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Court of Appeal of New Zealand |
Last Updated: 19 May 2017
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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First Appellant
EMBAY TRUSTEE LIMITED
Second Appellant |
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AND
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First Respondent
CHRISTOPHER STEPHEN HARRIS
Second Respondent
TIMOTHY JAMES STONE
Third Respondent |
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Hearing: |
21 February 2017 |
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Court: |
Asher, Simon France and Peters JJ |
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Counsel: |
K F Gould for Appellants
B J Upton for Respondents |
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Judgment: |
JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Peters J)
[1] This is an appeal against a decision of Hinton J in the High Court at Auckland, in which the Judge declined the appellants’ application for an order putting the first respondent, Smart Water Technology Limited (Smart Water), into liquidation.[1]
[2] The appellants, in essence a Mr Fletcher and a Mr Dobbs, are minority shareholders in Smart Water. Pursuant to s 174 of the Companies Act 1993 (the Act), they sought an order to wind up Smart Water on the grounds that its affairs had been conducted in a manner that was oppressive, unfairly discriminatory or unfairly prejudicial to them. In particular, Messrs Fletcher and Dobbs relied on the unfairly prejudicial ground.
Background
[3] Messrs Harris and Stone, the second and third respondents, incorporated Smart Water in January 2009. They are, and always have been, the company’s directors. Smart Water is in the nature of a start-up, although it is possibly moving beyond that point now. It developed and supplies an electronic product that remotely reads the amount of water in a tank.
[4] Until October 2009, Messrs Harris and Stone’s company, Moffatt Asia Pacific Limited (Moffatt), owned all of the shares in Smart Water.
[5] In October 2009, Invision Enterprises Ltd (Invision), a company associated with Messrs Fletcher and Dobbs, performed some development work for Smart Water. The agreed consideration was that Messrs Fletcher and Dobbs, as owners of Invision, would each receive a 12.5 per cent shareholding in Smart Water. Accordingly, since October 2009, Messrs Harris and Stone through Moffatt have controlled 75 per cent of the shares in Smart Water and, between them, Messrs Fletcher and Dobbs have controlled the other 25 per cent through their respective companies.
[6] Moffatt also owns 100 per cent of, and Messrs Harris and Stone are the directors of, Ivent Solutions Limited (Ivent). Ivent supplies componentry to Smart Water at a margin, its staff support Smart Water’s operations, and Smart Water occupies part of Ivent’s premises. Ivent also supplies services to Invision.
[7] The shareholders fell out in 2014 and this proceeding seeking to wind up Smart Water was commenced in mid-2015.
The law
[8] Section 174 provides:[2]
174 Prejudiced shareholders
(1) A shareholder ... of a company ... who considers that the affairs of a company have been, or are being ... 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) No order may be made against the company or any other person under subsection (2) unless the company or that person is a party to the proceedings in which the application is made.
[9] It is apparent from the above that, if a shareholder makes out oppression or another ground for relief, the court must then consider whether it would be just and equitable to grant relief. If it is, the court may order such relief as it thinks fit, including relief within the broad range of orders given in s 174(2). Relief is remedial, not punitive.[3]
[10] Thomas v H W Thomas Ltd remains a leading authority on s 174, although in that case the Court of Appeal was considering the predecessor provision to s 174, being s 209 of the Companies Act 1955.[4] In Thomas, Richardson J said:[5]
In employing the words “oppressive, unfairly discriminatory or unfairly prejudicial” Parliament has afforded petitioners a wider base on which to found a complaint. Taking the ordinary dictionary definition of the words ... oppressive is “unjustly burdensome”; unfair is “not fair or equitable; unjust”; discriminate is “to make or constitute a difference in or between; to differentiate”; and prejudicial, “causing prejudice, detrimental, damaging (to rights, interests, etc)” ... The three expressions overlap ... and read together they reflect the underlying concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint ... The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him ...
High Court decision
[11] The conduct and nature of the relationship between Ivent and Smart Water was relied on by Messrs Fletcher and Dobbs in the High Court as being unfairly prejudicial to them. They argued that Messrs Harris and Stone’s association with Ivent gave rise to a conflict of interest. Specifically, they took issue with the fact that Ivent added a 20 per cent margin to products that it supplied to Smart Water. In addition to the relationship with Ivent, they also relied upon breaches of the Act by Messrs Harris and Stone and failures by Messrs Harris and Stone to supply information to them.
[12] Having heard evidence from the relevant witnesses and having considered the conduct in issue as a whole, Hinton J did not consider that Messrs Fletcher and Dobbs had established unfairly prejudicial conduct. The Judge noted that the terms, financial and otherwise, on which Ivent supplies Smart Water with products and services were favourable to Smart Water. It would be implausible for Ivent not to add a margin, and the margin was not excessive. Moreover, Ivent carried a significant part of Smart Water’s debts without any arrangement for interest payments.
[13] Hinton J also found that failures by Messrs Harris and Stone to supply financial information, and certain breaches of the Act, did not rise to the level of unfair prejudice. These failures did not amount to Messrs Harris and Stone cutting Messrs Fletcher and Dobbs out of the business. Rather, the Judge found that Messrs Fletcher and Dobbs were reasonably well-informed about the operations of Smart Water at least up until about mid-2014. Their requests for information in January 2015 were thoroughly addressed in correspondence from Messrs Harris and Stone and their lawyers between February and May 2015.
[14] Given the lack of unfair prejudice, the Judge was not required to decide whether it would be just and equitable to grant relief and, if so, whether to order a winding up.
[15] After the hearing, Messrs Fletcher and Dobbs made a further submission that Smart Water was insolvent based on its audited financial statements for the year ended 31 March 2015 (the 2015 statements) and that it should be wound up for this reason also. The submission was that Smart Water was balance sheet insolvent, in that its current liabilities exceeded its current assets. The 2015 statements became available after the hearing and are Smart Water’s first set of audited statements.
[16] The Judge did not accept the submission that she should order the winding up of Smart Water on this ground. First, the Judge said that the matters relied upon were apparent on the face of unaudited statements that were available before the hearing. Secondly, the Judge took the view that the important issue was whether Smart Water was able to pay its debts as they fell due. Smart Water’s principal debtor, by a considerable margin, is Ivent. The Judge found that, on the evidence, Moffatt had no present intention of causing Ivent to make demand of Smart Water for payment of this debt, and that Moffatt, through Ivent, remained willing to continue to support Smart Water. The Judge also accepted that Smart Water’s financial position was improving.
[17] Accordingly, the application for appointment of a liquidator was dismissed.
Interlocutory applications
[18] Smart Water’s audited financial statements for the year ended 31 March 2016 (the 2016 statements) became available earlier this year and Messrs Fletcher and Dobbs sought leave to adduce them as further evidence on appeal. Messrs Harris and Stone opposed leave. The up-to-date financial position of Smart Water is relevant, and the evidence is fresh, credible and cogent.[6] We therefore grant leave.
[19] Also, at the commencement of the hearing in this Court, Mr Gould for the appellants sought leave to amend the relief sought in the notice of appeal, to seek as an alternative that Moffatt be ordered to acquire Messrs Fletcher and Dobbs’ shares in Smart Water at a price to be fixed by an independent valuer.[7]
[20] We decline to allow this amendment. Messrs Fletcher and Dobbs have argued for winding up throughout. An order to acquire shares raises its own considerations, as Mr Upton submitted for the three respondents, which have not been addressed in the affidavits or submissions filed in the High Court. In any event, as appears below, we do not consider that the Judge erred in her conclusion that Messrs Fletcher and Dobbs have not established that they have been unfairly prejudiced by the conduct of Smart Water’s affairs. Accordingly, the issue of relief does not arise.
Grounds of appeal
[21] Mr Gould argued that the Judge erred in two respects.
[22] First, Mr Gould submitted that the Judge had applied the wrong test in assessing whether the relationship between Ivent and Smart Water gave rise to unfair prejudice. Mr Gould submitted that the Judge had considered whether the relationship was unfairly prejudicial to Smart Water when she was required to consider whether it was unfairly prejudicial to Messrs Fletcher and Dobbs.
[23] Secondly, Mr Gould submitted that the Judge erred in finding that breaches of the Act by Messrs Harris and Stone and their failure to supply information, or to supply it when due, were not unfairly prejudicial to Messrs Fletcher and Dobbs. In particular, Mr Gould submitted that the Judge erred by placing weight on the later steps taken by Smart Water to regularise its affairs. Mr Gould submitted that this was an error because prejudicial conduct also includes past conduct.
[24] Mr Gould also made submissions on the 2016 statements. Mr Gould submitted that the 2016 statements were further evidence that Smart Water is insolvent and that its financial position is deteriorating.
[25] Mr Gould further submitted that Smart Water had paid legal costs that Messrs Harris and Stone should have paid personally, this being a dispute between the shareholders and not the company, and that this in itself amounted to unfairly prejudicial conduct.
Analysis
Relationship between Ivent and Smart Water
[26] As Mr Gould submitted, the issue under s 174(1) of the Act is the effect of the relationship on Messrs Fletcher and Dobbs as shareholders rather than its effect on Smart Water. However, contrary to Mr Gould’s submission, we consider that this was the approach taken by Hinton J. Although she framed her conclusion as “I do not consider that the relationship between Smart Water and Ivent is unfairly prejudicial to Smart Water”, this statement must be read in context.[8] The issue of whether or not the relationship between Ivent and Smart Water was prejudicial to Messrs Fletcher and Dobbs as shareholders turned on whether the relationship was adverse to the interests of Smart Water. Indeed, the focus of Mr Gould’s submissions in the High Court was on the 20 per cent margin added by Ivent at the expense of Smart Water. If the relationship was not adverse to the financial interests of Smart Water, it is difficult to see how it could be prejudicial to Messrs Fletcher and Dobbs. Whilst the Judge did not make this link explicit, we consider it to be selfevident. Moreover, it is apparent from the Judge’s approach to Mr Gould’s other submissions that she was aware of the need to focus on prejudice to the shareholders rather than prejudice to Smart Water. For example, in considering the breaches of the Act and failure to provide information, the Judge properly focussed on the extent to which this resulted in Messrs Fletcher and Dobbs being cut out of the business.
[27] We agree with Hinton J’s assessment that the relationship between Ivent and Smart Water was beneficial to Smart Water. Ivent carries a significant debt for Smart Water without any arrangement for interest. It also appears that Ivent staff support Smart Water’s operations. Therefore, the relationship cannot be regarded as prejudicial to Messrs Fletcher and Dobbs as shareholders.
[28] As his submissions in this Court developed, Mr Gould focused more on a guarantee that Smart Water has given in respect of Ivent’s indebtedness to ASB, up to a maximum of $700,000. Mr Gould submitted that the giving of this guarantee could not be in Smart Water’s best interests but rather was in the interests of Ivent, Moffatt and Messrs Harris and Stone. Mr Gould submitted that the fact that Smart Water had given the guarantee constituted conduct that was unfairly prejudicial to Messrs Fletcher and Dobbs.
[29] The existence of this guarantee, although not the extent of the sum guaranteed, was disclosed in the 2015 statements. Yet the guarantee was not referred to in Mr Gould’s further submissions in the High Court, which concerned the 2015 statements. Mr Gould informed us that this was an error on his part. Therefore, the matter could have been put to the Judge.
[30] We have now received documents that show that the facts regarding the guarantee are in dispute. This Court is therefore not in a position to adequately assess the matter.
[31] Nonetheless, at a general level, we think that Smart Water could expect to provide security for any financial support that it receives. That is so whether the support is given by a bank or the company’s shareholders or by someone else. In this case, the financial support is coming from Ivent.
[32] Accordingly, we are not satisfied that the giving of the guarantee by Smart Water of Ivent’s obligations is unfairly prejudicial to Messrs Fletcher and Dobbs. It can be seen as a commercial response to Ivent carrying a large amount of Smart Water’s debt. Ivent is supporting Smart Water by not insisting on payment and by extending credit for lengthy periods of time in substantial amounts. Smart Water’s debt to Ivent was $350,428 and $291,681 at the end of 2015 and 2016 respectively.
[33] Nor do we consider Messrs Fletcher and Dobbs would be prejudiced in their capacity as shareholders if ASB were to call upon the guarantee. There would be a shortfall to Ivent on a winding up at present, and none of the shareholders would receive anything. Given that, Messrs Fletcher and Dobbs would not appear to be adversely affected by the guarantee at present.
[34] Accordingly, we do not see the giving of a guarantee in these circumstances as being oppressive or unfairly prejudicial.
[35] Messrs Harris and Stone sought leave to adduce a further affidavit of Mr Harris concerning the guarantee issue. Given our conclusions on this issue, we do not consider it necessary to assess the further affidavit of Mr Harris. Therefore, the application to adduce that evidence is declined.
Failure to provide information and breaches of the Act
[36] Mr Gould disputed the Judge’s finding that Messrs Fletcher and Dobbs had not been unfairly prejudiced by Messrs Harris and Stone’s failures to comply with several of their obligations under the Act and to provide information.
[37] The Judge accepted that Messrs Harris and Stone had breached several of their obligations under the Act. They did not prepare financial statements for the years ended 2010 and 2011. As at February 2015, they had not provided Messrs Fletcher and Dobbs with financial statements for the years ended 2012–2014 inclusive. Until 2015, they had failed to maintain an interests register and had failed to hold annual general meetings and provide annual reports. Annual returns that they filed with the Companies Office for the years ended 2010 and 2011 stated, wrongly, that annual general meetings had been held and that the shareholders had passed unanimous resolutions not to appoint an auditor.[9] There had also been a general failure to provide information to Messrs Fletcher and Dobbs, although there is no challenge to the Judge’s finding that this failure was confined to the second half of 2014.
[38] Mr Harris did not deny these omissions but his evidence was that they had been rectified as far as possible and that they would not be repeated.
[39] Mr Gould submitted that the Judge erred in considering that this conduct was not unfairly prejudicial on the basis that Messrs Harris and Stone had rectified these omissions prior to the hearing before her. His submission was that past conduct is equally capable of supporting an application under s 174.
[40] We do not consider the Judge failed to recognise this point, which is evident on the face of s 174(1). The Judge simply did not take the view that Messrs Fletcher and Dobbs had been prejudiced by these omissions. We agree, assuming without argument that they are matters that go to the conduct of Smart Water’s affairs.
[41] In this case, Messrs Fletcher and Dobbs made no complaint about the various failures until January 2015 at the earliest. Nor did they identify for the Court any respect in which they were unfairly prejudiced in fact by the non-compliance. As Richardson J said in Thomas, “prejudice” as used in s 174(1) requires detriment or damage to rights or interests.[10] It is apparent from s 175 that not every failure to comply with an obligation imposed by the Act will cause unfair prejudice to a shareholder.
Insolvency
[42] We accept Mr Gould’s submission that the state of affairs disclosed by the 2015 financial statements — namely that current liabilities exceed current assets — also appears in the 2016 statements. However, we do not consider that the Judge erred in declining to order a winding up or that we should order one now. Ivent has not made any demand for its debt. The clear evidence is that it does not intend to do so. Accordingly, nothing has changed.
[43] The material before the Judge indicated that Smart Water may well have a good financial future, and clearly Ivent, despite the large amount it is owed, is prepared to continue its support for the time being. Given that the only significant creditor supports the continued trading of Smart Water, it would be wrong for this Court to force a liquidation.
Legal costs
[44] Mr Gould made a separate submission regarding the legal expenses that Smart Water incurred in 2016, being $101,416 in total. Mr Upton advised us that not all of the costs were incurred in the present litigation as some relate to intellectual property matters. Mr Gould submitted that Smart Water should not meet these costs to the extent they relate to the defence of these proceedings, and particularly to the extent that the costs relate to Messrs Harris and Stone.
[45] We do not accept Mr Gould’s submission. Messrs Fletcher and Dobbs have been seeking to wind up Smart Water. As the Judge said, winding up is a remedy of last resort. In Thomas, Richardson J described it as “blunt and drastic”.[11] Smart Water was entitled to defend the proceedings and protect its existence. In fact, Smart Water was required to be a party to the proceedings, given the relief sought.[12]
[46] Lastly, the auditors must have been satisfied that it was reasonable for Smart Water to bear this expense and the amount of it. It is not for us to second guess their determination.
Result
[47] The appellants’ application for leave to adduce further evidence is granted.
[48] The respondents’ application for leave to adduce further evidence is declined.
[49] The application for leave to amend the notice of appeal is declined.
[50] We dismiss this appeal. We are not satisfied that the Judge erred in any respect and the additional points raised before us do not warrant a finding that Smart Water’s affairs are being or have been conducted in a manner that is unfairly prejudicial to Messrs Fletcher and Dobbs.
[51] The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
DMG
Solicitors, Auckland for Appellants
Simpson Grierson, Auckland for
Respondents
[1] Valmar Trustee Ltd v Smart Water Technology Ltd [2016] NZHC 519.
[2] Section 175 of the Companies Act 1993, which deems a failure to comply with particular provisions of the Act to be unfairly prejudicial for the purposes of s 174(1), was not relied upon in this case.
[3] Sturgess v Dunphy [2014] NZCA 266 at [148].
[4] Thomas v H W Thomas Ltd [1984] 1 NZLR 686 (CA).
[5] At 693.
[6] See Paper Reclaim Ltd v Aotearoa International Ltd [2006] NZSC 59, [2007] 2 NZLR 1 at [6].
[7] Companies Act, s 174(2)(a).
[8] Valmar Trustee Ltd v Smart Water Technology Ltd, above n 1, at [33].
[9] Mr Upton advised us that the Judge’s reference to 2014 in [39] of her judgment was a typographical error and should be 2011.
[10] Thomas v H W Thomas Ltd, above n 4, at 693.
[11] At 690.
[12] Companies Act, s 174(3).
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URL: http://www.nzlii.org/nz/cases/NZCA/2017/161.html