Walters v TMC Transport 2018 Limited

[2023] NZHC 1156

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE

CIV-2022-409-587

[2023] NZHC 1156

UNDER

Section 174 of the Companies Act 1993

BETWEEN

LUKE WILLIAM WALTERS

Plaintiff

AND AND

AND

TMC TRANSPORT 2018 LIMITED

First Defendant

TANI JOHN NEALE
Second Defendant

MARGARET NEALE

Third Defendant

Hearing:

4 May 2023

Appearances:

B B Gresson for Plaintiff

J A Frampton for Defendants

Judgment:

15 May 2023

JUDGMENT OF ASSOCIATE JUDGE LESTER

WALTERS v TMC TRANSPORT 2018 LIMITED [2023] NZHC 1156 [15 May 2023]

[1]                  In the first part of 2018, Luke Walters (Luke), Tani Neale (Tani), and Margaret Neale (Margaret), agreed to establish a transport company to operate out of Wanaka.

[2]                  Luke already owned a transport company called TMC Transport Limited. In substance, Luke folded that business into  the  new  company,  TMC  Transport  2018 Limited (the company) incorporated on 4 May 2018. Luke was a shareholder alongside Tani and Margaret; Luke holding 50 per cent of the shares and Margaret and Tani holding 25 per cent each.

[3]                  The company essentially operated as a transport company from May 2018 until mid-December 2019. At that time, Luke left the company under disputed circumstances. Margaret and Tani say the company finally ceased trading around May 2020 as it continued to meet its contractual commitments to clients.

[4]                  It is common ground that the company has  not  traded  since  the  end  of May 2020 at the latest.

[5]                  Upon incorporation, the company acquired a Volvo and Nissan truck and a flat deck trailer. Luke contributed $198,300.00 to the company, being his half share of the purchase price of those three assets, and Margaret and Tani contributed the other half. Those amounts were recorded as advances in each shareholder’s current account.

[6]                  With the company having ceased trading, it sold the Volvo truck and flat deck trailer for $212,750.00; that sale occurring in October 2020. In the following December 2021, it sold the Nissan truck for $23,000.00.

[7]                  It is common ground that the sale proceeds of the assets were paid to Margaret and Tani being $207,000 less $30,000 they returned to the company in order for it to pay GST being $177,000. By the time the sale proceeds were paid to Margaret and Tani, Luke had been removed as director (again in circumstances that are in dispute). Luke says the way the payment of the sale proceeds is recorded in the company’s accounts is as a repayment of Margaret and Tani’s account debt, together with what amounts to an advance of the balance by the company to Margaret and Tani. In short,

Luke complains that Margaret and Tani took all of the sale proceeds of the company’s assets for themselves.

[8]                  Margaret and Tani characterise this payment as their holding the company’s funds on its behalf. Their position is:

… they understand the need to account to the company for these funds subject to taking into account any necessary adjustments for payments that they have made on behalf of the company and/or the partial repayment that they expect to retain for their current account.

[9]                  Accordingly, the situation is that the company is assetless. The relationship between the parties has entirely broken down. The sale proceeds of the company’s plant, are held by Margaret and Tani  although how and where those funds are held  is not clear, there being no evidence the fund is intact.

[10]              In these proceedings, Luke complains the affairs of the company have been conducted in a manner which is unfairly prejudicial to him. He relies on various events in support of that proposition including the following:

(i)what he characterises as his unlawful removal as a director;

(ii)that the sale of the company’s assets were major transactions;

(iii)that the defendants have failed to provide him with information in relation to the sale of the assets;

(iv)the unlawful drawing of company funds that I have already described; and

(v)the incorrect treatment of his current account.

[11]              Luke seeks an order that his shares be acquired by Margaret and Tani and that they pay him compensation which he calculates as being 50 per cent of the company’s assets at the time he was removed as director. Luke puts the value of the assets at that time as $304,842.00 thus he claims $152,421.00.

[12]              With the plant selling for $235,75.00, the issue of whether the assets were sold at an undervalue arises. With Margaret and Tani raising issues as to the correct level of Luke’s current account, Luke only seeks judgment for liability in his application for summary judgment.

[13]Section 174 of the Companies Act 1993 (the Act) 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.

(3)       …

Luke’s removal as director

[14]              Ms Frampton, in submissions on behalf of the defendants, accepts that Luke was removed as a director in breach of the requirements of s 156 of the Act.

[15]              Luke was removed as  a director on 20 January 2020.   All of the events     Ms Frampton relies on as amounting to “implied consent to his removal” predate Luke’s removal.

[16]              Assuming without deciding it is possible for Luke to impliedly waive the accepted breach of s 156 of the Act, such would require him to first have full knowledge of the breach. Given all of the events relied on as implied consent predate Luke’s removal as a director, such cannot amount to waiver of the breach. In short, the points raised by Ms Frampton seem to be Tani and Margaret’s justification for removal rather than amounting to Luke consenting to be removed as director.

[17]              Ms Frampton then submits that because Luke’s removal was invalid, it was open to Luke to assert he was still a director. Ms Frampton submits that as Luke has not asserted his removal was ineffective, that shows he has consented to his removal.

[18]              I do not accept Ms Frampton’s submission. It amounts to Tani and Margaret saying that while they were in breach of s 156 of the Act, the fact that Luke did not take steps to challenge his removal means he consented to removal. He did not have to – he could raise his removal in a proceeding such as this one. Luke did not have to issue proceedings to undo his purported unlawful removal as a director. That was not the only option open to him, particularly when formal restoration to the office of director would only reinforce the deadlock in the company on how the sale proceeds should be divided. No authority is advanced by Ms Frampton for her submission. The fact is, Tani acted as if he was the sole director notwithstanding Luke’s later protests in relation to removal.

[19]              Ms Frampton then submits that Luke has not provided any evidence that he has suffered loss or damage as a result of his removal as a director. She submits that no remedy is justified on the facts as no detriment has been suffered. I do not accept this submission. As one of two directors, Luke enjoyed at least negative control of the company. Margaret and Tani maintain that a draft shareholders agreement, which was never signed, is nonetheless enforceable. If that is the case, then their removing Luke as a director deprived him of the benefit of the provisions in the shareholders agreement relating to how directors’ meetings were to be conducted.

[20]              I am satisfied Margaret and Tani’s removal of Luke as director was unfairly prejudicial to him as director – they treated him as having no longer having the power or authority of a director of the company after they removed him in a manner inconsistent with s 165 of the Act even though their counsel now submits Luke’s removal was ineffectual as a matter of law.

Payment of company funds to Margaret and Tani

[21]              The status of the funds paid to Margaret and Tani is unsatisfactory. On the face of the company records, the payments were recorded as repayment of their shareholder current account - so much is confirmed by their expert accounting evidence.

[22]              Accordingly, on the face of the company’s accounts, Margaret and Tani have been repaid their debt in full along with additional funds, leaving the company with nothing.

[23]              However, in this proceeding, Margaret and Tani assert they understand they will have to account for the funds albeit only after taking into account of what they call any necessary adjustments.

[24]              However, Margaret and Tani cannot have it both ways. They say they took the funds because of  concern  Luke  might  access  the  funds  if  they  were  held  in  the company’s bank account. In effect, they say they took the funds for safe keeping. If that is the case, then they hold the funds as bare trustees for the company. As bare trustees, they must account for the full amount of the funds received when called upon to do so by the company. The company, however, is controlled by Tani; he being the sole director. The prejudice to Luke is self-evident. Margaret and Tani hold company funds on a basis they do not explain but one that they seem to contemplate will permit them to claim deductions before having to repay anything to the company.

[25]              Further, there is reference in Ms Frampton’s submissions that Margaret and Tani claim they have not received payment for work they did on behalf of the company following Luke’s departure from the company. Margaret and Tani suggest the value of that work would be $40,000.00 plus GST. However, again referring to the draft

shareholders agreement, it records that: “Directors will not be entitled to remuneration from the Company unless otherwise agreed in writing by all Shareholders”.

[26]              There is no evidence the proceeds of sale of the plant paid to Margaret and Tani are held intact on interest bearing deposit on behalf of the company. The company’s accounts record the money being paid to Margaret and Tani in reduction of their current account and therefore for their personal benefit. However, they suggest the payment being recorded as a credit to their current accounts was their accountant’s decision. Had Margaret and Tani explained to their accountant they were holding the funds for  the  company,  the  accountant  would  not  have  treated  the  payment  as a payment to them. The funds would have been recorded in the accounts as being held by them on trust for the company, leaving their current account debt intact. One would have expected the money to be held in a solicitor’s trust account or on an interest bearing deposit with a bank. Absent evidence that the money is intact, given its accounting treatment and Margaret and Tani accepting they must account (rather than return the funds) points to them having used the funds for their own benefit; again they do not claim the funds are held undisbursed. Margaret and Tani recognising they recognise they have to return the funds, does not alter the fact the funds are no longer held by the company. The company is dependent upon recovering the money from them. That in itself is an unfair prejudice to Luke as shareholder.

Major transactions

[27]              On the company being established, its major assets were the two trucks and flat deck trailer referred to above which, in substance, were the only assets of the company.

[28]              Ms Frampton’s submissions in respect of the sale of the flat deck trailer and the Volvo truck were as follows:

34.With regards to the sale of the Domett flat deck trailer, this was sold for $40,989 in October 2020. TME financial statements for the year ended 31 March 2020 record total assets of $311,536 (CB.201) so the sale of this asset cannot have been a major transaction when considered alone.

1. With regards to the sale of the Volvo FM12 truck, this was sold for

$144,011 in October 2020 so was also sold for less than 50% of the

value of the TMC total assets as recorded in its financial statements for the year ended 31 March 2020 ($311,536) (CB.201). …

[29]              Ms Frampton is critical of Luke treating these sales as a single transaction in order to bring the  combined  sale  value  of  the  assets  of  $185,000.00  over  the  50 per cent threshold for a major transaction. Ms Frampton submits the assets had been given separate values in the company’s accounts and therefore, they should be treated as separate transactions for the purposes of the major transaction rules.

[30]              However, it seems to me the error in Ms Frampton’s above analysis is that if the sale of the two assets is to be viewed as separate transactions, then the total assets of the company cannot remain constant for each transaction. Once the Domett flat deck trailer has been sold, its value must be removed from the value of the assets of the company. Section 129(2)(b) of the Act defines “major transaction” as:

the disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the company’s assets before the disposition; [emphasis added]

[31]              If the two transactions are to be treated individually, then the value of the assets of the company before the sale of the Volvo truck was $311,536.00 (assuming it is appropriate to use book values) less the sale price of the Domett flat deck trailer, leaving the value of the company’s assets at $270,547.00. The Volvo truck was sold for $144,011.00; more than half of the value of the assets of the company at the time of its sale.

[32]              Accordingly, I find the sale of the Volvo truck was a major transaction which was not approved by a special resolution of the shareholders as required by s 129(1)(a) of the Act. Pursuant to s 175(1)(l) of the Act, failure to comply with s 129 is conduct which is unfairly prejudicial for the purposes of s 174 of the Act.

The way forward

[33]              I address only three of the instances of alleged prejudicial conduct by Margaret and Tani. Any one of the three is sufficient to trigger the ability to make orders under s 174(2) of the Act, if I consider it just and equitable to do so.

[34]              I am satisfied that orders are appropriate in this case. The company is not trading and its shareholders have fallen out. The parties cannot agree how the sale proceeds of the company’s assets are to be divided or the basis upon which they are held or be returned to the company. The circumstances cry out for the appointment of a liquidator.

[35]              Luke’s acceptance that there are issues as to quantum show that the company’s affairs and the rights of each shareholder need to be resolved by a liquidator. The validity of amounts alleged to have been drawn by Luke in breach of his obligations, and claims asserted by Margaret and Tani need to be investigated by a liquidator who will determine whether the claims made are valid. Liquidators routinely reconstruct shareholder’s current accounts with the benefit of access to all of the company’s records.

[36] As Margaret and Tani say, they hold the proceeds of the sale of the plant on behalf of the company, those proceeds are to be restored to the company liquidation. Those funds total $177,000.00 taking into account the sum they returned for GST referred to at [3] above.

[37]              Once the Court is satisfied there has been prejudicial conduct and that it is just and equitable to make orders, it may place the company into liquidation,1 and may make such further orders as it thinks fit.

[38]Accordingly, the orders I propose to make are as follows:

(i)that TMC Transport 2018 Limited be placed into liquidation; and

(ii)that Margaret and Tani pay to the liquidator within 10 working days of liquidation, the sum of $177,000.00.

[39]              Iain Nellies of Insolvency Management will be appointed liquidator. His reasonable fees will be payable from the assets of the company. Mr Nellies has confirmed to the Court he is prepared to accept appointment.

1      Companies Act 1993, s 174(2)(g).

[40]              If the parties wish to resolve the dispute between them without the need for the company to be put into liquidation, I allow until 1pm on Friday 7 July  2023  for  the parties to reach agreement – that extended period recognising Margaret and Tani being currently overseas.

[41]              Failing advice of settlement, the company will be placed in liquidation at 4:00pm on 7 July 2023. There will also be an order that Margaret and Tani are to pay to the liquidator within 10 working days of liquidation, the sum of $177,000.00 being the amount they say they received on the company’s behalf allowing for the return of

$30,000.00 to pay GST. Whether Margaret and Tani should be liable for interest on the funds will be for the liquidator to consider. Leave is reserved to the liquidator to seek further orders to enforce the obligation on Margaret and Tani to restore the company’s funds.

[42]              The parties will be able to take up their disputes in relation to the current accounts with the liquidator and provide evidence and submissions to him as they think fit.

Costs

[43]Costs are reserved.

Associate Judge Lester

Solicitors:

Todd & Walker, Queenstown (for the Plaintiff) Lane Neave, Christchurch (for the Defendants)