MIYAMOTO INTERNATIONAL NZ LTD v FOSTER STREET PROPERTIES LTD [2015] NZHC 3086

MIYAMOTO INTERNATIONAL NZ LTD v FOSTER STREET PROPERTIES LTD [2015] NZHC 3086 [7December 2015]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYCIV-2015-409-481[2015] NZHC 3086BETWEEN MIYAMOTO INTERNATIONALNEW ZEALAND LIMITEDPlaintiffAND FOSTER STREET PROPERTIESLIMITEDFirst Defendant124 CENTRAL LIMITEDSecond DefendantHearing: 4 December 2015Appearances: M Freeman for PlaintiffNo appearance by or for First DefendantD J Ballantyne for Second DefendantJudgment: 7 December 2015JUDGMENT OF MANDER J[1] Miyamoto International New Zealand Ltd (Miyamoto) has sued twocompanies, Foster Street Properties Limited (Foster) and 124 Central Limited(Central), for breach of contract relating to the purchase and development of anearthquake damaged building in Peterborough Street, Christchurch (the building). Italleges Foster failed to comply with an agreement which provided for Miyamoto'sacquisition of a shareholding in a nominee company which was to take ownership ofthe building. Further, that professional fees owed to Miyamoto for structural andseismic assessment work have not been paid.[2] The building was purchased. However, the company originally intended totake ownership of the building, 124 Peterborough Limited (Peterborough), andincorporated for that purpose, was not ultimately nominated as the purchaser. Centralwas nominated by Foster as the purchaser. It is alleged Central is controlled by Fosterand its directors. Central intends selling the building and has placed it on the market.As a result, Central's asset may potentially be liquidated. Miyamoto fears that as aresult, the proceeds of any sale will be disbursed to entities with connections to Foster.[3] Miyamoto contends that but for Foster's breaches the building would havebeen the asset of Peterborough, the original nominee company incorporated to ownthe building on settlement of the purchase agreement, and in which it had a beneficialshareholding. Peterborough has now been struck off the Companies Register.[4] Miyamoto seeks a freezing order restraining Central from disposing of, dealingwith, or diminishing the value of its asset, namely the building. It makes that claimon the basis that it has a beneficial entitlement to a shareholding in that companypursuant to an agreement between itself and Foster, the value of which will bediminished should its only asset be sold and the proceeds disbursed. Miyamoto claimsFoster, in breach of its obligations, unilaterally substituted Central for Peterborough,a company in which it has no shareholding. In doing so Foster prevented Miyamotofrom acquiring an interest in the asset through its shareholding in Peterborough.[5] Central opposes the making of a freezing order. Foster, which has been servedwith the application for the freezing order, did not appear in opposition.Background[6] In mid 2013, Foster entered into a conditional agreement to purchase thebuilding. Miyamoto was approached by the directors of Foster about entering into anagreement to purchase and develop the building. Miyamoto's expertise in structuraldesign work to earthquake strengthen the building was the reason for the initiative.[7] On 4 July 2013, Miyamoto and Foster signed heads of agreement, regardingthe purchase, development and strengthening of the building. The relevant terms ofthat agreement include the following:(a) Miyamoto would undertake the structural design work required for thebuilding. An estimated fee was agreed for that work. A significantlysmaller fee would be charged for due diligence work if the project didnot proceed beyond the due diligence stage.(b) Foster was to manage the development, including the purchase andupgrade of the building. It was entitled to charge a fee for thismanagement contract.(c) Foster would provide initial funding for due diligence costs and thedeposit. In return, Foster was entitled to charge a fee for providing thecapital.(d) A special purpose company would be formed to own and develop thebuilding.(e) In addition to its fees for professional services, Miyamoto would obtaina 30 per cent shareholding in the special purpose company which wasto own the building. Foster would hold a 70 per cent shareholding.(f) Miyamoto would enter into an agreement to lease two floors of thebuilding. The term, rental and other details were agreed. Similarly,Foster or Peterborough would enter into an agreement to lease theground floor.(g) Provision was made for a company, Taurus Group Limited (Taurus),which is alleged to house an accountancy business owned by two of thedirectors of Foster, to confirm further funding to complete the purchaseand complete the upgrade before the agreement to purchase becameunconditional.[8] On 31 July, Foster paid the deposit on the building and the purchase contractbecame unconditional. On 9 August, Peterborough was incorporated as the specialpurpose company. Two of its directors were directors of Foster, the third a director ofMiyamoto. The shares were held in trust by Taurus pending execution of ashareholders' agreement governing ownership and management structure. Shortlythereafter Miyamoto and Peterborough entered into an agreement for phase one of theseismic strengthening work (conceptual design).[9] On 27 August, the contract for the purchase of the building came due forsettlement. Thereafter penalty interest accrued.[10] Foster alleges that, on 13 September, Miyamoto refused to sign an agreementto lease in accordance with the heads of agreement. Miyamoto maintains it had agreedto a finalised lease agreement as early as 6 September and was in a position to sign thelease agreement once a shareholder agreement between the shareholders ofPeterborough had been executed.[11] On 16 September, Foster incorporated Central. Miyamoto claims that when itinquired of Foster about this development it was assured that if Central was substitutedas the special purpose company it would not alter the arrangements between them.[12] Before the end of September, Miyamoto completed the phase one seismic work(conceptual design) and provided it to Foster. At this time it presented invoices forpayment for both the due diligence work and the phase one seismic work it hadcompleted. Miyamoto also presented Peterborough with its contract for the phase twoseismic work (detailed design).[13] On 30 September, Foster nominated Central as the purchaser of the building.The next day, a director of both Foster and Peterborough emailed Miyamotoexpressing concern about that company's services and the feasibility of the project.[14] Foster alleges that at this time Miyamoto was still refusing to sign ashareholders' agreement for Peterborough, and the agreement to lease. For its part,Miyamoto maintains agreement to the shareholders agreement turned on resolution ofhow cost overruns should be managed. As a result of Taurus agreeing to fund costoverruns, Foster and Miyamoto agreed that Taurus would receive a 20 per centshareholding in Peterborough and their shareholdings would reduce to 55 percent and25 percent respectively. With this issue resolved there was no impediment to thesigning of the shareholders agreement.[15] On 2 October, Central settled the purchase of the building. Miyamotomaintains that prior to that date the parties had met and agreement had been reachedregarding the agreement to lease and the shareholders agreement. However, it appearsissues regarding Miyamoto's fees had emerged. Miyamoto's position is that theseissues were being worked through, and in respect of phase two had been agreed. Fostermaintains they were some way from concluding a shareholders' agreement and thatMiyamoto was still refusing to execute the agreement to lease the space allocated inthe building.[16] It appears by mid-October, the parties had reached an impasse. There arecommunications to Miyamoto on behalf of Peterborough expressing concern about thescope, timeframe and costing of the phase two and phase three strengthening work.For Miyamoto's part, it advised Foster that it was still waiting for the phase two(detailed design) contract to be signed so that it could proceed with that work.[17] On 8 November, Miyamoto was advised that its services were no longerrequired. It is not clear whether Mr Fonagy, who made that communication, did so onbehalf of Foster or Peterborough (Mr Fonagy was a director of Foster). Although bythis time the building was actually owned by Central. In any event, Miyamoto wasadvised on 11 November that Foster was ending its arrangement with Miyamoto onthe basis the project was no longer feasible with Miyamoto as its partner in the absenceof an executed agreement to lease. Reference was made to various concerns, includingfees and that Foster had received a much cheaper and timely alternative proposal tocarry out the engineering work from a third party.[18] In explanation for why it had nominated Central for the purpose of settling thepurchase contract on 2 October, Foster maintained it was continuing to incur penaltyinterest and needed to settle the unconditional purchase contract. It had been a gamblefor Foster to confirm the purchase contract before completing due diligence and in theabsence of securing a signed up tenant and firm costings and scope for thestrengthening plans. Foster maintained that in the absence of Miyamoto'scommitments coming to fruition in terms of the lease and its assurances regarding thetiming and cost effectiveness of its strengthening design, Foster considered the projectwas no longer feasible with Miyamoto.[19] The engineering work on the building was completed by another engineeringfirm and it is now being marketed for sale as a tenanted commercial building.The respective positions of Miyamoto and Foster[20] Miyamoto claims the building was purchased by Central as the special purposecompany nominated by Foster because Miyamoto had no shareholding in that entity.As a result, it was deliberately excluded from holding any interest in the buildingand/or profits from the venture in contravention of the heads of agreement.Additionally, it claims it has not been paid for either the preliminary strengtheningplan and phase one (conceptual design) work.[21] Foster's position is that, as a result of Miyamoto not executing the leaseagreement and the shareholder agreement during the due diligence stage of the project,it was not able to settle the purchase contract, and as a result was forced to make otherarrangements. Because of the lack of accord between itself and Miyamoto, the projectwith Miyamoto was not feasible. It maintains it achieved no benefit from itsnomination of Central, and had no choice but to nominate Central as purchaser in orderto settle the purchase contract.[22] In May 2015, Miyamoto demanded Foster and Central fulfil its allegedobligations to it, including that it be provided with a shareholding in Central. Further,that its outstanding professional fees be paid. Foster and Central have declined thosedemands.Requirements for a freezing order[23] There are essentially three requirements for a freezing order:(a) Good arguable case – A good arguable case is established if theallegations made are capable of tenable argument and supported bysufficient evidence, having regard to the early stage at which theapplication has been brought.1 There is no requirement that theapplicant demonstrate its case to be strong enough to entitle it tosummary judgment. What is required to meet the threshold is that itscase be better than one barely capable of serious argument, but need nothave a greater than 50 per cent prospect of success.2(b) It must be shown there are assets to which the order can apply – Anorder may extend to property in the name of a non-party, althoughnormally joinder will be required when true ownership of the propertyis in issue, or a claim is made upon the non-party.3 In the present case,the asset sought to be the subject of the freezing order is owned byCentral which is named as the second defendant.(c) The applicant must show a real risk of dissipation – It is a requirementto establish a real risk of dissipation. This is central to the freezingorder jurisdiction.4 Of itself, the fact a respondent is going to disposeof assets does not invoke the freezing order jurisdiction unless there isa real risk that a judgment in favour of the applicant will be partly orwholly unsatisfied if the freezing order is not made.5 Mere suspicionis not enough.6 Assertion of belief that a respondent may dissipate itsassets unsupported by solid grounds justifying that belief is insufficient,although proof of likelihood of dissipation is not necessary.7 Proof ofa real risk of dissipation has been described as circumstances from1 Dotcom v Twentieth Century Fox Film Corp [2014] NZCA 509, (2014) 22 PRNZ 479; Hannay vMout [2011] NZCA 530; Wing Hung Printing Company Ltd v Saito Offshore Pty Ltd [2010] NZCA502, [2011] 1 NZLR 754.2 Wilsons (NZ) Portland Cement Ltd v Gatx-Fuller Australasia Pty Ltd [1985] 2 NZLR 11 (HC andCA) at [21]-[22]; Ninemia Maritime Corp v Trave Schiffahrts GmbH & Co KG (TheNiedersachsen) [1983] 1 WLR 1412 (CA) at 1417.3 Shaw v Narain [1992] 2 NZFLR 544 (CA) at 548; SCF Finance Co Ltd v Masri [1985] 1 WLR876 (CA); High Court Rules, r 32.4.4 Tranquil Holdings Ltd v Hudson (1987) 2 PRNZ 551 (HC) at 552.5 High Court Rules, r 32.5(4); Oaks Hotels and Resorts NZ Ltd v Body Corporate 358851 [2013]NZHC 2695 at [18], [19] and [22].6 Euro-National Corporation Ltd v NZI Bank (1991) 4 PRNZ 365 (HC) at 372.7 Mogilin v Jo HC Auckland CIV-2011-404-1584, 26 August 2011, at [34]; Oaks Hotels and ResortsNZ Ltd v Body Corporate 358851, [2013] NZHC 2695 at [17].which "a prudent, sensible, commercial [person] can properly infer adanger of default"; a test which is "not unduly exacting".8[24] Overarching these considerations is the need to consider the overall justice ofthe case, balancing the need to protect the applicant so as to ensure any judgment isnot rendered barren against any prejudicial hardship to the respondent or a third party.9DiscussionIs there a good arguable case?[25] Central submitted that Miyamoto's claim discloses no good arguable case andthat there is no real danger that any judgment it may obtain will be wholly or partlyunsatisfied by it disposing of, or dealing with its assets. It argued that the "operativefeatures" of the heads of agreement between Foster and Miyamoto were conditionalon due diligence being completed and the ongoing feasibility of the project.[26] Foster did not appear to be heard on Miyamoto's application. However,Central, in reliance upon Mr Fonagy's affidavit, submitted that the proposed purchaseagreement involving Miyamoto did not pass due diligence and was therefore broughtto an end.[27] Central argued that even if Foster was to concede that the heads of agreementproceeded past due diligence, it did not breach the operative clauses, and the onlyreason they were not given effect to was as a result of actions taken by Miyamoto. Inthat regard, reference was made to professional services provided by Miyamoto whichwere governed by separate professional consultancy agreements that Centralsubmitted were complied with by Foster. Provision for entry into agreements to leasewere to be governed by separate lease agreements which Miyamoto refused to enterinto. Further, a special purpose company was incorporated, namely Peterborough, theshareholding of which was held by Taurus as a bare trustee, to be applied as agreedonce due diligence and a shareholders' agreement had been executed. Neither of thoseevents came to pass.8 Raukura Moana Fisheries Ltd v The Ship Irina Zharkikh [2001] 2 NZLR 801 (HC) at [122].9 Shaw v Narain [1992] 2 NZLR 544 (CA) at 548.[28] Central submitted that it was not a party to any agreement between Miyamotoand Foster, and the claim that Central was established by Foster to own the buildingfor and on behalf of Miyamoto and Foster is incorrect. Central maintains there is alack of evidence to that effect, as there is that Central is under the control of Foster.[29] Miyamoto submitted that the heads of agreement entered into between Fosterand itself constituted a contract whereby a special purpose company would beincorporated, in respect of which the parties were to have the agreed shareholding inaccordance with the stipulated division. Notably, the heads of agreement, whilereferring to Peterborough as Foster's nominee, does not name the special purposecompany. Although it is part of its case that Peterborough was to perform thatfunction, hence the allocation of shares upon Peterborough's incorporation to Tauruson trust in accordance with the agreed division of those shares as between Miyamotoand Foster.[30] Miyamoto claimed that at no point did it resile from the agreement betweenitself and Foster. It submitted that the substitution of Peterborough with Central wasa device intended to exclude it from its interest in the building. It contended that Fosterwas responsible for that step being taken without its agreement. NotwithstandingFoster not having admitted to the incorporation or control of Central, it is plain fromthe circumstances that those steps were taken at its instigation.[31] Miyamoto submitted it is a matter of record that the directors of Central aretwo of three directors of Foster, and that the trustee company which holds the sharesin Peterborough on trust is a 75 per cent shareholder in Central. The other 25 per centshareholding, it is submitted, is held by a trustee company of solicitors which representthe interests of Foster or Mr Fogany, the other director of Foster. Central, on thehearing of the application, did not dispute those details. Furthermore, Miyamotosubmitted that Foster did not lose any control over the development after the propertywas transferred to Central.[32] Miyamoto submitted that it has a strong case which essentially rests on theagreement that it was to have a 30 per cent share in the special purpose companyformed to own and develop the building. Whether that was to be Peterborough orCentral is of no odds, and that ultimately Foster was in breach of its agreement toexclude Miyamoto from its shareholding in the special purpose company.[33] Miyamoto argued that the issue of due diligence is not determinative of thesituation where Foster unilaterally, and during the course of ongoing negotiationregarding the leases and the shareholder agreement, incorporated a substitute companyand nominated it as the purchaser of the building.[34] Having read the affidavit evidence filed, I am satisfied that Miyamoto has agood arguable case available to it which, if established, may result in it being entitledto a 25 per cent shareholding in Central, or damages to reflect the value of thatshareholding. That value in turn is clearly dependent upon the value of what Iunderstand to be Central's sole significant asset, namely the building.[35] There are obvious issues between the parties relating to their respectivepositions regarding the finalisation of the lease agreements and the position taken inrespect of the shareholder agreement. I am mindful that Foster was unconditionallycommitted to the purchase of the building and needed to settle the purchase agreement.It was stressed before me that the execution of lease agreements was an importantprerequisite to the progression of the parties agreement to jointly own and develop thebuilding, and that in the absence of agreement being reached the project was injeopardy.[36] However, on the present state of the evidence, it is not apparent to me hownominating Central as the purchaser improved Foster's position in terms ofdischarging its obligations to purchase the building, other than having the effect ofunilaterally excluding Miyamoto. At that time the parties appeared to have still beenin discussions regarding a number of issues, and Foster already had Peterboroughavailable to it as a vehicle to settle the purchase.[37] Clearly, there are factual disputes between the parties apparent from the filedaffidavits regarding the sequence of events and the respective representations andpositions being taken by the individuals involved at relevant points in the chronology.These are likely to be clarified only after testing such evidence at trial, and from aclose examination of the communications between the parties and the documentaryrecord. It is not possible to make findings of fact in areas in which there is conflictingaffidavit evidence, and any commenting on the evidence ought to be no more extensivethan is necessary to deal with the application.10 For present purposes, however, I amsatisfied that Miyamoto has met the necessary threshold that its case is capable oftenable argument which is supported by sufficient evidence.Real risk that the property will be dissipated[38] As previously mentioned, Central submitted that it has no contractualrelationship with Miyamoto. On its face, that appears clear. Its inclusion as a namedparty arises out of the contention that it is the special purpose company that is referredto in the heads of agreement which was to have ownership of the building, or at leasteffectively performed that function pursuant to the agreement between the parties. Inany event, for present purposes, the lack of privity between Miyamoto and Central isnot determinative. As recognised by the Court of Appeal in Shaw v Narain, a freezingorder can extend to property in the name of a non-party. Central has been joined, andhas had the opportunity to present argument in opposition to its asset being subject toan injunction.11[39] No issue arises regarding the ownership of the building by Central which it hasconfirmed is currently being marketed for sale. Miyamoto submitted that thisdevelopment constitutes an active step by Central to divest itself of the building whichwill result in a reduction in the value of the company's shares, which are the subjectof its claim.[40] Miyamoto has advised that in order to ensure the value of the shares areretained, it sought assurances from Foster and Central that in the event of a sale theproceeds would be held pending the determination of its claim. However, there hasbeen no agreement to that alternate means of preserving the position.10 Shaw v Narain [1992] 2 NZLR 544 (CA).11 Shaw v Narain, above; SCF Finance Co Ltd v Masri [1985], 1 WLR 876 (CA); see also HighCourt Rules, r 32.4.[41] Central disputes that Miyamoto's claim will be rendered nugatory if Centralsells the building. It accepts that the value of its shares would diminish if the proceedsof the sale were to be disbursed to shareholders. It also acknowledges that thecompany would be obliged to act in the interests of its shareholders if that is what theyresolve to do. However, it submitted there is presently no evidential foundation thatthis would actually occur.[42] Central submitted that mere suspicion was insufficient, and that Miyamoto'sconcern that the proceeds of sale would be disbursed is speculative. It sought toemphasise that Miyamoto's action relates only to the vesting of a 25 per centshareholding in Central, which it submitted would remain unaffected by the sale of thebuilding. Clearly, however, Miyamoto's interest in the litigation is premised on theshares reflecting the present value of the company, which in turn is dependent on thevalue of its asset and its retention. It is that alleged entitlement which it seeks topreserve by freezing order.[43] Central submitted that there is no evidence of propensity on Central's part todissipate money or arrange its affairs in order to defeat any judgment Miyamoto mightobtain. Further, that the allegations made by Miyamoto that Foster's actions weredesigned to exclude it from any agreed interest in the property are denied.[44] The issue of whether the applicant has shown a real risk of dissipation turns onan assessment of the likelihood of what will occur if the building is sold and fundsbecome available for distribution to the shareholders of Central. I am satisfied that inthe event of a sale it is likely the sale proceeds will be distributed out of the company.Central, as I understand the position, has no other function but to be the legal ownerof the building, and there appears no reason why the proceeds of the sale would beretained by the company for the purpose of further investment, to be used in respectof any other operation, or meet other commitments; none have been identified.[45] The risk of the disposal of assets, however, is not of itself sufficient to invokethe freezing order jurisdiction. The Court needs to be satisfied there is a real risk thatas a result any judgment that may be obtained by the applicant will be partly or whollyunsatisfied in the absence of a freezing order being made. As I have already observed,it is not apparent that Central conducts any other business, and it appears the buildingis its only asset. There is evidence in Mr Fogany's affidavit that Foster has not tradedsince nominating Central to purchase the building at the end of September 2013. Heexpects it to be struck off the Companies Register for failing to file its annual return.It does not trade, and Mr Fonagy deposes the company has no money. It would appeartherefore that neither company would be in a position to meet any monetary awardshould Miyamoto be successful.[46] It would appear clear therefore that neither of the corporate defendants namedin this proceeding would be able to meet a prospective judgment for the value of a 25per cent shareholding in Central as valued on the basis of its ownership of the building.While Central seeks to make the point that Miyamoto is only seeking a 25 per centshareholding, Miyamoto's clear concern is that the value of that shareholding willreduce should the building be sold and the proceeds distributed. What it seeks in termsof a prospective judgment will therefore be defeated.[47] I am satisfied there is a real risk of dissipation of Central's asset in the eventof its sale, and of the likely distribution of the proceeds. The circumstances are suchthat it can properly be inferred there is a danger of the worth of any judgment in favourof Miyamoto being rendered partly or wholly unsatisfied in the absence of a freezingorder being made.Balancing the interests of the parties[48] Having regard to the wider considerations of the balance of convenience interms of whether I should exercise my discretion to make a freezing order, in my view,it favours the order being issued.[49] Miyamoto has provided an undertaking as to damages, and I am satisfied it hasthe financial resources available to it to pay any damages the Court may order as aresult of the freezing order being granted. Miyamoto is a solvent company reportedas having an annual turnover of between two and three million dollars, and is part ofa wider international network of companies, with 50 per cent of its shareholdingowned by Miyamoto International Incorporated. This is reported to be a significantengineering company, based in California, which carries out work internationally.[50] Miyamoto's statement of claim is to be the subject of a strike out applicationby Central, to be heard on 14 December next. That will necessarily involve a closerexamination of the affidavit evidence, although, as I understand the position, theoutcome of that hearing may not affect Miyamoto's claim as against Foster. As alreadyobserved, the freezing order can extend to property in the name of a non-party, as isrecognised by the High Court Rules.12[51] I have concluded that Miyamoto has a good arguable case available to it, atleast on the basis of the limited assessment that can be undertaken on the hearing ofan interlocutory application, and that Miyamoto has shown a real risk of dissipation.The effect of Central divesting itself of its major asset prior to the resolution of thecurrent proceeding would be to remove the value from the shareholding which it seeksas a remedy. In the absence of any representation of direct prejudice to Central fromsuspending or delaying the sale of the building, in respect of which I understand it hasno current offers, I am satisfied, when balancing the interests of the parties, that afreezing order should be made.12 High Court Rules, r 32.4.Orders[52] Accordingly, I make the following order:(a) A freezing order restraining 124 Central Limited from disposing of,dealing with, or diminishing the value of its asset, being a property at124 Peterborough Street (CT CB15A/1229).[53] The costs of and incidental to the application for the freezing order arereserved.Solicitors:Thomas Deway Sziranyi Letts, Lower HuttCanterbury Legal, Christchurch