M D COURTNEY ORTHODONTICS LIMITED V THE SPECIALIST ORTHODONTIC CENTRE LIMITED HC PMN CIV-2006-454-365

M D COURTNEY ORTHODONTICS LIMITED V THE SPECIALIST ORTHODONTIC CENTRE LIMITED HC PMN CIV-2006-454-365 27 March 2007IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV-2006-454-365BETWEEN M D COURTNEY ORTHODONTICS LIMITED Plaintiff AND THE SPECIALIST ORTHODONTIC CENTRE LIMITED Defendant Hearing: 26 March 2007 Appearances: G.A. Paine for Plaintiff P.J. Reardon for N.M.Tobin Orthodontics Limited Judgment: 27 March 2007 at 3.00 pm In accordance with r540(4) I direct the Registrar to endorse this judgment with a delivery time of 3.00pm on the 27th day of March 2007.JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL Introduction[1] The plaintiff seeks an order to place the defendant company into liquidation. The grounds for the application are that it is just and equitable that the company be put into liquidation in terms of s241(4)(d) Companies Act 1993. [2] The defendant company The Specialist Orthodontic Centre Limited takes no part in this proceeding. It has not filed any Statement of Defence or opposition to the order sought.[3] N.M. Tobin Orthodontics Limited ("Tobin Orthodontics"), a 50% shareholder in the defendant company on 6 June 2006 filed a Statement of Defence to the present application, however. [4] When this matter was called before me on 26 March 2007, Mr Reardon appeared as counsel for Tobin Orthodontics and Mr Paine appeared as counsel for the plaintiff. There was no appearance for the defendant company.Background Facts[5] The defendant company was incorporated on 21 October 2004. The share capital in the company was allocated and is held equally by Tobin Orthodontics and the plaintiff M.D. Courtney Orthodontics Limited. Mr Michael David Courtney and Mr Neil Michael Tobin are directors. [6] Mr Courtney and Mr Tobin are orthodontists practising in Palmerston North. At the time the defendant company was incorporated, as I understand the position, they operated their individual orthodontic practices from shared rooms at 499 Church Street, Palmerston North. As part of this arrangement, they incorporated the defendant company to act as a service company to provide and manage their Church Street rooms, together with plant, equipment and staff for the operation of their individual practices. [7] Difficulties soon arose with this arrangement, however. This culminated in the departure of Mr Courtney from the Church Street premises in about December 2005. At that time he established alternative premises elsewhere from which he then began to conduct his own orthodontic practice. Mr Tobin, however, remained in the Church Street premises. [8] As a result, difficulties arose with respect to the ownership and operation of the defendant company. [9] Allegations and counter-allegations passed between Mr Courtney and Mr Tobin. Their situation became acrimonious in the extreme.[10] Notwithstanding this, it seems that discussions took place between the parties concerning the possible purchase by Tobin Orthodontics of the plaintiff's shares in the defendant company. Tobin Orthodontics contends that it made repeated offers to buy the plaintiff's shares in the defendant at market value. It says the first of such offers was made on 13 December 2005 and other offers were made, including one in writing in a letter dated 22 March 2006. It seems that nothing transpired from these. [11] Interestingly, the constitution of the defendant company at paragraphs 15.1- 15.6 contains standard pre-emptive provisions for the sale and transfer of its shares. [12] Clauses 15.3, 15.4 and 15.5 in my view are potentially relevant here. They provide:15.3 Transfer notice and fair priceEvery shareholder including the personal representative of a deceased shareholder or the assignee of the property of a bankrupt shareholder wanting to sell or transfer any share or shares shall give notice in writing to the directors of the desire to sell or transfer such share or shares. If such notice includes several shares it shall not operate as if it were a separate notice in respect of each such share, and the proposing transferor shall be under no obligation to sell or transfer some only of the shares specified in such notice. Such notice shall be irrevocable and shall be deemed to appoint the directors the proposing transferor's agent to sell such shares in one or more lots to any shareholder or shareholders of the company (including the directors or any of them) at a price to be agreed upon between the party giving such notice and the directors or, failing agreement between them within 28 days of the directors receiving such notice, at a fair price to be determined on the application of either party by a person to be nominated by an independent chartered accountant. Such person, when nominated, and in certifying the sum which in that person's opinion is the fair price for the share, shall be considered to be acting as an expert and not as an arbitrator and accordingly the Arbitration Act 1908 and any subsequent modifications or re-enactment thereof shall not apply.15.4 Offer to shareholders and consequent saleUpon the price for such shares being agreed on or determined as aforesaid (as the case may be), the directors shall forthwith give notice to each of the shareholders (other than the person wanting to sell or transfer such shares) stating the number and price of such shares and inviting each of the shareholders to whom the notice is given to state in writing within 21 days from the date of the notice whether such shareholder is willing to purchase any and, if so, what maximum number of such shares. At the expiration of 21 days from the date of the notice the directors shall apportion such shares amongst the shareholders (if more than one) who have expressed a desire to purchase the same and as far as may be pro rata according to the number of shares already held by them respectively, or if there be only one suchshareholder, the whole of such shares shall be sold to that shareholder, provided however, that no shareholder shall be obliged to take more than the maximum number of shares stated in that shareholder's response to such notice. Upon such apportionment being made or such one shareholder notifying such shareholder's willingness to purchase, as the case may be, the party wanting to sell or transfer such share or shares shall be bound, upon payment of the said price, to transfer such share or shares to the respective shareholders or shareholder who have or has agreed to purchase the same and, in default thereof, the directors may receive and give a good discharge for the purchase money on behalf of the party wanting to sell and enter the name of the purchasers or purchaser in the share register as holder of such share or shares so sold.15.5 Sale of shares not taken by shareholdersIn the event of all of such shares not being sold under the preceding sub- clause within 60 days of the directors receiving notice under clause 15.3 hereof, the party wanting to sell or transfer shall be at liberty within a further period of 30 days to sell the shares not so sold, but not a portion only, to persons who are not shareholders, provided however, that such party shall not sell them for a price less than the price at which the same have been offered for sale to the shareholders as aforesaid, but every such sale shall nevertheless be subject to the provisions of clause 16 hereof.[13] In the present case it seems that the plaintiff has not only rejected the approaches from Tobin Orthodontics to buy its shares, but it has also chosen not to give to the directors of the defendant company any transfer notice with respect to those shares pursuant to clause 15.3.Counsel's Arguments and My Decision[14] The present application is made pursuant to s241(4)(d) Companies Act 993 which states:(4) The Court may appoint a liquidator if it is satisfied that – ... (d) it is just and equitable that the company be put into liquidation.[15] Before me, suggestions were put forward by counsel for Tobin Orthodontics that the present application may also be based upon the prejudiced shareholders provisions outlined in s174(2)(g) Companies Act 1993 which state:(2) If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fitincluding, without limiting the generality of this subsection, an order- ... (g) putting the company into liquidation.[16] Leaving aside at this point questions over the jurisdiction Associate Judges may have to deal with applications which proceed under s174 Companies Act 1993 (and in this regard I refer to s26I Judicature Act 1908), it seems that the present application in any event can proceed to be considered under s241(4)(d). [17] As to these aspects, Fogarty J in Flight Park Tandems Limited v Club Flying Kiwi Limited (HC Invercargill, 27 April 2005, CIV-2003-425-443) when considering an application made under both sections 174 and 241 Companies Act 1993 stated at paragraph [21]:[21] Section 174 and s241 overlap, as did s210 and s222 of the Companies Act 1948 (UK). For example a Court may appoint a liquidator under s241(4)(d) on the just and equitable ground or exercise powers under s174(2)(g).[18] I therefore proceed to consider this application on the just and equitable ground for winding-up noted in s241(4)(d). [19] In considering this "just and equitable" ground, Morrison's Company and Securities Law, vol. 2, at paragraph 56.5 states:The "just and equitable" ground upon which a Court may place a company in liquidation has been carried through from the old version in the 1955 Act. The history of the "just and equitable" ground for liquidation was reviewed, and the grounds of its application considered, by the House of Lords inEbrahimi v Westbourne Galleries Limited where the following principles were laid down:• The words "just and equitable" are not to be interpreted so as to include matters ejusdem generis with the other grounds for Court-ordered liquidation.• It is not permissible to create categories or headings under which cases must be brought if this ground is to apply. The deliberately general words must remain general and must not be reduced to the sum of particular instances.• The Courts should not be too timid in giving the expression its full force.• The applicant for the liquidation order is not confined to relying on such circumstances as affect him or her in the capacity of shareholder, but can rely on any circumstances of justice or equity which affect him or her in his or her relations with the company or with the other shareholders.• The "just and equitable" provision enables the Court to subject the exercise of legal rights to equitable considerations. This includes considerations of a personal character between one individual and another which make it unjust or inequitable to insist on legal rights or to exercise them in a particular way. Therefore, it is not fatal to the application of this ground that acts have been carried out in carrying on the company's affairs, within the strict wording of the company's constitution.• A company is more than a mere juridical entity with a personality in law of its own. There is room in company law for recognition of the fact that behind or amongst the company there are individuals with rights, expectations and obligations inter se which are not necessarily merged in the company structure as defined in the Act and in the company's constitution. To these may be added the principle that it is an extreme step to liquidate a successful and prosperous company, one which is properly managed, and a strong case must be made out before such an order will be made. The Court will restrain or dismiss an application which asserts doubtful rights and which could cause substantial or irreparable damage. Although the Act does not necessarily require it, applicants will probably have to show that there is no adequate remedy, apart from liquidation, open to them, and that they are not acting unreasonably in seeking to have the company liquidated instead of pursuing that other remedy. ...[20] Morrison's Company and Securities Law does go on to consider an analogy between the liquidation of a company and the dissolution of a partnership. Paragraph 56.6 of Morrison (Volume 2) states:The dissolution of a partnership may also be obtained on "just and equitable" grounds. This provides a link between s241(4)(d) and the principles of probity, good faith and mutual confidence which are applicable in equity as between partners. For instance, if one of the directors is excluded from taking part in the management of the company by the use of the other director's majority voting power, or if the directors have lost confidence in each other, or disagree so seriously that they cannot carry on business together, the company can be liquidated.[21] In Jaycue Investments Limited (in liq) v J. Fox Developments Limited (HC AK, 2 April 1996, M925/95, Tompkins J) a deadlock had arisen because the principal shareholders in the company were not able to work together in any way for the company's mutual benefit. There, Tompkins J made an order placing the company into liquidation first, because the purpose for which the company wasformed had long since gone, and secondly, because there appeared to be a deadlock in the company having regard to the events that had occurred there. [22] In the present case there is little argument that the relationship between Mr Courtney and Mr Tobin and their respective companies as shareholders in the defendant company has broken down in a major way. They have fallen out and the relationship between them has become quite dysfunctional. It is not necessary to isolate the origins of the breakdown in that relationship. Suffice to say that the fact that, as I understand it, Mr Courtney and Mr Tobin are competitors for similar orthodontic business in the Manawatu Region may provide some explanation for many of the events which have occurred around and since Mr Courtney's departure from their shared Church Street premises in December 2005. [23] Notwithstanding this, from submissions made to me by counsel for Tobin Orthodontics, it seems that Mr Tobin continues to use the defendant company as a service company for his orthodontic practice, providing the use of premises, plant and equipment to him, and continuing to employ staff (said to be at least six in number) for this purpose. [24] That said, and notwithstanding the position acknowledged above that the relationship between Mr Courtney and Mr Tobin has entirely broken down, I am not satisfied that this is an appropriate case at the present time for an order to be made liquidating the defendant company on the just and equitable ground. [25] In terms of the principles outlined in Morrison's Company and Securities law at paragraph 56.5 (noted at paragraph [19] above), it is an extreme step to liquidate a viable company, and a liquidation application should be restrained or dismissed in circumstances which would cause substantial or irreparable damage to such a company. [26] In the present case, as I have noted, the plaintiff's intention presumably is just to sell its shares and sever all links with the defendant company, Tobin Orthodontics and Mr Tobin.[27] Here, in my view, there is an adequate remedy open to the plaintiff apart from liquidation which has not been properly pursued. As I see it, this should be fully explored before liquidation based upon the apparent deadlock between the parties is considered. That alternative remedy, based upon clause 15.3 of the defendant's constitution noted at paragraph [12] above, is the issue by the plaintiff of a transfer notice to the directors for the sale of its shares. That the defendant company's constitution provides specifically for this process in situations of disagreement or disharmony such as the present one, is readily apparent. [28] In my view this transfer notice process should be followed here. This is particularly the case given the indications provided to me at the hearing of this matter that the defendant company is continuing to operate as a service company with six employees. [29] I am reinforced in these views, as I see it, by the House of Lords decision inO'Neill v Phillips [1999] 2 AllER 961 which I believe is on point. That case considered liquidation proceedings and at 974J Lord Hoffman said:... I think that parties ought to be encouraged, where at all possible, to avoid the expense of money and spirit inevitably involved in such litigation by making an offer to purchase at an early stage. ...Usually ...the majority shareholder will want to put an end to the association. In such a case, it will almost always be unfair for the minority shareholder to be excluded without an offer to buy his shares or make some other fair arrangement. ...If the respondent to a petition has plainly made a reasonable offer, then the exclusion as such will not be unfairly prejudicial and he will be entitled to have the petition struck out.And see Yovich (2001) 9 NZCLC 262,490 where the New Zealand Court of Appeal expressly endorsed the approach in O'Neill. [30] And it follows too that the parties to this proceeding will require some time to consider this option of giving and pursuing a share transfer notice. It is unclear whether there may be reason to hope that if Mr Tobin (and Tobin Orthodontics) wish to continue to operate the Tobin orthodontic practice with the assistance of the defendant service company, then he and Mr Courtney may be able to sort out valuation and purchase issues to enable a transfer of the shares in the defendant without the need for further intervention by the Court. If this proves not to bepossible, however, then in view of what could then be an impasse between the parties, there may ultimately be no alternative but for an order liquidating the defendant to be made under the just and equitable ground. That is a matter for a later occasion, however. [31] Accordingly, and adopting a similar approach to that taken by Fogarty J inFlight Park Tandems Limited v Club Flying Kiwi Limited, no decision is to be made now as to whether grounds exist for making the liquidation order sought by the plaintiff against the defendant company under s241(4)(d). [32] Instead, the plaintiff's present application to place the defendant company into liquidation is adjourned. It is to be listed for call in the Associate Judge's List at 10.00am on 16 July 2007. [33] This should enable sufficient time for the parties to explore and pursue fully the other remedies I have noted above. If these prove to be unsuccessful, then I will deal finally with the plaintiff's liquidation application on 16 July 2007. [34] Leave is however reserved in the meantime for any party to approach the Court on 48 hours notice to request a further directions conference in this matter if required. [35] At this point, costs are reserved. 'Associate Judge D.I. Gendall'Solicitors:Bruce Andrews Solicitors, Palmerston North for Plaintiff Cooper Rapley, Palmerston North for N.M. Tobin Orthodontics Limited