KARIKAAS NATURAL DAIRY PRODUCTS HOLDINGS LIMITED v ARUNDEL FARM HOLDINGS LIMITED [2023] NZHC 3672

KARIKAAS NATURAL DAIRY PRODUCTS HOLDINGS LIMITED v ARUNDEL FARMHOLDINGS LIMITED [2023] NZHC 3672 [13 December 2023]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2023-409-413[2023] NZHC 3672UNDER Section 290 of the Companies Act 1993 andPart 19 of the High Court Rules 2016IN THE MATTER of an application to set aside a StatutoryDemandBETWEEN KARIKAAS NATURAL DAIRYPRODUCTS HOLDINGS LIMITEDApplicantAND ARUNDEL FARM HOLDINGS LIMITEDRespondentCIV-2023-409-414UNDER Section 290 of the Companies Act 1993 andPart 19 of the High Court Rules 2016IN THE MATTER of an application to set aside a StatutoryDemandBETWEEN KARIKAAS NATURAL DAIRYPRODUCTS LIMITEDApplicantcontinued Hearing: 7 November 2023Appearances: G K Riach and H H Hughes for ApplicantS R A Hayman for RespondentJudgment: 13 December 2023Reissued: 14 December 2023JUDGMENT OF ASSOCIATE JUDGE LESTERAND JOHN LAMERS and HEATHERLYNLEY LAMERSRespondents[1] John and Heather Lamers (the Lamers) with Alan and Diana Hawkins (theHawkins), purchased a cheese manufacturing business in 2004. The purchase was byKarikaas Natural Dairy Products Holdings Limited (Holdings), which is the parent ofthe trading company, Karikaas Natural Dairy Products Limited (Trading).[2] The Lamers and the Hawkins have fallen out. The Lamers have wanted to endtheir involvement in the venture since at least August 2021.[3] In January 2004, around the time the purchase of the business settled, theLamers, the Hawkins and Holdings entered a shareholders agreement(the Agreement) which recorded that the Lamers, in addition to their purchase ofshares, would advance $333,000.00 to Holdings. That advance was made with theAgreement recording that the loan was to be documented in a separate loan agreement.While an unsigned copy of the loan agreement has been produced, it is commonground that the advance was for an initial term of two years. Part payments were madeagainst the debt in 2008, 2012 and 2013 leaving a balance of $200,000.00 outstanding.In 2006, this advance was put in the name of the Lamers' company, Arundel FarmHoldings Limited (Arundel). In July 2023, Arundel called for repayment of theadvance.[4] In addition, both the Lamers and the Hawkins are, via their respectivecompanies, owed money as recorded in current accounts. The amount recorded asowing by Holdings to Arundel under its current account is $78,893.00.[5] In 2018 and 2019, the Lamers advanced a total of $377,073.00 to Trading. Thisloan has not been repaid. The Hawkins interests also advanced funds to Trading, therelevance of which is noted below.[6] Arundel and the Lamers have issued statutory demands in respect of theamounts they say are presently due and payable. Arundel under its current accountand the balance of the loan originally made by the Lamers and the Lamers in relationto the advance referred to in the preceding paragraph.[7] Holdings and Trading have applied to set aside the demands. As the issues ineach application overlap, this judgment deals with both demands together save whereseparate issues concerning Holdings or Trading arise.[8] The application to set aside relies on the following clauses of the Agreement:8 Dividend Policy and Funding8.1 The Parties agree to the following general policies:(a) The Board will, subject to the Company meeting the solvencytest in Section 52 of the Companies Act 1993, and after havingregard to the Company's need for funds to maintain it asa viable business make a distribution by way of a dividend itsentire after tax profit for each financial year. Such dividendsallocated to the Parties shall be paid or credited to theirrespective separate shareholder's current accounts with theCompany.(b) Each Party will fund in proportion to their shareholding theCompany's operations so as to maintain the Company asa viable business.8. 2 If at any time the Parties are unable to agree as to whether or not theabove general policies should be carried out, or as to the extent towhich or the manner in which they should be carried out, then Clause12 shall apply.(emphasis added)[9] In the Agreement, the reference in cl 8.2 to cl 12, is to a provision entitled"Termination by Reason of Fundamental Disagreement". Clause 12.1(c) and 13provide:12.1 If a Fundamental Disagreement as to a major matter shall occur asstipulated in Clause 12.2 or the Parties are unable to agree on:(c) Any Party shall be entitled to give to the other notice in writing("Notice of Termination") that unless the matter in dispute is agreedwithin the period specified in the Notice of Termination (not beingless than three months) the Agreement shall be terminated. If suchmatter is not agreed within the period so specified, then unless it shallotherwise be agreed in writing, the following provisions shall apply;(i) The Parties shall endeavour to reach agreement whereby oneof them or its nominee shall buy out all of the shares of theother in the Company;(ii) If no such agreement is reached within the period of onemonth after expiration of the Notice of Termination, then,within a further period of fourteen (14) days, each Party shallsubmit to the Company competitive bids to purchase the otherparties shareholding. The highest bid will prevail, and in thatevent the Party making the highest bid, and the other Party,will be bound together in a contract for the sale and purchaseof the other Party's shares, at the tendered price.(emphasis added)13.1 Any sale and purchase pursuant to Clauses 11 and 12 shall becompleted as soon as practicable with the purchasing Party payinga deposit of 20% with the balance payable on settlement in twelve(12) months from the date of payment of the deposit. On settlementthe Party selling shares shall deliver to the Party purchasing sharesa duly executed transfer in respect of the shares in question and anyresolutions that need to be signed by the selling Party approving theshare transfer and letters of resignation of the Director/s appointed torepresent the holders of such shares against payment by the purchaserof the sale price.13.2 Any sale and purchase of shares pursuant to Clauses 11 and 12 shallbe on terms that the relevant shares shall be sold free from all liens,charges, encumbrances or other adverse rights and together with allrights and benefits attaching to them on the date of sale, that all loanaccounts shall be repaid as between the Company and the Party sellingshares and that the Party selling shares shall be released from anyguarantees given for the benefit of the Company or shall beindemnified against liability under such guarantees by the Party orParties purchasing shares.[10] In May 2023, the Hawkins' solicitors invoked cl 12.1(c) ultimately leading tothem giving notice on 23 June 2023 that the Agreement was terminated. The Lamers'letter calling up the advances, as noted above, was on 4 July 2023, leading the Hawkinsto say the calling up of the debt and the issue of statutory demands is tactical.[11] That the amounts claimed in the demands are owed to Lamers/Arundel, nor thequantum of those amounts, is in issue.The grounds of challenge to the statutory demands[12] As well as asserting the demands were issued for collateral purposes, as bothMr Hawkins and Mr Lamers are directors of both companies,1 the companies assertMr Lamers is in breach of his director's duties to the companies in calling up theadvances. However, the main focus of Mr Riach's submissions (as counsel forthe companies), was as the parties agree the shareholder buyout process at cl 12.1(c)has been kept alive, despite the 14 day period having expired, cl 13.2 provides loanswill be repaid as part of the cl 12 share buyout. Mr Riach submits this means that asthe cl 12 process remains alive and as payment of the loans is tied to that process, thatin turn means the statutory demands were premature.Shareholders agreement has been cancelled[13] The issue of a notice under cl 12.1(c) of the Agreement sets time running onthe life of the agreement. Unless the notified dispute is resolved; " the agreementshall be terminated". The 23 June 2023 notice of termination gave three months foragreement to be reached on the disputes raised in the letter. The three months expiredon 23 September 2023 without resolution being achieved. The Lamers do not disputethe validity of the 23 June 2023 termination notice.The link between cl 8 and termination[14] The Agreement provides that termination of the agreement: " shall not affectsuch rights and obligations of the Parties as are intended to survive the termination".[15] Clause 8.2 of the Agreement provides that if the parties cannot agree onwhether the general policy of shared proportional funding (joint funding) should becarried out, or to what extent, then the termination provisions apply. Firstly, cl 8.2 ofthe Agreement confirms joint funding is a general policy only and secondly,contemplates that joint funding will be subject to ongoing discussion. Further, if howjoint funding policy is to be applied and to what extent, cannot be agreed, a notice oftermination may be issued. In my view, a party cannot be entitled to terminate because1 Mr Lamers has consented to the company bringing these applications.of a disagreement over the joint funding policy but nevertheless be obliged to continuejoint funding or not to withdraw existing funding on termination.[16] In my view, cl 8 of the Agreement did not survive termination.An implied duty to support the company despite cl 8 not applying?[17] The parties recorded their rights and duties as shareholders in the 2004Agreement. I am satisfied there is no room to imply an obligation to continue to fundthe companies following the termination of the Agreement. That would be to find animplied agreement or some other duty obliging the parties to continue with obligationsakin to those in cl 8 when here, a disagreement over funding in accordance with thatclause, has brought their Agreement to an end.[18] However, the cl 12 buyout process had been kept alive by the parties at thetime of the hearing.[19] Mr Riach refers to cl 13 of the Agreement which relates to the settlementprocedures where there is a sale and purchase of shares pursuant to cl 12. Clause 13.1provides on the sale and purchase of shares under cl 12, all loan accounts shall berepaid as between the company and the parties selling their shares with repaymentbeing within 12 months from the notice buyout. This is an obligation that survivestermination given it is intended to govern how the termination provisions shouldoperate. Clause 12.1(c)(ii) was intended to create a "quick fire" process where eachparty would put forward their best price for the shares with the highest offer beingsuccessful.[20] Despite the 14 days in cl 12 having expired, both parties have treated the cl 12process as running on.[21] As the cl 12 buy-out offer process had not been completed by the time of thehearing, there was a good argument that cl 13 defers the payment of loans untilthe cl 12 and cl 13 process has been completed, at least insofar as loans caught bycl 13. The parties had explored amendments to the cl 13 sale process but kept openthe option of reverting to the basic cl 12 process. Accordingly, at the conclusion ofthe hearing I considered it was arguable that a party could not call up their loans as ifa buyout under cl 12 was to occur, then cls 13.1 and 13.2 would defer when thevendor's loans would be repaid.Breach of director's duties[22] Ms Hayman, counsel for Mr Lamers, submitted no breach of director's dutiesarise as alongside the duties Mr Lamers has as director, he also has personalcontractual rights.[23] Ms Hayman referred to Hunan Holdings Ltd v Virionyx Corporation Ltd,where the Court held that a director who enters into transactions with a company isfree to exercise contractual rights under those contracts and in doing so, prefer theirown interests over the interests of the company.2 Such a director is not constrained toexercising their personal contractual rights in the best interests of the company;to require otherwise would "operate as a disincentive to directors of privatecompanies in providing debt capital, as it would most likely prevent them from everseeking repayment".3[24] I accept Ms Hayman's submissions on this point. If Mr Riach was right, thenadvances by directors to companies would be "locked in" if the company was not ableto repay them. Loans would become the equivalent of equity, even where a loan hadfallen due for repayment.[25] Holdings is a party to the Agreement. Holdings has therefore agreed to theloans being repaid on the cl 12 process being completed. Having so agreed, Holdingscannot say the Lamers requiring repayment is a breach of Mr Lamers' duty either aspart of the cl 12 process or outside that process if neither party seeks to buy out theother. As discussed, Mr Riach submitted the parties have treated Trading as alsocaught by the Agreement. If that is correct, then Trading also cannot complain ofa breach of duty.2 Hunan Holdings Ltd v Virionyx Corporation Ltd, HC Auckland, CIV-2005-404-1480,13 December 2005 at [116].3 At 116.Collateral purpose[26] It will be recalled that the letter calling up repayment of the debts was sentshortly after Hawkins issued their notice of cancellation of the Agreement. The timingcreates the arguable appearance that the calling up of the loan was a response totermination, but that does not make calling up the loans an abuse of process.[27] Cancellation of the Agreement put in train a process that would see either theLamers/Arundel or Hawkins' loans repaid depending on who was the higher bidder inthe cl 12.1(c) bidding process. In other words, repayment of the Lamers/Arundel debtwas inherent in the notice of termination if Hawkins bought the Lamers' shares.[28] Clause 13 of the Agreement determines when the loans were to be repaid. Ifcl 13 applies then the collateral purpose submission does not add anything. If cl 13does not apply, then as cl 8 is no longer in force there is, in my view, nothingobjectionable to a creditor seeking recovery of what they are owed.[29] The situation at the hearing on 7 November 2023 was that the parties had leftopen the ability to have recourse to the original cl 12 procedure. Ms Hayman, counselfor Arundel, was concerned that either time would drift with the parties negotiatingamendments to the cl 12 procedure or, if they reverted to the cl 12 procedure with theoriginal 14 days having run, there would be no set timeframe for that process to becompleted. The hearing concluded on the basis the parties would confer on whetherto use the cl 12 process or not and report back to the Court. Release of this decisionwas deferred on that basis.[30] The bidding process set out in cl 12 was completed on 24 November 2023.The Hawkins' interests bid $1.00 which was apparently set as a reserve. The Lamers'sheet of paper tendered by them stated that they submitted "no bid".[31] The Lamers say that the Agreement does not require them to submit a bid. TheHawkins' position is apparently that if both Lamers and Hawkins were to submit whatthey consider to be the minimum bid, that is the reserve of $1.00, the Lamers's bidwould necessarily be "the higher" and therefore the winning bid, as it would be a bid of$1.00 for the purchase of only 40.03 per cent of the shareholding (the Hawkins'interests shares) as opposed to a bid of $1.00 for 59.97 per cent of the shareholdingheld by the Lamers interests.[32] Counsel for the Lamers' interests submits that the Hawkins' bid of $1.00 maynot have been intended to be a genuine bid as it appears it was submitted incircumstances where the Hawkins believed the Lamers were bound to submit a bid of$1.00 that would necessarily mean they won the auction.[33] The bidding process does not call for an attempt to place a value on each shareheld by the parties in the way the approach attributed to the Hawkins would suggest,that is, $1.00 for 40.03 per cent would be a higher per share price than a bid of $1.00for a bid of 59.97 per cent.[34] The cl 12.1(c)(ii) process is blunter than that. A party simply proposes a pricefor the other side's shareholding, not a price per share. The lodging of one price avoidsthe need for any attempt to try and arrive at a per share price. Such is not what theprocess contemplates. Nor does the setting of a reserve require a bidder to meetthe reserve. If the reserve is not met, a lot is passed in.[35] The idea that the setting of a reserve could be manipulated to compelthe Lamers' interest to purchase, on the basis their offer was the higher per share price,cannot have been contemplated by the setting of a reserve.[36] Accordingly, the position is as follows:(i) If the Hawkins' interests were to seek orders, as is apparentlycontemplated, to require the Lamers' interests to bid $1.00, then therewould be a deadlock on the price and the cl 12 process will have failed.(ii) In the alternative, if the Lamers' construction of the meaning of cl 12is correct and they did not need to tender a price, then the Hawkins arethe highest buyer and are obliged to buy the Lamers' shares and to payout all the Lamers' interests advances in accordance with the agreementreached as part of the sale process; that all loans would be subject tothe cl 13 payment timing.[37] Counsel for the Lamers' interests advises that they have called upon counselfor the Hawkins' interests to confirm whether their $1.00 bid can be treated asa genuine bid.[38] If the cl 12 process has failed, the Lamers' interests are entitled to call up theirloans. If the Hawkins do not confirm their bid then the cl 12 process has failed. If theHawkins confirm their bid the cl 12 and 13 process applies.[39] Accordingly, my judgment in respect of the statutory demand is as follows:(i) If the Hawkins' interests confirm that their $1.00 bid is a genuine bidthen they will be the successful purchasers under the cl 12 process andthe statutory demands will be set aside with the parties having agreedthat all loans will be repaid pursuant to cl 13, that is in 12 months' time.(ii) If the Hawkins' interests state that their bid is not a genuine bid thenthe cl 12 process will have failed and the application to set asidethe statutory demands will be dismissed and the time for payment ofthe demands will be extended to 31 January 2024.(iii) The Hawkins' interests are to confirm their formal nomination to mewithin 48 hours of the release of this decision. If no confirmation isreceived from the Hawkins that their bid is genuine, the application toset aside the demands will be dismissed.Costs[40] If the Hawkins' interests do not confirm their bid and the application to setaside the statutory demands are declined then the respondents are entitled to costs ona 2B basis plus disbursements as fixed by the Registrar.[41] If the Hawkins' interests confirm their bid then there shall be no order as tocosts.____________________________Associate Judge LesterSolicitors:Harmans, Christchurch (for Applicants)Lane Neave, Christchurch (for Respondents)Copy to counsel:G Riach, Barrister, Christchurch (for Applicants)