CRESCENT CONSTRUCTION LIMITED assignee of LUSCIOUS LIVING INTERNATIONAL LIMITED v SACHDEVA [2023] NZHC 3478

CRESCENT CONSTRUCTION LIMITED assignee of LUSCIOUS LIVING INTERNATIONAL LIMITED vSACHDEVA [2023] NZHC 3478 [1 December 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2023-404-001595[2023] NZHC 3478BETWEEN CRESCENT CONSTRUCTION LIMITEDassignee of LUSCIOUS LIVINGINTERNATIONAL LIMITEDAppellantAND MANISH SACHDEVARespondentHearing: 3 October 2023Appearances: G Jindal for the AppellantU Kuddus for the RespondentJudgment: 1 December 2023JUDGMENT OF TAHANA JThis judgment was delivered by me on 1 December 2023 at 12noonPursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Ormiston Legal, AucklandMBC Law Ltd, AucklandIntroduction[1] This is an appeal against a District Court decision1 granting leave to CrescentConstruction Ltd (Crescent) to join a proceeding, subject to first obtaining the OfficialAssignee's consent. The Official Assignee has not consented, and Crescent nowappeals to this Court.[2] The key issue on appeal is whether the Judge erred in requiring Crescent toobtain the consent of the Official Assignee.[3] Mr Kuddus for Mr Manish Sachdeva says Crescent does not have standing tobring the appeal and nor should the Court enlarge the time for the filing of the appeal,which was a day late. I therefore also need to consider those procedural issues.[4] Before considering the above issues, I outline the relevant background and theJudge's findings in the District Court.Background[5] On 20 December 2020, Luscious Living International Ltd (Luscious Living)and Mr Sachdeva, entered into a sale and purchase agreement for a business. A disputearose between the parties and was referred to the Disputes Tribunal for resolution.[6] On 6 July 2021, the Disputes Tribunal ordered Mr Sachdeva pay $30,000 toLuscious Living.2 Mr Sachdeva did not pay and appealed to the District Court in July2021. Mr George Prinsloo, the sole director and shareholder of Luscious Living, wasdeclared bankrupt that same month.[7] On 13 April 2023, Luscious Living entered into a deed of assignment withCrescent purporting to assign its debt claim against Mr Sachdeva to Crescent for $1(the Deed).3 The Deed was signed by Mr Prinsloo and Mr Ali Johar, who is a directorof Crescent. Mr Prinsloo's signature is witnessed; Mr Johar's is not.1 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647.2 Luscious Living International Ltd v Sachdeva Disputes Tribunal CIV-2021-044-0184, 06 July2021.3 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [3].[8] On 14 April 2023, Judge Clark directed that Crescent formally apply forjoinder in the proceeding.4[9] On 21 April 2023, Crescent applied under r 4.52 of the District Court Rules2014 (the DCR) to be a party to the appeal by Mr Sachdeva on the basis that it hadacquired the rights of Luscious Living pursuant to the Deed. Mr Sachdeva opposedthat application.District Court decision[10] Judge Sinclair observes that the assignment may not be valid and enforceablein circumstances where Mr Prinsloo is an undischarged bankrupt.5 The Judge refersto the applicable provisions of the Companies Act 1993 (the Act) noting that unders 151(2)(b), Mr Prinsloo is disqualified from being appointed or holding office as adirector because he is an undischarged bankrupt.6 Under s 157(1)(c), the office ofdirector of a company is vacated if the person holding that office becomes disqualifiedfrom being a director pursuant to s 151.7[11] The Judge then refers to the High Court, Court of Appeal and Supreme Courtdecisions in Clark v Libra Developments Ltd.8 In that case Mr Hyslop, who was thesole director of Libra, was adjudicated bankrupt and no replacement director wasappointed. The High Court held that ss 158(b) and 126(1) of the Act validatedMr Hyslop's actions on behalf of Libra following his bankruptcy. Section 158(b)provides that "[t]he acts of a person as a director are valid even though the personis not qualified for appointment."9 Further, Mr Hyslop remained a de facto directorbecause in terms of the definition of director provided in s 126(1) of the Act,Mr Hyslop was a person "occupying the position of a director of the company bywhatever name."104 At [2].5 At [6].6 At [6].7 At [6]; and Companies Act 1993, s 157(1)(c).8 Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA and SC).9 Companies Act 1993.10 Companies Act 1993, s 126(1)(a).[12] The Judge appears to accept the findings in Clark, but then goes on to notesubmissions by Mr Kuddus, counsel for Mr Sachdeva, that Clark can be distinguishedbecause the potential consequences of finding Mr Prinsloo's actions valid aredifferent.11[13] In Clark, Mr Hyslop had set up a family trust and then incorporated a company(Libra) with the trustees of the family trust as the shareholders. Mr Hyslop was thesole director and became bankrupt. He sought to argue that Libra (and not himselfpersonally) had entered into a venture with Mr Clark and that any profits from thatventure were payable to Libra. If they were paid to Mr Hyslop personally, they wouldbe subject to his bankruptcy.[14] In considering Mr Prinsloo's position, the Judge noted that:(a) the purported assignment has the potential effect of defeating theinterests of any creditors of Luscious Living and of creditors inMr Prinsloo's own estate;12 and(b) as a consequence of Mr Prinsloo's bankruptcy, the Luscious Livingshareholding is now vested in the Official Assignee meaning that anyassignment requires the Official Assignee's consent.13[15] The Judge noted the absence of evidence that the Official Assignee had givenconsent, or had any knowledge of the proceedings.14 The Judge ordered that theOfficial Assignee's written consent be obtained, and if so obtained, an order for joindercould be made at a subsequent case management conference.15Relevant law[16] Crescent applied to be a party under r 4.52 of the DCR, which sets out the basison which a new party can be joined to a proceeding, as follows:11 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [9].12 At [11].13 At [12].14 At [12].15 At [15].4.52 New parties order(1) Subclause (2) applies if, after a proceeding has commenced, there isan event causing a change or transmission of interest or liability(including death or bankruptcy) or an interested person comes intoexistence, making it necessary or desirable that—(a) a person be made a party; or(b) an existing party be made a party in another capacity.(2) An application without notice may be made for an order that theproceeding be carried on between the continuing parties and the newparty (a new parties order).(3) The new parties order must, unless the court otherwise directs, beserved on—(a) the continuing parties to the proceeding; and(b) each new party, unless the person making the application isthe only new party.(4) The new parties order is binding on a person served from the time ofservice.(5) A person who is not already a party who is served with a new partiesorder must file a statement of defence in the same time frame andmanner as a person served with a statement of claim.[17] Rule 4.52(1) requires that after the proceeding has commenced there be anevent that causes a change or transmission of interest. Here, the alleged event is thetransfer of Luscious Living's interest in the proceeding to Crescent.Does Crescent have standing to bring the appeal?[18] Mr Kuddus challenges Crescent's standing to bring the appeal saying thatCrescent is not a party to Mr Sachdeva's appeal against Luscious Living.[19] Crescent was the applicant under r 4.52 which was the relevant proceedingbefore the District Court. Under s 124 of the District Court Act 2016, a party to aproceeding in the District Court may appeal to the High Court against the whole or apart of a decision made in the District Court in relation to the proceeding. Crescentclearly has standing.Should leave be granted for late filing of the appeal?[20] Mr Kuddus then argues that this Court should not allow Crescent's appealbecause the filing fee was paid a day late.[21] Crescent was required to file the notice of appeal by Wednesday 2 August2023.16 It was emailed to the Court and Mr Kuddus on Monday 31 July 2023 (priorto the deadline). The filing fee was paid on Thursday 3 August 2023, one day afterthe deadline, and the appeal was accepted for filing.[22] Mr Jindal for Crescent says he was in a hearing on Wednesday 2 August 2023and this is the reason for the delay.[23] The Supreme Court has confirmed the relevant factors when determiningwhether to grant leave are: the length of the delay and the reasons for it; the parties'conduct; the extent of the prejudice caused by the delay; the prospective merits of theappeal; and whether the appeal raises any issue of public importance.17[24] Mr Kuddus says Mr Jindal has a history of non-compliance and that is relevantwhen considering whether the Court should exercise its discretion. I do not considerthat any history of non-compliance is such that it demonstrates prejudice toMr Sachdeva. Particularly when the non-compliance in this instance is a matter of oneday.[25] Mr Kuddus also refers to an observation of Holland J in Saleman v Clarksonthat, "I do not want it to be considered that time limits in the Rules can be ignored andare not matters of importance."18 That observation must be read in the context of thejudgment, where the Court noted that the District Court Judge did have jurisdiction togrant the enlargement of time. Mr Kuddus has not addressed the factors prescribed bythe Supreme Court in Almond v Read and simply asserts that the strict time frameshould be enforced. This is an unreasonable position.16 High Court Rules 2016, r 20.4. An appeal is to be filed within 20 working days after the decisionappealed against is given. The decision was given on 4 July 2023.17 Almond v Read [2017] NZSC 80, [2017] 1 NZLR 801 at [38].18 Saleman v Clarkson [1982] 2 NZLR 430.[26] Mr Jindal has provided a reasonable explanation for the delay. He was in ahearing in Wellington on 2 August 2023. The length of the delay was only one day.There is no prejudice to Mr Sachdeva because his counsel had notice of the appeal.The appeal is not without merit and while it does not raise any issue of publicimportance, the circumstances of the delay support granting an enlargement of time.[27] Having considered the relevant factors, I grant the application to enlarge timefor the filing of the notice of appeal.Did the Judge err in requiring the consent of the Official Assignee?[28] Judge Sinclair does not set out the requirements of r 4.52 but I understand fromthe analysis that the Judge was concerned to ensure that there had been a transmissionof Luscious Living's interests to Crescent such that r 4.52 provided a basis for joiningCrescent.[29] Mr Jindal for Crescent says the Judge did not correctly apply the SupremeCourt's decision in Clark v Libra Developments Ltd19 and no reasons were providedfor not applying it. In Clark v Libra the Court of Appeal reached its decision afterconsidering the effect of the provisions of the Act and in particular s 158 whichprovides that the acts of a director are valid even though the person is not qualified forappointment. This equally applies to Mr Prinsloo's conduct as a director.[30] The Judge appears to have distinguished Clark because the consequences offinding the transaction binding in Clark were different to the consequences of findingthe Deed binding on Luscious Living.[31] The Judge referred to the fact that in Clark if a partnership existed, Libra couldact as partner after Mr Hyslop was bankrupt and in circumstances where Libra'sshareholders did not appoint any other directors.[32] The Judge noted that Mr Prinsloo was purporting to execute a document onbehalf of Luscious Living assigning the right to enforce payment of a judgment sum19 Clark v Libra Developments Ltd [2007] NZSC 16.(if the appeal is unsuccessful) to Crescent. The Judge noted that the effect of the Deedwas to potentially defeat the interests of creditors of Luscious Living and/or creditorsof Mr Prinsloo.[33] I do not consider that the consequences are relevant to the interpretation of theAct and s 158 as the consequences of Mr Hyslop's conduct was not the reason for theCourt of Appeal and the Supreme Court's decision in Clark on how s 158 should beinterpreted.[34] The Judge then appears to accept that because Mr Prinsloo was the soleshareholder of Luscious Living, the Official Assignee's consent was required for theDeed noting that, "[a]ny assignment requires the consent of the Official Assignee."20No reason was provided for this conclusion.[35] It is necessary to identify the legal basis for the Judge's finding that theassignment requires the consent of the Official Assignee. Especially when s 17(1) ofthe Act provides that no act of a company is invalid because the company did not havethe capacity, the right, or the power to do the act or to transfer the property. Thisapplies to the validity of the Deed, and Crescent is entitled to rely on s 17 to establishthat the Deed is valid.[36] Mr Johar, director of Crescent, provided an affidavit indicating that henegotiated the Deed on an arms-length basis. He checked the Companies Register andnoted that Mr Prinsloo was the sole director and shareholder. He then received thesigned Deed from Mr Prinsloo understanding that he was authorised to sign it.[37] There is no evidence that Mr Johar did not act in good faith. While Crescentonly paid $1, the value of the Deed depends on the value of the opportunity tosuccessfully defend Mr Sachdeva's appeal and recover the $30,000. That opportunityrequires expenditure on legal fees, includes the risk of non-recovery, and an adversecosts order.20 Sachdeva v Luscious Living International Ltd [2023] NZDC 13647 at [12].[38] Further, there is no requirement for shareholders to consent to a transactionunless the constitution so requires and/or a special resolution is required for a majortransaction.21 Mr Kuddus submits that it was a major transaction but there is noevidence before the Court as to the financial position of Luscious Living to supportthis contention.[39] Luscious Living was not in liquidation at the time of the Deed and its financialposition is unknown. It is accepted that the shares of Luscious Living were vested inthe Official Assignee in circumstances where Mr Prinsloo was bankrupt. Thecorrespondence with the Official Assignee indicates that it is taking steps to removeLuscious Living from the register. That suggests it has no interest in pursuingMr Sachdeva or challenging the Deed, but the actual position is unknown. Thathowever, was not information that was before the Judge.[40] While the Judge was legitimately concerned with the interests of the OfficialAssignee, there was no analysis as to why the Official Assignee's consent was requiredfor the transaction. It was simply accepted that it was, without identifying how theAct or company constitution required shareholder approval. There was also noanalysis as to how, if shareholder approval was required, a lack of approval impactedCrescent's ability to rely on the Deed when s 17 expressly provides that a company'sact is not invalid merely because the company did not have the capacity, right or power,to do the act.[41] Neither Luscious Living nor the Official Assignee was represented at thehearing. It is the interests of creditors of Luscious Living (and the Official Assigneeas the shareholder of Luscious Living) that the Court was concerned to protect. If theOfficial Assignee wishes to challenge the validity of the Deed and provide evidenceas to why Crescent is unable to rely on the Deed despite s 17, then they may apply tojoin the proceeding to challenge the validity of the Deed. On the evidence available,and based on Clark and the provisions of the Act which validate a company's actionsas against a third party such as Crescent, I consider that it is desirable that Crescentjoin the proceeding and defend Mr Sachdeva's appeal.21 Companies Act 1993, s 129.[42] In the circumstances, I consider that the Judge erred in making the OfficialAssignee's consent a condition of joinder. I do however, consider it appropriate thatthe Official Assignee be served with a copy of this judgment so they may determinewhether to intervene in the appeal before the District Court.Result[43] The appeal is upheld in part.[44] The orders at [15](a) and (c) of the District Court judgment are set aside. Thejudgment otherwise stands. I order that Crescent be joined to the proceeding and thatit serve a copy of this judgment on the Official Assignee.Costs[45] Crescent is successful and my preliminary view is that it is entitled to 2B costs.If the parties are unable to agree, leave is granted to file costs memoranda.______________________Tahana J