(d)The fact, as I understand it, that at least one formal complaint has been made to the Police by one party here against the actions of the other.
Although these ultimately will be matters for a full hearing of Ms Strachan’s liquidation application, on their face it would seem that the significant degree of trust which existed between the parties when the company was formed, the property was purchased and they commenced their relationship as part of what was essentially a form of joint venture arrangement, would appear to have gone completely now. This relationship would seem to be the subject of a complete and irretrievable breakdown.
[28] In Vujnovich, a company structure between three brothers who were equal shareholders was found originally to have been a partnership type concept for the contracting and property work in which they engaged. Although in that case, originally orders were sought under the then equivalent of s 174 Companies Act 1993 (as prejudiced shareholders) because the breakdown in the relationship between the
brothers meant that any type of working relationship was impossible, the Court found that as the actions complained of were the acts of individual personalities involved with the company, rather than the company itself, it concluded that the only sensible order to make was to place the company into liquidation. These orders in the High Court were confirmed in the Court of Appeal.
[29] In Jenkins v Supscaf Limited a company was formed as part of a joint venture arrangement which involved a substantial degree of trust between the parties. There, Heath J reviewed the history of the phrase “just and equitable” and held that the applicant party needed to demonstrate both a justifiable lack of trust and confidence and also that liquidation was the only appropriate method of bringing their relationship to an end. In that case, the justification was made out and the factors argued by the shareholders who opposed the order including detriment to the company and possibly a reduced value in its assets were not enough to counter the Court’s conclusion that liquidation was appropriate.
[30] In the case before me, at this stage there would appear to be elements like those that have existed in other partnerships or joint ventures which have broken down irretrievably. In my view, there are also issues of trust and confidence as well as a clear deadlock between Ms Strachan on the one hand and the Moodies on the other that need further exploration at a full hearing.
[31] On its face, and given the magnitude of the serious allegations made here by each party against the other and the clear level of distrust between them, there would appear to be a fundamental breakdown in the relationship between the parties such that a dissolution of what is effectively a relationship in the nature of partnership in the terms outlined in Ebrahimi v Westbourne Galleries Limited would be justified. This matter clearly needs to proceed to a full hearing.
[32] This conclusion, in my view, is supported by the following additional matters regarding the position of the company itself, a position which as I see it may very well raise some real concerns:
(a) No meetings of the Board of Directors of the company have taken place for some years, despite what are said by Ms Strachan to be attempts she has made as a Director to arrange these meetings.
(b)Significant decisions as to the operation of the company (including for example the lease of a portion of the premises to Live Properties Limited) have been taken by Mr Moodie as one director alone, it is said without proper reference to the other director, Ms Strachan.
(c)No annual accounts have apparently been prepared for the company since 2007 and it may well be that GST and taxation issues arise.
(d)As I have noted at para [11] above, a separate bank account under the control of Mr Moodie has been opened into which rental monies clearly earned by the company have been paid thereby bypassing the company bank account – albeit Mr Moodie contends that these funds have been used for company purposes.
(e) Generally from the present evidence before the Court it would appear that the affairs of the company and those of other parties may have been inextricably mixed and this might well have lead to a degree of confusion for the company which needs to be regularised.
[33] For all these reasons, I take the view at this point that when all the evidence is before the Court, the “just and equitable” ground for winding up the company under s
241(4)(d) Companies Act 1993, may well be made out here. And although there are accusations made on both sides as to a wide range of matters (some relevant and many irrelevant here), in my view, there is no basis on the present evidence to suggest that the breakdown in trust or deadlock between the parties has been caused solely by the conduct of Ms Strachan. Further, as I see the position, at this point this case does not appear to be one where remedies alternative to a liquidation order such as other orders under s 174 Companies Act 1993 would be appropriate. Here, it appears the parties have for some time and without success endeavoured to make arrangements for the sale of the property (an unsuccessful auction took place on 12 December 2006) or for
the purchase by one shareholder of the interest of the other. Ms Moodie has claimed that an exit mechanism was agreed at the outset whereby the Moodies could buy out Ms Strachan’s shares, but this has been strongly disputed by Ms Strachan. Certainly, before the Court there did not appear to be any evidence of either a Shareholders’ Agreement or some provision in the constitution of the company for the buy-out by one party of the other party’s shares. Nor did any party before me suggest that this was a matter where an entitlement to refer the dispute to mediation or arbitration existed as was the case in Allan v Pelf Ltd HC Christchurch, CIV-2009-409-2263, 22
March 2010, A.J. Doogue.
[34] For all these reasons I am satisfied that Ms Strachan has done enough here to show that her liquidation application on its face has merit and should proceed to a full hearing.
[35] I turn now to the grounds advanced by Ms Moodie in support of her present stay application.
[36] From her application and the submissions advanced by Mr Moodie before me, it would appear that the grounds upon which Ms Moodie relies in her application are:
(a)That the Employment Court proceedings involve what she alleges are the same issues and questions as the present liquidation application and that the administration of justice is at risk of being scandalised if the present application is allowed to proceed;
(b)That Ms Strachan’s actions are an abuse of process in that they seek to liquidate her only asset before the decision of the Employment Court is given;
(c)The defamation, employment and liquidation proceedings all arise from the “same overlapping factual matrix” and give rise to “overlapping issues and questions for determination by the Courts in the context of their respective jurisdictions”; and
(d)There are no proper grounds here for a liquidation order under the “just and equitable” test.
[37] Although she does not expressly state this in her present application and the material in support, Ms Moodie as applicant appears to be contending here that issue estoppel exists or that it will do once the decision of the Employment Court referred to earlier is delivered. On this question, the Court of Appeal in Shiels v Blakely [1986] 2
NZLR held that:
It must be possible to say positively and without room for doubt that the issues are indistinguishable from that which was determined in the earlier action.
(It is clear here, however, that a final determination of the Employment Court has not as yet happened).
[38] In my view, there is no question of issue estoppel arising here in the sense that the same issues and questions are before this Court as were before the Employment Court. Ms Strachan’s application in this Court for a liquidation order relates to the company itself as a separate legal entity. The “just and equitable” grounds do involve a consideration of the actions of the company’s shareholders and directors to a certain extent, but these must clearly relate solely to company matters and the operation of its business affairs. To endeavour to mix employment and other matters in this consideration is, in my view, inappropriate.
[39] I am satisfied here also that the actions of Ms Strachan in bringing the present proceeding cannot be considered as an abuse of process. Whether or not her shareholding in the company represents her only asset is irrelevant to the proceeding in this Court. And similarly, the defamation proceedings as I understand it relate entirely to personal matters between Ms Strachan and Mr Moodie. The company is clearly no party to that action and its business and continuance need to be viewed separately.
[40] The liquidation application before this Court is a discreet matter affecting the company and its shareholders and officers in that capacity. I do not accept that the
present proceeding gives rise to overlapping issues and questions relating to other proceedings.
[41] As to Ms Moodie’s final contention that the facts here do not justify a liquidation order being made on the “just and equitable” grounds, for the reasons I have outlined above, I am satisfied that on the material currently before the Court there is a reasonable argument that a liquidation order should be made. This, however, is a matter for consideration after a full hearing.
[42] I am satisfied, therefore, that proceeding with the liquidation here does not suggest unfairness or undue pressure on the part of Ms Strachan. Ms Moodie has been unable to show that there are clear and persuasive grounds for a stay to be ordered here. Clearly the present liquidation application is based on a total breakdown in the relationship between the shareholders and directors involved in this company and I am satisfied the best course of action here is to proceed to a full hearing to resolve the issue on full evidence – Seapark Group Limited v Convertech Group Limited.
Conclusion
[43] For all these reasons the application by Ms Moodie for a stay of the liquidation proceedings and to restrain advertising is dismissed.
[44] As a next event, and to enable time for consideration to be given to advertising the liquidation application, this matter is adjourned to a call in the Companies List on
6 October 2010.
[45] As to costs, Ms Strachan has been successful in opposing the present application and I see no reason why costs on a scale basis should not follow the event in the normal way.
[46] Costs on the application before me are therefore awarded to Ms Strachan against Ms Moodie on a Category 2B basis together with disbursements as fixed by the Registrar.
‘Associate Judge D.I. Gendall’
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