Provida Foods Ltd v Foodfirst Limited HC Hamilton CIV 2009-419-1581 [2011] NZHC 499 (18 May 2011)

Last Updated: 18 June 2011

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

_{CIV 2009-419-1581}

BETWEEN PROVIDA FOODS LIMITED Applicant

AND FOODFIRST LTD Respondent

Hearing: 18 May 2011

Counsel: MD Branch and CD Marr for applicant

DA Campbell and ML Broad for respondent

Judgment: 18 May 2011 at 5:00 PM

_{JUDGMENT OF FAIRE J}

Solicitors: Harkness Henry, Private Bag 3077, Hamilton

Kensington Swan, Private Bag 92 101, Auckland

PROVIDA FOODS LIMITED V FOODFIRST LTD HC HAM CIV 2009-419-1581 18 May 2011

Introduction

[1] This judgment deals finally with the applicant’s application to set aside a statutory demand issued by the respondent and served on the applicant which is dated 4 November 2009. It follows a further hearing and full submissions from counsel following my interim judgment of 29 June 2010. I shall refer to the applicant as “Provida” and the respondent as “foodfirst”.

[2] The principal issue for determination is whether the applicant has a counterclaim, set-off or cross-demand which exceeds the amount specified in the statutory demand, less the prescribed amount. The demand sought payment of

$977,852.13. As a result of an acknowledgement by way of a resolution passed at the respondent’s annual general meeting that $43,566 was due from the respondent to the applicant, the sum claimed by the respondent is now reduced to $934,286.13. That sum, plus interest, is held in the Registrar of this court’s trust account pending determination of this application. Mr Branch referred also to the alternative ground which is provided in the Companies Act 1993, s 290(4)(c) and which I shall also analyse.

[3] I shall not repeat:

(a) The background facts;

(b) The statutory grounds on which the application is based; and

(c) My summary of the law in relation to the court’s approach to

applications to set aside statutory demands all of which are set out in the interim judgment.

The set-off and counterclaim: the applicant’s statement of claim

[4] Following my interim judgment the applicant has issued proceedings against

the respondent. That proceeding represents the pleaded basis for the applicant’s

claim that it has a counterclaim, set-off or cross-demand which satisfies the requirements of the Companies Act 1993, s 290(4)(b) so that the statutory demand should be set aside.

[5] I shall analyse two aspects of the statement of claim. In the first place, I will consider in this judgment each cause of action in the new proceeding to ascertain whether or not it would survive a strike out. If, in fact, the causes of action would survive a strike out, I will next move to determine whether there is an evidential basis for the allegations contained in the statement of claim so that the court can be satisfied that there is a real basis for the set-off and counterclaim or, as it is

sometimes expressed, that there are “clear and persuasive grounds”[1] for the set-off

and counterclaim.

[6] The applicant’s statement of claim pleads four causes of action which are headed respectively:

(a) breach of obligation owed by foodfirst to Provida; (b) breach of duty;

(c) contractual set-off; and

(d) prejudicial conduct: the Companies Act 1993, s 174.

[7] The causes of action pleading breach of obligation owed by foodfirst to

Provida and breach of duty are alternative causes of action and seek judgment for

$778,837.

[8] The damages claimed are particularised in a schedule to the statement of claim. Those damages are said to be the applicant’s share of profits that would have been allocated to it by the respondent for the financial years 2005, 2006, 2007, 2008,

2009 and seven months of 2010. It is pleaded that such profits would have been

allocated had the respondent complied with its obligations pursuant to art 3.5 of its constitution and accordingly collected debts of $3,079,217 in the years that I have mentioned.

[9] The breach of duty cause of action repeats the allegation and pleads that because of the special status of funds which are set aside in what is known as the Retained Discount Account (referred to in the judgment as RDA) the respondent owes the applicant a duty to use reasonable skill and care when managing its business and to act in the best interest of its business so as not to jeopardise the RDA entitlement of the applicant.

[10] The third cause of action is additional to the alternative causes of action provided by the first and second causes of action. It pleads that on a proper interpretation of the respondent’s constitution the applicant is entitled to set-off against the debt which the applicant owes to the respondent the sum which appears in the respondent’s accounts being the applicant’s RDA entitlement. It is common ground that that currently stands at $406,983. That is the current position and takes account of the partial reduction in the amount of the claim which I referred to in [2] of this judgment.

[11] The fourth cause of action relies on the Companies Act 1993, s 174 and pleads that the respondent’s business has been conducted in a manner which is, or is likely to be, oppressive, unfairly discriminatory, or prejudicial to the applicant. The applicant says that as a consequence an order should be made that it is entitled to set- off its RDA entitlement against the debt owed by it to the respondent. The set-off is the sum referred to in the third cause of action, namely $406,983. Additional relief is sought seeking the purchase of the applicant’s shares in the respondent and the production of documentation. I was further advised an additional remedy would be sought in an amended claim, being the liquidation of the respondent.

The first cause of action: breach of obligation under constitution

[12] The first cause of action requires a consideration of the effect of art 3.5 of the

respondent’s constitution.

[13] Article 3.5 of the respondent’s “altered constitution”, which is in the same

form as in its first constitution, provides:

3.5 The Company will use its best endeavours to collect from all its members the invoiced price for all merchandise delivered to each member and protect the Company and its members overall from any defaults, inactivity or other malpractices of any individual member.

[14] The basis of the applicant’s claim is pleaded in paragraph 15 of the statement of claim which provides:

15. The obligation contained in clause 3.5 of the Constitution is owed to members, including Provida, and requires foodfirst to use its best endeavours to collect from all its members the invoiced price for all merchandise delivered to each member and protect foodfirst and Provida from any defaults, inactivity or other malpractices of any individual member.

The general allegation is particularised in paragraph 16, which need not be separately considered.

[15] Although not specifically pleaded in the statement of claim, in Mr Branch’s

submissions he referred also to art 3.7 of the constitution which provides:

3.7 The Company will as in the past work towards a cohesive and properly structured distribution of merchandise throughout the country and the provision of goods and services that are determined by the Board to be complementary thereto and to this end may purchase shares in companies (including member companies) which can provide such goods and services.

[16] Mr Branch referred to the Companies Act 1993, s 171 which provides:

171 Personal actions by shareholders against company

A shareholder of a company may bring an action against the company for breach of a duty owed by the company to him or her as a shareholder.

[17] Mr Branch referred to the commentary to s 171 in Brookers Company Law[2]

where the learned authors state:

CA171.01 Right to bring action

Section 171 codifies the common law right of a shareholder to bring an action against the company for breach of a duty it owes to the shareholder. The Act does not specifically detail any duties that are owed by the company to shareholders. However, they are likely to include matters such as a failure to pay an authorised dividend, or a failure to allow a shareholder to exercise voting rights: D O Jones, Company Law in New Zealand: A Guide to the Companies Act 1993, Wellington, Butterworths, 1993, p 134. In addition to any duties under the Act, the constitution may provide for duties owed by the company to its shareholders.

Duties relating to the business carried on by the company, such as restraints of trade, have generally been regarded as outside the ambit of the company- shareholder relationship. See, for example, Ryans Cartage Services Ltd v Connor (1982) 1 NZCLC 98,569.

Section 171 does not specify the remedies available to a shareholder in this type of personal action.

[18] Counsel were unable to locate any cases on the Companies Act 1993, s 171 which are on point.

[19] Mr Branch submitted that the obligations contained in arts 3.5 and 3.7 are obligations owed by the respondent to its shareholders and are not obligations owed by the directors to the respondent. Understandably, Mr Campbell took issue with that proposition.

[20] Mr Campbell submitted that there were three specific hurdles which must be overcome before the basis for a claim for breach of art 3.5 could arise. He mentioned a fourth which relates to the second part of the inquiry which needs to be raised as to whether there is sufficient evidence that is clear and persuasive to support the alleged ground. The three hurdles that he raised were the following:

(a) Does art 3.5 of the constitution give a personal action to a shareholder against the respondent company for breach?

(b) Does a breach of art 3.5 give a remedy to individual shareholders?

(c) Is the claim in this case caught by the established law that a shareholder may not bring a personal action to recover a loss arising from a reduction in the value of a company’s shares?

(a) Does art 3.5 of the constitution give a personal action to a shareholder against the respondent company for breach?

[21] Article 3.5 appears in a part of the constitution headed “The Company’s

Functions”. That can be compared with other parts of the constitution: arts 4.1 to

4.10, which appear under the heading “The Members’ Functions”; and arts 5.1 to 5.8, which appear under the heading “The Shares”, to illustrate just some parts of the constitution.

[22] Article 3.5 is not expressed as a duty.

[23] It is appropriate to bear in mind why breaches of the constitution will, without some specific aspect, not generally give rise to a personal claim. If all breaches of a constitution of a company could give rise to a personal claim, the effect would be to overrule Foss v Harbottle.[3]

[24] Professor Farrar in Company Law[4] said:

It is sometimes maintained that in any event there is a roundabout way of enforcing outsider rights on the basis of every member of the company having a right to have the company’s business conducted in accordance with the articles, see Wedderbum [1957] CLJ 193. However, a clear authority to this proposition is somewhat limited.

The reason for that is quite clear. If one elevated every matter in the articles of association of a company to the status of a contractual right vested in each and every member the rule in Foss v Harbottle[5] would be able to be completely disregarded. The whole effect of that rule, despite the growth of exceptions, is that ordinarily the court does not interfere at the suit of a member with an alleged wrong done with respect to administration of the company.

[25] Mr Campbell referred to a number of policy reasons for the general position, which I need not review for the purposes of this case. The general approach, which I

_{have just outlined, must be the starting point for this examination.}

[26] Articles 3.0 to 3.7, under the heading “The Company’s Functions”, disclose the purpose or reason for the company’s existence. This group of articles sets out the scope of work to be carried out by the internal management of the company at the direction of the company’s directors.

[27] There is much force in Mr Campbell’s submission that if best endeavours have not been complied with, the particular irregularity complained of can be put right by a resolution of the ordinary majority of shareholders. RR Drury in “The Relative Nature of a Shareholder’s Right to Enforce the Company Contract” said:[6]

It is necessary to bear in mind the long-term contractual relationship between the participants in a company, and the probable inimical effect of litigation upon this. It then becomes possible to suggest that every shareholder has the right to have the company run in accordance with the contract in the memorandum and articles of association, but that this right is subject to the rights of every other shareholder to condone or ratify breaches of internal management procedure ... namely by taking into account the wishes of the majority .... Such an approach would facilitate (but not guarantee) the resolution of the dispute without recourse to harmful litigation.

[28] I accept Mr Campbell’s submission also that whilst the cure by the majority does not personally recover them the lost revenue, that in itself is not material. In the first place the lost revenue is the company’s. The fact that by application of art 8 it is ultimately distributed to shareholders does not assist the applicant’s argument. The rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[7] generally prohibits any action by shareholders to recover losses suffered by a company.

[29] In accordance with the articles of the constitution of the company there can, in particular by art 8.1, be no distribution of the net profit until they are firstly established and after making due provision for the matters that are specifically referred to in art 8.1. Accordingly, the losses complained of are losses of the company.

[30] I mention the one reservation I had in this case about the proposition just stated. The structure of this company is such that the distribution of its profits is

unlikely to affect the value of the shareholding because the principal intention seems to be to distribute those net profits to the various RDAs of its members. Nevertheless, that is not the only place that those net tax paid profits are directed because there is provision for the payment of a dividend in respect of each parcel of shares.

[31] The analysis just carried out leads me to the conclusion that the constitution does not give a personal action to a shareholder against the respondent company in respect of a breach of art 3.5. However, in case I am wrong I do not rest the examination of whether this first cause of action has a proper foundation on this analysis alone.

[32] Accordingly, I consider the second of the hurdles raised by Mr Campbell.

(b) Does a breach of art 3.5 give a remedy to individual shareholders?

[33] It is common ground that if Provida was to succeed with its first cause of action then all shareholders would have the same claim, although their actual rights to the precise distribution would vary according to shareholding and perhaps also to the rules for the distribution of net profit.

[34] Mr Campbell drew attention to the difficulties that such a proposition raises, namely:

(a) Judgment could only be met from the shareholders’ funds;

(b) foodfirst would be required to use the equity of those same

shareholders’ funds to meet these claims; and

(c) When the last two matters are considered the futility of the exercise is revealed.

[35] Mr Campbell submitted, in my view correctly, that the illogicality of recognising such a claim with the results that follow is the reason why one can conclude that either or both of the following propositions apply. First, the duty is not

owed personally. Second, breach is an irregularity which can be dealt with at an annual general meeting of the respondent.

[36] This leads me to conclude that the second hurdle raised by Mr Campbell equally provides a reason why the first cause of action cannot succeed.

(c) Is the claim in this case caught by the established law that a shareholder may not bring a personal action to recover a loss from a reduction in the value of a company’s shares?

[37] I refer to the third hurdle raised by Mr Campbell. That is the proposition that a shareholder may not bring a personal claim to recover a loss arising from a reduction in the value of the company’s shares.

[38] Mr Campbell submitted that even if Provida was successful in proving a breach of art 3.5 of the constitution gave rise to a personal action against foodfirst, nevertheless Provida’s claim for personal loss as a shareholder is simply an attempt to recover a loss arising from a reduction in the value of the company’s equity.

[39] He referred to Prudential Assurance Co Ltd v Newman Industries Ltd (No2):[8]

[A shareholder] cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company....

[40] Mr Branch referred me to Christensen v Scott.[9] He drew attention to the following statement of principle referred to by the Court of Appeal:

Where such a party, irrespective that he or she is a member, has personal rights and these rights are invaded, the rule in Foss v Harbottle is irrelevant.

[41] It is appropriate to mention the different factual position that was before the court in Christensen v Scott.[10] The claimants there suffered personal losses under

guarantees of their company’s obligations. They asserted an independent duty arising not out of their status as shareholders of the company, but as personal clients of their professional advisers. That must be contrasted with Provida’s position in this case. Provida’s status to bring the claim arises from its position as shareholder. Its loss is merely a reflection of the loss suffered by all the shareholders of foodfirst.

[42] That position is clear from a consideration of art 8.1 through to art 8.7 of the constitution. There is contained a provision for the board of the company to recommend to the annual general meeting the making of certain provision out of funds once the net tax paid profit of the company is established. That provision requires a recommendation to be made in respect of the dividend to be payable in respect of each parcel of shares and what discount should be carried to the RDAs. The company must make a net tax paid profit before the board is even in a position to make a recommendation to the annual general meeting. This reinforces my conclusion that Provida’s claim is a claim arising from a reduction in the value of the company’s equity. Accordingly, I conclude that because of this third hurdle, this cause of action would not succeed.

(d) Conclusion

[43] The conclusions I have reached indicate that the applicant does not pass the first stage of the analysis of its counterclaim, namely whether it would survive the strike out test of disclosing a reasonable cause of action. That makes unnecessary a consideration of whether there is an evidential foundation for Provida’s claim. Mr Branch took me through the analysis which is in the evidence and which supports it. Mr Campbell did not raise specific submissions in opposition to that analysis principally because he said it was unnecessary to do so. What is clear is that for a variety of reasons, bad debts were not collected and decisions were made to advance money which may not have been properly justified, resulting in the company’s performance being behind where it should have been had there been no problems. I raised with counsel when this aspect of the case was being examined what contingency deduction would apply to such a claim. The claim really has been calculated on the basis that if there had been no such failure, that all shareholders had paid their debts and investments were not made when they were, then the company’s

position would have been that much better. Some of the reasons for the position which has arisen are not attributable to foodfirst but, of course, its shareholders. foodfirst’s primary responsibility should have been to have reacted quickly, almost in a damage control approach. I do not have anywhere near enough information before me to see where, if in fact a proper analysis of damages could be carried out, a damages claim would lead to. I simply express the view that, having regard to the way the matter was argued before me, had I concluded that the first cause of action would survive a strike out test I would have held that there was a sufficient foundation evidentially for it so that the Companies Act 1993, s 290(4)(b) could be applied in respect of it.

Second cause of action: breach of duty

[44] The second cause of action in Provida’s statement of claim is based on what is described as a trust relationship or a special relationship or some other equitable duty.

[45] I was provided with no specific case authority supporting the cause of action pleaded.

[46] This cause of action, however, encounters the same difficulty which was referred to under the third hurdle in relation to the first cause of action. Provida’s loss is in fact a reflection of the company’s loss. In my view, Mr Campbell was correct when he submitted that if the duties of the type pleaded here did exist, they

would circumvent the rule in Foss v Harbottle.[11] I do not consider that this is a case

where the duties alleged should be allowed to proceed to trial in a case where there is no proper foundation for them.

[47] The second aspect of the analysis that is required in relation to the second cause of action is whether there is an evidential foundation for the claims made. The evidence advanced is precisely the same as for the first cause of action, as is the

prayer for relief. My comments in relation to the first cause of action and to this aspect apply equally to the second cause of action.

The third cause of action: contractual set-off

[48] The third cause of action in the statement of claim pleads contractual set-off. [49] Mr Branch advanced identical submissions to those which were placed before

the court at the hearing on 24 June 2010. Those submissions were dealt with in [30] to the first sentence in [43] of my interim judgment of 29 June 2010. In my interim judgment I expressed one reservation in the analysis of this position and that was that the very exercise of the discretion to recommend allocation to the RDAs might be a justification for the application of the Companies Act 1993, s 174. Accordingly, it is my view that the third cause of action, which will be limited to the current balance of Provida’s RDA entitlement of $406,983, survives only if it comes within the umbrella of a claim pursuant to the Companies Act 1993, s 174. That is, it may be considered alongside Provida’s fourth cause of action.

[50] The claim itself, $406,983, is a liquidated sum and therefore falls within the first of the two examples referred to by the Court of Appeal in Covington Railways Ltd v Uni-Accommodation Ltd,[12] should I find that there is a reasonable possibility of the liquidation of foodfirst.

The fourth cause of action: prejudicial conduct

[51] The fourth cause of action alleges oppression, unfairly discriminatory, or unfairly prejudicial conduct.

(a) The claim

[52] The essence of this claim is pleaded in paragraph [27] of Provida’s statement

of claim which provides:

27. The affairs of foodfirst have been, and are being, or are likely to be, conducted in a manner that is, or an act or acts of foodfirst have been, or are, or are likely to be, oppressive, unfairly discriminatory or prejudicial to Provida.

Particulars

a. foodfirst:

i. has failed to provide Provida with documents and information that it has provided to other shareholders, including:

all details of the Pinnacle Project;

material provided to shareholders who have been

labelled “active members” by foodfirst;

ii. treated Provida differently in relation to its set-off claim than other shareholders, notably Pellows Frozen Foods Limited and Service Foods (Wellington) Limited;

iii. preferred the interests of other members over Provida with a

view to restricting Provida’s growth;

iv. failed to invite Provida to meetings of “active members” in

direct breach of the Constitution;

v. is proceeding with the Pinnacle Project which will result in those shareholders who are still “active members” being preferred to the detriment of Provida.

b. The relationship between Provida and the other shareholders has irrevocably broken down through no fault of Provida.

[53] The relief claimed is:

A. An order that foodfirst purchase Provida’s shares as provided for in

clause 5.3 of the Constitution.

B. An order that foodfirst pay out Provida’s RDA balance by way of setting that sum off against the debt owed by Provida to foodfirst.

C. Alternatively, an order under s 178 of the Companies Act 1993 that foodfirst provide Provida with all information provided to or made available to “active members” since 5 October 2009.

D. Costs.

Mr Branch advised that an amendment to the statement of claim would be sought which provided for an order to be made that foodfirst be placed into liquidation.

[54] Mr Branch made it clear that this cause of action is independent and additional to the first and second causes of action. It is an alternative to the third cause of action.

[55] For the purpose of this analysis the Companies Act 1993, s 174(1) and (2)

require consideration. The Companies Act 1993, s 174(1) and (2) provide:

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.

[56] Provida is, of course, a shareholder and therefore has standing to bring a claim pursuant to the Companies Act 1993, s 174.

[57] The Court of Appeal has given guidance on the meaning of the words

“oppressive, unfairly discriminatory, or unfairly prejudicial”:[13]

I do not read the subsection as referring to three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense helps to explain the other, 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 under s 209 [the predecessor to s 174]. 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 on the part of those in control of the company.

[58] Mr Branch clarified Provida’s position as follows:

(a) No part of the s 174 cause of action relates to the actions on which the best endeavours claim is based. Any management decisions which give rise to that claim are not relied upon for the purposes of the s 174 claim.

(b) The particular management decisions which Provida relies upon are said to be based on self- interest of current management.

[59] Mr Branch submitted that because of the above clarification, his client’s case was not concerned with “the business judgment” rule. Mr Campbell relied on Latimer Holdings Ltd v SEA Holdings NZ Ltd.[14] Here the Court of Appeal referred to the following three principles as very well established:

[70] First, errors of judgment by management, inefficiencies, and poor business management without distinct elements of bad faith or self- interest cannot amount to oppression. The cases under this head go back at least as far as Re Five Minute Car Wash Service Ltd [1966] 1

WLR 745.

[71] Secondly, in any event, Judges are ill-equipped to evaluate business strategies, and have accordingly exercised self-restraint. See Howard Smith Ltd v Ampol Petroleum Ltd [1974] AC 821 per Lord Wilberforce, “. . . it would be wrong for the court to substitute its opinion for that of management, or indeed to question the correctness of management's decision, on [questions of this character] if bona fide arrived at” (at p 832). And see also the case concerning the dismissal of Mr Venables as chief executive of

Tottenham Hotspur (Re Tottenham Hotspur plc [1994] 1 BCLC 655 (Lord Nicolls V-C)). This is sometimes called the “business judgment” rule. Judges, on the other hand, do have training and expertise in dealing, for instance, with fraud, illegality, or conflicts of interest.

[72] Thirdly, the remedy is not (without more) appropriate for the facilitation of exit from a company where there are straight-out disagreements over company strategy. This point was distinctly reinforced by this Court recently in Yovich & Sons Ltd v Yovich where, in delivering the judgment of this Court, McGrath J said at para [31]:

“The statutory protection for prejudiced shareholders is not intended to facilitate exit from the company in all cases where minority shareholders differ from the majority on the policy and direction of a company which they see as being to their disadvantage.”

[60] The court gave further guidance:[15]

[107] In settling expectations and understandings for the purpose of this section Judges will necessarily have to focus on the formal nexus of understandings in the firm which the parties have themselves established. These might be termed the “formal” or “internal” understandings. But sometimes Courts (in our view legitimately) focus also on external standards in identifying reasonable expectations and understandings (see, for instance, Re A Company (No 008699 of 1985) [1986] BCLC 382 at p 389 (per Lord Hoffmann); and Re A Company, ex p Burr [1992] BCLC 724 at p

727 (per Vinelott J)). However in settling reasonable expectations, Chancery Judges have not strayed into the quagmire of attempting to

imply terms into more formal expectations.

...

[113] The operative words of the provision express a general principle which is directed to “an unjust detriment to the interests of a member of the company” (Thomas at p 693). That test is an objective one. The provision may be prayed in aid even if the conduct accords with the company's constitution, because even then inappropriate prejudice may still arise. Relief can be given even if the conduct complained of does not involve a want of good faith or a lack of probity. The fact that all members are treated uniformly as members will not necessarily make conduct fair. The reasonable expectations of members are distinctly relevant – though this factor is not in and of itself necessarily determinative – and those expectations are not necessarily restricted to purely “internal”, or “formal” expectations. There are no fixed categories of cases to which s 174 apply. The provision is one of general application. Relief may be sought even with respect to a listed company.

...

[120] Even if that were not so, as this Court was at pains to emphasise in Thomas (at p 696), it is very difficult to get within the oppression remedy by showing that, differently managed, a company might do better by minority shareholders. We entirely agree with Williams J that as a general proposition Courts cannot appropriately be involved in second-guessing decisions by boards and shareholders as to the more appropriate direction and management of a company. This Court cannot correct poor strategic decisions, if such they be.

...

[121] ... it would be unlikely that the Thomas formula could be met when there are rules specifically to deal with the situation that have been complied with.

[61] Mr Campbell referred to the Limitation Act 1950, s 4(1)(d) as a potential bar to part of this cause of action. Mr Branch responded by submitting that Provida was simply relying on evidence which happened more than six years ago to help prove that actions undertaken within the limitation period amounted to a breach of the Companies Act 1993, s 174. He submitted that Provida does not rely on conduct which occurred more than six years ago to found the claim of oppression.

[62] I accept his submissions as far as this analysis can be taken at this stage of the case. Certainly, I would not find against Provida’s claim at this early stage on the basis that there is a clear limitation bar to the relief sought.

(b) The complaints

[63] Having regard to the short summary I have given in respect of cases where reliance is placed on the Companies Act 1993, s 174, I now consider the specific complaints which are relied upon in paragraph 27 of Provida’s statement of claim. In doing so I follow the order adopted by Mr Branch in his submissions. That certainly puts each complaint into perspective.

(c) Failure to invite Provida to meetings

[64] Provida complains that it was not invited to the meetings, chaired by the managing director, of active members of foodfirst. Active members are those who are still trading through foodfirst and, in particular, placing orders for products

through foodfirst. Provida complains that it was excluded in breach of art 6.7 of the constitution. The constitution provides that if a member attends the annual general meeting that member is entitled to attend a conference. The constitution provides that the purpose of the conference is to hold a working session with members and their approved advisers and approved executive staff designed to grow foodfirst and its business.

[65] foodfirst has made it plain that Provida will not be allowed to participate in the conference even if it was to attend the annual general meeting. Mr Pickup, the chairman of the board of foodfirst, in his fourth affidavit, gives the reason for this as follows:

I acknowledge that foodfirst has not invited Provida to conferences of active trading members. Given that Provida trades as a competitor it is not appropriate for Provida to be invited to or to attend these meetings. Likewise, foodfirst has not provided Provida with certain documentation provided to active trading members prior to or during conferences that follow the general meetings.

[66] On the face of the constitution, foodfirst’s position here is in breach of its constitution. foodfirst’s position is that it is following a position which has been standard practice for over 15 years. Only active trading members attend the conferences that follow the annual general meetings. The reason for the exclusion is the commercial sensitivity relating to suppliers and members.

[67] Mr Campbell submitted that if Provida, as a competitor, was allowed to attend the conferences of active trading members, and did so, the conferences, to use his words, would be doomed. Members and suppliers would be reluctant to attend. Suppliers would be unlikely to share pricing information and specials with members in an open meeting. Members would be unable to have a candid discussion about best practices, opportunities and to share information with each other. He submitted that, accordingly, in fact Provida has lost nothing.

[68] It will be noted from the explanation that there is no denial that there is a breach of the constitution in the practice which is being followed by foodfirst. What is not clear on the material before me is precisely what its effect has been to date.

(d) Failure to provide documents and the “Pinnacle project”

[69] Mr Branch next dealt with the allegation that foodfirst has failed to provide Provida with documents and information that it has provided to other shareholders, including all details of the “Pinnacle project” and material provided to shareholders who have been labelled “active members” by foodfirst. There are two specific areas that require comment. There has been a practice of disseminating confidential information about pricing, specials and other promotional material. Understandably, Mr Branch did not concentrate his submissions specifically on that aspect. Rather, he concentrated on a second area which is clearly of concern to Provida. foodfirst has announced the adoption of a new distribution model, referred to in the papers as the Pinnacle distribution model. Mr Branch submitted that Provida has a well- documented interest in ensuring that Pinnacle does not impact on Provida’s RDA entitlements. It would, for example, if the funds available annually do not permit the RDA entitlements to be paid out.

[70] Provida also complains that foodfirst has failed to comply with its obligations under the Companies Act 1993, Schedule 1, cl 2 by not giving notice of the business to be conducted at the annual general meeting, or other relevant information that was supplied to members. That complaint is important, it is said, because Provida had no notice of the proposed resolution relating to Pinnacle. He submitted that this action amounts to a breach of the Companies Act 1993, s 174.

[71] The material presented to me in relation to Pinnacle is unsatisfactory. At the end of the first day’s hearing in relation to this part of the application I invited counsel to confer with a view to putting before the court an agreed statement of the principles which are enshrined in Pinnacle. There was no agreement. What was produced on the second day of the hearing was an affidavit by the financial controller of foodfirst, Ms Kristine Brothers. Mr Branch initially objected to my reading it but later compromised that position and left it to me to determine what weight should be given to it.

[72] Before I set out her advice as to Pinnacle, it is appropriate to refer to the constitutional requirements in relation to distributions to shareholders.

[73] Profits, dividends and discounts are dealt with in arts 8.1 and following of the constitution of foodfirst. In [34] of my interim judgment I set out those articles in full.

[74] The provisions to which I have referred reflect the constitution in its amended form following its amendment in 2002. The previous constitution contained art 8.5 in the following form:

8.5 Subject as aforesaid Vouchers shall be payable to each member entitled to the same on a rotational basis over 10 years or such other period as the Board determines and on a “first in – first out” basis. The sequence will be fixed by the Board from time to time. Notwithstanding the foregoing, the vouchers shall be immediately due and payable should the Company go into liquidation or be placed in receivership.

[75] Article 8.5 in the form just referred to is the only article which was changed in the amended constitution dealing with profits, dividends and discounts.

[76] The former art 8.5 is the basis for foodfirst’s agreement that the vouchers for the years 2000, 2001 and 2002 shall be paid in the years 2010, 2011 and 2012. As already mentioned in this judgment, credit was given for the 2000 voucher following the annual general meeting of 31 August 2010 and is reflected in the giving of credit for $43,566 off the amount originally demanded.

[77] foodfirst made substantial losses in 2009. Mr Pickup, in his fourth affidavit, annexes long term cashflow statements prepared in September 2010 which show the effect of two contingency options available to foodfirst with respect to making RDA payments. He expressed the two contingency options as follows:

a. The first option would re-allocate approximately $1 million in losses against 2003 to 2008 RDA balances, pay Pinnacle rebates and also make Pinnacle RPS payments (the equivalent of Pinnacle RDA payments). ...

b. The second option does not re-allocate the $1 million losses, but instead delays the 2003 RDA payments for 2 years and then pays out the RDA each year in full thereafter, which foodfirst believes it can do under its constitution (although this is not in line with current board policy, which is to pay out RDA entitlements as early as possible). ...

He then annexed cashflow statements dealing with the two options.

[78] One difficulty with the analysis from here on is that Mr Campbell acknowledged a mistake in the cashflow statements dealing with the second of the two options just referred to.

[79] The mistake relates to the provision made in the 2013 and 2014 years for movements in the new systems, that is the Pinnacle rebate, whilst there would be no payments in the pre-Pinnacle RDA members’ entitlement.

[80] In his fourth affidavit, Mr Pickup, under the heading “Pinnacle project” said:

The current intention of the board is to implement the fifty percent pinnacle Rebate for the financial year starting 1 April 2011. This will mean profits will be distributed fifty percent to members following year end (Pinnacle rebates) with the balance being credited to members RPS (the equivalent of Pinnacle RDA payments). Foodfirst has taken legal advice regarding a change in constitution and that advice is that a change in constitution is not necessary to effect Pinnacle.

[81] That, however, has to be compared with Ms Brothers’ affidavit, which was submitted with the intention of clarifying the position for the court and Provida. She said:

Assuming Project Pinnacle proceeds from 1 April 2011, the company’s

operating surplus will be distributed as follows:

a. the Board of Foodfirst will determine a percentage of the operating surplus to be applied to the Pinnacle Rebate Scheme. The percentage is at the discretion of the Board of Foodfirst. Members will have no contractual entitlement. The intention is that Foodfirst will apply 50% of the operating surplus to the Pinnacle Rebate Scheme. Based on (conservative) forecasts that I have done, a 50% rebate ought to be able to be achieved over the medium term while still generating sufficient net profit such that there is enough cash to meet the RDA falling due.

b Once the Pinnacle Rebate Scheme for any year has been determined. the amount will be declared shortly after balance day. It will then be recorded in the accounts as a liability and the intention is to pay it within six months thereafter. An advantage of Pinnacle Rebate scheme is that some members can apply these rebates in a tax effective manner.

c. The remaining amount becomes the company’s nett profit and is

taxed. That nett taxed profit will then be allocated, as it always,

pursuant to clause 8.1 of the constitution. Any profit not retained or paid by way of dividend will be carried to the Retained Discount Account. That account has been renamed the Retained Pinnacle Scheme (RPS) but is, in fact just the old RDA account and will operate as it always has.

[82] If Mr Pickup’s evidence was taken literally it would appear that what is proposed under Pinnacle is in breach of art 8.1. The explanation given by Ms Brothers is, however, that members who are in Pinnacle will be paid a rebate on what they are invoiced for the goods which they have ordered which, presumably, has the effect of reducing the gross profit figure which, under art 8.1 of the current constitution, is the starting point for the allocation for dividends and the current RDA.

[83] On the material that was placed before me I am left with considerable sympathy for Provida’s position and its apprehension that what was originally a long-term entitlement to receive its RDA entitlements may well be in jeopardy. I suspect that only a thorough examination of the documents together with cross- examination of the officers of foodfirst at the trial of the proceedings which have been commenced by Provida may provide the answer.

[84] Faced with this unsatisfactory explanation as to Pinnacle, Mr Branch submitted as follows:

(a) Pinnacle is in effect a new discount scheme which will only be available to members trading with foodfirst, including any new members added. It appears as if foodfirst has produced a new category of active members not mentioned in the constitution.

(b) The new scheme will see 50 per cent of the profits paid out each year to active members with the balance being paid into an account similar to the RDA.

(c) In order to appreciate the effect of Pinnacle regard needs to be had to the way the existing RDA scheme works. RDAs are paid out on a rolling 10-year basis. Non-trading members are paid out effectively

from the efforts of current members. The members’ earnings in the current year are credited to the RDA which provides foodfirst with the cash reserves from which it can meet the rolling RDA payments. The members’ earnings for the current year will not become due for payment for another 10 years, or possibly never if that is what the board chooses. The new constitution, with the amendment to art 8, allows the directors to decide when those RDA payments will be made. However, the intention has been expressed that the board would continue to pay the oldest RDA payments first, which would seem to be the only fair way to do it as that is the historic method of dealing with them. In Provida’s case the new system means that it would be paid less than what it effectively earned for foodfirst in any one year. It may even lead to a situation where no funds will find their way through to the RDA.

[85] Mr Branch acknowledged, as did Mr Hudson, a director of Provida, that there was a need to implement a system like Pinnacle because, understandably, a new member coming in to foodfirst under the existing model is required to wait some 10 years before the effect of the discount available is released to it.

[86] I am not in a position, in this judgment, to determine whether the change proposed is in breach of foodfirst’s constitution or not. That is essentially because the precise basis for the scheme has not been established. Mr Branch argued that Pinnacle is contrary to the constitution. He referred to art 3.6 of the constitution. That provides:

3.6 The Company will, whenever possible and expedient, so arrange matters that discounts are, at the discretion of the Board, credited to members in accordance with the discount formula and will operate the Retained Discount Account and issue vouchers.

He next referred to the Articles dealing with profits, dividends and discounts to which I have made reference. He noted that the previous constitution provided for the payment of the RDAs on a rolling basis. He further submitted that it is clear there is only to be one discount scheme. He submitted it is contrary to the intention of the constitution that a completely different discount scheme can be put in place

which has priority over the discount scheme mandated by the constitution. He relied on art 8.1 which makes it clear that profits are to be allocated to either dividends or to the RDAs. By contrast, effectively Pinnacle has the effect of siphoning off profits into a different discount scheme. The implication appears to be that under Pinnacle the trading member will effectively receive half the fruits of that member’s efforts immediately. By contrast, those inactive members who earned significant amounts of money for foodfirst will simply have to await a decision of the Board as to whether they will ever see the fruits of their efforts.

[87] Mr Campbell submitted that Pinnacle in fact poses no prejudice to Provida that would justify any order pursuant to s 174. He submitted that the model’s purpose was to attract new members and would reward existing members by providing increased incentives and better trading terms. Those terms were in the form of rebates based on the volume of purchases. He claimed that the rebates are nothing more than a pricing decision. He submitted, accordingly, that it was a decision for management. Its purpose, in fact, was to move foodfirst from a low volume, high margin state to a high volume, low margin state. He submitted the only concern that Provida could have would be if Pinnacle led to reduced profits which, in turn, interfered with the ability of the company to pay aged RDA entitlements and at the same time produced a corresponding benefit to current members. He submitted that there was no evidence that that result would follow and relied on the conservative cashflows which he claimed had been produced. I have already commented on the fact that he acknowledged a mistake in those cashflows.

[88] I have already referred to the fact that the inquiry in this application necessarily is incomplete. Mr Branch raised two further matters which also cannot be determined on the material before me. He submitted that what Pinnacle involved was a discount to shareholders and was therefore in breach of the Companies Act

1993, s 55. Why I cannot determine that issue precisely in this judgment is that until the precise payments relating to the application of the Pinnacle system are established one cannot finally say that what is paid as to a 50 per cent share of, effectively, surplus to new members is either a rebate or a discount. Theoretically, if it is a rebate it would not be caught by s 55. I am certainly not in a position to

determine whether the scheme, if it is a discount scheme, is fair to all members. The implication is that its application will be unfair to some members.

[89] Mr Branch next referred to the Companies Act 1993, s 117 dealing with alteration of shareholders’ rights. Once again, I am not in a position to analyse this submission because I cannot finally determine whether the method of trading proposed by Pinnacle is, in reality, a breach of art 8.1 of the company’s constitution.

[90] It is common ground that there are good reasons for the trading members of foodfirst to want to change the existing structure. It is acknowledged by Mr Hudson of Provida that requiring a large majority of foodfirst’s profits to be tied up for 10 years would not encourage new membership or signal a growth of the company’s business. The difficult question, however, is whether the changes that are being proposed can be effected as management decisions or whether they require a change to the constitution. I cannot determine this question until it is revealed exactly how the rebate to active members is applied. Alternatively, the members could resolve to liquidate as a solvent liquidation with assets being sold to a new entity controlled by the trading members. Indeed, that is a solution which Provida would no doubt find attractive because art 8.5 provides that the vouchers issued in respect of RDA become immediately due and payable should foodfirst go into liquidation or receivership.

[91] I do not overlook Mr Campbell’s submission that Provida’s strategy here is to

obtain early access to its RDA as a part of its exit strategy from foodfirst.

(c) Differential treatment

[92] I turn next to the complaint as to the differential treatment provided to Pellows Frozen Foods Ltd. That company was a member. Mr Pickup explains foodfirst’s position in paragraphs 40 to 44 of his affidavit of 2 December 2009.

[93] In brief, the founding director of Pellows Frozen Foods Ltd died. There was

a shareholders’ resolution putting the company into liquidation. A buyer for the

company was found. Mr Pickup concluded that the reasons for the treatment given in respect of Pellows Frozen Foods Ltd were as follows:

Although there was a personal guarantee from Mr Pellow and his widow Mrs Pellow guaranteeing Pellow’s obligations to foodfirst, it was decided by the board at the time that it would be oppressive to pursue Mrs Pellow for the outstanding trading account and litigation would not be commercially viable when related to its RDA account. In the circumstances foodfirst’s directors decided that it was appropriate to set-off Pellows’ RDA account against its trading debt and write off the balance of Pellow’s debt.

[94] Pellows’ position following its exit as a member of foodfirst is different from that of Provida. There was no question of Pellows trading in competition with the remaining members of foodfirst. By contrast, Provida is a competitor. There are therefore entirely different considerations which, obviously, were taken into account by the board when it dealt with Pellows’ position.

[95] I am not satisfied on the material placed before me that this particular complaint would, by itself, justify the court’s intervention under the Companies Act

1993, s 174. My conclusion, as with the other aspects of complaint, is given in light of the inquiry that one must make when determining whether there is sufficient evidence of a counterclaim or set-off for the purposes of the Companies Act 1993, s 290(4).

(f) Preferring other members’ interests

[96] The next particular alleges that foodfirst preferred the interests of other

members over Provida with a view to restricting Provida’s growth.

[97] Mr Hudson provides considerable evidence of a number of matters that are the basis for this complaint in paragraphs 48 to 98 of his updating affidavit of

22 November 2010. The complaints are spread over a number of years and go back to 2002.

[98] Mr Branch summarised this position in his written submissions:

Provida has laid an evidential foundation as to the actions of foodfirst being to limit Provida’s growth. The most obvious being the close, and preferential, relationship enjoyed by certain foodfirst members and the

failure of foodfirst to make it known to Provida that other foodfirst members

wished to sell. ...

He drew attention to the fact that the allegation of prejudicial conduct is against people such as Mr Dave Walters, Mr Doug Nicklen and Mr Eric Forbes. He noted none of these people had been asked to swear an affidavit rebutting Mr Hudson’s claims.

[99] I have no doubt at all that the relationship between Mr Hudson on behalf of Provida and the management and board of foodfirst has become severely strained. What is apparent, however, is that no attempt by way of the issue of proceedings was taken by Provida in respect of these matters until the possibility was raised in my interim judgment of 29 June 2010. That, by itself, is not a reason for discounting the complaints but does place them into perspective.

[100] Some specific conclusions can be recorded which are important in the analysis of the s 174 cause of action. They are:

(a) The current and most significant potential prejudice to Provida relates to how its contingent entitlement to its RDA vouchers, which total

$406,983, are dealt with.

(b) Historically Provida could expect its current RDA entitlement to be paid in accordance with the vouchers it holds for the years 2001,

2002, 2003, 2004, 2005, 2006, 2007, 2008 and 2009. I have assumed there was no trading by Provida with foodfirst in 2010. If I am wrong and there was, there would be an additional voucher for 2010. Historically payment would be expected to be made on the 10th anniversary of each voucher.

(c) The new constitutional provision, art 8.5, provides that members’ entitlement to be paid their vouchers is to be determined by the board of foodfirst from time to time. The board has expressed an intention, however, to follow the historic plan.

(d) If foodfirst is placed into receivership or liquidation, the vouchers are immediately payable.

(e) Payment of the sum recorded in a voucher is subject to set-off. In the case of any active member that means the member receives the net figure after taking into account any set-off

whether the same arises out of unpaid purchase money for merchandise or arising howsoever and whether or not the set- off is a true set-off at law

by the operation of art 8.4 of the constitution.

(f) If a member has been a non-trading member for a year or longer it is unlikely that there would be any set-off in respect of that non-trading member’s voucher.

(g) If foodfirst was placed into liquidation before payment of the amended amount claimed under the statutory demand of $934,286.13

Provida consequently has a set-off in respect of its RDA entitlement of $406,983 as from the time of the liquidation. Accordingly, there is a contingent basis for an immediate set-off of $406,983 which is dependent upon foodfirst being placed into liquidation or receivership.

(h) Historically on the exit of a member foodfirst redeems all but one of the retiring members’ shares. Presumably it has been able to do this because the directors who vote in favour of such a resolution are able to sign and do sign a certificate stating that in their opinion foodfirst will immediately after the shares have been redeemed satisfy the solvency test. The certificate would also have provided the grounds for that opinion. That obligation is imposed on the directors by the Companies Act 1993, s 70.

(g) foodfirst’s solvency

[101] Mr Branch questioned why foodfirst had not offered to purchase 4,999 of Provida’s 5,000 shares. That is the position which normally follows when a member moves from active to inactive status. He submitted that the only reason was because the directors of foodfirst are unable to sign a solvency certificate. In this respect, he relied upon the Companies Act 1993, s 70 and the preceding sections dealing with a company acquiring its own shares. Why the board delayed its decision is not explained. Whether the delay was caused by a director’s concern about signing a solvency certificate is not the subject of any comment from directors of foodfirst. This issue does cause me some concern.

[102] Mr Campbell said that the board of foodfirst will consider whether or not to redeem Provida’s shares at the conclusion of this application. He confirmed the usual course when a member resigns from active status is for foodfirst to redeem the

4,999 shares. One share is retained to allow the member to be paid out its RDA entitlements in the usual course. He did not take issue with the valuation of shares and confirmed that, at best, Provida’s entitlement to set-off would be for the sum of

$10,000 for the redemption of the 4,999 shares.

[103] foodfirst’s statement of financial position as at 31 March 2010 has been produced. These are now considered against the solvency test as enacted in the Companies Act 1993, s 4.

[104] Mr Campbell summarised the position in terms of assets and liabilities from the statement of financial position. He noted that that statement recorded current assets of $10,011,552 and current liabilities, being entirely trade and other payables, of $8,165,958. Mr Campbell’s analysis, however, did not take account of non- current assets which are recorded at $654,055 and the position in relation to the RDA which, at balance date, totalled $3,285,462.

[105] The notes to the financial accounts make the following comment in relation to RDA:

Each year out of the net profits after tax of the Company the Board shall recommend to the AGM a discount that shall be carried to the Retained Discount Account. The amount carried each year to the credit of each member to the Retained Discount Account is calculated in respect of each member by means of the discount formula. The transfer is made from retained earnings to the retained discount account when the Board approves the allocation of profits to the retained discount account in respect of a financial year. A transfer is made back to retained earnings from the retained discount account when the Board, at their discretion, approves payment of dividends to members.

[106] The position, save for a liquidation, reflects the conclusion I reached and which is discussed in [30] to the first sentence of [43] of my interim judgment of

29 June 2010. This is the case save for one issue and that is the potential contingency of foodfirst going into liquidation. In that event the RDA amount of

$3,285,462 becomes immediately payable. But for that contingency, the second limb of the solvency test is satisfied on the material placed before me as at 31 March 2010 because foodfirst’s assets appear to exceed the value of its liabilities. I add the further rider that even if the RDA is regarded as a contingent liability, the members who have an interest in that sum do not, on my interpretation of the constitution, have a right to call for payment before liquidation and certainly could not use the existence of their voucher as a basis for placing foodfirst into liquidation.

[107] Accordingly, it is necessary to look at the first part of the solvency test and to determine whether there is any evidence of foodfirst being unable to pay its debts as they become due in the normal course of business.

[108] There is no actual evidence of non-payment of foodfirst’s debts. Mr Pickup in his fourth affidavit advises that the company has performed solidly for the financial year to date. Current members’ purchases are said to be up six per cent on the same period last year and 12 per cent in the three months to 30 November 2010. He confirms that the directors are confident that the company will achieve its budgeted trading profit for the year ended 31 March 2011. There is an acknowledgement that the litigation with Provida does produce an uncertainty, but that is a non-recurring expense.

(h) Conclusion

[109] Whilst there are complaints about the treatment of Provida that ground an arguable case, when I come to look at the remedial result of an application under the Companies Act 1993, s 174 the outcome is less clear.

[110] No reason has been provided for the delay in redeeming all but one of Provida’s shares. Indeed, Provida would be entitled to a set-off for the value of those shares. Both counsel have proceeded on the basis that 4,999 shares have a value of

$10,000 at least for the purposes of this application.

[111] The material advanced by foodfirst supports the proposition that foodfirst is unlikely to be wound up on account of a lack of solvency but for one matter. That arises because, at the moment, foodfirst is not following its historical practice in not redeeming the 4,999 shares which are the substantial part of Provida’s shareholding. That leaves me with the apprehension that the directors may be concerned about executing the solvency certificate.

[112] If there is a real risk of liquidation, Provida’s RDA entitlement should be secured until the s 174 application has been disposed of or the risk of liquidation otherwise removed.

[113] On the other hand, if a resolution to redeem the shares was passed by the directors and a solvency certificate was executed by them in terms of the Companies Act 1993, s 70 my concern would be largely met.

[114] If the liquidation issue can be satisfactorily resolved there is still the further question which requires an answer: Is there a clear and persuasive ground for concluding that the court in dealing with Provida’s s 174 application would require foodfirst to give credit for some or all of the RDA held by way of an award of compensation as part of an order under s 174(2)? At the moment there is no clear basis for concluding that the historic basis for distribution of RDA through the voucher system will be interfered with. Bearing in mind that this is a discretionary

remedy I consider that the possibility of a credit for the RDA entitlement is most unlikely because:

(a) It would be contrary to the historical expectation; and

(b) It would have an unfair effect on remaining shareholders, both active and inactive.

[115] The Companies Act 1993, s 290(7) provides that a statutory demand may be set aside on terms.

[116] I return to the liquidation issue in considering what are appropriate terms. I take account of the value of 4,999 shares at $10,000, which I consider should be available as a set-off from the original debt. The set-off operates, however, on the understanding that there is a transfer of the actual shares from Provida to foodfirst. If there is a liquidation before payment of the RDA entitlement of $406,983 that also would have to be set-off. A sum representing the shares and the RDA entitlement should be held conditionally for a period or until determination of the s 174 application.

[117] I have already mentioned that my one concern about liquidation relates to the fact that the directors have elected not to redeem the shares and complete the solvency certificate. I record that there is no material before me for concluding that a general creditor is likely to bring an application pursuant to the Companies Act

1993, s 241 seeking the liquidation of the foodfirst which would trigger the set-off provisions in relation to the RDA. When I take the combination of circumstances that I have just listed into account I am led to the position that the only real concern I have about the risk of liquidation arises from the directors’ position and whether they, who have full knowledge of the circumstances of foodfirst, are prepared to sign the solvency certificate. That is central to the conditions that I intend imposing on this particular case.

[118] It is clear that the statutory demand should be set aside. That is because the debt which is the subject of the demand is currently secured.

[119] Accordingly I conclude that a conditional order should be made in reliance on s 290(7).

[120] Before pronouncing the order it is appropriate that I refer very briefly to one further matter.

[121] Mr Branch referred to the further ground in the application, namely that provided by the Companies Act 1993, s 290(4)(c). That provides that the court may grant an application to set aside a statutory demand if it is satisfied that the demand ought to be set aside on other grounds than those provided for in s 290(4)(a) and (b).

[122] In [12] of my interim judgment I set out the approach which the Court of Appeal endorsed in applying s 290(4)(c). I do not regard any matter that I have examined to date in this application as justifying a different conclusion to that which I have arrived at in analysing the case pursuant to s 290(4)(b).

Orders

[123] I order as follows:

(a) The statutory demand is set aside;

(b) The Registrar shall pay forthwith to the solicitors for the respondent the sum of $518,303.13 together with 55.5 per cent of the interest held by the Registrar on the total sum which is held on trust by him up to the date of payment;

(c) The sum of $416,983 shall continue to be held by the Registrar plus interest thereon until satisfaction of one or other of the following conditions:

(i) until further order of the court in the proceeding CIV 2010-

419-1283; or

(ii) Until production to the Registrar of a resolution of the board of directors of foodfirst authorising the redemption of 4,999 shares held by Provida plus a certificate from the auditors of foodfirst fixing the price of the 4,999 shares in accordance with the constitution of foodfirst, plus a solvency certificate which complies with the Companies Act 1993, s 70. In the event that this part of the conditional order is met and the Registrar is provided with evidence that the shares have been redeemed, the Registrar shall pay the sum as certified by the auditors of foodfirst to the solicitors for the applicant and the sum being the balance, ie $416,983 minus the amount certified by the auditors to the solicitors for the respondent. The interest in respect of those sums shall be apportioned in accordance with the capital payments that I have directed to be paid.

_{(d) I reserve leave to apply for further orders.}

Costs

[124] I also had the opportunity of discussing the question of costs. These will be reserved in line with the agreement of counsel at the time so that they have the opportunity of discussing and, if appropriate, agreeing on a resolution of the same, failing which application can be made to me to fix costs. In that last event memoranda should be filed in support, opposition and reply at seven-day intervals on the question.

The substantive proceeding

The new proceeding issued by Provida in CIV 2010-419-1283 now requires a case management conference, it having been adjourned for mention to the date fixed for the hearing of the statutory demand proceeding. I simply record that a separate minute allocating a case management conference is being issued at the same time as this judgment in relation to that proceeding.

_{JA Faire J}

Solicitors:

---

[1] Bryanston Finance Ltd v de Vries (No 2) [1976] Ch 63 (CA) at 78.

[2] Brookers Company Law (online looseleaf ed, Brookers) at [CA171.01].

[3] _{Foss v Harbottle [1843] EngR 478; (1843) 2 Hare 451, 67 ER 189 (Ch).}
[4] _{JH Farrar, Company Law (Butterworths, London, 1985) at 102.}
[5] Foss v Harbottle, above n 3
[6] RR Drury “The Relative Nature of a Shareholder’s Right to Enforce the Company Contract” (1986) CLJ 219 at 238-239.
[7] Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA).
[8] Prudential Assurance Co Ltd v Newman Industries Ltd (No 2), above n 7 at 222-223.
[9] Christensen v Scott [1996] 1 NZLR 273 (CA).
[10] Ibid, at 280.

[11] Foss v Harbottle, above n 3.
[12] Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].

[13] Thomas v HW Thomas Ltd [1984] 1 NZLR 686 (CA) at 693.
[14] Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 1 NZLR 328.

[15] Ibid, at 329.