Stuart v Lightning Cleaning Services Limited
[2017] NZHC 2254
•18 September 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-971 [2017] NZHC 2254
BETWEEN GORDON JAMES STUART
Plaintiff
AND
LIGHTNING CLEANING SERVICES LIMITED
First Defendant
LUKE TIMOTHY ATTARD Second Defendant
Hearing: 13 September 2017 Counsel:
D Chisholm QC for Plaintiff
No appearance for First Defendant
Second Defendant in personJudgment:
18 September 2017
JUDGMENT OF WHATA J
This judgment was delivered by me on 18 September 2017 at 11.15 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Burton Partners, Auckland
STUART v LIGHTNING CLEANING SERVICES LIMITED [2017] NZHC 2254 [18 September 2017]
Introduction
[1] This case before me as part of the Duty Judge list. Mr Stuart claims he is a shareholder, creditor and guarantor in respect of the defendant, Lightning Cleaning Services Limited (Lightning Cleaning). He obtained an ex-parte interim injunction and an ancillary order to the following effect:
(a) An interim injunction restraining the defendant, Mr Attard, or Rapid Group NZ Limited, or their agents or employees, from disposing, dealing with, or diminishing the value or any assets of the defendant company, in particular any proceeds of sale of the defendant company’s assets.
(b)An ancillary order that Mr Attard swear an affidavit within three days giving full particulars of any asset sales by the defendant company, payments made out of any proceeds of sale, and the whereabouts of any proceeds, as well as any payments made by the company to Mr Attard or Rapid Group NZ Limited (the disclosure order).
[2] Mr Attard responded with an application to discharge the orders. He did not comply with the ancillary order, claiming the information sought was privileged. Given this, the plaintiff made an application for the appointment of interim liquidators.
[3] I resolved to grant the plaintiff’s application. My reasons follow.
Background
[4] Mr Stuart claims he is a 50 per cent shareholder, creditor and guarantor of Lightning Cleaning. Mr Stuart refers to a number of documented loans made by him to the company.
[5] Mr Attard is currently the sole director of Lightning Cleaning. He is also the director and shareholder of Rapid Group NZ Limited (“Rapid Group”) which is the other 50 per cent shareholder in Lightning Cleaning. He says that Mr Stuart is no
longer a shareholder, creditor or guarantor of Lightning Cleaning. He admits that Mr Stuart lent money to Lightning Cleaning, but that his drawings account is net positive. He also claims, in short, that Mr Stuart breached a shareholders’ agreement and he therefore triggered the deemed transfer procedure, with the result that the shares were transferred to Rapid Group in March 2017.
The proceedings
[6] Mr Stuart believes the company is effectively in a deadlock situation. He commenced proceedings to have the company placed into liquidation. The grounds are that:
(a) As at 31 January 2017, the plaintiff was a shareholder, that he had resigned as director and Mr Attard did not have the authority to remove him as a shareholder.
(b)Mr Attard sought to remove the plaintiff as a shareholder without his agreement.
(c) These actions among others mean that Mr Attard has breached s 241(4)(ba) of the Companies Act 1993.
[7] Mr Stuart also claims that the company defaulted on his shareholding loan in March 2016 and has not been able to repay its arrears since. He claims the company was insolvent for the year ending 31 March 2016, both in equity and on a working capital basis.
[8] The proceedings came before the Court for case management on 29 June
2017. Timetabling orders were set down and the matter allocated two hearing days on 9 and 10 October 2017. The timetabling orders were amended on 11 August 2017. An issue as to the valuation of the shares was noted with Associate Judge Bell encouraging both sides to take steps to have the shares valued.
Sale of company assets
[9] In the meantime, on 21 August 2017, Mr Stuart discovered that Lightning Cleaning’s business had been substantially sold to Crewcare Commercial Cleaning without Mr Stuart’s approval (which he says was required pursuant to s 129 of the Companies Act). Requests for information about the sale, he says, failed to provide any particulars of the sale of the business or dealings with the proceeds of sale. Mr Stuart believes the company accordingly has been substantially liquidated, with Mr Attard openly procuring distributions in favour of Rapid Group, and not disclosing the full extent of the assets sale. Accordingly, Mr Stuart sought an injunction preventing further dealings with the company’s assets and/or the proceeds of sale of the company’s assets, together with orders seeking disclosure about what has happened to the proceeds of sale.
Interim injunction and ancillary orders
[10] On 25 August 2017, Toogood J made the orders noted at [1]. Mr Attard was required to comply with the disclosure order within three working days. The matter then came back before this Court on 4 September. Muir J observed that Mr Attard had not provided an affidavit in accordance with the ancillary order, or sought an extension. Muir J noted he was accordingly in contempt of the orders of the Court. He was however prepared to allow Mr Attard a further opportunity to comply. He directed that Mr Attard comply with the ancillary order by 5:00 pm Thursday 7
September 2017. Muir J noted that unless he complied by that time:
(a) He would expose himself to orders of this Court in contempt.
(b)His notice of opposition to the liquidation application would be struck out without further order of this Court.
Mr Attard’s response to the orders
[11] Mr Attard produced a lengthy affidavit in response to Muir J’s orders on 7
September 2017. The affidavit addresses a wide range of topics and makes a number of claims about Mr Stuart and the impact that he has had on the fortunes of the
company. He maintains, in short, that the company is solvent and the only significant barrier to its success is Mr Stuart. Most relevantly he notes in respect of the disclosure orders:
59.I am of the view the details requested as being of a privilege nature, further I signed a confidentiality agreement stating I would not disclose the discussions. There is no legal requirement, nor is any reasonable reason for Mr Stuart to see the documents, an unreasonable request, by the standard of the law, an unlawful request. I have not had time to document the legal principles behind this position, but I believe the court is well aware of the history of this principal.
60.As Mr Stuart is not a shareholder, this is an irrefutable position, as the registry states only Rapid Group is the shareholder, and the constitution states the registry should be taken on prima facie.
61.In addition, before agreeing to any sale, I spoke to Mr Meys at Neilson lawyers and confirmed that I was able to act in my role as a director, in good faith, based on the current shareholding that are on the register. I was informed, yes, and that I could conduct business, relying on the share registry as it is.
62.I do note that Crew Care’s legal team have sent the details of the sale to Mr Stuart, as per Mr Chisholm’s memorandum, on Friday the 4th. Just another reason why the order should not be in place, how can Lightning Cleaning Service be punished, as well as the contractors and their families, based on the request for information, that Mr Stuart already has?
[12] Insofar as concerns Rapid Group he says:
69.I again claim privilege and confidentiality on disclosing the payment to Rapid Group, and other staff/contractors that are associated through me, as again Mr Stuart is not a shareholder, nor a director. There is no benefit or reasons for this information. I have disclosed more than enough to show the court that I have allowed for enough funds to have the sale completed and the issue resolved with haste, if the court allows me to do so, the earlier I am allowed to start trading again the less damages will need to be sort.
Mr Stuart’s position
[13] Mr Stuart’s view is Mr Attard has in fact sold the bulk of the company’s
business and that there is uncertainty as to the quantum of the proceeds of sale and
where they have gone. He produced evidence to show that the company is now, and has been for some time, trading insolvently.1
[14] He noted the only financial record Mr Attard disclosed in an affidavit sworn
18 August 2017 was a profit and loss statement for the financial year ending 31
March 2017. He says Mr Attard did not disclose the balance sheets, and in light of the loss of $45,694.82 (reflected in the profit and loss statement) the company has become even more insolvent than was recorded in previous financial statements.
[15] Mr Stuart then produced a table as to the financial position of the company over the last few years, which he says is supported by relevant financial statements attached to his affidavits. A copy of the table produced by him is attached as Appendix A.
[16] He also referred to the fact that note seven on page 14 of the draft 2016 financial statement confirmed:
The company was insolvent on both an equity and working capital basis. The financial statements have been prepared on the going concern basis in spite of the company’s deficiency of net assets as the directors have provided financial support in order to continue operations.
[17] He also referred to an accountant’s covering email dated 13 March 2017, sent
to him and Mr Attard confirming the following:
Due to the insolvency issue with the company Gordon has agreed to keep the directors fees against his shareholders current account and will address his own 2016 tax return.
[18] Mr Stuart also alleges Mr Attard has been prepared to meet his own personal liabilities out of the assets of the company to the detriment to the creditors generally. He provided the following list of outstanding creditors including:
(a) His shareholder’s loan of $154,050 plus unpaid accruing interest. Full
interest has not been paid for well over a year and no interest has been paid since March 2017.
1 In breach, he says, of s 135 of the Companies Act 1993.
(b)The Westpac loan being approximately $130,000 plus accruing interest.
(c) Desmond Jackson, who received a Disputes Tribunal award on 23
August 2017 of $2,316.26 (including a sum due in March 2017). He has also filed an appearance in support of my liquidation application.
(d)Andrew Lewis is owed $3,225.75. He has also filed an appearance in support of my liquidation application.
(e) Staples Rodway is owed $4,543.50. It has also filed an appearance in support of my liquidation application.
(f) A contractor, Kavi Wijebahu, is owed $15,752.30 for August and
September 2016, February 2017 and July 2017.
(g) Moana Cook of T & M Contractors is owed $3,535.67.
(h)Erna Rua, a cleaner for Jetts Whakatane, is owed $1,026 for February and July 2017.
(i)Modi Naitik of Vihat Services Ltd is owed $6,711.74 for September and October 2016 and July 2017.
(j)Kaushai Shai contacted Mr Stuart saying he was owed money but did not disclose the quantum owed.
(k) As noted in paragraph 24 of Mr Stuart’s third affidavit sworn on 24
August 2017, David Owen (the company’s former operations manager now employed by the purchaser, Crewcare) has unpaid Kiwisaver contributions from November 2016.
(l) There were large arrears of GST and PAYE at the beginning of the
year, but despite requests over the last few months by Mr Stuart’s
lawyers, Mr Attard has not been prepared to disclose records evidencing the present extent of the liabilities.
(m)Crewcare have confirmed they will be seeking a refund from the company due to the loss of the Jetts Gym contract shortly after the sale. Mr Stuart is not sure what sums were actually paid to the company from Crewcare.
Argument
[19] Mr Chisholm submits Mr Attard cannot be trusted, having flagrantly breached Toogood J’s order and Muir J’s unless order. He says an interim liquidator is needed because the Court can have no faith Mr Attard is acting in the best interests of the company, the company’s creditors or Mr Stuart – a 50 per cent shareholder and guarantor of the company’s indebtedness to Westpac. He says there was no proper basis for the purported transfer of Mr Stuart’s shares to Rapid Group.
[20] In terms of the appointment of interim liquidators, he points to the evidence of the company trading on an insolvent basis. He says there is sufficient evidence to show that the company meets either cash flow or the balance sheet for the purposes of the solvency test in s 4 of the Companies Act.
[21] He submits further that Mr Attard’s conduct in relation to the purported dealings with Mr Stuart’s shareholding was improper and reflects badly on him. In terms of s 246, he submitted the Court can be satisfied that it is both necessary and expedient for the purposes of maintaining the value of the assets owned and/or managed by the company to appoint an interim liquidator.
[22] Mr Attard’s refusal, he says, to disclose the whereabouts of assets including the proceeds of sale is a strong reason to decline Mr Attard’s application for variation, and is in fact a further reason for the appointment of an interim liquidator. He says compliance with the Court’s order should have been uncontroversial.
[23] Mr Attard responds that there is no proper basis either for the application for liquidation or for the interim order. He says Mr Stuart is no longer is a shareholder
or creditor of the company and that, in short, he is doing everything he can to keep the company afloat and the main cause of any financial concern arises from the freezing orders that injunctions obtained by Mr Stuart.
[24] Mr Attard maintains that the information sought by the Court was privileged information to the company and its remaining shareholder, Rapid Group. He clarified that he was not seeking to claim privilege against self incrimination.
Assessment
[25] Section 246(1) of the Companies Act states:
246 Interim liquidator
(1) If an application has been made to the court for an order that a company be put into liquidation, the court may, if it is satisfied that it is necessary or expedient for the purpose of maintaining the value of assets owned or managed by the company, appoint a named person, or an Official Assignee for a named district, as interim liquidator.
…
[26] As noted by various commentaries or authorities, “expedient” conveys a
relatively low threshold for appointment.2
[27] I agree with Mr Chisholm that, on the evidence available to me, Mr Attard may have acted in breach of his duties to the company, the shareholders and the creditors. Mr Attard purported to transfer Mr Stuart’s shares to his company without a clear basis for doing so. He sold company assets without involving Mr Stuart. He appears to have applied the proceeds of sale to the benefit of Rapid Group, on the basis, he says, of overdue management fees. And he refused to comply with the disclosure orders on the basis of privilege. As Mr Chisholm submitted, a director acting responsibly would not hesitate to provide that information, particularly when confronted with an application for liquidation. I have little hesitation in this context in making an order appointing interim liquidators.
[28] Moreover, even if I am wrong about this, it is quite clear to me that:
2 See for example Ming Shen v An Ying International Financial Ltd HC Auckland CIV-2006-404-
3088, 28 July 2006 at [11].
(a) the company is in a deadlock situation;
(b)Mr Stuart has a reasonable basis to claim he remains a shareholder, creditor and guarantor of the company;
(c) there are significant liabilities to creditors that remain unpaid; and
(d)with the assets of the company having been sold, there is an arguable case that the company is and has been trading while insolvent.
[29] In these circumstances, it is plainly necessary and expedient to appoint interim liquidators in order to place the company in as best a position as possible pending the resolution of this substantive application to place it in full liquidation.
[30] As to Mr Attard’s applications to have the orders varied, for the reasons already expressed, and given Mr Attard’s approach to the ancillary orders, I am not prepared to make any application for variation except as sought by the plaintiffs, namely to release control of the assets effectively to the interim liquidators. I note in the interim liquidators will be in a position to bring an impartial perspective and may be able to support if Mr Attard’s claims about the legitimacy of his dealings with the company’s assets. In this regard, the appointment of interim liquidators is not necessarily adverse to either Mr Attard’s or Rapid Group’s interests.
[31] Accordingly, as noted in my Minute of 13 September 2017, I made orders at
4:45 pm appointing interim liquidators. Mr Attard’s application is declined.
Costs
[32] The plaintiff is entitled to costs, on a 2B basis, on his application to appoint interim liquidators.
Appendix A
0
1