Kyle v Huapai Enterprises Limited (in liquidation) [2015] NZHC 463 (13 March 2015)

Last Updated: 31 December 2018

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-002685 [2015] NZHC 463

BETWEEN	KYLE KYLE Plaintiff
AND	HUAPAI ENTERPRISES LIMITED (in liquidation) First Defendant
AND	DEAN BARRINGTON BENJAMIN HERRING Second Defendant

Hearing:	10 March 2015
Appearances:	B M Hojabri for the Liquidators L A B Kemp for Second Defendant and for P G Reeve No appearance by or for the Plaintiff
Judgment:	13 March 2015

RESERVED JUDGMENT OF WYLIE J

This judgment was delivered by Justice Wylie on 13 March 2015 at 3.00 pm

Pursuant to r 11.5 of the High Court Rules

Solicitors: Keegan Alexander, P.O. Box 999 Shortland Street Auckland 1140 – B M Hojabri; Kemp Barristers and Solicitors, PO Box 600, Kumeu 0841 – L A B Kemp

KYLE v HUAPAI ENTERPRISES LIMITED [2015] NZHC 463 [13 March 2015]

Introduction

[1] The liquidators of the first defendant, Huapai Enterprises Limited (Huapai), seek to recover the sum of $567,816.09 from the second defendant, Dean Herring (Mr Herring), and from a Mr Peter Reeve. The application has been brought pursuant to s 298 of the Companies Act 1993.

[2] The amount sought by the liquidators is said to represent the value of a property at 156F Main Road, Kumeu, Auckland, which was transferred by Huapai to Mr Herring and Mr Reeve as trustees of Mr Herring’s family trust on 3 October 2013. The liquidators say that Huapai received no consideration for the transfer, and that the transfer took place within the three years preceding Huapai’s liquidation.

Factual background

[3] Huapai was incorporated in 1966 by the late Mr B J Herring. He built the company up over the years, and it acquired various properties in Kumeu.

[4] When Mr B J Herring died IN September 2009, his shares in the company passed to his two children, Mr Herring, and his sister, Andrea. In addition, both Mr Herring and his sister were directors of Huapai. Mr Herring had been appointed a director on 9 November 2009, and his sister became a director on 18 January 2012.

[5] Andrea Herring died in April 2012, and her shareholding passed to the plaintiff
– Mr Kyle, as the executor of her estate. He then became a director of Huapai.

[6] At the time of Mr B J Herring’s death, Huapai owned two factory units situated at 156 Main Road, Kumeu. One was known as 156B, and the other as 156F. The two units were of different sizes, and they had different rent prospects. Both were unencumbered.

[7] There were differences between Andrea Herring and Mr Herring in relation to their late father’s estate, and Mr Kyle, in his capacity as Andrea Herring’s executor, commenced proceedings against Mr Herring in May 2012. He alleged oppressive conduct by Mr Herring under s 174 of the Companies Act.
[8] It was eventually agreed between Mr Kyle and Mr Herring that the property at 156B would be sold, that Andrea Herring’s estate would be paid out and that Mr Herring would take a transfer of the property at 156F. It was anticipated that the property at 156B was more valuable than the property at 156F and any difference in the value of the two properties was to be adjusted when 156B was sold. A formula was put in place in this regard. Any additional cash payment due to Mr Herring was to be held in a solicitor’s trust account pending resolution of the proceedings commenced by Mr Kyle. Those proceedings were to be adjourned, and the matters in dispute in those proceedings were to be submitted to arbitration. If it was ultimately determined that Mr Herring was liable to Huapai, then the monies held by the solicitor were to be applied to satisfy the resulting debt either in whole or in part. If the monies were insufficient, Mr Herrring was to be liable for the balance personally. The company was to be wound up and any resulting tax liability was to be shared equally between Mr Herring and his late sister’s estate.

[9] It is common ground that this agreement was recorded in an email dated 29 July 2013 sent by Mr Kyle’s solicitors to Mr Herring’s solicitors. It was also common ground that the agreement was intended to settle all matters in dispute between Mr Herring and his sister’s estate.

[10] The agreement was implemented in part:

(a) Huapai sold 156B for $760,000. That was 87 per cent of its then Government valuation. The Government valuation of 156F was
$650,000. Applying the same percentage, the value of 156F was fixed at $567,816.09.

(b) The difference in value between the two properties was $192,183.91. Each parties’ half share of the difference was $96,091.95.

(c) Andrea Herring’s estate was paid out half of the net proceeds of the sale of 156B less $96,051.95 – a total of $629,870.36.
(d) Mr Herring placed the sum of $96,091.95 into the trust account of the independent solicitor pending resolution of the proceedings which had been brought against him by Mr Kyle.

(e) On 20 September 2013, Mr Herring nominated himself and Mr Reeve, as trustees of the Dean Herring Trust, to take the transfer of the property at 156F from Huapai.

(f) The property at 156F was transferred by Huapai direct to Mr Herring and Mr Reeve on 3 October 2013.

[11] Mr Herring and Mr Reeve, in their capacity as trustees of the Dean Herring Trust, entered into an acknowledgement of debt in favour of Mr Herring. The acknowledgement was for the total sum attributed to the property at 156F – namely
$567,816.09. Mr Herring has since forgiven the debt.

[12] There is little information about the trust before the Court. A copy of the trust deed has not been made available. Mr Herring in his affidavit deposed that the beneficiaries of the trust include his children and grandchildren. He confirmed that Mr Reeve is a trustee of the trust, but not a beneficiary, and that he (Mr Herring) does not have an interest in the trust assets. Rather, Mr Herring said that he is a discretionary beneficiary of the trust.

[13] I was not told what happened to the proposed arbitration, but in the event the substantive proceedings were dealt with by way of formal proof on 20 August 2014. Andrews J ordered that Huapai should be wound up, that a Mr Dalton and a Mr Kemp should be appointed as liquidators, that all of Huapai’s property should be transferred to them as liquidators, and that Mr Herring should pay compensation to the liquidators in the sum of $341,973 (excluding costs).¹ This represented rental owing in respect of the units for the period September 2009 to September 2013, rental not accounted for, and unapproved wages and drawings taken by Mr Herring.

¹ Kyle v Huapai Enterprises Limited [2014] NZHC 1981.

The interlocutory application

[14] These proceedings have been brought by way of interlocutory application. I do not consider that that was appropriate. The substantive proceedings have been finally determined. Judgment has been given and it has not been appealed. Once a final decision has been made, the Court is, subject to certain exceptions, functus officio.²

[15] An interlocutory application is an application seeking an interlocutory order, and an interlocutory order is an order or a direction of the Court that is made or given for the purposes of a proceeding or an intended proceeding, or which concerns a matter of procedure or grants some relief ancillary to that claimed in a pleading. Once a proceeding has been finally determined, no interlocutory order can be made in the context of those proceedings. There is nothing for any order to be interlocutory to.

[16] It seems to me that there should have been separate proceedings filed, or alternatively an originating application. Although an application under s 298 of the Companies Act is not expressly covered by r 19.2 in the High Court Rules, a liquidator can seek direction from the Court by way of originating application under r 19.4(a). Further leave can be sought that any proceeding not mentioned in rr 19.2 to 19.4 be commenced by way of originating application.³

[17] Neither party, however, raised this issue. Indeed, Mr Kemp, appearing for Mr Herring, was prepared to accept that the proceedings were appropriate, notwithstanding Mr Reeve is not named in the same.

[18] In the circumstances, and given that I heard full argument from the parties, I am prepared to treat the application as being an originating application, and to deal with it accordingly. Any additional filing fee is to be paid by the liquidators to the Registrar.

² Re Rakich ex parte Wrightson NMA Ltd HC Whangarei B25/89, 16 November 1989. See also Ryde Holdings Ltd v Sorenson [1995] 8 PRNZ 339 (HC).

³ High Court Rules, r 19.5(1).

[19] The application was filed on 16 December 2014. Mr Herring filed a notice of opposition on 10 February 2015. Mr Reeve has taken no steps, but Mr Kemp confirmed that Mr Reeve was served and he entered an appearance on behalf of both Mr Herring and Mr Reeve when the matter was called before me.

[20] The application is made pursuant to s 298 of the Companies Act. Relevantly, it provides as follows:

...

(2) Where, within the specified period, a company has disposed of a business or property, or provided services, or issued shares, to—

(a) a person who was, at the time of the disposition, provision, or issue, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or

...

the liquidator may recover from the person, relative, company, or related company, as the case may be, any amount by which the value of the business, property, or services, or the value of the shares, at the time of the disposition, provision, or issue exceeded the value of any consideration received by the company.

...

(4) For the purposes of subsections (1) and (2), specified period means—

...

(b) in the case of a company that was put into liquidation by the court, the period of 3 years before the making of the application to the court together with the period commencing on the date of the making of the application and ending on the date on which, and at the time at which, the order of the court was made; and

...

[21] The Court of Appeal has observed – in relation to s 311C of the Companies Act 1955, which was the predecessor provision to s 298 – that:⁴

It has a wide scope, which the Court should not abridge, but in our opinion it is designed within that wide scope for reasonably clear cases of inadequate

⁴ Re Burgess Homes Ltd (in liq) [1989] 1 NZLR 692 (CA) at 696 per Cooke P.

consideration. The Court should be slow to condemn under it a bona fide commercial or family bargain negotiated at arm’s length and with no intention of defeating creditors.

[22] In the present case, the disposition of the property at 156F Main Road, Kumeu by Huapai was pursuant to a family bargain, negotiated between Mr Herring and Mr Kyle as executor of Andrea Herring’s estate. Solicitors were involved, and it seems, insofar as I can glean from the papers, that the bargain was negotiated at arm’s length. Further, it appears from the liquidators’ affidavit that there are only two prospective creditors:

(a) the Inland Revenue Department, in respect of depreciation which was clawed back on the sale of 156B and the disposition of 156F disposition. The estimated liability is $45,000; and

(b) a related entity, Evander Holdings Limited. That company has been removed from the register. It was controlled by the Herring family. Its directors were Mr Herring and Mr Kyle. The shares were held by members of the Herring family, including the estate of Andrea Herring, and the estate of a Ms Z E Herring. Mr Herring also held shares. The liquidator in his affidavit states that there is an historical debt owed to Evander Holdings Limited. Mr Herring in his affidavit agrees and says that the debt was in the sum of $165,199.

[23] Any liability to the IRD is covered by the agreement of 29 July 2013. It falls to be shared equally between Mr Herring and Andrea Herring’s estate.

[24] There is in theory a debt still owing by Huapai to Evander Holdings Limited. Given that Evander Holdings has been removed from the register, that debt now vests in the Crown.⁵ The liquidators have put the Crown on notice of the debt. If the debt is to be recovered, Evander Holdings will have to be reinstated to the register. No steps have been taken in this regard. It seems unlikely that any attempt will be made to recover the debt. If the moneys were to be recovered, it would then be open to those who would have been entitled to the funds to apply for an order vesting all or part of

⁵ Companies Act 1993, s 324,

the moneys in them.⁶ As I understand it from counsel, the persons primarily entitled to make an application would be Mr Herring and Mr Kyle as the executor of Andrea Herring’s estate.

[25] Mr Herring has annexed to his affidavit the liquidators’ first report dated 18 September 2014. It records that the Inland Revenue Department is a preferential creditor, and also that there are unsecured creditors owed approximately $60,000. However, no mention of these unsecured debts is made by the liquidator in his later affidavit. The liquidators are in receipt of the funds which Mr Herring initially deposited with the independent solicitor – namely $96,091.95. Huapai also of course has the benefit of the compensation ordered by this Court – namely $341,973. There would appear to be plenty of money to pay any creditors without recourse to moneys recovered as a result of the deposition of the property at 156F Main Road, Kumeu.

[26] I conclude that there was no intention to defeat creditors – for the simple reason that there are no creditors whose position is not protected by the funds which are in hand or available.

[27] The question arises as to whether or not in the circumstances, s 298 nevertheless applies in its terms.

[28] If a liquidator is to succeed on an application under s 298, he or she must establish the following:⁷

(a) that there has been a disposition of property,

(b) that the disposition of the property has been made by the company,

(c) that the disposition occurred within the specified period,

(d) that the disposition was made to a person who falls within the classes of persons to which s 298 applies, and

⁶ Section 324(4).

⁷ Vance v Bradbury (2009) 10 NZCLC 264,469 (HC); affirmed by Bradbury v Vance [2009] NZCA 277, (2009) 10 NZCLC 264,541.

(e) that the value of the disposition exceeded the value of any consideration received by the company.

[29] There is no difficulty with (a) to (c) above. It is clear from the affidavits filed that Huapei disposed of its property at 156F Main Road, Kumeu within the specified period detailed in s 298(4)(b).

[30] The dispute between the parties relates to elements (d) and (e).

To whom was the disposition made?

[31] A liquidator may only recover from a party to whom a company has disposed of a business, or a property, or to whom it has provided services or issued shares.⁸

[32] Mr Kemp for Mr Herring contended that the property was disposed of to Mr Herring’s personally, and that he then transferred it to his family trust, the Dean Herring Trust.

[33] The liquidators submitted that the property of 156F was disposed of directly to Mr Herring and Mr Reeve as trustees.

[34] If Mr Herring is correct, then clearly there has been a disposition made to a person who falls within the classes of person to which s 298(2)(a) applies. Mr Herring was a director of the company at the relevant time.

[35] The same applies if the liquidators’ argument is correct. Mr Herring and Mr Reeve are nominees of Mr Herring, who was a director of Huapai. Further, Mr Herring has deposed that the beneficiaries of the trust are him, his children and his grandchildren. Messrs Herring and Reeve are also trustees for relatives of Mr Herring as a director of Huapai.

[36] Either way, the disposal was to a person or persons who fall within the class of persons to which s 298 applies. The dispute is, however, potentially significant

⁸ Kings Wharf Coldstore Ltd (in rec and liq) v Wilson [2005] NZHC 283; (2005) 2 NZCCLR 1042 (HC) at [94].

because it dictates who recovery can be obtained from if the requirements of s 298 are otherwise satisfied.

[37] Mr Kemp accepted that the unit at 156F was transferred by Huapai to Mr Herring and Mr Reeve as trustees, but he asserted that the property was not disposed of by the company to them. Rather, he said that it was disposed of, in equity, to Mr Herring, and that he then on-sold the property for the same consideration to the trustees of his trust for the same value as had been agreed between him and Huapai. He relied upon the Court of Appeal’s decision in Bevin v Smith⁹ and argued that Mr Herring had the right in equity, which could have been protected by a caveat or enforced by a decree for specific performance, to take a transfer of the property after Huapai agreed to transfer it to him in the email dated 29 July 2013. He argued that as from that date, there was a constructive trust between Huapai as the registered proprietor, and Mr Herring as the beneficiary, and that Huapai could not deal with the property at 156F in a way which was inconsistent with the 29 July 2013 agreement.

[38] The only document which bears on the issue is the deed of nomination dated 20 September 2013. It is equivocal. Mr Herring was described as the nominator, and Messrs Herring and Reeve as trustees were described as the nominee. The first recital to the deed recorded that Mr Herring had entered into an agreement to purchase the property from Huapai. The second recital recorded that Mr Herring nominated himself and Mr Reeve for the purpose of adopting his rights and obligations to complete the purchase on the terms agreed. The covenants in the deed recorded the adoption by the nominee of the rights and obligations of Mr Herring and Mr Herring’s consent to the nomination. In its form and in substance the deed is a deed of nomination – not a deed of assignment. However, it does record that Mr Herring had entered into an agreement to purchase the property from Huapai, and further that he and Mr Reeve as trustees had entered into a deed of acknowledgement of debt in the sum of $567,816, and that the nomination was in consideration for that acknowledgement of debt. There is no obvious reason why the acknowledgement of debt was necessary, if Mr Herring was simply nominating himself and Mr Reeve as trustees to complete the agreement with Huapai.

⁹ Bevin v Smith [1994] 3 NZLR 648 (CA).

[39] The intricacies of the arrangements between Mr Herring in his personal capacity, and Messrs Herring and Reeve as trustees, do not, in my judgment, affect the position insofar as Huapai is concerned. It was not a party to the deed. Rather, Mr Herring nominated himself and Mr Reeve to complete the transfer. That is what the deed of nomination provided for in its terms and it was the nomination which was presented to Huapai.

[40] It is of course common for parties to sale and purchase agreements to record that another party may be nominated by the purchaser to complete the agreement. In such cases the name of the purchaser in the agreement is usually followed by the words “or nominee”. Once nominated, a nominee does not become a party to the original agreement. Nor is the nominator released from the obligations contained in the agreement.¹⁰ The nomination is the process by which the nominee as a beneficiary of the contract is identified.¹¹ The nominee can become a party to the original agreement, but only by novation. Novation involves the making of a new contract between the nominee and the vendor. When there is a novation, usually the original purchaser will cease to be a party.¹²

[41] The email recording the agreement dated 29 July 2013 did not expressly allow Mr Herring to appoint a nominee. Rather, it seems that Mr Herring unilaterally nominated himself and Mr Reeve to take the benefit of his agreement with Huapai. Presumably, Huapai acquiesced to that nomination because it transferred the property direct to Messrs Herring and Reeve.

[42] In any event, s 298 focuses on the disposition by the company.

[43] The Court of Appeal – in dealing with the predecessor to s 298, held that the word “disposition” (and “acquisition” used in s 298(1)) is a wide and non-technical word, and that it should be given a fair, large and liberal interpretation, in accordance with what was then s 5(j) of the Acts Interpretation Act 1924. The Court considered that this was appropriate, to attain the statutory objective of ensuring that steps within

¹⁰ Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427 (CA) at 431.

¹¹ Rattrays Wholesale Ltd v Meredyth Young & A’Court [1997] 2 NZLR 363 (HC) at 382.

¹² Laws of New Zealand Contract (online ed) at [6].

the defined period before a winding up are not permitted to prejudice creditors unfairly.¹³

[44] The word “disposition” is not defined in the Companies Act. It is an ordinary English word. The verb “disposed”, and the related noun “disposition”, involve the action of getting rid of, alienating or making over.¹⁴ Disposition involves a transfer of an interest in property, as contrasted with mere possession.¹⁵ It has been held in the United Kingdom, albeit in a very different context, that there is no disposition where there is merely a contract to make a disposition. Rather, there is disposition only when the alienation is effected.¹⁶ I agree with that observation. It follows that an uncompleted contract for the sale and purchase of land is not in itself a disposition.

[45] Here, it is clear from the affidavits which have been filed, and from a copy of the certificate of title which has been produced, that the disposition was direct from Huapai to Messrs Herring and Reeve. Whatever intermediate role Mr Herring may have had does not alter the fact that the disposition was from the company to the trustees.

[46] Accordingly, I hold that the disposition of the property at 156F Main Road, Kumeu by Huapai was to Messrs Herring and Reeve in their capacity as trustees, and that they are persons who fall within the classes of person to which s 298(2) applies.

Did the value of the property a 156F exceed the value of any consideration received?

[47] It is clear from the affidavits which have been filed that no money was exchanged when the disposition occurred. Mr Kemp argued that the transfer was a distribution to Mr Herring as a shareholder which he in turn passed on to the trust, and/or that he supplied consideration, either in whole or in part, because money was owed to him by Huapai.

¹³ Re Burgess Homes Ltd, [1987] 1 NZLR 513 (CA) at [521].

¹⁴ The New Shorter Oxford English Dictionary on Historical Principles (5th ed, Oxford University Press, 2002) at 708; and see Daniel Greenberg Jowitt’s Dictionary of English Law (3rd ed, volume 1, Sweet & Maxwell, London, 2010) at 726.

¹⁵ Worcester Works Finance Ltd v Cooden Engineering Co Ltd [1972] 1 QB 210 (CA) at 220.

¹⁶ Bayoumi v Women’s Total Abstinence Union Ltd [2003] EWHC 212, [2003] Ch 283; reversed in part by [2003] EWCA Civ 1548, [2004] Ch 46 but see [26] and [43].

[48] As a matter of law, before any shareholder distribution can be made, the process detailed in s 52 of the Companies Act should be followed. That section provides that no distribution is to be made unless the board is satisfied on reasonable grounds that the company will satisfy the solvency test put in place by the legislation after the distribution. Directors who vote in favour of the distribution must certify that, in their opinion, the company will satisfy the solvency test after the distribution, and they must give the basis for that opinion.

[49] Here one of the liquidators has deposed that Huapai’s records contain no resolutions complying with s 52, and that there is no solvency certificate. The liquidator also queries whether the board could properly have approved such a distribution because of the historical debt owed to Evander Holdings Limited and the tax liability to the IRD.

[50] It is clear that the provisions of s 52 were not complied with. That, however, does not invalidate the company’s actions in making the distribution. Relevantly, s 17 of the Companies Act provides as follows:

(1) No act of a company and no transfer of property to or by a company is invalid merely because the company did not have the capacity, the right, or the power to do the act or to transfer or take a transfer of the property.

...

(3) The fact that an act is not, or would not be, in the best interests of a company does not affect the capacity of the company to do the act.

Further, the actions of the company in making the disposition could be ratified by the shareholders.

[51] Looked at broadly, it seems to me that the effect of the agreement made on 29 July 2013 was to distribute the company’s assets between its shareholders – Mr Herring, and his sister’s estate. This is what the parties sought to achieve, and the disposition by Huapai of the property at 156F, albeit to the trustees of Mr Herring’s direction, was to that end. Notwithstanding that the provisions of s 52 have not been met, Huapai actions in disposing of the property do not invalidate the transfer. It may well be that Messrs Herring and Kyle have breached obligations they owe to the
company and its shareholders under the Companies Act. However, in the circumstances of this application, that is irrelevant.

[52] As a result of this finding, it is not necessary for me to go on and consider Mr Herring’s argument about his current account credit with Huapai.

Conclusion

[53] For the reasons I have set out in this judgment, in my view the liquidators are not entitled to recover from Mr Herring and Mr Reeve the sum of $567,816.09 pursuant to s 298 of the Companies Act 1993. The application fails.

[54] Mr Herring is entitled to his costs on a 2B basis, together with his reasonable disbursements. I make no order in favour of Mr Reeve, however. He took no steps and he was not independently represented.

[55] I am considering whether to order payment of the costs by the liquidators personally. It seems to me that this application was misconceived from the outset and it is difficult to see what it was designed to achieve. I will not, however, fix liability for costs until I have given the parties the opportunity to comment on this issue. In this regard I direct as follows:

(a) a memorandum in relation to costs and whether or not they should be fixed against the liquidators personally is to be filed and served by Mr Herring within 10 working days of this judgment;

(b) a response from the liquidators is to be filed and served within a further 10 working days thereafter.

I will then deal with the issue on the papers, unless I require the assistance of counsel.



Wylie J