CLOVER4 LIMITED v BOURKE & ORS AS TRUSTEES OF THE JHB TRUST [2018] NZHC 2585_x000b_

CLOVER4 LIMITED v BOURKE & ORS AS TRUSTEES OF THE JHB TRUST [2018] NZHC 2585[3 October 2018]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYI TE KŌTI MATUA O AOTEAROAKIRIKIRIROA ROHECIV-2018-419-97[2018] NZHC 2585BETWEEN CLOVER4 LIMITEDApplicantAND J H BOURKE & ORS AS TRUSTEES OFTHE JHB TRUSTRespondentsHearing: 24 September 2018Appearances: Mr J S Ridling for the plaintiffMr N S Elsmore for the respondentsJudgment: 3 October 2018JUDGMENT OF ASSOCIATE JUDGE JOHNSTONIntroduction[1] In my judgement, there is a substantial dispute between the respondents, thetrustees of the JHB Trust, and the applicant, Clover4 Ltd, as to whether the latter isindebted to the former in the sum of $500,000 as alleged in their statutory demanddated 20 March 2018.[2] On that basis, Clover4 is entitled to the order its seeks pursuant to s 290(4) ofthe Companies Act 1993 setting aside the statutory demand.Background[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 FencourtRoad in Cambridge. It was and is the Bourke family farm, having formerly beenowned and farmed, as I understand it, by the late Mr Henry Bourke andMrs Mary Bourke, John Bourke's parents.[4] By the end of the first quarter of 2015 the farming operation had some financialdifficulties.[5] Mrs Bourke became aware of this. In mid May 2015 she met with her threechildren, John Bourke, Mary Bourke and Louise Bourke. They agreed on a proposalwhich 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 themwould have a 25 per cent shareholding, and to which each would pay $500,000. Theyexpected that they would then be able to raise sufficient additional finance fromexternal sources to enable the company to purchase the farm for $4,200,000, whichamount seems to have been agreed right from the outset. The terms of theirarrangements were not reduced to writing.[7] Later in May 2015 Mrs Bourke, John Bourke, Mary Bourke and Louise Bourkemet with a Mr Paul Aveyard of Westpac Banking Corporation and presented theproposal to him. By the end of May 2015 Mr Aveyard had come back to Mrs Bourkeand confirmed that the bank would provide a $2,200,000 facility which is what theyneeded 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 setout to engage solicitors to act on the incorporation of the company. She engagedMr Matt Makgill of Lewis' in Hamilton. She provided Mr Makgill with a handwrittennote which was effectively her instructions on behalf of the promoters. This documentdescribed the proposed shareholding arrangements in these terms:M L BOURKE: — 24 SHARES = $500,000 — BORROW WpcJ HB TRUST: — 24 ¨ = $500,000 — CASHMAB TRUST: — 24 ¨ = $500,000 — BORROW WpcLRB TRUST: — 24 ¨ = $500,000 — JHB TRUST LOAN96 Clover4 $2,200,000 Wpc[9] Having received instructions, Mr Makgill obviously concluded that it wouldbe wise for the promoters of the proposed company to enter into a shareholdersagreement. He drafted one. Apparently, he circulated it to the promoters. It is anextensive document, running to some 28 pages. The only clause which might havesome bearing on the dispute between the parties is cl 5. That reads:5.0 INITIAL SHAREHOLDER ACTIONS5.1 Each shareholder agrees to subscribe in cash for their shareholding inthe Company as follows:Mary Louise Bourke $500,000JHB Trust $500,000MAB Trust $500,000LRB Trust $500,000Such subscription amounts to be paid in cleared funds, in one lump tothe Company prior to or on the date of this agreement or as otherwiseagreed by the shareholders by Unanimous Resolution.[10] Given that the shareholders agreement was never finalised or signed, it is noteasy 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 theinstructions he had received and to that extent it might be said that the document isconsistent with Mrs Bourke's written instructions to him and her affidavit evidence inthis proceeding.[11] Clover4 was incorporated on 29 May 2015.[12] On 4 June 2015 the directors, Mrs Bourke, John Bourke, Mary Bourke andLouise Bourke all met with Mr Makgill to sign the documents relating to thecompany's acquisition of the farm. The company resolved to proceed with thetransaction. It agreed to the borrowing from Westpac and to grant the bank firstregistered securities.[13] Mr Makgill's notes of the meeting confirm that the four promoters anddirectors had all received a copy of the draft shareholders agreement but had not hadan opportunity to consider it in detail. He records that there were to be someamendments " relating to bloodlines and shares" and that the parties needed todiscuss these matters before getting back with their comments. In her evidence,Mrs Bourke says that she believes that those comments related to concerns expressedgenerally by family members that they did not want the shares being sold to personsoutside the family.[14] The company's acquisition of the farm took place on 4 June 2015.[15] The documentation produced by Mr Makgill recording the sale and purchasetransaction 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 byMrs Bourke and the three trusts to the company for the purpose of the acquisition. Ofcourse this documentation was never intended to be a record of the arrangementsbetween the promoters inter se or between the company and its shareholders. It wasdocumentation recording the later acquisition by the company of the farm.Nevertheless, the fact remains that it appears on its face to record Mr Makgill'sunderstanding of the arrangements.[16] By 11 November 2015 the parties were discussing rearranging Clover4'sshareholding. From a letter written by Mr Makgill on that date it is apparent that theseproposed rearrangements were linked to the distribution of the estate of the lateMr Bourke. It is not immediately obvious from the letter itself who the initiator of thisproposal 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 appearsto have treated the $500,000 payments by the four shareholders on the acquisition ofthe farm and consistent with Mrs Bourke's evidence.[18] It is apparent from draft financial statements prepared by the company'saccountants, 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 noevidence from the accountants themselves as to the reason for this. Mrs Bourke in heraffidavit offered hearsay evidence that she had spoken to the accountants who had toldher that they had taken their lead from the treatment of those payments by the solicitorsin the sale and purchase documentation.[19] In her affidavit Mrs Bourke also refers to a letter written by the solicitors actingfor the JHB Trust dated 10 October 2017 at a time when the parties were attemptingto resolve various issues and in particular John Bourke's proposal for therearrangement of the shares. That letter contains the following paragraph:That offer was withdrawn shortly after our letter of 30 March 2017 has nowbeen 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 havesecured funding to purchase Clover4 Ltd. Obviously this is at an amount thatmirrors the original funds of $500,000 per parcel of shares .[20] I am not convinced that this takes matters very far. The language might refereither to the acquisition of shares or advances.[21] The company's case, as supported by Mrs Bourke in her affidavit evidence, isthat the original arrangement was that each of the four shareholders acquired theirshareholding for $500,000, and that the documentation suggesting that these paymentswere advances to the company was based on inaccuracies in the company's solicitor'sdocumentation of the acquisition of the farm perpetuated by the company'saccountants. Obviously, as the parties' contractual arrangements were notdocumented, all the Court has is Mrs Bourke's assertion of the position which she saysshe makes on behalf of herself, Mary Bourke, Louise Bourke and the trustees of theirtrusts. But she can of course point to the items of documentation I have referred to assupporting her in that.[22] In support of the application the Court had before it a second affidavit swornby Ms Tania Frederiks who is a legal executive employed by Allen Needham & Co ofMorrinsville, Mrs Bourke's former solicitors. Ms Frederik's evidence concerns ameeting between the parties to the dispute and others on 9 May 2017. She attendedthis meeting with one of the firm's partners, Mr Alan Needham, acting forMrs Bourke. She made notes at the meeting and produces copies of these. Effectivelyher affidavit evidence is, and her notes confirm, that at that meeting Mrs Bourke andher advisers made it clear that they viewed the $500,000 payments as having been forthe acquisition of shares and that John Bourke made it equally clear that he took adifferent view. This meeting occurred of course around the time that this differencebetween the parties emerged, and I place no reliance on these previous consistentstatements. I do not see how it alters the position except to confirm that as early as9 May 2017 the parties were at odds on the point.[23] In response to Mrs Bourke's affidavit, John Bourke and the other trustees ofthe JHB Trust have filed a notice of opposition and John Bourke has filed acomprehensive affidavit. His evidence contradicts his mother's as to the arrangementsthat the parties reached in early 2015. He says that his mother's recollection of thediscussions 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 basedon the borrowings that each party was prepared to undertake. I never agreedto the farm being taken from me at a discount price and I had believed that myfamily 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 thatsupport his general contention that the $500,000 payments were shareholder advancesto the company. Obviously, Mr Makgill's documentation of the sale and purchasetransaction and the draft financial statements are amongst these.[25] Another document he points to is an email from Mary Bourke to the trusteesof 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 thecorrespondence or documentation hitherto referred to talks in terms of John Bourkehaving an option to re-purchase. But, as he says, at least one of his sisters appears tohave believed that to be the case.[26] The next point that John Bourke makes in his affidavit is that around the timethat arrangements were being made for Clover4 to purchase the farm, the farm wasvalued at $4.96 million. As I understand the point, it is that he would not have agreedto the farm being sold for considerably less than that, had he not been able to foreseea time when he could buy it back at the same price. There are two points in relationto 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, thevaluation to which John Bourke refers is dated 25 May 2015 which is after the partiesentered into the agreement to form the company but before incorporation and beforethe company acquired the farm.[27] John Bourke then emphasises that the draft shareholders agreement was neverfully negotiated between the parties and never executed. That is undoubtedly correctand why I do not place great emphasis on it.[28] In his affidavit John Bourke points to a number of what he describes asinaccuracies in Mr Makgill's notes of the meeting on 4 June 2015 which is no doubtintended to undermine any reliance on those aspects of the notes referred to earlier thattend 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 discussedhow ownership would be dealt with. We agreed that there would be four shareparcels of 24 shares each, and that each party would advance the company$500,000 to purchase the farm.[30] As Mr Ridling submitted that is rather less than a categorical denial of the caseas put by Clover4. However, I do not read it as any formal admission on John Bourke'spart. He refers to the shareholders advancing money to the company. The issue ofcourse is whether it was advanced by way of a payment for shares or by way of a loan.The opposing contentions[31] For Clover4, Mr Ridling began by acknowledging that the company as theapplicant bore the burden of establishing that in terms of s 290(4) there was asubstantial 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 withinthe family about the late Mr Bourke's estate and its administration and the ownershipof the farm and what is going to happen in the future. He reminded me of the evidencethat this is the second occasion on which the plaintiff trustees have sought to use thestatutory demand process to resolve issues. On 22 November 2017 they served astatutory demand on Clover4 for the difference between the price at which Clover4had acquired the farm and the value that the trustees said that the farm had at therelevant time based on the valuation already referred to. On its face, that would appearto be an ambitious use of the statutory demand process. In any event, an applicationto 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 ofthe situation. He suggested that if Westpac had thought that the four shareholders werenot investing capital in the company but rather making advances of $2 million, itwould not have been prepared to agree to provide the facility that it did to enable thecompany to purchase the farm. Although I pressed Mr Ridling on this contention, Iam not convinced that I understood the foundation for it. The shareholders, in oneway or another, were contributing close to half of the purchase price. The bank wascontributing a little over half. The bank of course was always going to take a firstranking security over the farm and a debenture over the moveable property, so that itwould be well secured. It has not been my experience that external lenders are overlyconcerned about the precise form of investment provided by shareholders. In short, Iam not persuaded by this argument.[34] For the respondents, Mr Elsmore focussed some attention on the provisions ofthe Companies Act that relate to the formation of companies and the obligations ofthose who subscribe for shares. He referred me first to s 41(a) of the Act which saysin effect that once incorporated a company is obliged to issue to any person or personsnamed in the application for registration as a shareholder or shareholders, the share orshares specified therein. He then referred me to s 46A which provides that a companyis only entitled to demand consideration from a shareholder for the issue of shares onincorporation if the company constitution so provides (irrelevant here, becauseClover4 has no constitution) or there is a contractual obligation by reason of a validpre-incorporation contract as defined in s 182 or a contract entered into after theregistration 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 onone 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 ofthe advance.[36] As I see it, that is the very issue before me. Either the promoters agreed onbehalf of the company to be formed that it would charge $500,000 for each of the fourparcels of 24 shares, or it did not.[37] Turning to the evidence, Mr Elsmore observed that if indeed the accounts haderroneously described the position, the shareholders, including Mrs Bourke, had hadfour years to raise the issue but had not done so.[38] He emphasised also the email from Mary Bourke referred to earlier in whichshe 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. Hiscontention was that from everyone's perspective treating the $500,000 payments tothe company by the shareholders as shareholder advances had a number of advantages.In my view that does not take matters much further.Discussion[40] In my view, this case comes down to a very simple point. What were thearrangements between the promoters of the company as to its structure and inparticular 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 forcefrom both sides.[43] The point is that if the Court is going to resolve this issue between these partiesthen that must be done in the context of formal proceedings with full pleadings,discovery and other interlocutory steps as necessary with witnesses giving evidenceand 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 wouldbe inappropriate for the JHB trustees to be permitted to short circuit that process byasserting that there is no dispute at all and using the Companies Act winding upprovisions — which are designed to deal with entirely different situations.[45] On that basis, as I have already said, the applicant, Clover4, is entitled to theorder it seeks.[46] I did not hear the parties in relation to costs and I therefore reserve them. Iexpect that counsel will be able to resolve costs without reference back to me. If itassists at all I can indicate that my preliminary view — subject of course to hearingfrom counsel — is that the applicant should have its costs on a 2B basis and I do noton 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 bymemorandum and I will deal with them on the papers.Associate Judge JohnstonSolicitors:Braun Bond & Lomas, Hamilton for the applicantHollister-Jones Lellman, Tauranga for the respondents