POUNAMU INTERNATIONAL LIMITED v RACHEL LEHEN [2014] NZHC 3394

POUNAMU INTERNATIONAL LIMITED v RACHEL LEHEN [2014] NZHC 3394 [22 December 2014]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2014-404-3307[2014] NZHC 3394UNDER the Companies Act 1993BETWEEN POUNAMU INTERNATIONALLIMITEDFirst PlaintiffLOWIE RECRUITMENT LIMITEDSecond PlaintiffAND RACHEL LEHENFirst RespondentLOWIE FATIGUE MANAGEMENTLIMITEDSecond RespondentMILLION DOLLAR IDEAS LIMITEDThird RespondentHearing: 19 December 2014Appearances: F Cuncannon for the PlaintiffsR Parmenter for the RespondentsJudgment 22 December 2014JUDGMENT OF ELLIS JThis judgment was delivered by me on 22 December 2014 at 10.30 ampursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate:.Counsel/Solicitors:F Cuncannon, Meredith Connell, AucklandR Parmenter, Barrister, Auckland[1] On Thursday 18 December the plaintiffs sought, on a without notice basis, afreezing order over the bank account of the second respondent, Lowie FatigueManagement Limited (LFML), and related orders for interim relief under s 174 of theCompanies Act 1993. All the orders sought relate to the alleged actions of the firstrespondent Ms Lehen in relation to the operation and management of LFML. MsLehen is presently the sole director of LFML and her company, Million Dollar IdeasLimited (MDIL) (the third respondent), is a 50 per cent shareholder.[2] The first applicant, Pounamu International Limited (PIL), is the other 50 percent shareholder of LFML, having acquired its shares from Lowie RecruitmentLimited (LRL) in July 2014. PIL's owners and directors are Mr Graham Lowe andMr Chalmers. It seems LFML was established essentially to operate some type ofjoint venture between MDIL and LRL, the precise terms of which are now in dispute.[3] In essence, however, it seems an arrangement was reached whereby for the firstyear or so of LFML's operation it was granted the use of LRL's support services andfacilities free of charge. As well, the company would have the benefit of the businesscontacts. The idea was that once LFML got on its feet it would be charged for theservices it received. During this establishment phase Ms Lehen was also employedby LRL. Initially, Mr Lowe and Ms Lehen were both directors of LFML.[4] The relationship between LRL/PIL and Ms Lehen took a turn for the worsewhen attempts were made to invoice LFML for the services it was receiving. MsLehen has declined to pay these invoices and, indeed, contends that they were issuedonly for tax purposes. Personal difficulties also developed between Ms Lehen and MrChalmers.[5] Then, due to ill health, Mr Lowe resigned his directorship midway through thisyear. He says that the understanding was that Mr Chalmers would then become adirector in his stead and steps were taken to formalise this. But because Ms Lehen'scompany, MDIL was a 50 per cent shareholder, Ms Lehen was able to block hisappointment, which she did. Mr Chalmers' joint authority over LFML's bank accountwas later removed by Ms Lehen.[6] Mr Lowe and Mr Chalmers are of the view that since (at least) August this yearthe affairs of LFML have been conducted by Ms Lehen in a way that is prejudicial toPIL. As well as pointing to Ms Lehen's actions in seizing control of the company (byblocking the appointment of Mr Chalmers) PIL alleges that:(a) She subsequently failed to comply with requests for information madeby PIL under s 178 of the Companies Act;(b) She has set up another company that now operates in competition withLFML.[7] It may be observed at this point that the last of these allegations would, if true,put Ms Lehen in clear breach of her Director's duties and would put her in jeopardyof a subsequent derivative action by PIL. Regardless of the outcome of the presentapplication she is therefore clearly on notice of that prospect.[8] Because it had been possible to serve the respondents during late Thursdaymorning I conducted a brief and Pickwickian hearing by telephone that afternoon.Shortly before the hearing Mr Parmenter had been briefed by the respondents but hadnot had the opportunity to get up to speed. But on the basis of the (necessarily one-sided) material that was before the Court I was satisfied that grounds for a freezingorder had been made out. More particularly, there appeared to have been a clear breachof s 178 and, in terms of the alleged breaches of s 174:(a) the existence of a disputed debt owed to LRL; and(b) Ms Lehen's refusal to provide the information to which PIL wasentitled; and(c) her apparent blocking of Mr Chalmers' appointment and his access toLFML's account; and(d) the apparent establishment by Ms Lehen of a new and similar company;all gave rise to a strong and reasonable inference that there was a risk of dissipation.I made a freezing order over LFML's account (on standard terms) accordingly.[9] At that point I also indicated my hope that Ms Lehen would be able to supplythe s 178 material overnight in order that a better informed determination of the otherorders sought could be made. I directed that there be a further telephone conferencewith me on Friday 19 December. That took place at 2.15 pm that day.[10] In the intervening period Ms Lehen swore an affidavit supplying the s 178information. That information shows that the account that had been frozen by me nowhas only about $2,000 in it. By contrast, on 21 October 2014 it containedapproximately $121,000.[11] As a result of this disclosure:(a) it was agreed (for what it is worth) that the freezing order shouldcontinue;(b) PIL no longer requires an interim order in terms of Ms Lehen's formernon-compliance with s 178; and(c) the interim order sought in relation to restoring Mr Chalmers' authorityover the bank account is also not required.[12] The only remaining issue was whether I should also make an interim orderappointing Mr Chalmers (or Mr Lowe) as a Director of LFML.[13] It is clear that where prima facie evidence of unfair prejudice exists interimorders can be made under s 174. While it seems that receivers and liquidators are quitecommonly appointed on an interim basis under the Australian and English equivalentsof s 174, the practice seems less common here.1 Moreover, Ms Cuncannon was not1 English examples include Wilton-Davies v Kirk [1998] 1 BCLC 274 Re Premier Electronics(GB) Ltd [2002] 2 BCLC 634 and Re Ravenhart Service (Holdings) Ltd [2004] 2 BCLC 376.Australian examples include South Downs Packers Pty Ltd v Beaver (1984) 8 ACLR 990 (at1001-2); Re Nerang Investments Ltd (1985) 9 ACLR 646 (at 648-9); Re Bike World(Wholesale) Ltd (1992) 6 ACSR 681 (at 684-5).able to point me to any other case in which an interim order appointing a Director hadbeen made.2 Indeed, my own research suggests that there is a case in which such anappointment was declined on the grounds that it was essentially a mandatory form ofrelief.3[14] Be all that as it may, it seems that an application for interim relief under s 174falls to be considered under the traditional two-stage test of whether there is a seriousquestion to be tried and where the balance of convenience lies.4 Consideration of thefirst limb requires consideration of the strength of the plaintiffs' claim for relief unders 174 of the Act.[15] Section 174provides:(1) A shareholder or former shareholder of a company, or any otherentitled person, who considers that the affairs of a company have been, or arebeing, or are likely to be, conducted in a manner that is, or any act or acts ofthe company have been, or are, or are likely to be, oppressive, unfairlydiscriminatory, or unfairly prejudicial to him or her in that capacity or in anyother capacity, may apply to the Court for an order under this section.(2) If, on an application under this section, the Court considers that it isjust and equitable to do so, it may make such order as it thinks fit including,without limiting the generality of this subsection, an order—(a) Requiring the company or any other person to acquire theshareholder's shares; or(b) Requiring the company or any other person to paycompensation to a person; or(c) Regulating the future conduct of the company's affairs; or(d) Altering or adding to the company's constitution; or(e) Appointing a receiver of the company; or(f) Directing the rectification of the records of the company; or(g) Putting the company into liquidation; or(h) Setting aside action taken by the company or the board inbreach of this Act or the constitution of the company.2 The appointment of receivers is one of the specific forms of relief referred to in s 174.3 Doyle v Doyle HC Wellington CP9/02, 24 April 2002.4 See for example Coleman v Lambie Assets Ltd [2013] NZHC 244 (a case in which the appointmentof an interim receiver was declined). The two stage test to which the Judge referred is a referenceto Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA) at 142.(3) No order may be made against the company or any other person undersubsection (2) of this section unless the company or that person is a party tothe proceedings in which the application is made.[16] In order to succeed in its substantive claim under s 174, PIL must show past,present, or likely future conduct in relation to the affairs of LFML which is oppressive,unfairly discriminatory, or unfairly prejudicial to them in their capacity asshareholders. The conduct must be of a kind that is in breach of a claimingshareholder's legal rights or of recognised equitable principles restraining the exerciseof majority powers.5 PIL must demonstrate, to the level of establishing that there is aserious question to be tried, the likelihood of such conduct.[17] As well, it will not be sufficient, to found a claim for relief under s 174, for theapplicants to demonstrate a lack of confidence in the management. Nor will it besufficient for the plaintiffs to assert that the way in which the company is beingmanaged may expose the company, as distinct from the shareholders, to risk or loss.Relief under s 174 is dependent on the conduct being oppressive, unfairlydiscriminatory, or unfairly prejudicial to the shareholders, not on its being detrimentalto the company. As the decision of the Court of Appeal in Latimer Holdings Ltd v SEAHoldings NZ Ltd makes clear, errors of judgment by management, inefficiencies andpoor business management without distinct elements of bad faith or self-interest,cannot amount to oppression.6[18] The difficulty in the present case is that to the extent the applicants' concernsare that the company is being mismanaged (in the sense of its business not beingpursued because Ms Lehen has set up another company in competition) that does notappear to be qualifying conduct. Moreover all shareholders would, presumably, beequally prejudiced by it. And it is perhaps relevant that MDIL itself only owns 50 percent of the LFML shares, so the present is not an orthodox minority shareholder case.To the extent that Ms Lehen needs majority support for any decisions she wishes tomake on behalf of the company, she does not have it.5 M Yovich & Sons Ltd v Yovich (2001) 9 NZCLC 262,490 at [54].6 Latimer Holdings Ltd v SEA Holdings NZ Ltd [2005] 2 NZLR 328 (CA) at [70].[19] I am prepared to assume for the purposes of this decision that, in the particularcircumstances of this case, the blocking by Ms Lehen/MDIL of the appointment of a"PIL" Director might constitute conduct that is unfairly prejudicial to PIL. I have nothad the benefit of any real argument on the point. But as a matter of fact that iscertainly what appears to have occurred.[20] Even on that assumption, however, I do not consider that the balance ofconvenience favours the grant of interim relief. Ordering either Mr Lowe or MrChalmers be appointed as a director is unlikely to achieve anything at all. Mr Loweis unwell and any appointment would no doubt be stressful for him. And therelationship between Ms Lehen and Mr Chalmers seems particularly acrimonious.The prospect of them being able to work together to advance the company's interestis most unlikely. Neither "side" has majority shareholder support. It is difficult notto conclude that they would immediately arrive at a personal and corporate impasse.[21] The above concerns are merely underscored by the fact that the Christmas andNew Year period is now upon us. To the extent that Mr Chalmers would be able torepair any damage that (the applicants say) has been done to the company's businesssuch repair is unlikely to be effected in the early weeks of 2015.[22] In my view, therefore, the appropriate course is to consider the substantives 174 application on its merits as soon as possible when the Court reopens in February.In the meantime, Ms Lehen is on very clear notice that she potentially faces legalaction for breach of her duties as the Director of LFML in the event that she has, asthe applicants contend, set up a separate business in competition with that company.[23] In summary:(a) The freezing order made by me on 18 December 2014 will continueuntil further order of the Court;(b) The applications for interim relief under s 174 of the Companies Act1993 are either not pursued or are declined.[24] The matter is to be called in the Duty Judge list in the week commencing2 February 2015.[25] Costs are reserved.____________________Rebecca Ellis J