Clover4 Limited v J H Bourke [2018] NZHC 2585 (3 October 2018)

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BETWEEN	CLOVER4 LIMITED Applicant
AND	J H BOURKE & ORS AS TRUSTEES OF THE JHB TRUST _Respondents

Hearing:	24 September 2018
Appearances:	Mr J S Ridling for the plaintiff Mr N S Elsmore for the respondents
_Judgment:	_{3 October 2018}

[1] In my judgement, there is a substantial dispute between the respondents, the trustees of the JHB Trust, and the applicant, Clover4 Ltd, as to whether the latter is indebted to the former in the sum of $500,000 as alleged in their statutory demand dated 20 March 2018.

[2] On that basis, Clover4 is entitled to the order its seeks pursuant to s 290(4) of the Companies Act 1993 setting aside the statutory demand.

[3] Prior to the events described below, the first-named respondent, Mr John Bourke, or entities controlled by him, owned and operated a farm in Fencourt Road in Cambridge. It was and is the Bourke family farm, having formerly been

CLOVER4 LIMITED v BOURKE & ORS AS TRUSTEES OF THE JHB TRUST [2018] NZHC 2585 [3 October 2018]

[4] By the end of the first quarter of 2015 the farming operation had some financial difficulties.

[5] Mrs Bourke became aware of this. In mid May 2015 she met with her three children, John Bourke, Mary Bourke and Louise Bourke. They agreed on a proposal which they hoped would ensure that the family could retain the farm.

[6] The proposal was that a company would be formed in which each of them would have a 25 per cent shareholding, and to which each would pay $500,000. They expected that they would then be able to raise sufficient additional finance from external sources to enable the company to purchase the farm for $4,200,000, which amount seems to have been agreed right from the outset. The terms of their arrangements were not reduced to writing.

[7] Later in May 2015 Mrs Bourke, John Bourke, Mary Bourke and Louise Bourke met with a Mr Paul Aveyard of Westpac Banking Corporation and presented the proposal to him. By the end of May 2015 Mr Aveyard had come back to Mrs Bourke and confirmed that the bank would provide a $2,200,000 facility which is what they needed to ensure that the company to be formed could purchase the farm.

[8] Mrs Bourke, who appears to have been the driving force in this matter, then set out to engage solicitors to act on the incorporation of the company. She engaged Mr Matt Makgill of Lewis’ in Hamilton. She provided Mr Makgill with a handwritten note which was effectively her instructions on behalf of the promoters. This document described the proposed shareholding arrangements in these terms:

M L BOURKE:	—	24 SHARES	=	$500,000	—	BORROW Wpc
J HB TRUST:	—	24 ¨	=	$500,000	—	CASH
MAB TRUST:	—	24 ¨	=	$500,000	—	BORROW Wpc
LRB TRUST:	—	24 ¨	=	$500,000	—	JHB TRUST LOAN
		_{96 Clover4}		_$2,200,000		_Wpc

[9] Having received instructions, Mr Makgill obviously concluded that it would be wise for the promoters of the proposed company to enter into a shareholders agreement. He drafted one. Apparently, he circulated it to the promoters. It is an extensive document, running to some 28 pages. The only clause which might have some bearing on the dispute between the parties is cl 5. That reads:

5.1 Each shareholder agrees to subscribe in cash for their shareholding in the Company as follows:

Mary Louise Bourke	$500,000
JHB Trust	$500,000
MAB Trust	$500,000
LRB Trust	$500,000

Such subscription amounts to be paid in cleared funds, in one lump to the Company prior to or on the date of this agreement or as otherwise agreed by the shareholders by Unanimous Resolution.

[10] Given that the shareholders agreement was never finalised or signed, it is not easy to know exactly what force this draft document might have. But it is fair, I think, for the Court to infer that Mr Makgill was doing his best in the draft to reflect the instructions he had received and to that extent it might be said that the document is consistent with Mrs Bourke’s written instructions to him and her affidavit evidence in this proceeding.

[12] On 4 June 2015 the directors, Mrs Bourke, John Bourke, Mary Bourke and Louise Bourke all met with Mr Makgill to sign the documents relating to the company’s acquisition of the farm. The company resolved to proceed with the transaction. It agreed to the borrowing from Westpac and to grant the bank first registered securities.

[13] Mr Makgill’s notes of the meeting confirm that the four promoters and directors had all received a copy of the draft shareholders agreement but had not had an opportunity to consider it in detail. He records that there were to be some amendments “... relating to bloodlines and shares...” and that the parties needed to discuss these matters before getting back with their comments. In her evidence,

Mrs Bourke says that she believes that those comments related to concerns expressed generally by family members that they did not want the shares being sold to persons outside the family.

[15] The documentation produced by Mr Makgill recording the sale and purchase transaction refers to the $500,000 payments made by each of Mrs Bourke, John Bourke’s trust, Mary Bourke’s trust and Louise Bourke’s trust as advances by Mrs Bourke and the three trusts to the company for the purpose of the acquisition. Of course this documentation was never intended to be a record of the arrangements between the promoters inter se or between the company and its shareholders. It was documentation recording the later acquisition by the company of the farm. Nevertheless, the fact remains that it appears on its face to record Mr Makgill’s understanding of the arrangements.

[16] By 11 November 2015 the parties were discussing rearranging Clover4’s shareholding. From a letter written by Mr Makgill on that date it is apparent that these proposed rearrangements were linked to the distribution of the estate of the late Mr Bourke. It is not immediately obvious from the letter itself who the initiator of this proposal was, but other documentation suggests that it was John Bourke. In any event, Mr Makgill’s letter said:

For the purposes of this proposal the value of 24 shares in C4L is $500,000 (the original cost price).

[17] On its face this is inconsistent with the way in which Mr Makgill’s firm appears to have treated the $500,000 payments by the four shareholders on the acquisition of the farm and consistent with Mrs Bourke’s evidence.

[18] It is apparent from draft financial statements prepared by the company’s accountants, Cooper Aitken, for the financial years ending 31 March 2016 and 2017, that the accountants too treated the $500,000 as shareholder advances. There is no evidence from the accountants themselves as to the reason for this. Mrs Bourke in her affidavit offered hearsay evidence that she had spoken to the accountants who had told

her that they had taken their lead from the treatment of those payments by the solicitors in the sale and purchase documentation.

[19] In her affidavit Mrs Bourke also refers to a letter written by the solicitors acting for the JHB Trust dated 10 October 2017 at a time when the parties were attempting to resolve various issues and in particular John Bourke’s proposal for the rearrangement of the shares. That letter contains the following paragraph:

That offer was withdrawn shortly after our letter of 30 March 2017 has now been replaced with the position as set out in our most recent correspondence. What has now changed is Mr Bourke and the trustees of the JHB Trust have secured funding to purchase Clover4 Ltd. Obviously this is at an amount that mirrors the original funds of $500,000 per parcel of shares ... .

[20] I am not convinced that this takes matters very far. The language might refer either to the acquisition of shares or advances.

[21] The company’s case, as supported by Mrs Bourke in her affidavit evidence, is that the original arrangement was that each of the four shareholders acquired their shareholding for $500,000, and that the documentation suggesting that these payments were advances to the company was based on inaccuracies in the company’s solicitor’s documentation of the acquisition of the farm perpetuated by the company’s accountants. Obviously, as the parties’ contractual arrangements were not documented, all the Court has is Mrs Bourke’s assertion of the position which she says she makes on behalf of herself, Mary Bourke, Louise Bourke and the trustees of their trusts. But she can of course point to the items of documentation I have referred to as supporting her in that.

[22] In support of the application the Court had before it a second affidavit sworn by Ms Tania Frederiks who is a legal executive employed by Allen Needham & Co of Morrinsville, Mrs Bourke’s former solicitors. Ms Frederik’s evidence concerns a meeting between the parties to the dispute and others on 9 May 2017. She attended this meeting with one of the firm’s partners, Mr Alan Needham, acting for Mrs Bourke. She made notes at the meeting and produces copies of these. Effectively her affidavit evidence is, and her notes confirm, that at that meeting Mrs Bourke and her advisers made it clear that they viewed the $500,000 payments as having been for

the acquisition of shares and that John Bourke made it equally clear that he took a different view. This meeting occurred of course around the time that this difference between the parties emerged, and I place no reliance on these previous consistent statements. I do not see how it alters the position except to confirm that as early as

[23] In response to Mrs Bourke’s affidavit, John Bourke and the other trustees of the JHB Trust have filed a notice of opposition and John Bourke has filed a comprehensive affidavit. His evidence contradicts his mother’s as to the arrangements that the parties reached in early 2015. He says that his mother’s recollection of the discussions that led to the sale of the farm to the company is not correct:

What occurred was I was told the price that would be paid for the farm based on the borrowings that each party was prepared to undertake. I never agreed to the farm being taken from me at a discount price and I had believed that my family would have my interests at heart.

[24] He then points to other items of correspondence that he says demonstrate that, at very least, there were different views about the nature of the transaction and that support his general contention that the $500,000 payments were shareholder advances to the company. Obviously, Mr Makgill’s documentation of the sale and purchase transaction and the draft financial statements are amongst these.

[25] Another document he points to is an email from Mary Bourke to the trustees of his trust on 30 March 2016 querying when he would be re-purchasing the farm. That appears to introduce yet another wrinkle to this matter because none of the correspondence or documentation hitherto referred to talks in terms of John Bourke having an option to re-purchase. But, as he says, at least one of his sisters appears to have believed that to be the case.

[26] The next point that John Bourke makes in his affidavit is that around the time that arrangements were being made for Clover4 to purchase the farm, the farm was valued at $4.96 million. As I understand the point, it is that he would not have agreed to the farm being sold for considerably less than that, had he not been able to foresee a time when he could buy it back at the same price. There are two points in relation to this. First, the reality is that the sale and purchase transaction was at a figure of

$4,200,000 and contained no provision for a subsequent re-purchase. Second, the valuation to which John Bourke refers is dated 25 May 2015 which is after the parties entered into the agreement to form the company but before incorporation and before the company acquired the farm.

[27] John Bourke then emphasises that the draft shareholders agreement was never fully negotiated between the parties and never executed. That is undoubtedly correct and why I do not place great emphasis on it.

[28] In his affidavit John Bourke points to a number of what he describes as inaccuracies in Mr Makgill’s notes of the meeting on 4 June 2015 which is no doubt intended to undermine any reliance on those aspects of the notes referred to earlier that tend to suggest that the shareholders in Clover4 purchased their shares.

[29] John Bourke’s description of the transaction in his affidavit is in these terms:

I accept that as part of the transfer process the shareholders met and discussed how ownership would be dealt with. We agreed that there would be four share parcels of 24 shares each, and that each party would advance the company

[30] As Mr Ridling submitted that is rather less than a categorical denial of the case as put by Clover4. However, I do not read it as any formal admission on John Bourke’s part. He refers to the shareholders advancing money to the company. The issue of course is whether it was advanced by way of a payment for shares or by way of a loan.

[31] For Clover4, Mr Ridling began by acknowledging that the company as the applicant bore the burden of establishing that in terms of s 290(4) there was a substantial dispute as to whether or not the JHB trustees had a claim against it.

[32] He emphasised that this proceeding arises in a wider context of a dispute within the family about the late Mr Bourke’s estate and its administration and the ownership of the farm and what is going to happen in the future. He reminded me of the evidence that this is the second occasion on which the plaintiff trustees have sought to use the statutory demand process to resolve issues. On 22 November 2017 they served a

statutory demand on Clover4 for the difference between the price at which Clover4 had acquired the farm and the value that the trustees said that the farm had at the relevant time based on the valuation already referred to. On its face, that would appear to be an ambitious use of the statutory demand process. In any event, an application to set the demand aside was made and the demand was set aside by consent. Unsurprisingly.

[33] Mr Ridling made an appeal to what he described as the commercial realities of the situation. He suggested that if Westpac had thought that the four shareholders were not investing capital in the company but rather making advances of $2 million, it would not have been prepared to agree to provide the facility that it did to enable the company to purchase the farm. Although I pressed Mr Ridling on this contention, I am not convinced that I understood the foundation for it. The shareholders, in one way or another, were contributing close to half of the purchase price. The bank was contributing a little over half. The bank of course was always going to take a first ranking security over the farm and a debenture over the moveable property, so that it would be well secured. It has not been my experience that external lenders are overly concerned about the precise form of investment provided by shareholders. In short, I am not persuaded by this argument.

[34] For the respondents, Mr Elsmore focussed some attention on the provisions of the Companies Act that relate to the formation of companies and the obligations of those who subscribe for shares. He referred me first to s 41(a) of the Act which says in effect that once incorporated a company is obliged to issue to any person or persons named in the application for registration as a shareholder or shareholders, the share or shares specified therein. He then referred me to s 46A which provides that a company is only entitled to demand consideration from a shareholder for the issue of shares on incorporation if the company constitution so provides (irrelevant here, because Clover4 has no constitution) or there is a contractual obligation by reason of a valid pre-incorporation contract as defined in s 182 or a contract entered into after the registration of the company.

[35] On the basis of those provisions Mr Elsmore submitted — uncontroversially, to my mind — that a company may only “... charge for its shares on registration on one or either of the bases set out in s 46A. He then submitted:

Clearly there is no pre-incorporation agreement in relation to the treatment of the advance.

[36] As I see it, that is the very issue before me. Either the promoters agreed on behalf of the company to be formed that it would charge $500,000 for each of the four parcels of 24 shares, or it did not.

[37] Turning to the evidence, Mr Elsmore observed that if indeed the accounts had erroneously described the position, the shareholders, including Mrs Bourke, had had four years to raise the issue but had not done so.

[38] He emphasised also the email from Mary Bourke referred to earlier in which she appears to have had her own views about the terms of the arrangements.

[39] Like Mr Ridling, Mr Elsmore made an appeal to commercial reality. His contention was that from everyone’s perspective treating the $500,000 payments to the company by the shareholders as shareholder advances had a number of advantages. In my view that does not take matters much further.

[40] In my view, this case comes down to a very simple point. What were the arrangements between the promoters of the company as to its structure and in particular did they intend that the $500,000 contributions be capital or loan funding.

[41] It is of course conceivable that the promoters had different views about that. No doubt that is why Mr Makgill sought to formalise matters in a shareholders’ agreement.

[42] What is abundantly clear to me is that the matter might be argued with force from both sides.

[43] The point is that if the Court is going to resolve this issue between these parties then that must be done in the context of formal proceedings with full pleadings, discovery and other interlocutory steps as necessary with witnesses giving evidence and being tested by cross-examination and a careful consideration of all of the issues.

[44] In short, my view is that there is a real dispute to be resolved here and it would be inappropriate for the JHB trustees to be permitted to short circuit that process by asserting that there is no dispute at all and using the Companies Act winding up provisions — which are designed to deal with entirely different situations.

[45] On that basis, as I have already said, the applicant, Clover4, is entitled to the order it seeks.

[46] I did not hear the parties in relation to costs and I therefore reserve them. I expect that counsel will be able to resolve costs without reference back to me. If it assists at all I can indicate that my preliminary view — subject of course to hearing from counsel — is that the applicant should have its costs on a 2B basis and I do not on the face of things see any argument for increased or decreased costs in this case. However, if counsel are unable to resolve costs then they may come back to me by memorandum and I will deal with them on the papers.

High Court of New Zealand Decisions

Clover4 Limited v J H Bourke [2018] NZHC 2585 (3 October 2018)