Van der Fluitt v O'Neill
[2021] NZHC 1651
•5 July 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-670
[2021] NZHC 1651
IN THE MATTER OF
AND
Liquid Studios Limited IN THE MATTER OF
Section 174 of the Companies Act 1993
BETWEEN
PETER WILLIAM VAN DER FLUIT and TAMARA JOAN O’NEILL
Plaintiffs
AND
MICHAEL ARTHUR JAMES O’NEILL
Defendant
Hearing: 28 June 2021 Appearances:
D W Grove for the Plaintiffs
R M Keane and E F Armstrong for the Defendant
Judgment:
5 July 2021
JUDGMENT OF GAULT J
This judgment was delivered by me on 5 July 2021 at 5:00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Solicitors / Counsel:
Mr D W Grove, Barrister, Auckland
Mr I Vodanovich (plaintiffs’ instructing solicitor), Vodanovich Law Ltd, Auckland Ms R M Keane and Ms E F Armstrong, LeeSalmonLong, Auckland
VAN DER FLUIT v O’NEILL [2021] NZHC 1651 [5 July 2021]
[1] Mr van der Fluit and Ms O’Neill (the plaintiffs) seek an interim order removing Mr O’Neill as a director of Liquid Studios Ltd (Liquid). The parties are Liquid’s three directors and shareholders.
[2] The substantive proceeding alleges prejudicial conduct by Mr O’Neill and seeks orders removing him as a director of Liquid and that the plaintiffs purchase his shares at a value to be determined by the Court.
Background
[3] Mr van der Fluit and Mr O’Neill were members of the music band Screaming Meemees in the 1980s.
[4]Mr and Ms O’Neill were married in 1998.
[5] Liquid was formed in 1999 by Mr O’Neill and three others. It carries on business producing music. By 2002 Mr O’Neill and Mr van der Fluit were each 50 per cent shareholders, and in 2002 Mr van der Fluit transferred 5,000 of his shares to Ms O’Neill. In 2015 Mr van der Fluit transferred 1,000 of his shares to Mr O’Neill. So now Mr O’Neill holds 26,000 shares (52 per cent), Mr van der Fluit holds 19,000 shares (38 per cent) and Ms O’Neill holds 5,000 shares (10 per cent).
[6]In May 2014 Mr O’Neill suffered a potentially fatal stroke.
[7] In January 2020 Mr and Ms O’Neill separated. They are involved in relationship property proceedings in the Family Court. Both accept that their shares in Liquid are relationship property.
Dispute in this proceeding
[8] The plaintiffs say that since Mr O’Neill’s stroke in 2014 he has been incapacitated and unable to undertake his functions and duties as a director of Liquid. The plaintiffs say there is no ill will towards Mr O’Neill but that he is being manipulated and controlled by his father and/or sister. The plaintiffs say that Mr O’Neill’s father and sister have actively disrupted and adversely affected the
operations of Liquid, and the plaintiffs have been prevented from running the company as directors.
[9] By way of defence and counterclaim, Mr O’Neill says the plaintiffs have acted improperly and prejudicially in terms of s 174 of the Companies Act 1993 (the Act), and his counterclaim also seeks an order that the plaintiffs acquire his shareholding.
[10] Accordingly, the parties are now aligned at least in seeking an order that the plaintiffs purchase Mr O’Neill’s shareholding. However, Mr O’Neill opposes his removal as a director in the meantime.
Approach to interim relief
[11] It is well settled that on an application for interim injunctive relief under the High Court Rules 2016, the Court addresses:1
(a)whether the plaintiff can show there is a serious question to be tried;
(b)where the balance of convenience lies; and
(c)where the overall justice lies.
[12] Whether or not s 174 of the Act itself gives the Court power to make interim orders, the traditional two-stage test applies,2 and relief will be granted under s 174 if it is just and equitable.
Leave to cross-examine
[13] Mr Grove, for the plaintiffs, sought leave to cross-examine Mr O’Neill. This was opposed by Ms Armstrong for Mr O’Neill. Mr Grove was content to leave this issue for determination later in the hearing when it might be clearer whether I would be assisted by cross-examination. He subsequently indicated that he would pursue the
1 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142; and
American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL).
2 Pounamu International Ltd v Lehen [2014] NZHC 3394 at [14], referring to serious question and balance of convenience.
application only in relation to Mr O’Neill’s capacity; that is whether Mr O’Neill has been acting as a director or his father and/or sister have been acting on his behalf, and whether he is incapacitated. Mr Grove submitted there were special circumstances warranting cross-examination but, as indicated, he was content for me to indicate whether I would be assisted by it.
[14] I declined to grant leave to cross-examine. I did not consider there were special circumstances, nor that I would be assisted by cross-examination given the Court’s approach to interim relief does not extend to resolving conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend.3 Further, I considered Mr O’Neill may be prejudiced by cross-examination in relation to his capacity without the protection appropriate if, by analogy, there were an application for appointment of a litigation guardian.
Serious question
[15] The plaintiffs rely on the following acts in support of their claim of prejudicial conduct under s 174:
(a)Mr O’Neill’s sister refused to allow Ms O’Neill to be paid a salary in line with what Mr van der Fluit receives.
(b)On 20 January 2020 Mr O’Neill arrived unannounced at the business with his sister, and Mr O’Neill assaulted Mr van der Fluit in front of Ms O’Neill and staff.
(c)Mr van der Fluit and Ms O’Neill do not have control of the company’s bank accounts due to the conduct of Mr O’Neill’s father and/or sister in contacting the BNZ.
(d)Mr O’Neill’s father threatened to stop payment of the salaries of Mr van der Fluit, Ms O’Neill and staff around 5 November 2020.
3 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407. See also Villa Maria Wines Ltd v Montana Wines Ltd [1984] 2 NZLR 422 (CA) at 425; and Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [9].
(e)On 24 February 2021 Mr O’Neill and his father attended Liquid’s storage facility and Mr O’Neill’s father placed a padlock on the storage unit so that Mr van der Fluit, Ms O’Neill and staff could not access it.
(f)Mr O’Neill’s relatives have imposed the services of an accountant, which has caused Liquid unnecessary and substantial expense.
(g)On 23 November 2020 an email from Mr O’Neill’s father’s email address, but sent in the name of Mr O’Neill, stated that Mr O’Neill would be resuming his position as managing director after a long period of illness. The email said that “no corporate decisions are to be made without my approval”.
(h)On 30 April 2021 Mr O’Neill signed a notice as majority shareholder removing Ms O’Neill as a director of Liquid. This led to an amended interlocutory application, but that issue was resolved on the basis that the notice was withdrawn.
[16] The plaintiffs’ underlying complaint is that Mr O’Neill is not in fact acting as a director of Liquid due to incapacity and that his father and sister are acting on his behalf.
[17] Ms Keane, for Mr O’Neill, submitted there is no serious question to be tried. She submitted first that the counterclaim does not obviate the need to establish a serious question, secondly that most of the allegations do not amount to prejudicial and oppressive conduct even if established and thirdly some complaints are disputed. Fourthly, Ms Keane also disputed the plaintiffs’ underlying complaint that Mr O’Neill is not in fact acting as a director due to incapacity and that his father and sister are acting on his behalf.
[18] I address these submissions in turn. First, it is, of course, correct that the mere fact that Mr O’Neill’s counterclaim under s 174 also seeks an order that the plaintiffs purchase Mr O’Neill’s shareholding does not itself indicate there is a serious question to be tried in relation to the plaintiffs’ claim under s 174. But the reality is that the
parties now seek the same substantive relief as to the plaintiffs’ purchase of Mr O’Neill’s shares, albeit for different reasons and no doubt on different terms. It is also common ground that following the plaintiffs’ purchase of his shares, Mr O’Neill is to resign as a director.
[19] In the circumstances, for the purposes of this application for interim relief, the more relevant question to be tried is whether Mr O’Neill should be removed as a director under s 174.
[20]Section 174 provides:
174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2)If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)requiring the company or any other person to acquire the shareholder’s shares; or
(b)requiring the company or any other person to pay compensation to a person; or
(c)regulating the future conduct of the company’s affairs; or
(d)altering or adding to the company’s constitution; or
(e)appointing a receiver of the company; or
(f)directing the rectification of the records of the company; or
(g)putting the company into liquidation; or
(h)setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
…
[21] Although the right to apply to the Court in s 174(1) is expressed in terms of what a shareholder or former shareholder “considers”, the components of s 174(1) are treated as substantive elements.4 Two of the requirements are in issue here. First, the conduct or act(s) in issue must be “of” the company. This is broad, extending to anything generally concerning the company, but excludes activities that directors or shareholders perform in a purely private or personal capacity.5 Secondly, the conduct must be “oppressive, unfairly discriminatory, or unfairly prejudicial”.
[22] On this basis, turning to Ms Keane’s second submission, I accept that some of the plaintiffs’ complaints may not directly relate to the conduct of the affairs of the company and/or may not directly affect the plaintiffs in their capacity as shareholders (for example, the salary issue). Some also appear unlikely to cause harm to the company and thus the shareholders. Even so, I consider there is a serious question that at least three of the specific complaints, if made out, concern the affairs of Liquid in a way that is likely to be oppressive, unfairly discriminatory, or unfairly prejudicial under s 174, whether or not they caused actual loss:
(a)The 23 November 2020 email from Mr O’Neill’s father’s email address, but sent in the name of Mr O’Neill, falls into this category. Even if it was sent by Mr O’Neill – rather than his father – and acknowledging that he is the majority shareholder, it was at least arguably not for him as one director of three, who had been absent for a long period, to dictate unilaterally that no corporate decisions were to be made without his approval. It may be that nothing has come of this email.
(b)There is no explanation in relation to the padlocking of Liquid’s storage facility.
4 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 708.
5 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 715.
(c)Mr O’Neill’s 30 April 2021 notice purporting to remove Ms O’Neill as a director of Liquid at least without calling a shareholders’ meeting, while withdrawn following Court action, was also misconceived.
[23] Turning to Ms Keane’s third submission, it is no part of the Court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend.6 Insofar as Mr O’Neill disputes the factual allegations, that is a matter for trial rather than to be resolved at this stage.
[24] Fourthly, as indicated, Ms Keane also disputed the plaintiffs’ underlying complaint that Mr O’Neill is not acting as a director due to incapacity and that his father and sister are acting on his behalf. Ms Keane disavowed the suggestion that Mr O’Neill’s sister was purporting to act on his behalf as a director of Liquid pursuant to an enduring power of attorney. A power of attorney would not empower her to act as a director of Liquid.7 The conflict of evidence as to whether Mr O’Neill is in fact acting as a director or his father and sister are acting on his behalf is a matter for trial.
[25] But there is no direct evidence that Mr O’Neill was acting as a director during his long period of illness (even with the assistance of his wife) at least prior to Mr O’Neill asking his sister to assist him in separating his and his wife’s financial affairs. Mr O’Neill did not say so in his very short affidavit, which primarily agreed with an affidavit from his sister, denied disrupting or adversely affecting Liquid’s operations and said he would like to sell his shares and resign as a director but cannot do that until the bank’s security over the Piha property and his personal guarantee have been released. His sister’s statement that he has continued to take an active role as a director can only speak to the period after she became involved. In reply, Mr van der Fluit said that Mr O’Neill had not attended one day of work since his stroke.
6 American Cyanamid Co v Ethicon Ltd [1975] AC 396 (HL) at 407. See also Villa Maria Wines Ltd v Montana Wines Ltd [1984] 2 NZLR 422 (CA) at 425; and Health Club Brands Ltd v Colven Botany Ltd [2013] NZHC 428 at [9].
7 Levin v Rastkar [2011] NZCA 210 at [46]; and Saad v Doumeny Holdings Pty Ltd [2005] NSWSC 893 at [17] as cited in Peter Watts Directors’ Powers & Duties (2nd ed, LexisNexis, 2015) at [2.2.2].
[26] As to the capacity issue itself, the plaintiffs’ evidence was that since Mr O’Neill’s stroke in 2014 he has been unable to work or undertake any roles whatsoever as director of Liquid. Mr O’Neill did not respond to this directly but, as indicated, agreed with his sister’s affidavit. Her affidavit said that he has communication difficulties, but he understands oral and written communication. She said she acts as his assistant; he makes the decisions and she simply helps him to communicate those decisions. Her affidavit annexed an assessment by Dr Casey, a consultant psychiatrist and psychogeriatrician. Dr Casey said she had interviewed Mr O’Neill in March 2019 and met him for 20 minutes on 28 May 2021. She reported that he still has significant expressive dysphasia. She said he was unable to give accurate timelines indicating paraphrastic errors. She said that, using simple enclosed questions, he understands that he is a director of Liquid. She said he is currently overseeing the company accounts, but is not engaged in any other decision making or future planning. She said that without knowledge of current or potential future issues on which his capacity may be required, it is not possible to fully assess his capability as a director. In conclusion, she said:
… when it comes to the understanding of and making decisions about current issues in the director role at Liquid Studios Ltd., from the limited information made available, the impression is that [Mr O’Neill] does comprehend matters. Questions need to be relayed in short sentences, usually in a “closed question” format. For a comprehensive assessment of the language deficit and an assessment of the capacity to decide on more complex matters, the engagement of a Speech Language Therapist would be necessary and optimal.
[27] I should also mention that Mr O’Neill’s solicitors in the Family Court proceedings initially advised that he needed a litigation guardian. However, it is common ground that that suggestion has not been pursued.
[28]The issue as to whether Mr O’Neill is incapacitated is also a question for trial
– it is not for me to resolve on this application.8
8 Also, lack of capacity does not automatically disqualify a director under the Act; court-recognised mental incapacity is required (under s 151(2), a person subject to an order under ss 30 and 31 of the Protection of Personal and Property Rights Act 1988 is disqualified).
[29] For the above reasons, I am satisfied the plaintiffs have shown a serious question to be tried.
Balance of convenience
[30] The balance of convenience involves balancing the risk of injustice to each party – deciding whether granting or refusing an injunction is the course which, after substantive determination, would best allow the adjustment of the rights of the parties in a way that accords with fairness and justice.9
[31] Mr Grove submitted the balance of convenience favours removal given Liquid’s thriving performance solely due to the plaintiffs’ efforts, and the undertakings and indemnities they have offered. As well as the standard undertakings as to damages, the plaintiffs have given undertakings relating to the affairs of Liquid aimed at addressing the concern about Mr O’Neill’s liability. In particular, the plaintiffs have undertaken that they will not increase the borrowings from the BNZ without giving Mr O’Neill 14 working days’ notice. Ms O’Neill also says that she cannot see any circumstances whatsoever that would lead them to need to increase the borrowings from the BNZ. Ms O’Neill also undertakes to allow Mr O’Neill’s representatives to continue to have access to Liquid’s Xero accounting system so that they can review and keep up-to-date with the company’s trading. She says she will also ensure that they are provided with all tax returns, including GST returns and financial accounts when they are completed/filed. Mr Grove submitted this will ensure full transparency pending Mr O’Neill’s shares being purchased. He also submitted that any diminution in the value of Liquid’s shares is irrelevant because the valuation date would be in 2014.
[32] The plaintiffs also proposed indemnities to cover any liability incurred by Mr O’Neill in relation to the BNZ security documents. Mr Grove submitted that as a result there is no possibility of damage to Mr O’Neill.
9 Congoleum Corporation v Poly-Flor Products (NZ) Ltd [1979] 2 NZLR 560 (CA) at 571; Mansfield v Bilkey [2016] NZHC 752 at [7]; and Christensen v Gordon [2020] NZHC 1486 at [32].
[33] Ms Keane submitted that the status quo should be preserved. She submitted that as a director Mr O’Neill is able to monitor the company’s spending by the banking arrangement with BNZ, and can have an active role in approving payments. She submitted that the effect of the interim relief would be that Mr O’Neill would be left in the invidious and wholly unreasonable position of having a significant investment in Liquid but no control over the company’s operations, and continuing to provide security for Liquid’s borrowings even once he has been removed as a director.
[34] I first consider whether damages would be an adequate remedy for either party. The plaintiffs have not identified any particular loss flowing from Mr O’Neill’s actions to date, but I accept that if he is not removed as a director and it is determined at trial that he has acted in breach of s 174 or is incapacitated, the plaintiffs may suffer loss. It was not suggested, however, that such loss is incapable of quantification or compensation by way of damages. If Mr O’Neill were found to have been incapacitated, those acting on his behalf may also be at risk of being shadow directors.
[35] On the other hand, I accept that if Mr O’Neill is removed as a director, he will lose his ability to participate in the management of the company pending sale of his shares, which could result in financial loss. Mr O’Neill does not accept the 2014 valuation date. The plaintiffs’ undertakings and indemnities provide some protection in terms of transparency and financial loss, but loss may be difficult to quantify at least where there is an argument it may have occurred in any event. Mr O’Neill also has concerns about the plaintiffs’ ability to satisfy the financial undertakings and indemnities and the Court has little specific evidence as to their means. I acknowledge that Ms O’Neill’s assets include her share of the relationship property.
[36] Mr Grove accepts that the interim relief sought is a form of mandatory injunction. That is a form of interim relief granted only in special circumstances.10 Also, here it is one of the very orders sought in the substantive proceeding so, as Ms Keane submitted, the relief sought is effectively final relief. It is not the only final relief sought so this may not be a case where the grant or refusal of an interlocutory
10 Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, 19 December 2011 at [48]; and Cama Products Ltd v Power Parts (2018) Ltd [2020] NZHC 802 at [10].
injunction may well determine the fate of the litigation,11 but even so I consider the effect of the order sought is a factor weighing against relief in the balance of convenience. Counsel did not cite any s 174 case in which an interim order removing a director has been made.12 The nature of the interim order sought – removing him as a director rather than restraining specific actions – weighs against relief. This is not countered by the fact that Mr O’Neill will resign as a director when he ceases to be a shareholder.
[37] Ms Keane also relied on the plaintiffs’ conduct, but I consider it is unnecessary to refer to Mr O’Neill’s allegations in support of his s 174 counterclaim and the plaintiffs’ responses.
[38] I consider the balance of convenience favours the status quo rather than removal of Mr O’Neill as a director. The plaintiffs say Liquid is running profitably, and they make up the majority of the board so can make routine board decisions. Given an earlier issue, the bank account requires all three directors to sign but that does not appear to be hampering Liquid’s operations. Mr O’Neill’s inclusion as a director until he ceases to be a shareholder gives him greater transparency than mere access to Liquid’s accounting system and finalised returns, and reduces the need for him to seek to intervene in his capacity as majority shareholder. The status quo also more likely incentivises the parties to progress quickly to agree the terms of sale and purchase of Mr O’Neill’s shareholding and avoid duplication of court proceedings.
Overall justice
[39] For these reasons, I also consider that overall justice weighs against an interim order removing Mr O’Neill as a director.
Result
[40]The application for interim order is dismissed.
11 Wilfred v Gan [2013] NZCA 457 at [21], citing McKay Electrical (Whangarei) Ltd v Hinton
[1996] 1 NZELR 501 (CA) at 507.
12 In Caringrace Inc v Claridge [2016] NZHC 1704, Clark J refused to do so.
[41] I encourage the parties to agree costs. If they cannot, I will receive brief memoranda (not exceeding three pages) within 20 working days and determine costs on the papers.
Gault J
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