HINSAN DEVELOPMENT LIMITED AND ANOR V WAITOMO CAVES (2002) LIMITED AND ANOR HC HAM CIV 2006-419-1317 [2006] NZHC 1087 (21 September 2006)

IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY
                                                           CIV 2006-419-1317



             BETWEEN                    HINSAN DEVELOPMENT LIMITED
                                        First Plaintiff

  
          AND                        MARTIN AND JENNY SANDIFER
                                        Second Plaintiffs

      
      AND                        WAITOMO CAVES (2002) LIMITED
                                        First Defendant

         
   AND                        KEITH AND ANNETTE MEICHTRY
                                        Second Defendant


Hearing:    
21 September 2006

Appearances: E St John for Plaintiffs
             J P Temm for Defendants
             P F Gorringe for Mr Cox

Judgment:    21 September 2006


                 (ORAL) JUDGMENT (NO. 2) OF HEATH J




Solicitors:
John Z Ewart, Auckland
Gawith
Burridge Masterton
Counsel:
E St John, Auckland
J P Temm, Rotorua
P F Gorringe, Hamilton

HINSAN DEVELOPMENT LIMITED AND ANOR V WAITOMO
CAVES (2002) LIMITED AND ANOR HC
HAM CIV 2006-419-1317 21 September 2006

Introduction


[1]    In this proceeding Hinsan Development
Ltd and Mr and Mrs Sandifer seek
interim injunctions in relation to steps taken by Mr and Mrs Meichtry to terminate a
management
contract involving Waitomo Caves (2002) Ltd (the company).


[2]    Mr and Mrs Meichtry currently hold 76% of the share capital in
the company,
with Mr and Mrs Sandifer holding 24%.


[3]    However, under agreements reached between the parties, Mr and Mrs
Sandifer
will acquire a further 25% shareholding on repayment of a debt owed by the
company. That is a debt secured under a general security
interest which has priority
over unsecured debt. Accordingly, it is very likely that Mr and Mrs Sandifer's 49%
interest in the company
will crystalise on sale of the company's business.


[4]    Mr Gorringe sought leave to appear this morning on behalf of a Mr Cox,
who m I understand is a creditor of Hinsan Development Ltd. I gave leave for Mr
Gorringe to remain in Court exercising a watching
brief in case any issues arose that
might affect his client. However, I have not received any submissions from him. If
Mr Cox were
to seek to be heard on a later occasion he will need to apply for
intervener status.


[5]    Further, Mr Temm has appeared today
not only on behalf of Mr and Mrs
Meichtry but on behalf of the company. Ordinarily, in a claim of this type the
company abides the
decision of the Court. In reality the issues involve claims
between the Meichtrys and the Sandifers and interests associated with
them.


[6]    To the extent that the purported termination of the management contract may
assume prominence as a contractual claim,
it may be necessary for the company to
be independently represented in the future.

Background


[7]     Until last week, Mr and
Mrs Sandifer were managing the Waitomo Caves
Hotel. That is the business operated by the company. They operated the business
under
what is called an "Independent Contractor Agreement for Facility
Management Services" which is dated 1 September 2004.


[8]    
Although the agreement has, by its terms, run its course, there has been a
ho lding over which requires the agreement to govern the
relationship.        Under
cl 10(c) of the agreement, termination could be effected by the company
immediately, where the company
believes "there is a conflict of interest relating to
the use of company resources or disclosure as per cl 6 or unauthorised expenditure
as
per cl 5".


[9]     Various reasons have been put forward by Mr and Mrs Meichtry to justify
termination. Those reasons include
suggestions that Mr and Mrs Sandifer entered
into contracts without approval, employed people contrary to immigration
requirements,
misappropriated company funds and acted contrary to share purchase
agreements. Those are all disputed by Mr and Mrs Sandifer. As
indicated at today's
hearing, I am unable to resolve those conflicts without cross-examination.


[10]    On 18 September 2006, I heard urgently the present interim injunction
applicat ion.
That had been filed the previous Friday. Two causes of action are
pleaded. One seeks relief under s 174 of the Companies Act 1993;
the other claims
wrongful termination of the management agreement.


[11]    Without going into detail, the basic problem that has
arisen has resulted out
of the use of a corporate structure by people who show scant regard for following
procedures required to
manage a company.


[12]    The impression I have from the affidavits filed, is that Mr and Mrs Sandifer
evidence a belief that they
were entitled, without interference from Mr and Mrs
Meichtry, to make decisions affecting the management of the company themselves.

[13]     As a matter of law that is wrong. Directions as to a company's business must
be made by the company directors at an appropriate
meeting. No such meetings
appear to have been held. While management functions are set out in the agreement,
a number of the areas
of contrest fall within the scope of directors decisions.


[14]     On the other hand, Mr and Mrs Meichtry seem to believe that
because they
are the major shareholders of the company they had the right to make decisions
unilaterally on the part of the company.
As a matter of law that was also wrong.


[15]     Again, decisions affecting the management of the company fall to be made
by the
board of directors. If shareholder decisions were required, proper meetings of
shareho lders must be held.


[16]     Indeed, the
Constitution of the company, in cl 24, sets out a dispute
resolut ion mechanism. That was not followed in this case.


[17]     What
is abundantly clear is that Mr and Mrs Sandifer and Mr and Mrs
Meichtry can no longer work together. There is clearly a deadlock
between them. It
will be nigh on impossible for the business of the company to be carried on by those
four people as intended directors
without some supervision from an independent
party.


[18]     It is clearly appropriate for the company to continue as a going concern.
All
are agreed that maximisation of value of the business will be achieved by sale as a
going concern.


[19]     Deadlock can only
be met by a liquidation order, if no other options are
available.   In those circumstances, both parties now agree that a mechanism
is
required to enable the business to proceed to sale under supervision of an
independent person.

Injunction principles


[20]
     When considering whether interim injunctions should issue, the Court must
consider whether there is a serious question to be
tried, where the balance of
convenience lies and, standing back, what is required in the interests of justice: see
Klissers Farmhouse
Bakers v Harvest Bakers Ltd  [1985] 2 NZLR 129 (HC and CA)
at 142.


[21]      In a case like this, there is a prima facie claim both for breach of management
contract and under
s 174.


[22]      The breach of contract issues arises from the lack of any proper corporate
decisio n to terminate, the decision
being made unilaterally by majority shareholders.
The s 174 issue arises from the obvious deadlock in management.


[23]      So,
the issue is really what is required to do justice between the parties in
order for their respective investments to be maximised.


[24]      As I indicated to counsel what the Court is really concerned with in a case
like this, is finding the path of least risk
to achieving the solution that is desired
between the parties.


[25]      Having taken instructions, counsel advise that their clients
agree that an
independent accountant ought to be appointed to perform functions in relation to the
verification of financial statements,
supervision of sale and supervision of
management pending sale. Where the parties disagree is on the question of who
should have
responsibility for management of the business pending sale.


Interim management issues


[26]      Mr St John, on behalf of the
plaintiffs, contends that the status quo as at the
date of the purported termination of the management agreement should prevail.

Should that occur, an interim mandatory injunction will be required to permit Mr and
Mrs Sandifer to continue to manage.


[27]
  Mr Temm, on behalf of Mr and Mrs Meichtry, submits that the current status
quo should continue with Mr and Mrs Faliu continuing
to manage on behalf of Mr
and Mrs Meichtry. If that situation were to occur, it is agreed that there can be no
object ion to Mr and
Mrs Sandifer remaining resident in the cottage in proximity to
the Hotel on the condition set out in para [14] of the judgment I
gave on 18
September 2006.


[28]   Further, it is agreed that should that situation pertain, a fiscally neutral
situation should
exist whereby Mr and Mrs Sandifer continue to be paid amounts due
to them under the management contract whilst any cost of employing
Mr and Mrs
Faliu is met out of the fee paid to Mr and Mrs Meichtry (or their company) for
services to the company.


[29]   The competing
arguments on management can be summarised as follows.
Mr St John raises the following points:


       a)     First, he submits that
no explanations have been given from Mr and
              Mrs Meichtry as to why it is inappropriate for Mr and Mrs Sandifer
   
          not to continue to manage the business. He submits that there is no
              basis for any of the allegations made
against Mr and Mrs Sandifer.


       b)     Second, he submits that the intention is not for Mr and Mrs Meichtry
              to
go into possession but rather for third parties, namely their daughter
              and son in law, to manage the business.


 
     c)     Third, he submits that the Sandifers ought to be regarded as having a
              49% interest in the company.    
  That percentage, while a minority
              stake, is so close to the 51% held by Mr and Mrs Meichtry as to
              remove
any suggestion that Mr and Mrs Meichtry have a greater
              interest in preserving the investment and maximising value on
sale.

       d)    Fourth, he points to the emotional attachment of Mr and Mrs Sandifer
             to their home environment,
to their children being at the local school
             and the relationships they have built in managing the hotel with the
  
          local community and local iwi. The proximity of the hotel to an
             important national tourist location is relevant
in that regard.


       e)    Fifth, Mr St John refers to the fact that the management contract was
             not terminated
by an authorised resolution of either directors or
             shareho lders of the company.


[30]   Mr Temm, makes the following
points in favour of Mr and Mrs Meichtry or
their nominees managing the business meantime:


       a)    First, trust and confidence between the Meichtrys and the Sandifers
             has
been destroyed. They cannot continue to work together.


       b)    Second, Mr and Mrs Meichtry have personal liabilities in relation
to
             company obligations. They are covenantors under the Deed of Lease
             with the landlord and are also guarantors
to the secured debt to
             Landmark Hotels Ltd, which is the debt that must be paid in order for
             the Sandifers'
49% interest in the company to crystalise.


       c)    Third, he points to the current shareholding position being 76% to the
             Meichtry's and 24% to the Sandifer's with sharing of profit.


       d)    Fourth, he refers to the historical issues
in relation to the Sandifers
             management, including the allegations I have outlined earlier.


       e)    Fifth, he
refers to an agreement entered into in February 2006 by
             which Mr and Mrs Sandifer agreed to purchase interests of Mr
and
             Mrs Meichtry in the company.           That agreement has not been
             completed, but cl 17 provided a
mechanism to permit sale of the
             business on the open market in the event that the transaction could not
           
 proceed. Importantly, Mr Temm submits, cl 17.1(ii) provides that Mr

               and Mrs Faliu (the daughter and son and law
of Mr and Mrs Meichtry)
               will run the business pending sale. That, he submits, recognises that
               Mr and
Mrs Faliu were regarded, in February this year, as suitable
               managers by Mr and Mrs Sandifer.


[31]    All of those
arguments are persuasive in their own right. But a decision must
be made. What is important is to find a mechanism which is fiscally
neutral and
which will provide sufficient trust and confidence to all participants to enable the
business to be sold for maximum
value as a going concern.


[32]    I add that one of the additional orders Mr St John submitted I should make
was to restrain meetings
of directors. I make it clear that I am not prepared to do
that. What must occur, however, is for the board of directors to be constituted
as
originally agreed and for any meetings of the board to be held on that basis.


[33]    Plainly, board meetings will be required
in order to make decisions about the
sale.   While I am going to appoint an independent accountant to supervise
management and sale
of the business, that person should not be required to assume
the obligations of a de facto director.      Mr and Mrs Sandifer and
Mr and Mrs
Meichtry must work together to the extent that those decisions must be made. If
they cannot, then liquidation is the only
option and that is a course which will be
unpalatable to both couples.


Conclusion and orders


[34]    On balance, I am persuaded
that interests associated with Mr and Mrs
Meichtry must be entitled to manage the business meantime.


[35]    I am particularly
influenced by the personal liabilities they hold in relation to
company debts and the fact that the Sandifers can be paid for the
services they would
have rendered to the company in the meantime, with no additional company costs
being made with regard to the
employment of Mr and Mrs Faliu.

[36]   Ultimately, it is likely that there will be a 50% share in profits (as is agreed)
and a
51%/49% split in relation to any capital left to distribute after payment of
creditors.


[37]   In my view, management by the Falius,
on a supervised basis, will provide
adequate protection for Mr and Mrs Sandifer. So far as their living arrangements are
concerned,
I continue in force the order made in para [14] of my judgment of 18
September 2006 so that they can continue to reside in the cottage,
provided they do
not interfere directly or indirectly with the running of the business. I will also be
making orders to ensure that
they are consulted adequately with regard to ongoing
decisio n making.


[38]   In the judgment of 18 September, I made the following orders:

       a.     The defendants
are restrained from holding or calling any meeting of
              shareholders of Waitomo Caves (2002) Ltd, pending further order
of
              the Court.

       b.     The defendants are restrained from issuing any further shares in
              Waitomo
Caves (2002) Ltd, pending further order of the Court.

       c.     The defendants are restrained from incurring any further debt
against
              Waitomo Caves (2002) Ltd and/or the business of the Waitomo
              Caves Hotel, save from normal trade
creditors of the business,
              pending further order of the Court.

       d.     The defendants are restrained from removing
any chattels or
              property belonging to Hinsan Development Ltd, Mr and Mrs
              Sandifer or Waitomo Caves (2002)
Ltd from the Waitomo Caves
              Hotel, pending further order of the Court.

       e.     The second defendants, their family
friends or agents, are restrained
              from making any further contact with Mr and Mrs Sandifer, other
              than
through their instructing solicitor, counsel, or accountants.

Those orders continue in force pending further order of the Court.


[39]   I make an order appointing Peter Leslie Shaw of Hamilton, chartered
accountant, to carry out the following functions:


       a)     To ascertain whether proper accounting recording have been kept by
              the company for the past two years
in accordance with the
              requirements of the Companies Act 1993.

       b)      To verify, so far as possible within
the available time, the financial
               posit ion of the company.


       c)      In conjunction with both Mr and Mrs Sandifer
and Mr and Mrs
               Meichtry, to arrange for the business to be sold on the open market as
               soon as possible.


       d)      To direct Mr and Mrs Faliu as to the procedures to be followed by
               them in relation to day to day
management of the company and to put
               in place procedures for reporting to him, on a daily basis, on the
         
     business carried out at the Hotel.


       e)      To report to this Court, on his findings and observations in relation to
               the matters to which he is required to attend, by 4pm on 29 September
               2006. Copies of any report are
to be made available to counsel for the
               plaint iffs and the defendants.


Mr Shaw's costs shall be met out of company
funds.


[40]   The proceeding is adjourned for a case management conference at 3.20pm on
2 October 2006 before an Associate Judge.
That will be a telephone conference. I
direct that Mr Shaw, as well as counsel, participate in that conference.


[41]   Counsel
and Mr Shaw will have an opportunity to discuss with the Associate
Judge the content of Mr Shaw's report and to make submissions
on what further
orders may be required having regard his report.


[42]   Leave to apply to any party is reserved, including Mr Shaw.


[43]   The costs of and incidental to the present application are reserved.
Ult imately, provided the business proceeds to sale
it is my view that costs ought
probably to lie where they fall. However, counsel will have an opportunity, in due
course, to make
submissions on that should they think fit.

[44]   I make it clear that payment of the management fee to Mr and Mrs Sandifer
shall
be made in accordance with normal practice, to date, under the management
agreement.


                                         
      ___________________________


                                                                    P R Heath J