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High Court of New Zealand Decisions |
Last Updated: 11 November 2014
IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY
CIV-2013-476-000193 [2014] NZHC 2781
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BETWEEN
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HARICOT INVESTMENTS LIMITED
Plaintiff
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AND
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MAEREWHENUA DISTRICT WATER RESOURCE COMPANY LIMITED Defendant
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Hearing:
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19 - 24 October 2014
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Appearances:
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C S Withnall QC and R M Reeve for Plaintiff
R W Raymond and V M Heward for Defendant
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Judgment:
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7 November 2014
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RESERVED JUDGMENT OF DUNNINGHAM J
Contents
Introduction ..........................................................................................................[1] How did the stand-off between Haricot and Maerewhenua arise? ...............[14] The Memorandum of Encumbrance [16] The new spray consent [19] The review of the company documentation [23] The Limitation on Directors [34] Issue of further shares [40] Deciding on a structure for the spray irrigation extension to the scheme [46] Issue of new shares on 16 August [54] Pressure is placed on Haricot [56] Relief under s 174 of the Companies Act 1993 ................................................[69]
Have the actions of the Company been “oppressive, unfairly discriminatory
or unfairly prejudicial?......................................................................................[76]
Introducing a new constitution containing the provisions in cls 3.1, 3.3, 4.2 and
10.4(f) [76] Requiring Haricot to enter into the new Water Supply
Agreement [94] Threatening to forfeit Haricot’s shares for non
payment of disputed water charges and threatening to redeem Haricot’s
shares for refusal to sign the Water Supply Agreement [113] Issuing
shares to Meridian Energy Limited and Mr Dogterom at a consideration of $1.00
per share [116]
HARICOT INVESTMENTS LIMITED v MAEREWHENUA DISTRICT WATER RESOURCE COMPANY LIMITED [2014] NZHC 2781 [7 November 2014]
Threatening to discontinue, then discontinuing, the supply of irrigation water
for failure to sign the new Water Supply Agreement [125] Enacting r 3 under cl 8 of the Memorandum of Encumbrance to enforce the requirement to sign the Water Supply Agreement [132]
Conclusion.........................................................................................................[136]
Introduction
[1] In 1969, Mr Alistair Wills was a progressive farmer who
could see the benefits of irrigating his land.
In that year he
commenced lobbying the District Commissioner of Works to set up an irrigation
scheme for farmers in the Duntroon–Bortons
area on the south bank of the
Waitaki River. His persistence eventually paid off and, in 1977, that scheme
was constructed to serve
14 farm properties by gravity supply.
[2] In 1989 the government decided to vest this, and other irrigation
schemes, in the users of those schemes. Maerewhenua
District Water
Resource Company Limited (Maerewhenua) was incorporated by the scheme
users to acquire and operate the
scheme. In 1990, the scheme vested in
Maerewhenua and scheme users subscribed to shares in the company at $1.00 per
share per assessed
irrigable hectare. Mr Wills’ farming company, Haricot
Investments Limited (Haricot) was one of those shareholders. The respective
obligations of the company and the scheme user were recorded in a Memorandum of
Encumbrance which was registered on the title to
the scheme user’s
land.
[3] Once in Maerewhenua ownership, the scheme continued to operate much as it had done under government ownership. However, that all changed when, in 2001, a new power project on the Waitaki River, Project Aqua, was proposed by Merdian Energy Limited (Meridian). The construction of the project’s canal would disrupt irrigation supply to three of the Maerewhenua farmers. Meridian was willing to provide an alternative water supply and this led to Maerewhenua applying for a new water consent to serve these farmers.
[4] However, this consent application, along with all others
relating to the Waitaki catchment, was “called
in” while a
statutory hearing process was undertaken to create a new Waitaki Catchment Water
Allocation Plan. Even though
Project Aqua was called off, Maerewhenua decided
to pursue the consent, and, despite the challenges of the constantly evolving
planning
regime for the Waitaki River, Maerewhenua was eventually granted
consent in 2010 (albeit subject to its own appeal of conditions).
It then had
to turn its attention to using the consent, so that it did not
lapse.
[5] It was then that factions developed in Maerewhenua. Haricot was
content with the status quo, while other shareholders
were keen to expand the
shareholder base, particularly when they were faced with the cost of replacing
the damaged intake in early
2011.
[6] The directors sought professional advice on changing
Maerewhenua’s constitution and water supply arrangements so that
the
company could take on new shareholders. They also decided to borrow money to
upgrade and expand its water supply network in
order to utilise the new consent.
Those changes were approved by special resolutions of the
shareholders.
[7] Haricot resisted these moves. It refused to sign the new
Water Supply
Agreement, or to pay water charges on the 16 shares it held, but was not
using.
[8] The directors of Maerewhenua retaliated with threats to redeem
Haricot’s shares and to stop Haricot’s water
supply.
Eventually, in the autumn of 2013, Maerewhenua stopped Haricot’s water
supply.
[9] Haricot responded by issuing these proceedings, claiming that the
company’s actions were ultra vires and/or oppressive,
unfairly
discriminatory or unfairly prejudicial to it, and seeking relief under s 174 of
the Companies Act 1993 (the Act).
[10] The relevant actions which are claimed to be ultra vires and/or to constitute oppressive, unfairly discriminatory or unfairly prejudicial actions under s 174, are:
(a) introducing a new constitution containing the provisions in cls
3.1,
3.3, 4.2 and 10(4)(f);
(b) requiring the plaintiff to enter into the Water Supply Agreement in
the form proposed;
(c) threatening to forfeit Haricot’s share for non payment of
disputed
water charges;
(d) issuing shares to Meridian Energy Limited and Mr Dogterom at a
consideration of $1.00 per share;
(e) threatening to redeem Haricot’s shares at a nominal value of
$1.00 per share because it refused to sign the Water
Supply
Agreement;
(f) discontinuing the supply of irrigation water for failure to sign the
new
Water Supply Agreement;
(g) enacting r 3 under cl 8 of the Memorandum of Encumbrance as an
alternative way to enforce the requirement to sign the Water
Supply
Agreement.
[11] By the close of the hearing, the relief sought by Haricot was confined
to the following:
(a) a declaration that the purported redemption of Haricot’s
shares was invalid (because there was a failure to comply
with s 68(b) of the
Act), even though the company has now rescinded that resolution;
(b) a declaration that “rule 3”, making it a condition of supply of water that the shareholder enters into the company’s then Water Supply Agreement, is not authorised under cl 8 of the Memorandum of Encumbrance and is of no effect;
(c) a declaration that cl 3.1 of the new constitution (which provides
that there is to be only one class of shares, namely water
shares) is
ineffective to alter or revoke the rights attaching to the original shareholding
of Haricot because it does not comply
with s 117 of the Companies Act
1993;
(d) a declaration that cl 3.3 of the constitution (which allows the
company to recover its operating and capital costs on a
per share basis) is
unenforceable against Haricot by virtue of s 101 of the Companies Act 1993, and
attempts to enforce it are oppressive
under s 174;
(e) a direction to amend cl 4.2 of the constitution to place limits on
the matters which the directors can require to be included
in Water Supply
Agreements to those matters which are required to be included pursuant to
any resource consent condition
or are reasonably necessary to ensure the
orderly, efficient and environmentally acceptable use of the scheme by
farmers;
(f) clause 14.4 of the Water Supply Agreement (which
requires shareholders to indemnify the company in specified
circumstances) be
“struck down” as being oppressive and beyond the powers of the
directors;
(g) an inquiry into damages over losses suffered by Haricot as
a consequence of having its water supply turned off
during part of
2013.
[12] The issues for me to determine are:
(a) whether the actions listed in [11] above are ultra vires
and/or constitute conduct which is “oppressive,
unfairly discriminatory or
unfairly prejudicial” under s 174; and
(b) if they are, whether it is appropriate to grant the relief sought.
[13] While the defendant has counterclaimed against the plaintiff seeking
certain mandatory orders and damages, it appears that
the defendant’s
concerns will be addressed by determining the extent to which the new
constitution and Water Supply Agreement
are enforceable against
Haricot.
How did the stand-off between Haricot and Maerewhenua
arise?
[14] It is necessary to review the background to the claim in more detail
in order to understand why Haricot has resisted the
changes the directors have
sought to introduce to the company, and also to understand why the directors
have taken the steps they
have against Haricot.
[15] As outlined above, Haricot’s director, Alistair Wills, was
heavily involved in the inception of the irrigation scheme.
He was also a
director of Maerewhenua in its early stages. He initially irrigated 55 hectares
of his land with border dyke irrigation
and, in 1980, obtained approval
which allowed for pumped spray irrigation of another eight
hectares.
The Memorandum of Encumbrance
[16] Once Maerewhenua was established, and the scheme
infrastructure and consent transferred to it, the directors investigated
the
appropriate legal structure to record water supply arrangements between the
company and each shareholder. The company’s
lawyer recommended a
Memorandum of Encumbrance, which gave security for payment of charges for water
and also gave notice of the
existence of the scheme, and the requirements to pay
rates before water is supplied to any purchaser of the irrigated
land.
[17] Two key provisions in the Memorandum of Encumbrance were cl 2(c),
which provided that:
The Grantor will pay a proportionate share (being the ratio of the assessed area divided by the number of hectares of assessable area in the irrigation scheme owned by the Grantee) of the cost of: any surcharge fixed by the Grantee in respect of any unbudgeted cost of any emergency repairs required to ensure the supply of water to all or any of the users of water in the scheme; of purchase of any capital equipment as may be necessary to ensure
that the scheme remains operative; of purchase of the scheme or repayment of
any debt.
and cl 8, which provided:
Any conditions or rules laid down by the Grantee from time to time relating
to the operation and use of the scheme by the Grantor
(and other users) shall be
observed by the Grantor. Failure to observe such rules shall give rise to a
right for the Grantee to
withdraw its consent for the Grantor to use water from
its scheme.
[18] When the encumbrance was executed the number of shares issued to
each shareholder was intended to reflect the number of hectares
the farmers
proposed to irrigate and Haricot was issued 81 shares. In April 1994,
Haricot’s assessed area was increased a
further 10 hectares, to 91 shares,
at a payment of $1.00 per share. Two other farms received additional shares at
the same time.
Mr Wills’ evidence was that the allocation of the new
shares was to reflect the areas that the shareholders wished to irrigate
and was
entirely based on the recommendations of a Mr Hurst, who had been engaged by the
board to advise on this issue. However,
it was common ground that Haricot in
fact only irrigated (and still irrigates), 75 hectares using water
supplied via the
Maerewhenua consent.
The new spray consent
[19] Maerewhenua’s existing resource consent allowed it to take 900
l/s from the Waitaki River. However, in early 2004,
as a consequence of
Meridian’s Project Aqua proposal, the company applied to take a further
468 l/s from the Waitaki River
for spray irrigation (the spray consent). Even
when Meridian’s plans changed, so that its proposed canal would not
directly
affect any Maerewhenua farmer, the spray consent was pursued and
several other shareholders in the company (including Haricot)
expressed an
interest in using the spray consent, if granted.
[20] However, when Project Aqua was cancelled, and all the existing consent applications had become part of a “call-in” by the Minister, the shareholder applicants had to decide whether they wanted to continue. Some, including Haricot, did not, and so there was spare capacity in the spray consent. It seems that different farmers showed an interest in the spray consent at different times, and at any given
stage, the company billed the costs of pursuing the spray consent application
to the farmers currently expressing an interest in it,
on a pro-rata
basis.
[21] Although the spray consent was applied for in Maerewhenua’s
name, from Haricot’s perspective, it was always intended
to be a
standalone consent and the costs of obtaining it were to be fully funded by the
new spray irrigators who intended to use
it. It was also Haricot’s
understanding that all costs for expanding the scheme to supply new spray
irrigators would be met
by those irrigators concerned. Indeed, in 2007 Mr
Wills’ brother, Errol Wills, drafted a cost sharing agreement between the
company and the prospective spray irrigators which, although never
signed, proposed that the costs of obtaining the consent
and of supplying
irrigation water to the new irrigators, would be the sole responsibility of the
new irrigators.
[22] The new spray consent was granted in May 2010. Although Maerewhenua
appealed an aspect of the conditions, so use
of the spray consent
could not commence at that point, it did bring to a head the need to consider
how the company was going
to enable the use of the consent, and bring in new
shareholders to take up the additional water the consent permitted.
The review of the company documentation
[23] In late November 2010, the Board of Maerewhenua began planning for
how they would introduce new shareholders into the scheme.
They decided to
engage Mr David Goodman, a lawyer from Goodman Tavendale Reid, to advise on a
share structure and constitution
which would facilitate the addition of new
spray irrigation shareholders.
[24] Mr Goodman familiarised himself with the scheme, and
provided a preliminary discussion paper to the shareholders
on 10 February
2011.
[25] At that point his advice was:
(a) the existing constitution had been adequate, but a new constitution, which covered the issues which affected the company going forward and gave it some flexibility to evolve over time, was required;
(b) the constitution need not distinguish between spray
irrigation and border dyke irrigation in its share structure,
but should
consider a distinction between property shares and water shares, with property
shares being voting shares with one share
issued per farmer and water shares
being issued relative to the volume of water taken and/or irrigated
hectares;
(c) an updated water supply agreement should be prepared to cover a
range of issues;
(d) there were some issues to consider regarding the alignment of the
existing and the new spray consent, including having a
single intake for both
consents.
[26] At the end of the meeting with shareholders, it was agreed that
Maerewhenua would proceed with instructing Mr Goodman to
draw up a new
constitution and water supply agreement, and that proposed new shareholders
would have a say in the drafting of those
documents.
[27] One of the directors, Mr Weir, sought feedback from the
shareholders following the meeting attended by Mr Goodman
on the proposals for
receiving the company’s documentation. Comments were received back from
two shareholders, including Mr
Errol Wills, but not from Haricot.
[28] At around the same time, the directors were dealing with the issue of reinstating the scheme intake which had been damaged by flooding in February
2011. The directors sought tenders for rebuild of the intake. Only two
tenders were received, one of which also proposed construction
of a new intake
upstream from the existing intake. The proposals were reviewed by an independent
irrigation specialist, Mr Terry
Heiler. In July 2011, he recommended
construction of a new intake at the upstream site over repair of the existing
intake.
[29] At the same time, the Board considered increasing the size of the pipes taking water from the new intake from 1200 millimetre pipes to 1350 millimetre pipes so
that water for both consents could be accommodated within them. The
directors, eventually, decided to proceed with increasing the
size of the
pipes.
[30] A special meeting of shareholders was held on 24 August 2011 where
the draft constitution and water supply agreement, prepared
by Mr Goodman in
consultation with the directors, were discussed and voted on. Prior to the
meeting both documents had been
circulated to all shareholders, along
with explanatory notes, for their consideration.
[31] The minutes of that meeting record that Mr
Errol Wills, of Downland Farms Limited, was concerned
that the Water
Supply Agreement gave more power to directors and Meridian’s
representative commented on the breadth of shareholder
liability. However, the
motion to adopt the new constitution and Water Supply Agreement was passed.
Only Haricot and Downland voted
against it.
[32] At the same meeting, the directors sought approval to proceed with construction of the new intake including their recommendation to use larger
1350 millimetre pipes in building the new intake to “future proof” the scheme. They said that other users could be brought in with the additional capacity; for example, farmers taking from the Maerewhenua River could shift their consent down to the company’s river intake. The shareholders were advised that the use of the wider pipe size would require funding an extra $50,000. A shareholder resolution approving the contract to build the new intake structure and pipe work, including the variation of cost in pipe size, was passed by the requisite 75 per cent majority on
1 September 2011.
[33] The new constitution was then formally adopted
on or about
3 November 2011 following the passing of a special resolution by
shareholders.
The Limitation on Directors
[34] On 30 November 2011, Maerewhenua’s AGM was held. Under the newly adopted constitution a minimum of three, and a maximum of six, directors was permitted, whereas under the previous constitution, a minimum of three and a maximum of four directors was permitted.
[35] There were seven nominees for the board, two of whom were continuing
directors and five who put themselves forward for election.
With six directors
permitted, all but one nominee could be appointed.
[36] However, Mr Weir (who was at the time the chairman of the Board),
said that the facility for having six directors was intended
to provide for when
the company had an expanded shareholder base once the company was using the
spray consent. With only nine farmers
currently members of the scheme, he
thought it cumbersome to have any more than the four directors in the interim,
which was the
maximum permitted under the previous constitution.
[37] Prior to the AGM, the directors had sought legal advice on this.
The advice was that the Board itself could not dictate
how many directors there
were. However, it could put it to the shareholders to resolve to limit the
number of directors, while still
being within the parameters provided for in the
constitution. A recommended wording for this resolution was proposed and that
resolution
was put to the shareholders at the AGM and passed. In light of it,
Mr Dogterom withdrew his nomination as a director, leaving four
nominations for
the two vacant positions to be voted on.
[38] Mr Wills was concerned at the legality of limiting the directors to
four. Mr Weir offered to adjourn the vote if the shareholders
were not in
agreement with proceeding in that way. However, the majority agreed to carry
on. Mr Keeling and Mr Weir were appointed
with Mr Hurst and Mr Richard
Wills continuing their appointments as they had not yet served a full term.
Mr Alistair Wills
and the remaining candidates were unsuccessful.
[39] Mr Alistair Wills’ view was that the whole process was “unfair” and effectively amended the constitution by a simple majority vote. Without his voice on the Board as a director he considers that the subsequent extension of the scheme to accommodate spray irrigators, at all irrigators’ cost, would not have gone ahead, or would have only gone ahead on the basis that the new shareholders bore the actual cost of their involvement.
Issue of further shares
[40] The next issue which created concerns for Haricot was the issue of
additional shares to Mr Dogterom and Meridian.
[41] For some time the directors had been concerned about the
discrepancies between some farmers’ shareholding and the
area they
actually irrigated. At least two shareholders, Mr Dogterom and Meridian,
irrigated more area than they had shares for,
whereas Haricot irrigated less
land than it had shares for. The new constitution provided for the shares to
be water shares which
directly related to the right to take a volume of water to
irrigate a hectare. It was important, therefore, that the shares accurately
reflected the irrigated area so that the charges paid, and the voting rights
accorded to the shareholder, were consistent with that.
[42] In May 2012, the directors decided to issue Mr Dogterom and Meridian Energy with additional shares. At that time Mr Dogterom held 155 shares in the company but in fact irrigated 390 hectares, while Meridian held 20 shares but irrigated 34 hectares. The directors resolved to issue a further 139 shares to Mr Dogterom and a further 14 shares to Meridian. The stated reason was to align the
shareholding with the actual number of hectares they
irrigated.1
[43] A shareholders’ special meeting was held on 12 April 2012 where a special resolution to issue those shares was passed. The special resolution was then sent to those shareholders not present, which included Mr Wills, for signing. On
17 April 2012, he signed the resolution, although as he notes, the share
price was not addressed in the covering letter, nor does
it appear, at that
stage, that the directors’ resolution resolving to issue the shares at
$1.00 per share had been passed.
That occurred at a directors’ meeting
on 10 May 2012.
[44] However, once the directors’ resolution approving issue
of the shares at
$1.00 per share was passed, the shareholder resolution referring to the Board resolution was again circulated to shareholders, with a request to read it carefully,
sign it and return it to the office. No shareholder advised that they
resiled from their
earlier support of the resolution, when
the shares were to be issued at $1.00, being the same price all the original
shares were issued
at.
[45] Mr Wills now says that although he signed the resolution agreeing to
the share issue, he “signed it thinking that all
was in order as it was
consistent with what we had previously agreed to, i.e., that there would be a
bonus issue of shares to all
existing shareholders”. It is not clear how
this understanding arose.
Deciding on a structure for the spray irrigation extension to the
scheme
[46] In April 2012, the Board formally engaged Mr Matt Ross to
advise the directors on development of the scheme. Mr
Ross was a former
chairman of the Board (although not a shareholder at the time), and had been
heavily involved in the Waitaki Catchment
Water Allocation Plan process. He
also had extensive experience serving on the boards of irrigation related
entities, including
as a director of Irrigation New Zealand from 2008 to
2011.
[47] Mr Ross assisted by preparing a schematic proposal for
infrastructure to amalgamate the existing scheme with staged developments
to
extend the scheme, including to the new spray irrigators. The various stages
proposed were:
(a) constructing the new intake and upgrading the capacity of the
existing primary race, which was already underway (stage 1);
(b) constructing a new pressurised pipe system to service the new
shareholders (stage 2(a));
(c) upgrading a further part of the existing race and
acquiring and upgrading a privately owned storage pond to become
part of the
Maerewhenua infrastructure (stage 2(b)); and
(d) a further upgrading of the race system, which could facilitate further spray irrigation in the lower reaches of the scheme area (stage 3).
[48] Mr Ross also recommended that the scheme be valued and
that new shareholders provide capital in accordance with
the proportion of
their ownership of the current scheme valuation, which would help offset some of
the capital requirements for the
proposed scheme development. The Board would
then establish and set a capital charge for the design and build processes for
the further
stages of the concept to be implemented.
[49] Around the same time, in June 2012, Mr Goodman was also advising the
directors on options for introducing new shareholders
to the scheme. Two
options were proposed. One option was to retain the existing structure and
issue shares based on a valuation
obtained by the company of around $3,500 per
share. Any shortfall for the 2(a) stage would be met by the company borrowing
and
recovering the cost of that loan through operational charges. As Mr Goodman
said “an issue remains [as] to whether that should
be an operational
charge across all shareholders or just the 2(a) shareholders”. The second
option was to create two classes
of shares, ownership or capital shares and
water shares.
[50] At the time Mr Goodman’s recommendation was to opt for the
status quo, the first option, but, at a meeting held on
18 July 2012, attended
by two of the directors and Mr Ross with Mr Goodman and the company’s
accountant Mr Chisholm, those
options were again debated. By the end of the
meeting, the company’s advisers were asked to prepare a presentation on a
two
class share structure to be presented to a meeting of shareholders (existing
and new). It proposed that existing shares were reclassified
as capital shares
preserving the existing shareholders’ ownership of the company, and which
would carry a right to vote, whereas
the new water shares would carry the right
to irrigate, at the applicable rate, one hectare and would be issued based on
the number
of hectares irrigated.
[51] However, after that meeting, Mr Ross and the two directors who attended had growing reservations about the two share structure and Mr Chisholm was contacted by Mr Weir about the company taking the alternative option of retaining one class of shares and issuing additional shares per hectare at the set market value. That meant that any shortfall in funding the scheme upgrades and extension would be met by borrowings paid for by all shareholders, existing and new.
[52] At a meeting on 7 August 2012, a slide presentation was presented to
existing and new shareholders by Mr Chisholm setting
out four options. The
first was for existing shareholders to fund all; the second was to issue shares
at $1.00 with a capital charge;
the third was a two share class structure of
capital and water shares, and the fourth option was to issue additional shares
at market
value on a per hectare basis and then all shareholders fund capital
development as required. The directors favoured option four
and, although no
formal vote was held on the proposal, on a show of hands, option four was
favoured.
[53] Haricot’s concern was that it had always understood that the
cost of the extension to service irrigators using the
spray consent would be met
by new shareholders, but the option being voted for required all
shareholders to share equally
in the costs of the infrastructure development
required. Haricot considered this put an unfair burden on existing shareholders
but
especially Haricot, given that the company wanted to charge on a per share
basis. There would be a shortfall between the new capital
raised from the
share issue, and the cost of the extensions, which would have to be funded by
higher debt than would be carried otherwise.
As Mr Wills put it, “the
existing shareholders were being asked to vote for a proposal that was the
most expensive option
for us and the cheapest option for the
newcomers”.
Issue of new shares on 16 August
[54] Following the 7 August meeting the company sought approval for a
special resolution increasing the shareholding of the company
to bring the new
spray shareholders in as shareholders, and to issue a further additional
126 shares to Mr Dogterom so
that he had sufficient shares to irrigate his 420
hectares, at a share price of $2,675 per share. All shareholders, with the
exception
of Haricot and Downland, resolved to approve the issue of shares as
described in the Board resolution.
[55] Once the new shares had issued, a second shareholder meeting was
held on
1 November 2012 to approve the company borrowing $4 million to fund the extension of the scheme.
Pressure is placed on Haricot
[56] It is clear from the above, Haricot generally opposed the steps
taken by the company to revise its constitution, to alter
the terms and
conditions of water supply with the shareholders, and to share the cost
of expanding the scheme to accommodate
new shareholders with the existing
shareholders. However, while all other shareholders had eventually accepted the
decisions made
by the company, Haricot did not and was becoming an increasing
problem for the directors.
[57] On 31 August 2012 the company wrote to Haricot enclosing its copy of
the new Water Supply Agreement and asked for it to be
signed and returned.
Haricot was not prepared to do this. Furthermore, from the period 20 June 2011,
it refused to pay water charges
on the 16 shares of spray irrigation which it
was not using.
[58] By late November 2012 Haricot owed Maerewhenua $10,561 in
outstanding water charges. On 22 November 2012, Goodman Tavendale
Reid wrote to
Haricot saying that Haricot was liable to pay its proportionate share of annual
charges as determined by the directors
and if it did not make payment, the 16
shares it was not using would be forfeited in accordance with cl 10.4(f) of the
constitution.
It also again reminded Haricot that it had not signed the
company’s current Water Supply Agreement. The letter required
Haricot to
sign and return it by 4 January 2013, failing which the company would
“exercise its right in accordance with cl
4.2 to redeem your shares par
value being $1.00”.
[59] The matter became more pressing because the bank required the provision of executed Water Supply Agreements as a term of its lending. In November 2011 it had asked for copies of the signed agreements to be supplied to it by 31 May 2012. Then, in January 2013 when the further borrowing was undertaken to complete stage
2(a), the bank again asked for confirmation that all Water Supply Agreements
had been executed, as it was “the key agreement
that underpins our
lending”.
[60] In December 2012, Haricot did pay the $10,561, albeit under protest as it did not want the 16 shares to be forfeited, particularly not for the sum of $16.00.
[61] On 18 December 2012, Goodman Tavendale Reid again wrote to Haricot
noting the payment of the outstanding water charges but,
again, requiring the
return of the signed Water Supply Agreement by 4 January 2013, saying that
“no extensions will be given”.
[62] Haricot’s lawyers responded, saying their client’s
liability was pursuant to cl 2 of the Memorandum of Encumbrance
and the
agreement did “not extend to cover the costs of an extended scheme
with a proportion of such costs being
attributed on an equalisation
basis”. They warned that any purported attempt to redeem shares would be
firmly opposed.
[63] Goodman Tavendale Reid replied on 14 January 2013 stating that the
new Water Supply Agreement replaced the old Memorandum
of Encumbrance and that,
in any event, Haricot was bound by the constitution which required holders of
water shares to enter into
the new agreement. It warned that unless the
agreement was signed and returned by 25 January 2013, Maerewhenua would take
steps
to discontinue the supply of water to Haricot.
[64] On 8 February 2013 the directors passed a resolution to redeem
Haricot’s
91 water shares at the paid up value of the shares, being $1.00 per share.
Goodman Tavendale Reid wrote to Haricot’s lawyers
on 19 March 2013 saying
that Haricot’s shares could now be redeemed although they would not
actually be redeemed until “a
future date to be determined by the
directors”. They again referred to the requirements of the constitution
and threatened
to disconnect the supply of water if the agreement was not signed
and returned within seven days from the date of that letter.
[65] On 27 March 2013, when the agreement was still not signed, Goodman Tavendale Reid wrote to Haricot’s solicitors advising that the company had now instructed the scheme manager to disconnect supply to Haricot. In addition to referring to the constitution, they also referred to cl 8 of the Memorandum of Encumbrance (which required Haricot to be bound by the “rules” of the company) and expressed the view that the constitution and the Water Supply Agreement represented the rules of the company which Haricot was bound to enter into.
[66] In April 2013 Haricot received another letter from Goodman Tavendale
Reid which explained that rules had now been made by
the company regarding the
operation and use of the scheme pursuant to cl 8 of the Memorandum of
Encumbrance. One of the rules, r
3, stated:
It shall be a condition of a supply of water by the company to the
shareholder/farmer that the shareholder/farmer enters into
the
company’s then current Water Supply Agreement.
[67] In that same month, Haricot’s water supply was then turned
off. Mr Wills says that Haricot had to destock its deer
herd and cease all
planned and current development on the farm, causing ”significant
financial loss” to Haricot’s
farming business.
[68] These proceedings issued shortly afterwards, on 19 April 2013,
seeking relief under s 174 of the Companies Act 1993, including
as described in
[12] above.
Relief under s 174 of the Companies Act 1993
[69] Section 174(1) of the Act provides:
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.
[70] The leading New Zealand authority on s 174 is Thomas v H W Thomas
Limited,2 albeit the relevant section discussed in that case was
the predecessor of s 174, being s 209 of the Companies Act 1955.
[71] In Thomas, Richardson J explained that the statutory remedy
this section provides is:
a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned
to the complaining member’s interests arising from the acts or conduct
of the company in that way is justifiable.
In the same decision Richardson J also gives guidance on the meaning of the
word
“oppressive, unfairly discriminatory, or unfairly prejudicial”;
saying:
In employing the words “oppressive, unfairly discriminatory or unfairly
prejudicial” Parliament has afforded petitioners
a wider base on which to
found a complaint. Taking the ordinary dictionary definition of the words from
The Shorter Oxford English
Dictionary: oppressive is “unjustly
burdensome”; unfair is “not fair or equitable; unjust”;
discriminate
is “to make or constitute a difference in or between; to
differentiate”; and prejudicial, “causing prejudice, detrimental,
damaging (to rights, interests etc.)”.
[72] The decision goes on to comment on the relationship between
the three expressions saying:
I do not read the subsection as referring to 3 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.
[73] Importantly, the Court emphasised that the section focuses on the
outcome of the conduct, as opposed to its motivation, saying
that:
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 a good faith towards him on the part of those in control of the
company.
[74] If I find that the affairs of the company have been conducted in a
manner that is “oppressive, unfairly discriminatory,
or unfairly
prejudicial” to Haricot, s 174(2) of the Court provides extremely wide
scope for granting relief. Specifically
it provides:
(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.
[75] In summary, if the grounds in s 174(1) have been made out, the Court
must still determine whether it is “just and equitable”
to grant
relief in the circumstances which have arisen and it has significant scope to
tailor any relief granted to the facts which
are before it.
Have the actions of the Company been “oppressive, unfairly discriminatory or
unfairly prejudicial?
Introducing a new constitution containing the provisions in cls 3.1, 3.3, 4.2 and
10.4(f)
[76] Haricot’s complaints about the new constitution are grounded
in Haricot’s view that it was inappropriate to have
a single class of
shares for both the old and new irrigators, so that the costs of borrowing for
the new stage 2(a) infrastructure
(over and above the capital introduced by the
new shareholders) was borne by all shareholders.
[77] Haricot endeavoured to represent the shift from the earlier understanding that new shareholders would bear the cost of the new infrastructure alone,3 to the single share option structure favoured by the directors in the presentation on
24 August 2011, as:
(a) reneging on an understanding the existing shareholders had; and
(b) being driven by parties such as Matt Ross who ended up benefiting
from the decision as a new shareholder, rather than by
proper independent
advice.
[78] However, I do not accept Haricot’s representation of the
position.
[79] First, there was never any agreement that new spray irrigators would
meet the costs of any scheme extension on their own.
They did meet the costs,
and risk, of pursuing the new spray consent, but those costs were reimbursed to
them by the company when
the consent was granted. The question of who would
fund the scheme extension was still to be determined at that point.
[80] The expert advice to the company traversed several options for
bringing in the new shareholders and there were advantages
and disadvantages no
matter which option was selected. The directors took account of that advice in
making a recommendation on
how to proceed.
[81] Clearly an advantage of having more shareholders was that there were more contributors to the operating costs. Furthermore, if existing shareholders incurred a share of the capital costs of stage 2(a), it was expected they would reciprocally benefit if further development of the scheme proceeded, for example, if the stage
3 development that Mr Ross proposed went ahead.
[82] The directors had also received advice that it was advantageous to proceed with “a minimum of differentiation between services and delivery groups”,4 and even more importantly, they had advice from the company’s accountant that the debt servicing cost per hectare which the existing shareholders were taking on was almost entirely negated by the reduction in operating costs per hectare. In other words, overall, existing shareholders would be paying almost the same cost per hectare even though they were funding the infrastructure required for the new shareholders, as
they would be without the new shareholders being brought on board.
[83] Haricot takes issue with four clauses of the constitution in
particular. The first is cl 3.1 which provides:
The Share Capital of the company will initially consist of one class of
shares being water shares.
Haricot argues that this clause increases its liability to pay charges to
Maerewhenua by basing charges on the 91 shares that Haricot
has held since 1994,
as opposed to its “assessed area” which it says is 75
hectares.
[84] However, Haricot cannot have its cake and eat it too. It is clear
from the evidence that the assessed area referred to
in the Memorandum of
Encumbrance was always meant to equate with the area irrigated by the
shareholder and in respect of which it
paid water charges. Haricot has
chosen to hold additional shares as insurance against its separate
groundwater consent
supplying insufficient water in the future as upstream
irrigators apply water more efficiently. It was also content, in the past,
to
pay both capital and operational charges levied on these shares.
[85] As the company always intended that the number of shares should
align with the amount of water taken and the charges paid,
it was sensible to
clarify that in the new constitution. That constitution was approved by a
special resolution of all shareholders
so, even if it did change Haricot’s
obligations, it did so in accordance with the requirements of s 117 of the Act.
If Haricot
chooses to hold 91 shares (however described) it must pay the charges
on those shares, whether or not it takes the water.
[86] The next complaint relates to cl 3.3 which provides for how the company may charge the shareholders and gives broad powers to fix water charges to recover operating and capital costs. The discussion above applies equally to cl 3.3. Haricot’s complaint that it has been used to to further “an agenda of capital expansion which is at odds with Haricot’s basic need to secure a stable and economic irrigation source for its farming activities” is simply not supported on the evidence. Indeed, the evidence is that the directors are satisfied that, with an expanded shareholder base, the scheme is more stable and economic, and the per share costs to individual farmers, including Haricot, are little changed. For this reason, I do not
accept that s 101 (which says a shareholder is not bound by a change which
increases
a shareholder’s liability) is engaged.
[87] The next complaint relates to cl 4.2 which deals with redemption by
the company of water shares for specified defaults, including
a failure to enter
into the current Water Supply Agreement.
[88] The company has acknowledged that the redemption clause does not
comply with s 68 and will address this by an amendment to
the constitution. It
has agreed not to proceed with any current action to redeem shares and so no
specific relief is sought by Haricot
on that aspect of this clause.
[89] However, Haricot does ask that the Court direct amendments to the
clause to place limits on matters which the directors can
require to be included
in Water Supply Agreements. It says they should be limited to those matters
which are required to be included
pursuant to any resource consent condition,
and those which are reasonably necessary to ensure the orderly, efficient, and
environmentally
acceptable use of the scheme by the farmers.
[90] While such relief may seem uncontentious, as the company’s powers are arguably already limited in this way by implied terms of the constitution, I am reluctant to do this without full debate on the issue. This proposed amendment was only sought at the end of the hearing and the company has not had an opportunity to comment on its appropriateness. There may be good reasons for including matters which fall outside these limits in the Water Supply Agreement. Furthermore, there is still room for debate about what constitutes a provision to ensure the “orderly or efficient” operation of the scheme so disputes may still arise. This is a matter the directors may wish to give further thought to in making the amendments to Maerewhenua’s constitution, as the greater clarity there is about what can be included in a Water Supply Agreement that is mandatorily imposed on users would be helpful, and, in any event, the Board can expect resistance from its shareholders if the terms of the agreement are unreasonable or unnecessary.
[91] The next challenge is to cl 10.4(f) which deals with
forfeiture for non payment of charges fixed by the
company. Clause
10.4(f) was relied upon to threaten forfeiture of Haricot’s 16 dry
shares if Haricot did not pay the
charges relating to them.
[92] No compelling reason was given as to why shares should not be
forfeited in those circumstances. In my view it is appropriate
that the company
have provision for forfeiture in such cases and, in any event, the question is
now moot, as Haricot has paid the
charges on those shares. Clause 10.4(f) is
therefore not unfairly prejudicial or oppressive in itself, (although I do not
rule
out the possibility of it being used oppressively or unfairly in a
particular set of circumstance) and no relief is warranted in
respect of
it.
[93] In summary, none of the clauses in the new constitution are invalid
under the Act or are, in themselves, oppressive, unfairly
discriminatory or
unfairly prejudicial to Haricot.
Requiring Haricot to enter into the new Water Supply
Agreement
[94] The new Water Supply Agreement was a document recommended by the
company’s solicitors and provision for it was made
in cl 3.2(a)(viii) of
the new constitution. That clause provided:
The holder of water shares shall enter into the company’s then current
Water Supply Agreement governing access to water, which
shall provide the terms
of water supply including the applicable rate of take.
[95] Much of the Water Supply Agreement appears innocuous. For example,
it sets out the obligation of the farmer to maintain
the flow and operation of
the water race or pipes by such things as repairing stock damage, clearing
noxious weeds, clearing debris
from the water race and maintaining fences along
the water race.
[96] Although a number of clauses in the Water Supply Agreement were referred to in the pleadings, by the close of the hearing Haricot’s case focused on cl 14.4 of the Water Supply Agreement. It provides as follows:
The farmer shall keep the company indemnified against all costs, claims,
demands, expenses, losses and liabilities of whatsoever nature,
including
without limiting the generality of the foregoing, claims for consequential loss
(including loss of profits) which may be
made against the company and which the
company may sustain, pay or incur as a result of or in connection with the
supply of services
under this Agreement, except where such costs, claims,
demands, expenses, losses and liabilities arise as a result of
a
negligent act or omission of the company or its agents, servants or
contractors.
[97] The thrust of Haricot’s complaint was that this clause
increased the liability of Haricot to the company compared with
its liability
under the Memorandum of Encumbrance. The Memorandum of Encumbrance only
required the Grantor, under cl 2(c), to pay
a proportionate share of specified
costs incurred by the company including repairs, purchase of capital equipment
or repayment of
debt; in addition to the water charges which were payable under
cl 2(b).
[98] Haricot argued that:
(a) under s 101 of the Act, it was not bound by an alteration of the
constitution of a company that increased the
liability of the
shareholder to the company (and cl 14.4 of the Water Supply Agreement did this)
unless the shareholder agreed
in writing to be bound by the alteration either
before, on, or after it is made;
(b) the agreement containing this clause could not be justified under
cl 8 of the Memorandum of Encumbrance. That was clearly
designed to deal with
operational issues, not to enlarge a shareholder’s liability to indemnify
the company;
(c) the Water Supply Agreement was not, at that stage, a requirement
imposed by the Regional Council on the Maerewhenua consent
although the
directors had stated it was a requirement; and
(d) in any event the Water Supply Agreement in its current form, did not meet the requirement of a Water Supply Agreement as described in the conditions of the new spray consent;
(e) it was not clear to Haricot that it was a requirement of the bank that
the agreement be entered into, although the directors had
said it
was.
[99] In response, Maerewhenua says shareholders were consulted on the agreement, the vast majority of them approved the new Water Supply Agreement on
24 August 2011, and the concerns raised by Haricot were not raised at any
point during that process. Instead Haricot simply insisted
it could not be
bound by a Water Supply Agreement as the Memorandum of Encumbrance was
the only “Water Supply Agreement”
required.
[100] From Maerewhenua’s perspective the real genesis of the problem
is the company’s insistence that Haricot either
pay the full charges on
its unused 16 shares, or redeem them at $1.00 per share. Once Maerewhenua took
steps to enforce that, and
to require Haricot to sign the Water Supply Agreement
so it could be provided to the bank, Haricot retrospectively raised these
issues.
[101] The company also points out that, to the extent Haricot seeks the
“setting aside of the actions of the defendants”,
the Water
Supply Agreement is not something which can be set aside now. All other
shareholders have agreed to it and signed
it and the bank has relied on that in
advancing funding to the company for the scheme development work. It does say,
however, that
it is revising the agreement so that it covers the matters
required by the conditions of the spray consent and it is open to reviewing
the
wording of cl 14.4, to make such liability proportionate to a user’s
shareholding.
[102] I am satisfied that the decision to review the constitution, and to include a requirement to enter a Water Supply Agreement, was done in good faith, and with a view to improving the management of the scheme. In particular, it was intended to resolve the historical anomalies over the differences between “assessed area”, irrigated area and shares held, to spell out the “terms and conditions” of use which were not spelt out in the Encumbrance but left for subsequent determination, and to prepare the company for the more rigorous requirements of the Regional Council expected to be imposed on any review of the consent, which would include a condition requiring a Water Supply Agreement.
[103] All of those were legitimate, even commendable, reasons for
setting the relationship between the farmers and the company
on a more formal
structure than in the past.
[104] Haricot did not take any opportunity to engage in consultation over
the terms of the Water Supply Agreement. Instead it saw
this as an implicit
criticism of the efficacy of the Memorandum of Encumbrance, which was, of
course, adopted when Mr Wills was active
in the running of the company. I
gained the impression that Mr Wills’ opposition was motivated as much by a
sense of defending
the legal structures he had introduced for the operation of
the company, as it was about the specific content of the Water Supply
Agreement.
As it transpired, during the course of the hearing, most of Haricot’s
objections to a new Water Supply Agreement
evaporated, leaving only the issue of
cl 14.4.
[105] No real reason for cl 14.4 in its current format was advanced at the
hearing, nor was there any real challenge to Haricot’s
assertion that it
did increase farmers’ liability, making them jointly and severally liable
to indemnify the company, unless
the circumstances fell within the exceptions
provided for in the clause.
[106] However, I do not accept that s 101 of the Act is brought
into play. Section 101 provides:
Notwithstanding anything in the constitution of the company, a shareholder is
not bound by an alteration of the constitution of a
company that-
(a) Requires the shareholder to acquire or hold more shares in the
company than the number held on the date the alteration
is made; or
(b) Increases the liability of the shareholder to the company-
unless the shareholder agrees in writing to be bound by the alteration either
before, on, or after it is made.
[107] The requirement to enter the Water User Agreement is provided for in cl 3.2(a)(viii) of the constitution. That provision, in itself, does not alter the shareholder’s liability to the company. It is the terms of the particular Water Supply Agreement proposed which does this. Such an agreement could equally have been
adopted by special resolution under the former constitution, so it is not the
new constitution that creates this extended liability,
and s 101 is not
engaged.
[108] The real issue is whether the particular terms of the Water Supply
Agreement are unfairly prejudicial to Haricot.
[109] It is reasonable for the company to require a Water Supply Agreement
to be entered into, to cover matters which might otherwise
be promulgated under
cl 8 of the Memorandum of Encumbrance, or which are required to address matters
prescribed by the conditions
of Maerewhenua’s water take consents, or
which are otherwise agreed to be appropriate.
[110] Clause 14.4 does not fall into that category and is, in my view,
unfairly prejudicial to Haricot (and to other existing water
users) as it was
formerly only obligated to the company to the extent prescribed in cls 2(b) and
2(c) of the Memorandum of Encumbrance.
[111] This leads to the question of relief. It is inappropriate that the
Water Supply Agreement itself is set aside as I am satisfied
it is required by,
and has been relied upon by, the bank.5 Instead, I consider that
Haricot is only bound by the company’s constitution to sign the current
Water Supply Agreement, if
cl 14.4 is deleted or is substituted with a clause
that is co-extensive with Haricot’s existing liability under cl 2 of the
Memorandum of Encumbrance and the common law.
[112] Accordingly, Haricot is entitled to relief as a prejudiced shareholder, albeit only to the extent of the deletion or replacement of cl 14.4 of the Water Supply Agreement as specified. Whether the company chooses to do that universally, or just for Haricot is, of course, for it to determine. If the parties can not agree on changes to the clause to make it co-extensive with Haricot’s existing liability, I reserve leave for the parties to apply to this Court for approval of any proposed replacement
wording.
5 Although it is not clear that the bank appreciated that the Memorandum of Encumbrance also committed the shareholders to liability for the company’s debts. Indeed the bank does not appear to have turned its mind to what provisional provisions in the Water Supply Agreement were important to it, and why that was needed in addition to the Memorandum of Encumbrance.
Threatening to forfeit Haricot’s shares for non payment of disputed
water charges and threatening to redeem Haricot’s
shares for refusal to
sign the Water Supply Agreement
[113] Maerewhenua threatened to redeem Haricot’s shares at a nominal
value of
$1.00 per share pursuant to the provisions of the constitution, for failing
to pay disputed water charges and for refusing to sign
the Water Supply
Agreement.
[114] This complaint is now moot as the company has, at the hearing,
confirmed it has rescinded resolutions to redeem Haricot’s
shares,
and it accepts that the company’s constitution does not comply with s
68 of the Act because it did not make provision
for how consideration was to be
paid for the shares on redemption.
[115] In my view that was a proper course to take. Given the
company’s express acknowledgement that s 68 of the Act was not
complied
with I see no need to grant declaratory relief to that effect.
Issuing shares to Meridian Energy Limited and Mr Dogterom at a consideration of
$1.00 per share
[116] This complaint relates to the special resolutions which were put to the
shareholders at the shareholders’ meeting on 12
April 2012, and then sent
to those shareholders not present for signing following the meeting. Mr Wills
signed the special resolution
on 17 April 2012, although at that stage
it appears that the directors had not formally resolved to issue the shares
at
$1.00 per share. That was done at the directors meeting on 10 May 2012, and
the special resolution was again referred to the shareholders
under cover of a
letter dated 15 May 2012.
[117] Haricot says this issue of shares was at under value, with agreed expert evidence being presented to the Court that the shares were valued at between
$2,600.43 and $3,174.26 at the time.
[118] Implicit in this is that Haricot has somehow been disadvantaged or prejudiced by the issue of shares.
[119] Maerewhenua, on the other hand, explains that the issue of
shares was designed to (better) align the shareholdings
of these two
shareholders with the water they were actually taking. They could then be
charged for water taken on these shares
(as the company charged on a per share
basis). That was clearly for the benefit of the company and the other
shareholders.
[120] Mr Wills’ assertion that he signed the special resolution
thinking it was a bonus issue to all the shareholders was
illogical. It was
inconsistent with the express terms of the resolution, and was not supported by
any contemporaneous document.
[121] Haricot could show no prejudice whatsoever as a result of this
action. While Haricot argued this diluted the share price
for the existing
shareholders, in the context of the operation of this particular company, where
the shares effectively ran with
the land and were not tradable or saleable, and
the water was being supplied as if the shares were held by these two
shareholders,
Haricot could not show any detriment. Its own rights to take
water were not altered, so the value which the shares gave to Haricot’s
land was unchanged.
[122] Furthermore, issuing these shares to existing shareholders at $1.00 was
consistent with the precedent set in 1994 where 43 shares
were issued to
existing shareholders to align their shareholdings with the area irrigated or,
in Haricot’s case, the area it
wished to irrigate. Haricot had received
10 of those shares at $1.00.
[123] Even if I were of the view that this did prejudice Haricot, this
would not be a circumstance where it would be just
or equitable to
provide any relief. The resolution was actioned over two years ago, it
affects third party rights and Haricot
signed the resolution confirming the
share issue. Haricot is therefore now estopped from asserting that the issue of
shares to Mr
Dogterom and Meridian on the terms approved was unfair and
prejudicial to it.
[124] In summary, the resolution to issue those shares at $1.00 per share was neither unfairly prejudicial or oppressive to Haricot, and no relief is warranted.
Threatening to discontinue, then discontinuing, the supply of irrigation
water for failure to sign the new Water Supply Agreement
[125] As explained, the directors threatened to, and then did discontinue
the supply of irrigation water on 4 April 2013 because
Haricot refused to sign
the Water Supply Agreement.
[126] Mr Wills’ evidence for Haricot was that, without certainty of
water for the following season, he destocked his farm
and suffered financial
loss. No further details of the financial loss were provided and, the water
supply was reinstated the following
irrigation season after these proceedings
had been filed. Haricot asked that, if this action is deemed “unfairly
prejudicial
or oppressive”, that the Court order an inquiry into
damages.
[127] Under the Memorandum of Encumbrance, the right to receive a supply of
water is conditional on the water user complying with
the terms and conditions
relating to the operation and use of this scheme. While Haricot argues that the
Water Supply Agreement
was unfairly prejudicial to it, it now appears
its only real complaint is in relation to cl 14.4 of the Water Supply
Agreement.
In general, its terms do relate to the supply of water and the
operation of the scheme.
[128] The company says the decision to require a Water Supply
Agreement followed extensive consultation which Mr
Wills did not
participate in. The objections Haricot now raises to the agreement
really only surfaced during the
litigation. When Maerewhenua threatened to
turn off the water it was endeavouring to act in the best interests of the
company and
it used the sanctions it understood were legally available under the
Memorandum of Encumbrance when Haricot repeatedly refused to
comply.
[129] Maerewhenua says water was cut-off, on advice, at the end of the irrigation season and during a period of sustained rainfall. The company says there is no proper evidence before the Court that the plaintiff has suffered a loss as a result of the disconnection of the water over the winter period. A mere statement that Haricot had to destock, without supporting evidence to demonstrate how this caused financial loss, was insufficient.
[130] I accept that the directors of Maerewhenua took the steps they did,
in good faith, acting on advice, and at a time when, they
understood, there
would be no practical detriment to Haricot. While some of the communications
between directors and their advisers
at this time relating to Haricot were a
little intemperate, that was largely borne out of frustration at Mr Wills’
unwillingness
to deal with the issues of concern in a constructive way. The
reality is that Haricot, through its lawyers, baldly stated it was
“unaffected by the changes to the Companies [sic] constitution” and
refused to countenance a Water Supply Agreement.
Despite correspondence between
the respective parties’ lawyers, where Maerewhenua explained its position
fully, Haricot’s
opposition to the agreement remained firm. In the same
period, the bank was pressing for confirmation that all Water Supply Agreements
had been signed. It was therefore understandable that the company eventually
proposed terminating the supply of water.
[131] Haricot’s evidence as to this causing financial loss is sparse.
It consists of no more than a bald statement that it
had to
“destock” its deer herd and this caused “significant financial
loss”. However, even accepting, at
face value that a loss may have
eventuated to Haricot, this is not a circumstance where I am prepared to grant
relief. Haricot
acted combatively at all stages and that approach was
a major contributing factor to its stand-off with the company. In
the end, its
objection to the Water Supply Agreement has been whittled down from total
rejection to a complaint against one clause.
Had Haricot approached the
drafting of the Water Supply Agreement as constructively as it has now,
rather than as rejecting
it in total because it was part of a suite of changes
to the company which Haricot was opposed to, the dispute would have been
resolved
sooner. In these circumstances, it would not be equitable to grant
relief when the company endeavoured to explain its position to
Haricot and
Haricot refused to engage with it.
Enacting r 3 under cl 8 of the Memorandum of Encumbrance to enforce the
requirement to sign the Water Supply Agreement
[132] I have already concluded that it was sensible, and within the company’s powers, to require entry into a Water Supply Agreement, in particular to deal with practical matters related to the running of the scheme, compliance with conditions of
consent, and financial liabilities and responsibilities as between the
company and the water users.
[133] Faced with Haricot’s rigid view that no Water Supply
Agreement was required because the Memorandum of Encumbrance
was the Water
Supply Agreement, it was unsurprising that the company looked to the terms of
the Memorandum of Encumbrance to support
and enforce the requirement to sign the
Water Supply Agreement.
[134] Although Haricot maintained its stance that r 3 (requiring entry into
a Water Supply Agreement) was not authorised by cl 8
and accordingly could be of
no effect, it was acknowledged that to the extent the terms and conditions of
the agreement related to
cl 8 matters, it could be used to require entry into
such agreement.
[135] While the Water Supply Agreement went beyond such matters, this
claimed action goes no further than adversely affecting Haricot
through the
imposition of cl 14.4. As that issue has already been addressed Haricot is not
further prejudiced by this, nor is any
additional relief required.
Conclusion
[136] In the end, I have determined that Haricot is entitled to relief on
one issue, that is, in relation to cl 14.4 of the Water
Supply Agreement. It is
not obliged to sign a Water Supply Agreement which contains the clauses
currently drafted, but only one
where the clause is removed, or revised to
reflect liability that is co-extensive with Haricot’s liability as stands
at present.
[137] In respect of the other issue where relief would have been available,
being the company’s purported redemption of all
Haricot’s shares
pursuant to a clause in the constitution which did not comply with s 68 of the
Act, no relief is required
as the directors have agreed to rescind that
resolution and to revise the constitution.
[138] Costs are reserved. While Haricot has had only limited success in these proceedings, I do recognise that the key issues of concern to Haricot being, the redemption of shares and the termination of its water supply, were only resolved
once it issued these proceedings. Indeed the decision to rescind the
resolution to redeem the shares was only notified to Haricot
in the course of
the proceedings.
[139] My tentative view, therefore, is that Haricot is entitled to
2B costs notwithstanding the outcome of this proceeding.
If costs cannot be
agreed:
(a) the plaintiff is to file a memorandum as to costs within four weeks of
the date of this decision;
(b) the defendant is to file a memorandum as to costs within a further two
weeks; and
(c) any memorandum in reply is to be filed within a further
week.
Solicitors:
C S Withnall QC, Dunedin
Wilkinson Rodgers, Dunedin
R W Raymond, Barrister, Christchurch
Anderson Lloyd, Christchurch
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URL: http://www.nzlii.org/nz/cases/NZHC/2014/2781.html