Vijayakumar v Manukau Family Doctors Limited
[2022] NZHC 1272
•1 June 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-1828
[2022] NZHC 1272
UNDER Part 18 of the High Court Rules 2016 IN THE MATTER
of Section 174 of the Companies Act 1993
BETWEEN
SOTHILINGIN VIJAYAKUMAR
Plaintiff/Applicant
AND
MANUKAU FAMILY DOCTORS LIMITED
First Defendant/Respondent
SIVA VASANTHAN
Second Defendant/Respondent
Hearing: 3 March 2022, further submissions 17 March 2022 Appearances:
R Harrington for the Plaintiff/Applicant
No appearance for the Frist and Second Defendants/Respondents
Judgment:
1 June 2022
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 1 June 2022 at 3.00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Shieff Angland, Auckland
VIJAYAKUMAR v MANUKAU FAMILY DOCTORS LTD [2022] NZHC 1272 [1 June 2022]
Introduction
[1] This proceeding concerns the management and affairs of the first defendant/respondent, Manukau Family Doctors Limited (the Company). The plaintiff/applicant, Dr Vijayakumar, is a minority shareholder in the Company, holding 120 shares (40 per cent). The other shareholder is the second defendant/respondent, Dr Vasanthan. Dr Vasanthan is the majority shareholder, holding 180 shares (60 per cent). He is also the Company’s sole director.1
[2] The Company is the commercial landlord of premises at Great South Road, Manukau (the Premises). The Premises are the Company’s only significant asset. Dr Vijayakumar, who has resided in Australia since 2006, is dissatisfied with the manner in which Dr Vasanthan is manging the Company, including the terms on which the Premises are being leased to a company associated with Dr Vasanthan.
[3] In an earlier application, Dr Vijayakumar claimed that Dr Vasanthan had breached his duties as a director of the Company, and applied under s 165 of the Companies Act 1993 (the Act) to bring a derivative proceeding against Dr Vasanthan (the Derivative Proceeding). In a judgment delivered on 19 July 2021, Associate Judge Bell declined that application, on the basis that Dr Vijayakumar had a more effective alternative remedy under s 174 of the Act.2
[4] Dr Vijayakumar accordingly filed these proceedings, seeking relief under s 174(2) of the Act. Neither defendant has participated in the proceedings, and accordingly the hearing proceeded by way of formal proof.3
[5]Dr Vijayakumar seeks the following orders pursuant to s 174(2) of the Act:
(a)the Company or Dr Vasanthan acquire his shares in the Company at a price fixed by the Court (pursuant to s 174(2)(a));4
1 Dr Vijayakumar was a director of the Company until August 2012.
2 Vijayakumar v Vasanthan [2021] NZHC 1827 [Derivative Proceeding judgment].
3 Dr Vasanthan did participate in the Derivative Proceeding, representing himself.
4 Valuation evidence relied on by Dr Vijayakumar assesses Dr Vijayakumar’s 40 per cent shareholding in the Company, plus his shareholder current account, at a range of $625,663 to
$709,109 (mid-point of $667,386).
(b)the Company or Dr Vasanthan pay compensation to Dr Vijayakumar for direct losses suffered as a result of Dr Vasanthan’s management of the Company, in a range of $103,395 to $123,121 (pursuant to s 174(2)(b));
(c)the Company or Dr Vasanthan pay Dr Vijayakumar consequential damages of $610,000 pursuant to the Court’s broad jurisdiction to make orders as it sees fit (s 174(2)); and
(d)costs.
[6] As a preliminary point, I am satisfied that the defendants were duly served with the papers in this proceeding, though as noted earlier, have taken no steps.
Factual Background
[7] On 17 June 2005, the Company bought 9/597 Great South Road, Manukau, Auckland (that is, the Premises) for the purpose of letting them out to a medical practice. The Premises are the Company’s principal asset. The deposit was divided 60:40 between Dr Vasanthan and Dr Vijayakumar in accordance with their proposed shareholding, with Dr Vijayakumar paying $133,334 and Dr Vasanthan $195,787. The remainder of the purchase price was met by a Bank of New Zealand (BNZ) mortgage.
[8] In or about June 2005, Radius Manukau Accident and Medical Limited (Radius) leased the Premises from the Company under a written deed of lease.5 The Company’s annual accounts record that at least until 2012, the rent was approximately
$75,000 per annum.
[9]In October 2006, Dr Vijayakumar moved to Australia.
[10] Some years later (the papers before the Court do not specify exactly when), Dr Vasanthan bought the practice from Radius, and continued to run a medical
5 Dr Vijayakumar does not have a copy of the lease, despite requests made of Dr Vasanthan.
practice, Manukau Family Doctors Accident & Medical Limited (Accident & Medical), from the Premises. At all relevant times, Accident & Medical is and has been owned in equal shares by Dr Vasanthan and his wife. Dr Vasanthan is the sole director of that company. It seems from the papers that Accident & Medical does not use the whole of the Premises, and that there is a smaller area to the rear of the Premises which has been and continues to be vacant.
[11]Dr Vijayakumar ceased to be a director of the Company in August 2012.
[12] The initial term of the lease to Radius expired in or around 2012. Dr Vijayakumar says that despite his repeated requests, there were no rental reviews since 2004. I note that Dr Vijayakumar was a director of the Company throughout this time period.
[13] The Premises are fitted out for a medical practice, including an x-ray room. Dr Vijayakumar says that neither Radius nor Accident & Medical paid for the fit-out. In an affidavit sworn by Dr Vasanthan in October 2020 in the Derivative Proceeding (included by Dr Vijayakumar in the bundle of documents in this proceeding), Dr Vasanthan says that he paid for the fit-out. As Associate Judge Bell noted in his judgment in the Derivative Proceeding, however, the fit-out is recorded as an asset of the Company in its accounts.
[14] Dr Vijayakumar says that since the expiry of the lease in or around 2011/2012, Dr Vasanthan has permitted Accident & Medical to continue to lease the Premises at a much reduced rate and on a monthly basis.
[15] Dr Vijayakumar says that between 2013 and 2020, the average annual rent Accident & Medical paid to the Company was approximately $47,000 (that is, $28,000 less per annum than the previous six years).6 Dr Vijayakumar also says that the Company has continued to paid outgoings on the Premises which, under reasonable and usual commercial lease terms, would have been recoverable from the tenant.
6 In the affidavit referred to at [13] above, Dr Vasanthan says that since Accident & Medical bought out Radius, the Premises have been half empty (and remained so as at the date of that affidavit), and that Accident & Medical pays $4,500 per month in rent. Dr Vasanthan confirms there is no written lease between the Company and Accident & Medical.
[16] As noted earlier, the Company borrowed money from BNZ in order to fund the original purchase of the Premises. It was obliged to make monthly repayments of principal and interest to BNZ.
[17] In 2015, BNZ issued notices under the Property Law Act 2007 (PLA) against the Company for unpaid mortgage arrears, and charged penalty interest and costs.
[18] Also in 2015, the Commissioner of Inland Revenue placed the Company into liquidation for non-payment of GST. Dr Vijayakumar says that he effectively ‘bailed the Company out’ by lending it $25,000 to enable it to meet its immediate obligations. As a result, on 8 May 2015, the High Court made an order terminating the Company’s liquidation.7 The Company repaid Dr Vijayakumar a year later, on 2 September 2016.
[19] Dr Vijayakumar says that in 2017, Dr Vasanthan caused the Company to take out a further and/or alternative loan with BNZ without advising or consulting with him.8 Dr Vijayakumar says that prior to this, the Company had no debt and $214,717 in funds. Dr Vijayakumar says that in April 2017, Dr Vasanthan used those funds to repay his own alleged advances to the Company.
[20] At least by late November 2019, Dr Vijayakumar had copies of the 2017 and 2018 accounts for the Company, as his solicitors wrote to Dr Vasanthan on 14 November 2019, raising a number of concerns and queries about the accounts, and requesting further information.9 Dr Vijayakumar says that following that letter, Dr Vasanthan did provide some documentation, but not all of the information sought.
[21] Since late 2019, the Company has again defaulted on loan payments to the BNZ, causing the BNZ to make demands on Dr Vijayakumar under a guarantee he provided in June 2005 in support of the Company’s borrowings.
7 Commissioner of Inland Revenue v Manukau Family Doctors Ltd (in liq) CIV-2015-404-117, 8 May 2015.
8 Dr Vijayakumar also deposes that he received no documents or communication from BNZ in relation to the further loan, and signed no documents in relation to it.
9 In the affidavit referred to at [13] above, Dr Vasanthan acknowledges that the accounts are in parts incorrect, though not being an accountant, says he does not know why.
[22] Dr Vijayakumar is also concerned that more recently, Dr Vasanthan has caused the Company to let other parts of the Premises, or Accident & Medical has sublet parts of the Premises, to other companies associated with Dr Vasanthan and his wife, and which also appear to be operating from the Premises (Manukau Dental Clinic Ltd, Mole Scan Ltd and New Zealand Laser and Cosmetic Clinic Ltd).
[23] Finally, in his judgment in the Derivative Proceeding, Associate Judge Bell recorded that “[b]oth Dr Vijayakumar and Dr Vasanthan accept that there should be a separation of interests”.10
The expert evidence
Valuation of the Premises — Mr Smithies
[24] Dr Vijayakumar has filed an affidavit sworn by Brett Smithies, a registered valuer, in which Mr Smithies assesses the annual market rental of the Premises, and also its market value, as follows:
(a)Based on what Mr Smithies says are standard lease terms and conditions for premises of this nature, namely a lease term of nine years, with three-year rent reviews and all outgoings paid by the tenant (which Mr Smithies refers to as a “standard net lease”), Mr Smithies assesses market rental as at February 2022 as $88,400 per annum plus GST (with no fit-out),11 or $97,920 per annum plus GST (with fit-out).
(b)Mr Smithies estimates the Premises’ market value (as at 3 December 2019) to be $1,535,000.12
10 Derivative Proceeding judgment, above n 2, at [29].
11 The level of “fit-out” referred to here being simply air conditioning and suspended ceilings. This compares to a valuation report attached to Dr Vasanthan’s affidavit referred to at [13] above, which assessed market rental for the Premises as at 1 December 2019 at $86,251. The assessments are accordingly not far apart.
12 This compares to the valuation report attached to Dr Vasanthan’s affidavit referred to at [13] above, which valued the Premises at $1,312,000.
Valuation of the Company — Mr Sheppard
[25] Dr Vijayakumar relies on expert evidence of Bruce Sheppard as to the value of the Company, for the purposes of any order made for the buyout of his interests.
[26] Mr Sheppard notes that the Company is a “single asset company” and that it was registered for tax purposes as a “Loss Attributing Qualifying Company”, with the consequence that the losses of the Company were able to be claimed by its shareholders, and equally any profits were taxable in the hands of those shareholders. Mr Sheppard notes that to the extent profits were made, those profits were distributed to shareholders by crediting shareholders with shareholder or director salaries, which is a common practice. He notes that actual distributions, to the extent made, were shown in the Company accounts as repayments of the shareholder loan accounts, which again is common practice.
[27] In terms of valuing Dr Vijayakumar’s shareholding, Mr Sheppard says it would be best established by assessing the net value of the equity of the Company at its market value. He explains that the process for doing this is to:
(a)establish the value of the assets of the Company, in this case the Premises;
(b)make adjustments due to cash, debts and accruals with reference to the Company’s annual financial statements; and
(c)make any other adjustments required with reference to the basis of the Premises’ valuation and inconsistencies in the financial statements.
[28] In establishing the value of the Premises, Mr Sheppard relies on Mr Smithies’ property valuation. I record that there is no basis for this Court to question or dispute Mr Smithies’ valuation, there being no evidence produced in this proceeding challenging it.
[29] Mr Sheppard explains that he has reviewed the Company’s financial statements (prepared by various chartered accountants over the years), and except for
the March 2020 financial statements, “they are [a] fair summary of the assets and debts of the [Company] at each year end”.
[30] Mr Sheppard notes that there are several issues contained in the financial statements (though despite these, says that they appear to be “substantially reliable in respect of the income and expenditure”), and has accordingly made some adjustments to the accounts to reflect those issues.13
[31]In terms of the accounts receivable, Mr Sheppard says the following:
The receivables seem to represent the sum of all income receivable by the company in the years from 31 March 2017 to 31 March 2020, including the prior period adjustment. This would reflect the case of not one single dollar of income being collected for 4 years, nor the rates or water adjustments due by the tenant.
I note that no accounts receivables were owing at 31 March 2019, suggesting that the receivable amount arose in the 12 months to 31 March 2020. It seems most likely that the accounts have been reconstructed to record rent arrears, and increase the advances to [the Company] by [Dr Vasanthan]. The receivable in turn is owed to [the Company] by [Dr Vasanthan] or parties associated with [Dr Vasanthan]. In effect these changes hide the net drawings of [Dr Vasanthan], and regardless constitute a recoverable asset of [the Company].
The accounts payable would appear to be the claimed management fees plus GST, $62,675. The balance would likely be usual accruals, which are likely to be accounting fees …
[32] To arrive at his valuation, Mr Sheppard has also adopted the following assumptions:
(a)that the Company will collect rent at the market value assessed by Mr Smithies;
(b)that the tenant will meet all outgoings;
(c)that the Company will meet its basic compliance costs, accounting etc; and
13 For example, in the 2017 and 2018 years, payments are shown into and out of the Company as capital introduced and drawings from and to Dr Vijayakumar. Mr Sheppard proceeds on an assumption that these amounts have not been paid to Dr Vijayakumar as he deposes, but instead paid to Dr Vasanthan.
(d)that the Company will pay tax at the corporate tax rate of 28 per cent.
[33] Mr Sheppard also discusses the fit-out value and how that impacts on his share valuation. He says the following:
The Property Valuation [by Mr Smithies] assumes that the property excludes a fit out beyond air-conditioning, suspended ceiling and recessed lighting. In [the] absence of specific make-good obligations or acknowledgement of fit- out ownership, any improvement in the property at the termination of a lease would normally vest in the landlord. I would expect that this would have been the case on the expiry of the original [Company] lease in 2012.
The fit out is of a moderate to high standard. It is usual that its inclusion in the valuation would increase the rental rate to greater than that assessed by Brett Smithies, in his valuation report. This has been confirmed by Mr Smithies’ affidavit in February 2022. At para 5.4 he confirms a “shell” rental of $88,400 and a turnkey rental of $97,920, an increase of 10.8%.
This higher rent may not necessarily have resulted in a higher property value. Tenants letting turnkey premises tend to sign shorter leases, which has an adverse impact on valuation. Having said this, the ‘shell’ rental is capitalised by Smithies in 2019 using a 5.5% capitalisation rate and if the valuation were unchanged, the turnkey p.a. rate would be 6.09%. Mr Smithies has not commented on what impact the higher rent would have on the valuation, nor on the impact on what the lease terms may have been, however, it is my view that the capitalisation rate on the higher rents in December 2019 would not have been more than 5.75%. This would imply a capital value, including fit out, of $1,702,000, an increase in the valuation of Smithies of $167,000.
Post December 2019, capitalisation rates on almost every asset class have declined and values have increased. This occurred due to massive fiscal stimulus combined with quantitative easing and falling interest rates. Anecdotally capitalisation rates on assets of this nature had dropped to as low as 4%. This trend has started to reverse, as forward interest rates have begun to increase, and likely are now nearer 5 to 5.5% on an asset of this nature. In my view, capitalising the turnkey rentals at 5.5% in this market [is] a conservative assumption.
[34]Mr Sheppard goes on to say that:
While on the surface the items detailed above are problematic, the net outcome is that the Financial Statements appear to be an acceptable reflection of the net asset position of the company for the purposes of this valuation.
[35] On the approach adopted by Mr Sheppard, he arrives at a valuation of Dr Vijayakumar’s 40 per cent shareholding in the Company, plus his current account balance, as at March 2022 of $625,663 (low range), $667,386 (mid-range) and
$709,109 (high range).
[36] Mr Sheppard has also considered what is said to be “direct losses” borne by Dr Vijayakumar as minority shareholder as a result of Dr Vasanthan’s alleged oppressive conduct. In short, this is an assessment of either income which could and should have been earned by the Company but which has not been (due to Dr Vasanthan’s actions or inactions), or increased costs incurred by the Company which ought not to have been, again but for actions or inactions of Dr Vasanthan.
[37] It is helpful to set out here Mr Sheppard’s table of assessed unrecovered revenue and what he considers to be wrongly incurred costs:
Summary of direct losses Between 2013 and 2020
| Lower Unfurnished | Mid-Range | Higher Fully Fitted | |
| Assessed rental payable under a commercial lease | 636,000 | 704,492 | |
| Rental recovered | -393,756 | -393,756 | |
| Unrecovered outgoings | 68,996 | 68,996 | |
| Lost revenue from the property asset | 311,240 | 345,486 | 379,732 |
| Interest paid on loans unrelated to [the Company] | 6,072 | 6,072 | |
| Cost associated with GST default and liquidation | 41,146 | 41,146 | |
| Other minor costs unrelated to [the Company] | 554 | 554 | |
| Total losses [to the Company] | 359,012 | 427,504 | |
| less tax | -100,523 | -119,701 | |
| Net loss to [the Company] | 258,489 | 283,146 | 307,803 |
| 40% portion of loss borne by [the Plaintiff] as shareholder | $103,395 | $113,258 | $123,121 |
[38] By way of explanation, the first three lines in the above table reflect additional rental which ought to have been recoverable from leasing the Premises at a market rate (based on Mr Smithies’ rental assessments), including unrecovered outgoings. The lower range reflects a lease absent a fit-out, and the higher range assuming rental received for a fully fitted-out premises.
[39] The interest paid on loans unrelated to the Company appears in the 2020 accounts. Mr Sheppard proceeds on the basis that this appears to be interest being
paid on a personal debt, given the earlier debt of the Company secured by the Premises had been repaid.
Summary of Dr Vijayakumar’s claim and submissions
[40]Dr Vijayakumar’s concerns can be grouped under the following headings:
(a)failure to procure formal lease and rent review;
(b)Dr Vasanthan preferring his interests over those of the Company;
(c)permitting the Company to engage in repeated financial defaults; and
(d)a failure to appropriately keep Dr Vijayakumar informed of the affairs and operation of the Company.
[41] As noted, Dr Vijayakumar says that despite his repeated requests, there have been no rent reviews in relation to the lease of the Premises from the Company to Accident & Medical. He notes Mr Smithies’ valuation evidence, and says that based on the Company having paid for the fit-out, the Premises should be returning at least
$97,000 per annum on a turnkey basis.
[42] Dr Vijayakumar further submits that the accounting evidence demonstrates that Dr Vasanthan received management fees of 7.5 per cent from the rental paid by his own company “for managing the lease arrangements between [the Company] and Accident & Medical”. It is submitted that Dr Vasanthan did not enter details of these arrangements in an interests register, nor provide a certificate that these arrangements were fair to the Company and the grounds for that opinion.14 Counsel for Dr Vijayakumar note that in this context, in the Derivative Proceeding judgment,
Associate Judge Bell observed:15
[Dr Vasanthan] will need to prove that the payments to the company were fair when they were made. Here, the payment of management fees for the year ending 31 March 2020 seems to be open to scrutiny, even if a management fee of 7.5 per cent of the rent can be justified.
14 Companies Act 1993, s 161.
15 Derivative Proceeding judgment, above n 2, at [18].
[43] In addition, and as noted, Mr Sheppard deposes that the Company accounts show that profits since March 2012 have been distributed as salaries pro-rated to shareholdings. However, Dr Vijayakumar deposes that he has received no actual dividends or other payments from the Company, contrary to what is recorded in the accounts. Counsel for Dr Vijayakumar observes that the accounts receivable recorded in the Company’s accounts for 2020 matches the rental income over the preceding four years from 2017 to 2020, and submits this cannot be coincidental. It is said that this suggests or confirms that whatever rent was paid was effectively “set off” by management fees or directors’ salaries charged by Dr Vasanthan to the Company.
[44] Further, Dr Vijayakumar refers to Mr Sheppard’s evidence that what financial records of the Company have been disclosed demonstrate that Company funds have been used to meet expenses that the Company ought not to have met, including:
(a)unexplained or personal expenditure;
(b)interest charged to the Company while it had no external debt;
(c)management fees charged with no rationale nor any contractual nexus;
(d)outgoings paid on the Premises that, on any reasonable lease agreement would have been recoverable from a tenant on a net lease;
(e)considerable cost associated with the GST default and the resultant costs of reinstatement following liquidation; and
(f)legal and other expenses incurred by Dr Vasanthan as a result of the issues Dr Vijayakumar raised.
[45] In relation to (f) above, counsel points to the judgment in the Derivative Proceeding, in which Dr Vasanthan acknowledged that he had incurred expenses (fees for lawyers and consultants) in dealing with Dr Vijayakumar’s complaints, and that he had used Company funds to meet those expenses (being the $54,500 for management
fees shown in the statement of financial performance for the year ending 31 March 2020).16
[46] Finally, the chronology of financial defaults has been summarised earlier. Dr Vijayakumar’s position is that Dr Vasanthan has inappropriately and in breach of his duties to the Company permitted the Company to go into default on loans and GST, and then taken out a further loan in 2017 when it would appear that this was not required, and that it was done without advising or consulting Dr Vijayakumar.
[47] Turning to the relief sought by Dr Vijayakumar, he seeks an order that Dr Vasanthan buy out his shareholding (and pay his shareholder current account) at the value assessed by Mr Sheppard.17
[48]Dr Vijayakumar also seeks damages for direct and indirect losses.
[49] In terms of damages for direct loss, Dr Vijayakumar relies on Mr Sheppard’s assessment summarised at [37] above. In short, he says this sum ought to be payable to him by Dr Vasanthan, being revenue that ought to have been earned by the Company but was not, or expenses paid by the Company which ought not to have been, but for Dr Vasanthan’s actions.
[50] Dr Vijayakumar also claims damages of $610,000 for what are said to be “consequential losses”. The claim is based on the premise that due to the financial uncertainties and pressures Dr Vijayakumar was operating under because of the way in which the Company was being managed (including tax liabilities resulting from the salary the Company had allocated to him but which had not been paid, resulting in him entering into a payment plan with the Australian Tax Office), Dr Vijayakumar made a decision to sell his New Zealand investment property in June 2016, realising
$1,310,000. Mr Smithies estimates the current value of that property to be $1,920,000. Counsel for Dr Vijayakumar submits that given the causative link between the alleged oppressive conduct by Dr Vasanthan and Dr Vijayakumar’s need to sell his New Zealand investment property, Dr Vasanthan ought to compensate Dr Vijayakumar for
16 Derivative Proceeding judgment, above n 2, at [15].
17 See [35] above.
the difference between the net sales proceeds and the property’s current market value, being $610,000.
Legal principles
[51] Section 174 of the Act allows a current or former shareholder who considers that the affairs of the company have unfairly prejudiced them to apply to the Court for relief. The Court has a wide range of remedies available if it considers the granting of relief to be just and equitable.18
[52] In Thomas v H W Thomas Ltd, the Court of Appeal held that the test for unfair prejudice encompasses any conduct of a company that is unjustly detrimental to the plaintiff shareholder, whatever form it takes, and regardless of whether there has been an invasion of legal rights, lack of probity, or bad faith.19 Relevantly, it can encompass conduct that unfairly excludes a shareholder from management participation.20
[53] Examples of conduct said to be evident in this case which the courts have found to constitute oppressive, unfairly discriminatory and unfairly prejudicial behaviour include:
(a)exclusion of the applicant from management or other involvement with the company;21
(b)diversion of business or assets from the company to directors or to other entities controlled by directors;22
(c)unfairly restrictive or discriminatory dividend policy, particularly where directors pay themselves excessive remuneration from funds that would otherwise be distributed to shareholders;23 and
18 Section 174(2).
19 Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA) at 693.
20 At 694.
21 At 694.
22 Seimer v Paragon Oil Systems Ltd (2001) 9 NZCLC 262,693.
23 Re Waitikiri Links Ltd (1989) 4 NZCLC 64,922.
(d)preferential treatment to related parties.24
[54] In terms of relief, in Jordan v Chemical Specialities Ltd, this Court said the following principles will be relevant when considering whether to grant relief, and if so, in what form:25
(a)relief is remedial rather than punitive;
(b)any order should be clearly directed to provide a remedy of an appropriate character;
(c)the courts should be wary of intervening in the management of a company to any extent greater than is strictly necessary to provide the appropriate remedy; and
(d)the courts have a broad discretion to select the appropriate remedy for the situation and should not hesitate to be creative and flexible in fashioning a remedy to fit the case.
[55] Before turning to my discussion of Dr Vijayakumar’s claims, it is worth commenting briefly on the claim for consequential losses. I was not directed to any authorities which discuss whether damages can be awarded for consequential losses said to have flowed from what is alleged to be oppressive conduct. However, counsel for Dr Vijayakumar submits that the authorities referred to demonstrate that the court has a wide power to award remedies that meet the circumstances of the case, and that this can include the payment of damages for consequential losses where that is warranted.
Discussion
[56] I am satisfied that the unchallenged evidence before the Court demonstrates on the balance of probabilities that the affairs of the Company have been and are being
24 In Jackman v Jackets Enterprise Ltd [1977] BCJ 52 (BCSC), the company made a loan on favourable terms to a sister company which was under the same control. It was held that, although no bad faith was involved, the depletion of the company assets unfairly prejudiced the minority.
25 Jordan v Chemical Specialities Ltd (1999) 8 NZCLC, 261,839 at 17–18.
managed in a way that is oppressive to Dr Vijayakumar as a minority shareholder. In particular, I am satisfied that the evidence suggests that the rental arrangements between the Company and a company or companies associated with Dr Vasanthan are not delivering an appropriate or optimum rental return to the Company.26 Given the tenant at the current time is a company associated with Dr Vasanthan, the inescapable inference is that he has been content for the Company (of which he is only a 60 per cent shareholder) to receive a lower than market rent from Accident & Medical.
[57] Further, I proceed on the basis of Dr Vijayakumar’s sworn evidence that he has not in fact received any salary or dividend paid from the Company for many years. Further, and based on Mr Sheppard’s evidence, it seems the Company is effectively being used by Dr Vasanthan as his “alter ego”, or at least that Company funds are being used for the benefit of either Dr Vasanthan himself or companies associated with him and his family.
[58] The position in relation to the Company’s financial defaults is slightly less clear, in that the mere fact a company is in financial difficulty and falls into default on its loans is not itself indicative of oppressive or unfair conduct. Nevertheless, there does not appear to be any real clarity as to why and how the Company has continued to fall into default, and then engaged in further borrowings when that has not been necessary. It is also of concern that Dr Vasanthan has utilised Company funds to pay for fees incurred by him in responding to Dr Vijayakumar’s complaints.
[59] I am therefore satisfied that the threshold for relief under s 174 of the Act is met, and that it is appropriate to make an order that Dr Vasanthan acquires Dr Vijayakumar’s shares. I also gave consideration as to whether an appropriate order might be to put the Company into liquidation. But given that relief is not sought, and that it appears Dr Vasanthan accepts that a buyout by him of Dr Vijayakumar’s shares would be appropriate,27 I consider that the preferable relief.
26 The actual rental is indeed lower than that assessed by the valuer relied on by Dr Vasanthan in the Derivative Proceeding.
27 Noting that in his affidavit in the Derivative Proceeding, he states that he had offered at an earlier point to buy Dr Vijayakumar out.
[60] I adopt the mid-range assessment by Mr Sheppard of $667,386. I do so recognising that there may be a dispute over how the fit-out was paid for. Further, to the extent that errors or lack of clarity in the Company’s accounts affect the correct value of the Company, that ought to fall on Dr Vasanthan’s shoulders, given as sole director of the Company, it was and is his responsibility to ensure that the Company’s accounts are correct and up to date at all times.
[61] I also consider it appropriate to make an order for damages payable to Dr Vijayakumar to reflect that, but for the manner in which Dr Vasanthan has conducted the affairs of the Company since at least 2012, there would likely have been greater value within the Company.
[62] The alleged under-recovery of rent and outgoings is the primary basis of the direct losses claim. I note that in the Derivative Proceeding, Dr Vasanthan produced valuation evidence which suggested that at least for the space occupied by Accident & Medical, the rent received was less than current market value by a total of around
$108,000 (after taking into account an adjustment for operating expenses the Company ought not to have paid). That is obviously less than that assessed by Mr Sheppard (and based on Mr Smithies’ rental assessment), part of the difference being that Dr Vasanthan’s valuation only related to a part of the Premises, being that which is occupied by Accident & Medical. It excluded a rear vacant portion of the Premises for which the rent was assessed at a total of $138,107. Associate Judge Bell noted that Dr Vasanthan had said that he had made efforts to find other tenants for the unoccupied space, but had been unsuccessful. The Judge accordingly noted that Dr Vijayakumar’s claim was on the basis that Accident & Medical should pay rent for the entire Premises, whether used or not, and observed “[t]hat part of the claim would be more difficult.”28
[63] I am conscious that this matter proceeds by way of formal proof, and that there is no competing factual or expert evidence filed in this proceeding challenging Mr Sheppard’s approach to the direct loss claim. Nevertheless, I must be satisfied on the balance of probabilities that the claim is made out. My assessment of Mr Sheppard’s evidence (and that of Mr Smithies) is that it is based on an assumption
28 Derivative Proceeding judgment, above n 2, at [13].
that the entire Premises would be fully leased at all times, which, at least by the time of the Derivative Proceeding, it was not. It is difficult to assess on the current evidence whether the fact the Premises have not been fully leased at all times is the result of default or failure on the part of Dr Vasanthan.
[64] Given these matters, I consider it appropriate to proceed on the basis of Mr Sheppard’s mid-estimate of direct losses, but to reduce that by one-third to reflect contingencies such as not being in a position to have the entire Premises fully leased at all times. I accept that this is somewhat arbitrary and broad brush, but reflects what I consider to be appropriate given the lack of direct evidence on the likelihood of the Premises being fully let at all times.
[65] Accordingly, there will be an order that Dr Vasanthan pays compensation to Dr Vijayakumar of $113,258 less 30 per cent, being $79,281.29
[66] I am not satisfied that the claim for consequential losses is made out. Ultimately, at the hearing before me, counsel for Dr Vijayakumar responsibly recognised that there were some difficulties with this aspect of the claim.
[67] First, evidence of a causative link between the manner in which the Company was being managed by Dr Vasanthan and Dr Vijayakumar’s decision to sell his New Zealand investment property is tenuous at best. Further and in any event, Dr Vijayakumar presumably received a market sale price for his New Zealand property in June 2016, and accordingly had the net sales proceeds available to him to invest as he saw fit. There is no evidence before me as to what became of those funds; for example, whether some or all of them were reinvested in property in Australia which has similarly appreciated in value over time; Dr Vijayakumar paid down debt and consequently was relieved of interest costs; or invested the net sale proceeds in some other way. In addition, had Dr Vijayakumar continued to hold his New Zealand property, there would have been various costs associated with doing so, including mortgage repayments, rates, utilities and other outgoings. No account is made for such costs in the claim for consequential damages.
29 $113,258 less $33,977.
[68] The claim for consequential losses is not made out on the balance of probabilities.
[69] Finally, and for completeness, I raised with counsel at the hearing whether there were any aspects of Dr Vijayakumar’s claim that were subject to limitation, given the claims for compensation for direct losses relate to, for example, a failure to recover rent from 2013, and thus stretch back to events which occurred more than six years prior to these proceedings being commenced.30
[70]Section 11 of the Limitation Act 2010 provides as follows:
(1)It is a defence to a money claim if the defendant proves that the date on which the claim is filed is at least 6 years after the date of the act or omission on which the claim is based (the claim’s primary period).
[71]“Money claim” is defined in s 12 as:
(1) Money claim means a claim for monetary relief at common law, in equity, or under an enactment.
[72] In supplementary submissions filed, counsel referred me to Alligators Fast Food Ltd v Chen31 and Hiscock v Panmure Orchards Ltd32 for the proposition that a claim for compensation under s 174(2)(b) is not statute barred, either by the 1950 or 2010 Limitation Acts. But even putting these authorities aside, pursuant to s 11 of the Limitation Act, a limitation defence to a money claim is a true defence, and is only applicable “if the defendant proves that the date on which the claim is filed is at least 6 years after the date of the act or omission on which the claim is based”.33
[73] In this case, given there has been no defence to the claim, it is self-evident that the defendants have not proved those matters required by s 11.
30 The s 174 proceedings were commenced on 23 September 2021.
31 Alligators Fast Food Ltd v Chen [2018] NZHC 587.
32 Hiscock v Panmure Orchards Ltd [2021] NZHC 3020.
33 Limitation Act 2010, s 11(1) (emphasis added). See also Humphrey v Fairweather [1993] 3 NZLR 91 (HC) at 101; Davys Burton v Thom [2007] NZCA 215, [2008] 1 NZLR 193 at [79].
Result
[74] There is an order that Dr Vasanthan purchase Dr Vijayakumar’s shares in the Company, and arrange for the Company to pay out his shareholder current account, in a total amount of $667,386.34
[75]There is a further order that Dr Vasanthan pay Dr Vijayakumar a sum of
$79,281 in compensation for direct losses suffered as a result of the manner in which Dr Vasanthan has managed the affairs of the Company.
[76] Dr Vijayakumar’s claim for compensation for consequential losses of $610,000 is dismissed.
[77] Dr Vijayakumar is entitled to costs on a 2B basis for steps taken in this proceeding (not those taken in the Derivative Proceeding), plus disbursements.
Fitzgerald J
34 Share value of $445,077 plus current account of $222,309.
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