Hospo Group Limited v Johnson [2015] NZHC 2972 (25 November 2015)

Last Updated: 30 November 2015

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2015-409-721 [2015] NZHC 2972

BETWEEN	HOSPO GROUP LIMITED Applicant
AND	KEVIN JOHNSON First Respondent
AND	STACEY IVAN GILES Second Respondent

Hearing:	25 November 2015
Appearances:	S W Rollo for Applicant J Moss and S T Cottrell for First Respondent No appearance for Second Respondent
Judgment:	25 November 2015

_{ORAL JUDGMENT OF DUNNINGHAM J}

[1] Hospo Group Limited is a company established by Mr Tarquyn Read, Mr Kevin Johnson and Mr Stacey Giles to run licensed premises in rented premises at 32 Allen Street, Christchurch.

[2] Mr Read’s evidence is that it was originally proposed that Messrs Read, Johnson and Giles would all be shareholders and Mr Read and Mr Johnson directors of the company, with Mr Read having a shareholding of either 33 or 34 per cent. However, the position, as recorded in the Companies Office, is that Mr Johnson is a

75 per cent shareholder and Mr Read a 25 per cent shareholder. While both

Mr Johnson and Mr Read were directors of the company, Mr Read was recently unilaterally removed by Mr Johnson as a director without consultation.

HOSPO GROUP LIMITED v JOHNSON [2015] NZHC 2972 [25 November 2015]

[3] Mr Read has contributed to the fit-out and furnishings of the bar established in Allen Street and has undertaken much of the hands-on operation. Mr Giles has financed the bar to the tune of just over $300,000.

[4] Hospo Group’s business however, has not prospered. Mr Read explains that he had expected that all the shareholders would “contribute as necessary for the first year or so, but that never happened and that has destroyed the business”.¹ He says the bar has struggled from the outset because it has never had enough money and the booking fee for bands which were intended to attract people to the bar were not paid, meaning that ticket revenue did not follow. Mr Read says, that from time to time, he

would use his personal funds to buy supplies including alcohol. He asked the other shareholders to help out, but they refused to put in further funds. Eventually the company missed a rent payment and was served with a statutory demand, but it paid that lease payment before it expired.

[5] However, he says the last straw for the business was when the power bill was not paid and a band turned up at the premises and could not play because there was no power. That has caused huge damage to the reputation of the bar. The business has now not been trading for some six to eight weeks and the landlord has issued a Property Law Act notice and a statutory demand. The lease will be forfeited if arrears of some $26,000 are not paid by this Friday.

[6] Mr Read considers that Mr Giles and Mr Johnson have been deliberately trying to destroy the business so that they can purchase it and adapt it for their own business purposes.

[7] Mr Giles has offered to purchase the business of Hospo Group Limited for

$300,000. Mr Johnson explains that this is effectively a $450,000 offer because it involves an associated debt write-off by Mr Giles of $150,000. The next best offer that has been received for the business from a third party was an offer for $160,000.

[8] Mr Read opposes the sale saying that it has been orchestrated without reference to him and he would not be repaid for the money that he has put into the

¹ See [30]-[34].

business, nor would he receive his unpaid wages for running it, which amount to some $60,000. In the circumstances, he has applied in the name of the company and sought an interim injunction on the following terms:

(a) that Hospo Group Limited its directors and shareholders must not accept or approve the agreement for sale and purchase of the business provided to Mr Rollo under covering letter dated 6 November 2015 or any other agreement for the sale of the business or assets of Hospo Group Limited without the written consent of Tarquyn Read or further order of the Court;

(b) that no changes are to be made into the company’s board or directors

or shareholdings without approval of the Court.

[9] The grounds on which the application is sought are as follows:

(a) that the proposed sale is a major transaction requiring approval by special resolution of 75 per cent of shareholders;

(b) Kevin Johnson and Stacey Giles do not own 75 per cent of the

company’s shares but have threatened to approve the sale;

(c) it would be a breach of the Companies Act 1993 for Messrs Johnson and Giles should they approve the sale without Mr Read’s consent;

(d) it would be unfairly prejudicial to the rights of Messrs Read and Dean Johnson for the sale to proceed without approval by special resolution; and

(e) whilst there is a dispute between shareholders and directors, it would be inappropriate for changes to be made to this company’s structure and governance.

[10] The application was granted, on an interim basis, on 9 November 2015 by

Mander J to hold the status quo. However, the proceedings were directed to be filed

on the respondents and the matter called in the next duty judge list. By that stage, the applicant had filed its statement of claim, which alleges breach of fiduciary duty by the respondents with particulars pleaded relating to non-compliance with the Companies Act, failure to disclose information and conflict of interest.

[11] The application for injunction is opposed. Opposition is based on the following grounds:

(a) The injunction was obtained in order to provide Mr Read time to make an offer to purchase the business or assets of the applicant (the company). The company is not trading. The company already has an offer from the second respondent in the sum of $300,000 but cannot accept that offer whilst the injunction is in place. Mr Read has not been able to match or better that offer and the company will lose its lease if it does not accept the offer of the second respondent and rectify a PLA Notice in respect of rental arrears that expires on

25 November 2015. The offer of the second respondent will not

only pay the rental arrears but all of the company’s debts in full

(including a significant debt to Mr Read’s contracting company);

(b) The injunction was granted to the applicant (the company) based on a number of errors or misinformation provided in the application documents. In particular:

(i) The company did not have any authority to apply for the injunction. The first respondent is the sole director and 75% shareholder of the company and did not authorise the solicitor or counsel on the record for the applicant company to apply for the injunction or issue the proceeding;

(ii) The instructing solicitor and counsel are not the company’s lawyers. GCA Lawyers, acting for the first respondent are and have been the company’s lawyers for over a year. The first respondent did not authorise the applicant to issue the proceeding;

(iii) The application did not disclose the extent of the company’s

debts;

(iv) The application did not disclose that Mr Read had been given the opportunity to purchase the business for quite some period, and in fact agreed that the business should be sold in order to pay out all of the creditors (including Mr Read’s contracting company); and

(v) The application did not disclose that counsel acting on the application had put in an offer to buy the property in which the business is located or explain why that was not a conflict in acting.

[12] Mander J accepted that the issue of the continuation of the injunction on an interim basis needed to be addressed as soon as possible. The matter was deferred to this hearing for the purpose of determining the following issues:

(a) whether Mr Read should be joined as a party and the related issue of the status of the presently named applicant, the company;

(b) whether Mr Read should be required to provide an undertaking as to damages. Mr Read presently resists such an undertaking on the basis that the present injunctive relief in his favour has been made pursuant to s 164 of the Companies Act; and

(c) whether the present interim injunction be continued or its terms modified.

[13] These issues remain relevant to the present hearing.

[14] Considerable affidavit evidence has been filed from both Mr Johnson and Mr Giles setting out the company’s current financial position and the reasons why they consider it would be inappropriate to continue the current interim injunction restraining the sale of the business when, in their view, the sale is the only real option in the present circumstances and will enable creditors to be paid.

[15] Mr Read, however, seeks that the injunction is continued. He has filed updated evidence about a proposal he considers he can put forward with new investors and where he considers time should be allowed for that proposal to be fully considered.

First Issue - Should Mr Read be joined as a party?

[16] This issue was resolved at the outset of the hearing with Mr Rollo accepting that it was appropriate that Mr Read be joined as a party in his own right.

[17] As a consequence, I direct that Mr Read be joined as an additional applicant.

[18] I am satisfied that that application was in reality brought by Mr Read in his capacity as a minority shareholder seeking to prevent the sale of the company’s business to the second respondent. Mr Read is currently not a director (whether or not his removal as a director was proper) and so did not have authority to commence proceedings in the name of the company.²

[19] I turn now to the substantive issues and I deal with them in the reverse order from which they were listed by Mander J. Clearly the issue of whether there should be a continuation of the interim injunction at all needs to be resolved before I consider whether an undertaking as to damages is required.

Second Issue - Should the interim injunction continue?

[20] In considering the issue of whether the injunction should continue, I am prepared to assume that Mr Rollo’s client has an arguable case that he is a 33 or 34% shareholder, and that a decision to sell the business is a major transaction which he should have the right to have a say on. The real issue is where the balance of convenience lies, in the particular circumstances that have arisen.

[21] Here the business is in default. While the amount owed by creditors is debated, it appears that at least $160,000 is owed to third party creditors, other than the investors who are represented in these proceedings.

[22] It is also agreed that these parties can no longer work together. The landlord has issued a Property Law Act notice which expires on Friday and a statutory demand. Mr Read and Mr Johnson are not prepared to put in any further money to pay the arrears in rent and, until Mr Read has his investors on board, he is not in a position to pay those arrears either. Equally there is no funding to seek relief against forfeiture and, in any event, evidence of the company’s ability to pay the rent arrears

_{would inevitably be required to obtain such relief.}

2. Indeed if the substantive proceedings continue it is clear that the company will need to be independently represented given the clear disputes between the shareholders of the company.

[23] If the lease is forfeited then of course, there is, in practical terms, no business to sell. The business will also lose its fixtures and it is debatable whether its chattels will be recovered.

[24] It comes down to whether I remove the injunction and allow Mr Giles’ offer to proceed, which may allow payment of the third party creditors in full or at least in large part, but not repay all the investors, or whether I defer matters by prolonging the injunction, in which case the lease in all likelihood will be forfeited, to see whether the parties can agree to accept instead Mr Read’s proposal.

[25] Mr Read’s claim as a prejudiced shareholder can, in my view, still be able to be pursued if the interim injunction is lifted. While he will certainly lose the opportunity to take over the business and turn it around, as he deposes in his affidavit he could do, any losses he incurs will be a monetary loss and while they may be very difficult to prove, are not impossible. I have to weigh up that prejudice to Mr Read with the prejudice to the business and to the other shareholders if the interim injunction remains in place, and a sale which might see some value salvaged from the business, is prevented.

[26] While I have no doubt that Mr Read’s proposal is sincere, I have the immediate issue of the risk of the loss of the business if something concrete is not tied up this week.

[27] I am not prepared to allow the injunction to continue, to enable further negotiation between the two prospective sides to purchase the business when, in my view, Mr Read’s offer is not obviously better than Mr Giles and where there is a real risk that there will be no business at all if the current offer is not accepted and implemented.

[28] The parties have had two weeks to put a better proposal together and unfortunately that has not eventuated. Bearing in mind the imminent risks to the business as a whole, which will mean there is nothing left for either purchaser to pursue if the interim injunction is not lifted, I have determined that in considering the balance of convenience, the interim injunction should be discharged.

Third Issue – Undertaking as to damages

[29] Because of that decision there is really no need for me to go on to consider the issue as to whether Mr Read should be required to give an undertaking as to damages. However, for the record, had I sustained the interim injunction, there would be a real risk of damages arising and I would have required an undertaking as to damages, notwithstanding this is a statutory injunction under s 164 of the Companies Act, rather than a conventional injunction. In the circumstances, I understand that would have been difficult to provide, so the point may have been moot in any event.

[30] Costs will be reserved.

Solicitors:

Christopher B Morrall, Christchurch

GCA Lawyers, Christchurch