Fortune Mile International Limited v Judge [2014] NZHC 3146 (4 December 2014)

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IN THE MATTER	of a Part 18, subpart 3, High Court Rules application under s 174 of the Companies Act 1993, and Part 31 under s 241 of the Companies Act 1993, and Part 32 of the High Court Rules
BETWEEN	FORTUNE MILE INTERNATIONAL LIMITED First Plaintiff SHING CHUNG (DANIEL) KWOK Second Plaintiff AUSTRALEC SWITCHGEAR (NZ) LIMITED Third Plaintiff DKBY PROPERTY LIMITED Fourth Plaintiff
AND	BRIAN EDWARD NEIL JUDGE First Defendant SIONE SAUNI DOUGLAS TOLUAKI Second Defendant RSB ELECTRICAL LIMITED Third Defendant

Hearing:	4 December 2014
Counsel:	M Phillipps for Plaintiffs JD Turner for Defendants
_Judgment:	_{4 December 2014}

[1] The third defendant, RSB Electrical Ltd (“RSB”), has brought an urgent application to discharge an interim freezing and restraining order. The interim freezing and restraining orders were made on 1 December 2014. As is the usual practice, they were made without notice.

[2] The application is urgent because the freezing order prevents RSB paying its employees. I made an order by consent earlier today permitting $95,245.42 to be freed from the order so that RSB can pay its employees. However, RSB is a trading company and it is also urgent to determine whether the order which restrains that company paying trade creditors should continue.

[3] RSB is a company based in Auckland and specialises in various aspects of electrical servicing, maintenance, installation and design, as well as project management and data and communication services.

[4] There are 1,000 shares in RSB. Forty-six per cent of those shares are held by the first plaintiff, Fortune Mile International Ltd (“Fortune Mile”). The remaining

54 per cent are held by the first and second defendants, Brian Edward Neil Judge and

[5] RSB has approximately 20 staff, including registered electricians and apprentices. It owns 12 vehicles, including work vans and associated equipment. Although the details are sketchy it would seem that Messrs Judge and Toluaki are working shareholders. The principal of Fortune Mile is the second plaintiff, Shing Chung (Daniel) Kwok. There is evidence that he has had some involvement in the actual working of the business. However, it also seems that he only became involved in RSB some years ago when he took over the shareholding of another person. He asserts that he advanced monies to the company.

[6] There are two other companies that must be mentioned with which Mr Kwok has an association. One is the third plaintiff, Australec Switchgear (NZ) Ltd

(“Australec”). It has been a supplier to RSB of various electrical products. The other is the fourth plaintiff, DKBY Property Ltd (“DKBY”), which has provided a guarantee and security for a loan facility for RSB with the Bank of New Zealand (“BNZ”).

[7] The correspondence that has been annexed to the limited affidavits filed so far discloses that a state of conflict has arisen between Mr Kwok on the one hand and Messrs Judge and Toluaki on the other hand. Mr Kwok states that he does not trust Messrs Judge and Toluaki and that they are unable to meet or discuss anything constructively.

[8] Mr Kwok, personally and under the various companies he controls, issued these proceedings asserting three causes of action and seeking various orders. The first cause of action is brought by Fortune Mile, as a shareholder of RSB, claiming that the affairs of the company are being conducted in an oppressive and unfairly discriminatory and prejudicial way. It is alleged that shareholder advances have not been repaid and that voidable preference payments to creditors are about to be paid. It is asserted that Messrs Judge and Toluaki are carrying on business in a way that will create a substantial risk of loss to RSB’s creditors and it is said that it is just and equitable for the company to be placed into liquidation. Orders are sought along those lines. In addition, interim orders are sought stopping payment of creditors of RSB pending further order of the Court.

[9] The second cause of action is a straight claim in debt brought by Australec, and it is said that there is an expired statutory demand. The sum claimed is $20,900. An order is sought for the company to be put into liquidation.

[10] The third cause of action really involves two allegations. The first is that RSB owes Australec $173,187.76 for electrical equipment supplied by Australec. The second is that RSB owes DKBY $107,184.79, being the balance of a larger sum that it has paid into RSB’s BNZ bank account. It is asserted that RSB is about to make voidable preference payments. Orders are sought freezing the RSB’s bank accounts and putting RSB into liquidation.

[11] These allegations are all denied by the defendants, Messrs Judge and Toluaki and RSB. Mr Toluaki in his affidavit questions whether there is such a company as Fortune Mile. He says there is no record of such a company being registered in New Zealand or, as is pleaded, in Hong Kong. He states that what has arisen is essentially an inter-shareholder dispute. He claims that the company is solvent and able to pay its debts. He asserts that these proceedings are an effort on Mr Kwok’s part to obtain leverage in the shareholder dispute, and if possible to achieve his goal of assuming majority control of the company.

[12] In relation to the first cause of action, Mr Toluaki denies that there is any oppressive discriminatory or prejudicial behaviour by him or his co-director, Mr Judge, and asserts that the only payments that are being made are those that have to be made in the ordinary course of business. He denies that $20,900 is owed to Australec and points out that the statutory demand has expired. He denies that the sums claimed by Australec and DKBY are owing.

[13] The freezing order jurisdiction is set out in Part 32 of the High Court Rules. In order to obtain a freezing order, an applicant must establish three requirements:¹

(a) a good arguable case as pleaded in the statement of claim; (b) assets to which the order could apply; and

(c) a real risk that the defendants will dissipate or dispose of those assets creating a real risk that judgment in favour of the applicant would be partly or wholly unsatisfied.

[14] The Court will also look at the overall justice of the situation and give attention to undue hardship to a defendant or third parties.²

²Bank of New Zealand v Hawkins [1989] NZHC 198; (1989) 1 PRNZ 451 (HC) at 455–456.

[15] Given that this is an application to vary a without notice application it is appropriate to approach the issues from the point of view that it is for the plaintiffs to make out their case in the usual way.

[16] In order to obtain a freezing order, an applicant must show that there is a good arguable case on the substantive claim. While this is not stated in Part 32 of the High Court Rules, in the form of freezing order attached to Schedule 1 of the High Court Rules the applicant is required to state that he or she has a good arguable case and the Court must be satisfied that there is a danger that the judgment in favour of the applicant will be wholly or partly unsatisfied.³

[17] To establish a good arguable case, an applicant must show that one of the causes of action is at least tenable.⁴The onus is on the applicant who must provide sufficient evidence to establish a sufficiently plausible foundation for the causes of action, bearing in mind the early stage of the proceeding.⁵

[18] It is central to all three causes of action that RSB owes significant debts and is insolvent. It is difficult at such short notice and with such limited material before the Court to evaluate whether or not there is a good arguable case in relation to the specific debts. There are some indications that all is not as the plaintiffs allege. For instance, it was pleaded that there was an outstanding statutory demand in relation to

$20,900. However, it is rightly accepted by Mr Phillipps for the plaintiffs that that statutory notice has expired. I do not have enough information to make a meaningful assessment of the key claims.

[19] However, in relation to the overall position of the company I would hesitate to describe the plaintiffs’ claim that RSB is insolvent as being a good arguable case. While Mr Phillipps has done a calculation showing that RSB owes $896,043, a number of the figures he includes are in contention. Mr Toluaki has produced BNZ

_{bank details as at 2 December 2014 showing a bank balance in credit in
the sum of}

[20] While RSB undoubtedly owes sums of money, this significant bank balance and the claimed outstanding debts due are an indication that the company is not insolvent. Mr Toluaki asserts that it is trading profitably. There is no sign that the BNZ, which is RSB’s primary secured creditor, is in any way concerned about how RSB is trading.

[21] Thus, on the present state of the papers the plaintiffs have not made a good arguable case that RSB is insolvent. While I accept that the information on which I make this assessment is relatively scant (which is understandable due to early stage of the proceeding), in seeking a freezing order the plaintiffs are required to provide sufficient evidence to satisfy the Court that the allegations in the proposed claim are capable of tenable argument. The evidence the plaintiffs have provided does not go that far. However, given the conclusions that I have reached on the next requirement, I do not have to express a final position on this point of good arguable case.

[22] The third requirement is that there must be a real risk of dissipation of the assets that would render any subsequent judgment on the substantive claim partly or wholly unsatisfied. Rule 32.5(4) of the High Court Rules provides:

32.5 Order against judgment debtor or prospective judgment debtor or third party

(4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—

(a) the judgment debtor, prospective judgment debtor, or another person might abscond; or

(b) the assets of the judgment debtor, prospective judgment debtor, or another person might be—

(ii) disposed of, dealt with, or diminished in value (whether the assets are in or outside New Zealand).

[23] There are limitations placed on the jurisdiction set out in r 32.6(2) and (3):

(2) If the likely maximum amount of the applicant’s claim is known, the value of the assets covered by the freezing order must not exceed that amount together with interest on that amount and costs.

(3) The freezing order must not prohibit the respondent from dealing with the assets covered by the order for the purpose of—

(c) disposing of assets, or making payments, in the ordinary course of the respondent’s business, including business expenses incurred in good faith.

[24] Some of the early cases on freezing orders, formerly called Mareva injunctions, said that there must be evidence that a defendant is seeking to evade justice by disposing of assets to make itself judgment-proof.⁶More recent New Zealand authorities have suggested that such a purpose is not required. In Bank of New Zealand v Hawkins Gault J stated:⁷

[Counsel] further submitted that it is not necessary for a plaintiff to prove any nefarious intent on the part of the defendant. He submitted that if the likely effect or result is that the assets will be put out of reach of the plaintiff, that is sufficient, even if an intent to defeat the creditor is not established. I accept the submission which is supported by the Court of Appeal in Ninemia Corp v Trave Schiffahrtsgesellschaft [1984] 1 All ER 398, 419.

[25] The approach in Bank of New Zealand v Hawkins would appear to be reflected now in the wording of r 32.5(4)(b)(ii). That rule does not refer to intent;

⁷Bank of New Zealand v Hawkins, above n 2, at 454. See also TGB Holdings Ltd v BFP Trustees

rather it refers to assets being “disposed of, dealt with or diminished in value”, and

[26] It is clear from r 32.6(3)(c) that disposing of assets in the ordinary course of business is not the type of disposal that the third requirement refers to. Indeed, the rule says that the Court “must” not prohibit such a disposal. The disposition of assets that creates a risk that invokes the freezing order jurisdiction must be a disposition that is not in the ordinary course of business. There must be a risk which warrants the extraordinary step of a Court intervening to protect a possible creditor prior to any judgment and prevent a defendant against whom there is no judgment from the free use of its assets. Further, it must be shown that without the freezing order there is a real risk that the plaintiff will be left with a judgment that is partly or

[27] The particular focus of the plaintiffs’ application is a proposed payment of

$122,017.76 to a supplier, Scott Electrical Ltd, for LED lighting. That lighting will be used in what is presently the major project of RSB which is a building project in Central Park. The payment was meant to be paid on Friday, 28 November 2014, but due to various administrative errors it was not in fact made. Mr Toluaki deposes that the non-payment is causing delay in completing the Central Park project. He has exhibited invoices. The documents show that a payment was to be made but failed for administrative reasons.

[28] Mr Phillipps has argued that the effect of paying Scott Electrical Ltd will be to give it a preference and that there are other more longstanding creditors who are more deserving of payment, in particular the third plaintiff, Australec.

[29] However, the freezing order jurisdiction is not designed to sort out arguments as to priority between creditors. There is no evidence that Scott Electrical Ltd is not

an entirely genuine third party creditor. It could be expected that, as a payment was due but has not been made, Scott Electrical Ltd will not make the supplies until it is paid. There is nothing inherently unbelievable in Mr Toluaki’s assertion that it is essential that the payment be made and the lighting supplied to enable the job to be completed within the timeframe. If he is right and no payment was made which meant that the job is not completed, that could visit severe consequences on RSB.

[30] Thus this payment would appear to not be the type of payment which the freezing order jurisdiction is aimed to prevent. Indeed, it falls explicitly within the exception to the freezing order jurisdiction in r 32.6(3) which states that a freezing order must not prohibit a defendant from dealing with assets for the purpose of making payments in the ordinary course of business, including business expenses

incurred in good faith.¹⁰There is nothing to indicate that this payment will not be

[31] The same applies to the general trading position of RSB. There is nothing to indicate that any of the intended payments are not going to be made in the ordinary course of business. Often when freezing orders are sought it is alleged that those in control of a defendant’s company are seeking to benefit themselves at the expense of those who would ordinarily be entitled to the payments. No such allegations are made in relation to the intended payments by RSB.

[32] Rule 32.5(4) provides that the Court “may” make an order if it is satisfied that, having regard to all the circumstances, there is a danger that the judgment or prospective judgment will be wholly or partly unsatisfied because of the removal or disposal. The general rule that a respondent can deal with its assets without constraint which applied to the original Mareva jurisdiction is still reflected in the new detailed rules. Even if the disposal will result in insufficient funds to pay a plaintiff, the Court is unlikely to interfere if the disposition was genuine and in the

¹¹Barclay-Johnson v Yuill [1980] 1 WLR 1259 (HC); Whitmarsh v A’mon Corporation Ltd (1988)

[1988] NZHC 261; 2 PRNZ 576 (HC) at 582; and Oaks Hotels & Resorts NZ Ltd v Body Corporate 358851, above n 8, at [20].

[33] In my view the third requirement has not been made out by the plaintiffs. To apply the test referred to by Lawton LJ in Third Chandris Shipping Corporation v Unimarina SA, facts from which the commercial court, like a prudent sensible commercial person, could properly infer a danger of default if the assets were removed has not been made out.¹²

[34] It is a misuse of the freezing order jurisdiction to allow the jurisdiction to be used for anything other than its specific purpose of stopping the disposition of assets, not in the ordinary course of business, which will have the effect of defeating any judgment the plaintiff might obtain.¹³The jurisdiction is not designed to provide a plaintiff with pre-judgment security, or to allow one creditor relief from what is perceived to be the preferment of another creditor.¹⁴If the debt is a genuine trade debt and the payment in good faith, freezing orders should not be granted. Their effect could be to sink a good business, and give one creditor Court ordered preference over others.

[35] Before concluding I refer to submissions that Mr Phillipps has made recording that Mr Kwok and his interests are in the process of repaying the BNZ debt and achieving subrogation of the debenture, which may enable the appointment of a receiver. Mr Phillipps referred to the plaintiffs’ wish to preserve assets pending the appointment of a receiver. Mr Turner for the defendants submits that the company is solvent, and no receiver can be properly appointed.

[36] I am unable to reach a view on whether a receiver could be appointed, but I do record that I do not see the possibility of a receiver being appointed as being relevant to the relatively narrow point as to whether the unusual remedy of a freezing order should have been made available in this particular case.

[37] As discussed above, the freezing order jurisdiction is not designed to help secured creditors improve their security position. It is not a pre-receivership or pre-

_{liquidation holding mechanism for a creditor. It is designed to protect
creditors who}

¹²_{Third Chandris Shipping Corporation v Unimarine SA
[1979] QB 645 (CA) at 671.}

¹⁴Whitmarsh v A’mon Corporation Ltd, above n 11, at 582; and Oaks Hotels & Resorts NZ Ltd v

are at risk of losing the fruits of their judgment by dispositions that are not part of ordinary trading.

[38] I have traversed the overall justice of the situation in the course of this judgment. It would be unduly harsh to place the future of RSB at risk because of what appears to be an inter-shareholder dispute.

[41] Mr Turner has sought increased costs or indemnity costs, but I see no particular factor which takes this case out of the ordinary.

[42] The plaintiffs are to pay the defendants’ costs on a 2B basis, together with reasonable disbursements.

High Court of New Zealand Decisions

Fortune Mile International Limited v Judge [2014] NZHC 3146 (4 December 2014)