Young v Remarkable Exquisite Design Limited

[2022] NZHC 635

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE

CIV-2021-425-102

[2022] NZHC 635

UNDER

the Companies Act 1993

IN THE MATTER

of an application for liquidation of

a company under section 241 of the Act

BETWEEN

MARIA CATHERINE YOUNG

Plaintiff

AND

REMARKABLE EXQUISITE DESIGN LIMITED

Defendant

Hearing:	1 March 2022
Appearances:	K McDonald for Plaintiff (M Young observing) B Gresson for Defendant
Judgment:	31 March 2022

JUDGMENT OF ASSOCIATE JUDGE LESTER

YOUNG v REMARKABLE EXQUISITE DESIGN LIMITED [2022] NZHC 635 [31 March 2022]

[1]    The  plaintiff,  Ms Young, has applied under s 241(4)(d) of the Companies Act 1993 (the Act) for an order that the defendant, Remarkable Exquisite Design Limited (RED), be liquidated on just and equitable grounds.

[2]    Ms Young is a 33 per cent  shareholder  in  RED.  Mr Geoffrey  Short  and Ms Katrina Wardill hold the remaining 67 per cent shareholding between them. The three shareholders are also directors. Ms Young lives in Hamilton, while the remaining shareholders live in Queenstown.

[3]    RED was incorporated on 8 August 2019 and, on 28 August 2019, purchased a high-end apartment in Queenstown for $2,175,000 (the apartment). Each of the shareholders introduced cash, with the balance met by a bank loan.

[4]    RED was the third such venture between the three former friends. Two other companies were incorporated, one called Takitimu Pounamu Limited, which purchased a property in the Pounamu Apartments in September 2018. The second was Short Kat Mouse Limited which purchased a property at Beacon, Queenstown on   28 June 2019. The properties owned by those other companies have now been sold, albeit, as I will refer to below, there is a dispute as to the division of the proceeds of sale from Short Kat Mouse Ltd. The proceeds of sale are still held on trust by the company’s solicitors pending resolution.

[5]    Opposition to the order was advanced by Mr Short and Ms Wardill. There is no shareholder agreement or any other contractual documentation governing the relationship between the parties.

[6]    The statement of claim pleads that the relationship between the three shareholders has irrevocably broken down and that the three of them have come to   a deadlock. The defendants admit such is the case.

[7]    The relationship appears to have broken down over the plaintiff’s concerns that Mr Short and Ms Wardill have failed to account for rental income for the apartment and have used the apartment for their own purposes without accounting to the

company for rent and have failed to provide all relevant  company information to  Ms Young.

[8]    While there are disputes between the affidavit evidence of Ms Young  and  Mr Short, neither party sought to cross-examine.   However, there are matters in    Ms Young’s affidavit not responded to by Mr Short. I now touch briefly on those matters. The starting position is it is common ground the parties’ relationship is effectively at an end and they cannot work together.

Financial information

[9]    There was some delay in Ms Young being provided with access to the Xero accounting system operated by RED. Access was not given until January 2021. The majority shareholders also declined to provide Ms Young with access to the on-line booking platforms used by RED. Mr Short says the reason for declining Ms Young access is:

These were created under my and Kat’s personal names, prior to Maria purchasing shares in the company. They are linked to other properties we own which Maria has no interest in. At no stage was it agreed or contemplated she would have access to those platforms.

[10]   The history of reservation/bookings of RED’s apartment is company information to which the directors are entitled. Ms Young explained in her first affidavit that it would be possible for her to be added as a co-host of RED’s property without her being able to access any other property information owned by the majority shareholders. Mr Short’s reply affidavit does not claim this is not possible nor provide anything from the online booking company to counter Ms Young’s evidence.

[11]   Ms Young then takes issue with the majority shareholders’ personal use of the apartment. Ms Young says the agreement was that they would each be entitled to one week’s use of the apartment per year. Mr Short says that he and his co-shareholder are entitled to use the apartment at any time provided such use did not conflict with  a paying customer’s booking. Even accepting Mr Short’s evidence, the unanswered evidence from Ms Young is that the majority shareholders have not kept to their own version of the personal use agreement.

[12]   The uncontradicted evidence from Ms Young is that, at a time when she has evidence the  apartment  was occupied by  the majority  shareholders (a report from  a private investigator), when she checked the online booking platform, it showed the apartment as being unable to be booked by the public. Further, it seems that, when the majority shareholders used the apartment for their own use, they used the cleaning company engaged by the company to service the apartment. The use of the cleaning company was at the company’s expense, meaning Ms Young was paying for one-third of the cleaning service engaged for the private use of the majority shareholders.

[13]   Ms Young notes that one of the booking platforms used by the company, Booking.com, in an invoice dated 3 September 2021, reported room sales of $11,450 for August 2021 and invoiced the company $1,717.50 for commission. The evidence shows that the company paid the commission invoice but did not receive the $11,450. Ms Young’s suspicion is that the rental was received directly by the majority shareholders and not deposited into the company’s account.

[14]   Mr Short’s explanation at para [10] of his reply affidavit is as follows, and is frankly hard to understand:

Regarding her claims as to Booking.com, there were three occasions where payments made on Booking.com, rather than going direct to Booking.com and then being paid into the company bank account (as is usually the case) did not get paid from Booking.com into the company account. We have contacted Booking.com to recover payments identified by Maria and which have inadvertently been paid to Booking.com.

[15]   The short point is why would the majority shareholders not query the company account being subject to a direct debit for commission when it never received the rental?

[16]   It seems Ms Young, who at the time had access to the company’s bank account, paid the private investigator, referred to in [12] above, from company funds. This was seen as an unauthorised use of company funds by the majority shareholders who then removed some $3,600 from the company’s bank account into their own account. Since that time they have directed all income from the apartment to their own account. It was only when such was disclosed by the majority shareholders in this proceeding that details of those transactions have been provided to Ms Young.

[17]   Ms Young also refers to the company paying cleaning bills that could not be matched to guest stays at the apartment. Ms Young identifies nine instances of that occurring. Mr Short only provides an explanation as to two of those bills. It may be that some of those costs relate to private use by the majority shareholders or it may be that they relate to bookings where the money was not banked into the company account.

Where does the true position lie?

[18]   The majority shareholders deny any wrongdoing. However, Mr Short’s affidavit does not deal with all of the matters raised by Ms Young in her evidence. In particular: the majority shareholders’ apparent breach of their own claimed terms for private use of the apartment; having the company pay cleaning costs for the majority shareholders’ private use of the apartment; an incomplete explanation of the cleaning costs that did not correspond to guest bookings or at least payments; and the failure to justify declining Ms Young’s access to the online booking platforms.

[19]   I will come back to the significance of these matters not being resolved when I deal with the submissions of Mr Gresson, counsel for the majority shareholders. The position  of  the  majority  shareholders  is  that  Ms Young  was  responsible  for   the breakdown in the relationship between the parties.

Legal principles

[20]   The relevant principles were summarised by Associate Judge Andrew in his recent decision, McGehan v Te Hoe Dairies Ltd:1

[15]      The words “just and equitable” are words of “the widest significance”.2 They do not limit the jurisdiction of the Court to any case.3 Each case must be considered on its facts.

[16]      As Bell AJ held in Sea Management Singapore Pte Ltd v Professional Service Brokers, “Because there is no limit to the kinds of cases where it may be just and equitable to order a liquidation, categorisation has been

1      McGehan v Te Hoe Dairies Ltd [2021] NZHC 1796 at [15]-[17].

2      Re  Bleriot  Manufacturing  Aircraft   Co   Ltd   (1916) 32 TLR 253,255. See also Ebrahimi v Westbourne Galleries Ltd [1973] AC 360 at 374 (HHL); and Jenkins v Supscaf Ltd [2006] 3 NZLR 264 (HC) at [93]-[99] and [109]-[114].

3      Jenkins v Supscaf Ltd, above n 2, at [93]-[99].

deprecated.”4 However, orders liquidating a company on the just and equitable ground may be justified in cases where serious deadlock has arisen between directors.5

[21]   Judge Andrew approached his analysis by asking first, whether the relationship between the parties had deteriorated to the point that there was a serious deadlock imperilling the continued operation of the company and then second, whether there were realistic alternatives to the impasse other than liquidation.

[22]   The answer to the first question is found in the pleadings. As I have said, it is not disputed by the majority shareholders that the parties’ relationship has irretrievably broken down and there is deadlock. I find that the company is in deadlock.

[23]Here, I note from Mr Gresson’s submission that:

The defendants accept that a deadlock exists between them and the plaintiff, and that no progress can be made as to the management of the company as between those parties as a result of the breakdown in the relationship. However, they do not accept that the company’s management or operation in itself is deadlocked. The plaintiff is a minority shareholder and director. The company is still able to make decisions at the board level through its majority shareholders.

[24]   However, I accept the submission of Ms McDonald, counsel for the plaintiff, that this submission is answered by the observation made by Judge Andrew in his decision where he said:6

It is no answer to the question of whether there is deadlock to say the farm is still operational and performing well. It is the affairs of the Company, here in disarray, that are relevant.

[25]   Given the affairs of the company have got to the point that it cannot even operate its own bank account, I have no difficulty in accepting that the affairs of this company are in such disorder, and the lack of trust between the parties is such that there is a serious deadlock frustrating the operations of the company.

4      Sea Management Singapore Pte Ltd v Professional Service Brokers HC Auckland CIV-2011-404-5313, 25 January 2012 at [3].

5      Re Yenidje Tobacco Co Ltd [1916] 2 Ch 426 (CA).

6      McGehan v Te Hoe Dairies Ltd, above n 1 at [24]

[26]   Mr Gresson submitted that Ms Young had to bear, if not all, a significant part of the responsibility for the falling out. Where a lack of confidence between shareholders is due substantially to the conduct of a plaintiff, the plaintiff cannot insist on the company being liquidated if the other shareholders wish the company to continue.7

[27]   Mr Gresson referred to the plaintiff’s refusal to allow the net proceeds from the sale of Short Kat Mouse Ltd to be distributed. It seems Ms Young has similar concerns in respect of that company as to the treatment of its income. Ms Young says that she has called for access to the Xero records for that company as long ago as December 2020 in order to satisfy herself in that regard. Mr Short and Ms Wardill have continued, on Ms Young’s case, to refuse to make that information available. Accordingly, whether and to what extent Ms Young was justified in declining to agree to the distribution of the sale proceeds from that company turns on allegations that cannot be resolved in this case.

[28]   In this regard, the case is not dissimilar to the McGehan case where the Judge said:8

I find this is a case where there is no clear-cut apportionment of blame. In such cases the real determinant for granting relief is the existence of the breakdown, not the cause of it.9

[29]   Here, I have noted that some of Ms Young’s concerns are simply not answered by Mr Short’s evidence. I do not accept Mr Gresson’s submission that the breakdown in confidence is substantially due to Ms Young’s conduct. Ms Young has raised concerns that have not been responded to.

[30]   The real issue here is whether there is a realistic alternative to the impasse other than liquidation.

[31]   Counsel, as one would expect, have attempted to settle the dispute. There was no offer on the table in this case capable of acceptance by Ms Young at the time of the

7      Re Kiwitea Sawmilling Co Ltd (1978) 1 BCR 193 and Ebrahimi v Westbourne Galleries Ltd [1972] 2 All ER 492 at 507.

8      McGehan v Te Hoe Dairies Ltd, above n 1 at [22].

9      Re Rongo-Ma-Tane Farms Ltd (1987) 3 NZCLC 100,145 (HC) at 100,151.

hearing before me. Mr Gresson drew an analogy with the significance of an offer by the defendants to purchase a plaintiff’s shares in the context of proceedings under     s 174 of the Act and  he  referred  to  Birchfield  v  Birchfield  Holdings  Limited.10 Mr Gresson’s submission was, where there was a disgruntled shareholder who wished the company’s assets to be liquidated, if the majority agreed to purchase their shares that would put the applicant in the same position they would be in (if not a better one than if a liquidator realised the assets and made a distribution). In an appropriate case, such a submission may prevail but not in this one.

[32]   As I noted earlier, there is no extant offer to purchase Ms Young’s shares. The types of issues to be addressed in such an offer, if the parallel with s 174 cases is to be applied, can be seen from the Court of Appeal decision in Birchfield. Previous offers made by majority shareholders here did not provide for the apartment to be valued by a registered valuer, provided for a deduction of a notional real estate agent’s commission when no sale was going to occur, made no provision for costs and did not make any provision for Ms Young’s concerns over diverted income or inappropriate expenses.

[33]   I agree with Mr Gresson that, if there was an offer on the table that answered Ms Young’s concerns, such may well mean it could be said there is a viable alternative to liquidation. The effect of liquidation here is the apartment will be sold and the net proceeds distributed to the shareholders after the liquidation fees are met. An offer for Ms Young’s shares based on the net value of the apartment and something to settle the disputed income/costs issue may have made liquidation inappropriate. However, no such offer was on the table here and notwithstanding counsel being given some weeks to revisit settlement since the hearing, no resolution was possible.

[34]   While the value of Ms Young’s claims in terms of her entitlement to one-third of their value are relatively modest, they have not been addressed. That the amounts in issue are modest “cuts both ways”. If the majority shareholders maintain the value of Ms Young’s one-third share of the claims the company has against them is so

10     Birchfield v Birchfield Holdings Limited [2021] NZCA 428.

modest as to make liquidation unreasonable, that only begs the question of why they would not be prepared to deal with that claim on a commercial basis.

[35]   The majority shareholders have not suggested any alternative means to address Ms Young’s concerns. For example, without assessing the appropriateness of them declining Ms Young access to company information in relation to the history of bookings of the apartment, there was no offer for, in effect, a taking of account by someone independent in respect of the bookings by reference to online history of bookings against funds received.

[36]   As the parties have been unable to negotiate a solution to their dispute, the Court is left with a choice between requiring the parties who have fallen out to continue in a dysfunctional business relationship or to bring that to an end through liquidation where the liquidator will  be  able  to  address  matters  of  concern  to  Ms Young. The company was a single asset/single venture company. The liquidation process in respect of the company’s asset will be straightforward. The investigation of matters of concern to Ms Young may be more time consuming but that only begs the question of why the majority shareholders would not make available company information as regards the booking history which would, to a large extent, demonstrate Ms Young’s concerns were (on the majority shareholders’ case) without merit.

[37]Accordingly, as Associate Judge Andrew put it in the McGehan case:11

The relationship between the parties has deteriorated to the point that there is a serious deadlock and the parties are not able to work together in any way for the benefit of the Company. There are no other realistic alternatives to the impasse, except liquidation, and no other factors going to justice and equity suggesting I should not exercise my discretion and place the Company into liquidation.

[38]I adopt Judge Andrew’s approach.

11     McGehan v Te Hoe Dairies Ltd & Ors, above n 1 at [36].

[39]I make the following orders and directions:

(i)The defendant company, Remarkable Exquisite Design Limited, is placed  into  liquidation  pursuant  to   s 241(4)(d)   of   the Companies Act 1993. It is just and equitable to do so.

(ii)I appoint Mr Dennis Clifford Parsons, licensed insolvency practitioner, as the liquidator.

[40]My order is timed at 11am on 31 March 2022.

Costs

[41]   As to costs, I am satisfied Ms Young has succeeded. There is no reason why costs should not follow the event. As sought by the plaintiff, Ms Young is entitled to costs and disbursements against the defendant company on a 2B basis. I so order.

Associate Judge Lester

Solicitors:

Gallie Miles, Te Awamutu (for the Plaintiff)

Todd & Walker Law, Queenstown (for the Defendant)