Hodgson v Inverell Properties Limited HC Wellington CIV-2009-485-2343 [2011] NZHC 904 (11 August 2011)

Last Updated: 23 August 2011

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

_{CIV-2009-485-2343}

IN THE MATTER OF Section 174 of the Companies Act 1993

BETWEEN CHRISTINA AILSA MCLEAN HODGSON

Plaintiff

AND INVERELL PROPERTIES LIMITED Defendant

Hearing: 10 August 2011

Counsel: P D Sills for Plaintiff

C S Chapman for Defendant

Judgment: 11 August 2011

JUDGMENT OF THE HON JUSTICE KÓS (Discovery and Joinder)

[1] On Monday the plaintiff died. Mrs Hodgson was 94 years of age. Her husband is 95. In recent years the Hodgsons have resided in a rest home in Auckland.

[2] Mrs Hodgson has always been the family shareholder in the defendant company. She owned about 35% of the shares, and appears to have done so since the defendant company was formed in 1970. Her husband has never held shares in the defendant. But he was its sole director from 1970 until November 2006. At that point Mr Malcolm Fraser (whose family had also held shares) became the sole director. He now holds some 60% of the shares in his own right. The company has invested in various commercial properties and other assets, usually via subsidiary

_companies.

HODGSON v INVERELL PROPERTIES LIMITED HC WN CIV-2009-485-2343 11 August 2011

[3] After ceding control the Hodgsons became dissatisfied with Mr Fraser’s management of the company. They considered that they had been excluded from its management and that the company had not complied with various legal obligations. Their major complaints have related to the manner in which accounts have been compiled, and alleged failures to consult shareholders on major transactions or to record transactions with companies associated with Mr Fraser in the register of interests. In particular, they complained about an advance of $450,000 or so by a subsidiary of the defendant, Downtown Self Storage Limited, to V A Draper & Co Limited, a company owned by Mr Fraser. V A Draper was once a well-known earthmoving and contracting company, but is now a vehicle for the provision of management services by Mr Fraser.

[4] Mr Fraser says that he has not acted improperly in directing the defendant. He says the V A Draper payment, for example, was for the termination of a long term contract for the supply of management services when the assets of Downtown Self Storage Ltd were sold. He says that if the accounting processes are informal, that is simply a continuation of the regime imposed by Mr Hodgson when he was in charge. The Hodgsons’ complaints arose because they were no longer in charge. But Mr Fraser says the Hodgsons have not been excluded, and that the Inverell group of companies now have proper audited accounts, as the shareholders have required.

[5] In August 2009 Mrs Hodgson asked the defendant company to pay for a share valuation, and to buy out her shares. The defendant refused. Mrs Hodgson’s complaint thus became also that the Hodgson family investment was effectively providing capital for Mr Fraser’s various business activities, over which they had no influence.

[6] Mrs Hodgson therefore commenced proceedings in November 2009. The claim is brought under s 174 of the Companies Act 1993 and alleges unfair prejudice in the management of the defendant company. The relief sought is valuation and purchase of the plaintiff ’s shares by the defendant.

[7] In June 2010 Mrs Hodgson applied for further and better discovery, and the defendant applied for further and better particulars. I comment below on the

resolution of those applications. On 24 August 2010 the proceeding was set down for a four day trial, to commence on 6 December 2010. But instead the parties went to mediation and the fixture was vacated. The mediation was not immediately successful, but a settlement agreement was eventually entered in January 2011. It was conditional. But because of financial and seismic events since then, the settlement did not become unconditional. It has now been abandoned. The parties have returned to litigation.

[8] On 29 September 2010 Gendall AJ delivered a detailed judgment dealing with the two applications referred to above.

[9] He determined that further and better particulars should be given of several of the paragraphs of the statement of claim.

[10] The discovery application sought further and better discovery of three categories of documents. The category with which we are concerned is:

Files held by the defendant’s accountant for the defendant and its

subsidiaries.

The defendant submitted, in opposition, that this would encompass a vast amount of material, including copies of communications between it and its accountants, transactional data, individual accounts, notes, working papers and other materials compiled by the accountants. It submitted that what was really relevant was the accountants’ instructions, and documents relating to the payment to V A Draper.

[11] The Associate Judge held as follows:

[80] I accept Inverell’s submission that the plaintiff’s request is too broad: see AMP v Architectural Windows Ltd. The plaintiff has not provided any real reasons why entire accountant’s files must be discovered and are relevant to her claim. As clarified at the hearing of this application, the request comprises all of Munro Benge’s files for Inverell since the firm was instructed, which was in 2006 or 2007. It is not limited to the financial accounts prepared by Munro Benge, the discoverability of which does not appear to be in dispute.

[81] Mrs Hodgson refers to two matters in particular that she contends justify discovery of the files: the issue of timing as to accounting instructions given, and the alleged failure to consult Mrs Hodgson regarding payments to third parties other than at arm’s length. With respect to timing, I accept that

instructions by Inverell to the accountants regarding the preparation of accounts would be of relevance, but it is difficult to see why discovery of the entire files is needed.

[82] Similarly, with respect to the latter issue, in my view, Mrs Hodgson’s request is somewhat misconceived, as her pleading regarding these particular transactions can hardly justify discovery of all accountant’s files. Nevertheless, I accept that it is not unduly burdensome to require discovery of all documents on the accountant’s files that relate to payments that were not at arm’s length. It seems that this category of documents would be sufficiently narrow and well defined so as to confine discovery to “relevant” documents. ...

[83] Apart from these two matters, however, it is unclear how the accountant’s files relate to Mrs Hodgson’s general allegation that Inverell failed to keep proper accounts and did not comply with audit requirements. It appears that Mrs Hodgson is in possession of the accounts prepared by Munro Benge to the extent that they are currently available. I have no doubt that Mrs Hodgson is entitled to request Inverell’s accounting records, as “information” under s 178 Companies Act 1993 ... That said, a reasonable argument must exist that the documents to provide this information if relevant should be provided on discovery to a shareholder.

[84] However, there is no reason why Mrs Hodgson should not be able to further particularise the nature of her allegations before additional discovery is provided of documents other than accounting records. This is not a case where the particulars sought depend on information held by Inverell, although further particulars will no doubt come to light once relevant documents are discovered. Mrs Hodgson, must have some idea why she claims that Inverell failed to keep proper accounts and did not comply with audit requirements. If she does not, and intends to use discovery as a tool to verify a base-less and vague suspicion, then her request must be treated as a pure “fishing expedition”.

[85] For these reasons, it is my view that Ms Hodgson should provide further particulars to the extent that this is possible, to clarify the nature of her allegations, before the scope of discovery of the accountant’s files is finally determined. I do envisage, however, that at least some further discovery may well be needed, including discovery of instructions, and I reserve leave to Mrs Hodgson to seek orders to that effect if required.

[12] The Associate Judge held that the defendant was to give further and better discovery of three categories of documents: documents relating to transactions that resulted or would result in the defendant or its subsidiaries changing the nature of its business; documents relating to payments by the defendant to third parties that were not at arm’s length; and remaining documents relating to each major transaction particularised at paragraph 15(c) of the statement of claim. He reserved leave, following particularisation, to Mrs Hodgson “to seek further orders for discovery of accounting records”.

[13] There are two applications before me. Both are by the plaintiff:

(a) an application for further and better discovery of the following documents.

(i) financial accounts and accounting records relating to

Downtown Self Storage Limited for the financial years ended

31 March 2000 to 31 March 2010, and any related correspondence or other documents;

(ii) financial accounts and accounting records relating to the defendant and/or any of its subsidiaries for the financial years ended 31 March 2000 to 31 March 2010, and any related correspondence or other documents;

(iii) documents relating to the appointment of auditors for the defendant and/or any of its subsidiaries for the financial years ended 31 March 2007 to 31 March 2010;

(iv) documents relating to the preparation of accounts for the defendant and/or any of its subsidiaries for the financial years ended 31 March 2007 to 31 March 2010;

(v) documents relating to the Online Annual Return lodged for the defendant on 14 August 2008;

(b) an application to join Mr Fraser as second defendant to the proceeding so as to advance causes of action for:

(i) deceit, and

(ii) breach of duty to the plaintiff as a shareholder under s 140 of the Companies Act 1993.

[14] Following discussion between counsel and the Bench, in which I intimated that the application was far too broad, Mr Paul Sills (for the plaintiff) narrowed the scope of this application to the following documents:

(a) Vanguard Investments: the annual accounts for the subsidiary company Vanguard Investments Ltd;

(b) Accountant’s files: documents on the accountants’ files comprising (i) working papers and (ii) correspondence between the accountants and directors of the Inverell group of companies – relating to the preparation and finalisation of the accounts of those companies for the years commencing 1 April 2006 to date;

(c) Intercompany ledger: a ledger recording intercompany journal entries for the years 1 April 2009 to date (if such document in fact exists). In this respect I note that the defendant has discovered a ledger recording such journal entries for the years 1 April 1997 to 31 March 2009.

[15] In relation to these matters Mr Christopher Chapman (for the defendant)

advanced this position:

(a) Vanguard Investments: This company was acquired in the middle of

2006, and the accounts for the years 2008, 2009, 2010 have in fact all been discovered. The defendant should have a copy of the accounts for the year ending 31 March 2007 in its possession, as those accounts would have been compiled during the period of its ownership. The defendant will produce that document if it exists.

(b) Accountants’ files: Mr Chapman indicated he “did not want to make a major issue” of this matter given that it had been greatly narrowed from the original application. His practical concern was the precise degree of relevance and whether the working papers were unduly

voluminous. Broadly however he accepted that the newly restricted discovery request was within the overall scope of relevance under paragraph 15 of the statement of claim (which the defendant has denied in whole).

(c) Intercompany ledger: The defendant will produce it if it exists.

[16] Mr Chapman also accepted in discussion with me that documents relating to certain transactions by Downtown Self Storage Ltd would be relevant. These transactions involved the $450,000 advance (which the defendant had already given discovery of), the ownership of a boat and jet ski by that company, and its payment (for some years after it had ceased trading) of certain Vodafone accounts. These lie somewhat beyond the scope of what had been sought, but plainly would be relevant to the s 174 claim.

Decision

[17] I am satisfied after hearing from counsel that the now-restricted range of documents sought in this application is appropriate. There will therefore be orders requiring the defendant to give discovery of the following:

(a) annual accounts for Vanguard Investments Ltd;

(b) documents on the accountants’ files comprising (i) working papers and (ii) correspondence between the accountants and directors of the Inverell group of companies relating to the preparation and finalisation of the accounts for the defendant and its subsidiary companies from 1 April 2006 to date;

(c) the ledger referred to in paragraph [15](c) above (if extant);

(d) documents explaining the following transactions by Downtown Self

Storage Ltd: the payment to V A Draper & Co Ltd, the ownership by

Downtown of a boat and jet ski, and payment of Vodafone accounts

since the company’s assets were sold in May 2006.

Joinder application

[18] As noted, the plaintiff has applied to join Mr Fraser as a second defendant in the proceeding, in order to elicit two causes of action against him:

(a) deceit, and

(b) breach of his duty to Mrs Hodgson pursuant under s 140 of the

Companies Act 1993.

[19] The essential gravamen of the deceit claim is that Mr Fraser allegedly had represented to Mrs Hodgson that the subsidiary company Downtown Self Storage Ltd had ceased trading in May 2006. Yet it continued to meet payments for Vodafone telephone charges, and was meeting motor vehicle expenses and so forth. The plaintiff points to discovered GST returns filed, an advance received from another subsidiary company called Volumex of $40,757 in the year ended 31 March

2009 and another advance of $189,144 introduced by Inverell in the same year.

[20] As to the consequence of these alleged misrepresentations by Mr Fraser, in terms of loss to Mrs Hodgson, Mr Sill submits:

If Mrs Hodgson had been aware of DSS’s activities, she would have demanded that proper explanations were given for expenditure, ownership of assets, and transactions to non-group companies. At this stage, it seems likely that DSS, Inverell and the shareholders have suffered loss as a result of DSS operating beyond shareholder scrutiny, although the extent of that loss cannot be calculated until a proper audit of the group is completed.

[21] The second proposed cause of action, relating to s 140 of the Companies Act

1993 concerns non-entry in the interests register of transactions between the same company Downtown Self Storage Ltd, V A Draper & Co Ltd (Mr Fraser’s management company) and two restaurant companies, Snappers Restaurants Ltd and Snappers Restaurant (Paraparaumu) Ltd, which are also owned by Mr Fraser. It is not apparent what if any loss has been caused by these transactions.

[22] The defendant company opposes the joinder of Mr Fraser on a number of grounds. First, no draft amended statement has been tendered. Secondly, the joinder of Mr Fraser would likely result in additional discovery requirements, and further delay to a proceeding that is already over 18 months old and has still not yet gone to trial. Thirdly, that s 140 provides no private right of action to a shareholder. (That submission is, however, clearly incorrect given the terms of s 169(3)(b) of the Act). Fourthly, and fundamentally, there was no evidence to suggest that the plaintiff had incurred loss as a result of any breach of s 140, or misrepresentation in relation to the status of Downtown Self Storage Ltd. Mr Chapman also pointed to the fact that the accountants themselves had described that company as a “non-trading” company in

2008 and 2009.

Decision

[23] I made clear to Mr Sills during the course of argument that I was not prepared to grant an order for joinder of Mr Fraser in relation to the two proposed causes of action. My principal concerns were the prospect of delay in determination of the s

174 proceeding, which in the circumstances of the recent death of the plaintiff, and the advanced age of her husband, is not desirable, and the absence of any articulated loss as a result of the allegations. I indicated to Mr Sills that I consider it preferable by far that the proceeding under s 174 go to trial as soon as possible, untrammelled and uncomplicated by peripheral causes of action of perhaps dubious merit. None of that prevents issue of a separate proceeding against Mr Fraser if that can be justified.

[24] I did indicate to Mr Sills, however, that I was minded to join Mr Fraser to the s 174 proceeding so that, if need be, the Court’s powers under s 174(2)(a) could be exercised, if the plaintiff ultimately succeeded, to require either the company or Mr Fraser to acquire the plaintiff’s shares.

[25] If the plaintiff does succeed under s 174, then any share valuation will need to take into account any actual or potential right of recovery against directors for the misuse of company assets. Whether this has occurred is a matter which can to some extent be teased out in evidence in the s 174 proceeding. Mr Chapman accepted that the existence of such claims (or correction of accounts to allow for such) would be

an aspect of the valuation process. Any misuse of corporate property would be a liability due to the company and would, as he himself observed, “need to be accounted for in the share price”.

[26] In the end both counsel were content with joinder of Mr Fraser for the limited purpose indicated by the Court during argument.

[27] An order is therefore made joining Mr Fraser as a second defendant to the s 174 proceeding, but without granting leave to amend the statement of claim in any respect other than to insert him as a party.

Two final matters

[28] First, Mr Chapman objects to one of the new particulars pleaded, that being to paragraph 15(c)(vii). I need not relate its detail. There is no application before me in relation to it. In the end Mr Sills accepted that he should review the accounts and perhaps reparticularise that pleading. If there is a difficulty about this, or as to discovery in consequence, the parties can go back to Gendall AJ for further directions.

[29] Secondly, as I have indicated, what is important is that this proceeding be tried as soon as possible. The Court offered the parties a four day hearing starting on

5 December 2011. Unfortunately that is not convenient to Mr Sills, as he has another fixture then. But I encourage counsel to liaise with the Court to obtain such a fixture, and, if need be, to accept a fixture on short notice. This is a case that needs to be determined urgently.

Disposition

[30] Orders are made in accordance with paragraphs [17] and [27] above. Costs are reserved. I note the outcome was essentially a compromise and that the hearing took 90 minutes.

Postscript

[31] I have today received a memorandum from Mr Chapman raising, tentatively, an issue regarding the procedural consequences of the regrettable demise of Mrs Hodgson. Mr Chapman suggests it may be that the s 174 proceeding is now spent. I very much doubt that can be the case. The suggestion seems to flow from Mr Sills’ reference to the company’s affairs being a “quasi-partnership”. But here my doubts are compounded. I very much doubt that that description is an accurate or relevant statement in the context of this proceeding. There will be a need to amend the statement of claim in consequence of the death of Mrs Hodgson. And it may be that an application to strike the proceeding out will be ventured after all. So be it. Leave is reserved to apply accordingly in either case.

Stephen Kós J

Solicitors:

Carson Fox Legal, Auckland for Plaintiff

Brandons, Wellington for Defendant