VAN VELZEN AND FOULKES AS TRUSTEES OF THE VAN VELZEN TRUST V LOLLIPOPS EDUCARE HOLDINGS LTD HC AK CIV-2013-404-000359

VAN VELZEN AND FOULKES AS TRUSTEES OF THE VAN VELZEN TRUST V LOLLIPOPS EDUCARE HOLDINGS LTD HC AK CIV-2013-404-000359 [25 January 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2013-404-000359[2013] NZHC 20BETWEEN TANIA ANN VAN VELZEN ANDDEBRA JANE FOULKES AS TRUSTEESOF THE VAN VELZEN TRUSTPlaintiffAND LOLLIPOPS EDUCARE HOLDINGSLTDFirst DefendantAND ASCOT HOLDINGS (2011) LTDSecond DefendantHearing: 25 January 2013 (by telephone)Appearances: P J McPherson for DefendantsI M Hutcheson for PlaintiffJudgment: 25 January 2013Reasons: 25 January 2013REASONS FOR JUDGMENT OF VENNING JThis judgment was delivered by me on 25 January 2013 at 5.30 pm, pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateSolicitors: I M Hutcheson, AucklandHesketh Henry, Auckland[1] This file is before the Court this afternoon on the plaintiffs' application forinterim relief. Mr McPherson appears for the defendants who have been served on a Pickwick basis.Procedural issues[2] Bambino Investments Limited (Bambino) and Lollipops Educare (Ellerslie) Limited (Lollipops (Ellerslie)) purported to commence proceedings on 10 December 2012 (CIV-2012-404-7389) seeking various forms of substantive injunctive relief. They also sought interim relief against the defendants to those proceedings. Bambino and Lollipops (Ellerslie) also sought orders granting them leave to commence proceedings by way of derivative action.[3] The matter was referred to Peters J on 12 December 2012. Peters J noted that an application to commence a derivative action pursuant to s 165 Companies Act 1993 must be made in the name of its shareholder or director. The application was defective. Without leave the proceedings could not be pursued by the plaintiff companies.[4] By response, and in the same proceedings, Ms van Velzen purported to file an application on notice seeking leave to commence proceedings by way of derivative action.[5] The matter was referred to Asher J on 17 December 2012. The Judge directed the application be served and noted that if there was to be an urgent interim injunction hearing a separate application should be filed. The application for leave to commence a derivative proceeding has been served and has been allocated a date of 11 February 2013 in the Duty Judge list.[6] On 21 January 2013 the plaintiffs filed a second affidavit of Ms van Velzen together with an affidavit of Mr Neighbours and further affidavits confirming service of the application to commence proceedings by way of derivative action.[7] On 22 January 2013 the file was referred to me as duty Judge.[8] The affidavits of Ms van Velzen and Mr Neighbours were directed at obtaining orders preventing Lollipops Educare Ltd, Lollipops Educare Holdings Ltd, and Ascot Holdings (2011) Ltd from commencing the operation of a Lollipops daycare childcare centre at 45 Ascot Avenue, Remuera pending further order of the Court.[9] Having reviewed the file I issued a minute on 22 January 2013 pointing out certain defects with the application and proceeding.[10] The application for leave to commence derivative proceedings under s 165 should have been filed under r 18.1 as a separate proceeding rather than as an application in the existing proceeding.[11] Further, I noted that the amended application for injunctive relief was pursued in the name of Bambino and Lollipops (Ellerslie) but that until an order was made (in what should have been the separate derivative proceeding) granting leave for Ms van Velzen to bring the proceedings there was no jurisdiction to make the orders sought.Present proceedings[12] The plaintiff's legal advisors have now filed this separate set of proceedings, CIV-2013-404-359. The plaintiff is Ms van Velzen and Ms Foulkes, as trustees of the van Velzen Trust, the major shareholders in Bambino.[13] The plaintiffs seek orders in these proceedings granting relief by way of interim injunction directing Lollipops Educare Holdings and Ascot Holdings (2011) to refrain from commencing the operation of a Lollipops Educare Childcare Centre at 45 Ascot Avenue, Remuera. Mr Hutcheson confirmed that the plaintiffs do not rely on the franchise agreement but rather rely on the provisions of a shareholders agreement between Bambino, Lollipops Educare Holdings and the plaintiffs.[14] The plaintiffs rely on clause 2 of the agreement in particular:2. Ongoing ArrangementsMain Operating Objectives2.1 The parties agree that the Business is to be profitably operated and grown with the objectives of:a. maximising (subject to prudent and reasonable financial constraints) opportunities in the Business which become available in order to maximise Shareholder wealth; andb. sharing the benefits of wealth creation by the Company amongst the Shareholders, proportionate to their shareholdings,and the provisions of this agreement shall be read and construed subject to this clause 2.1.Parties' Obligations2.2 Each party shall use its best endeavours to achieve the objectives stated in clause 2.1 and in the utmost good faith perform and ensure the Company performs, its obligations under this agreement.[15] Mr Hutcheson says that the defendants' intention to open a childcare centrewhich may compete with Bambino is in breach of clause 2. He submits that damages will be difficult to assess so that the balance of convenience favours the status quo. He seeks the injunction on behalf of the plaintiff.[16] The first issue is whether the plaintiff can establish a serious question to betried. Clause 2 does not prevent the defendants from establishing or operating otherchildcare centres. I consider there to be considerable force in Mr McPherson'ssubmission that the shareholders agreement must be read with the terms of thefranchise agreement as well. The franchise agreement between Lollipops Educareand Bambino contemplates that Lollipops Educare may franchise other childcarecentres provided they are not within a two kilometre radius of the business ofBambino. The business of Lollipops Educare is the establishment and franchising ofchildcare centres. In the circumstances, and absent an express condition to thateffect in the shareholders' agreement it will be difficult for the plaintiff to imply acondition into clause 2 preventing Lollipops Holdings, which holds 100% of theshares in Lollipops Educare, or Lollipops Educare from establishing other childcarebusinesses. The plaintiff fails to satisfy the Court that there is a serious question tobe tried that clause 2 of the shareholders' agreement prevents the defendants fromestablishing other childcare centres.[17] In relation to the breach of the franchise agreement alleged in the other proceedings Mr McPherson notes his instructions are that the Ascot Centre is not within the two kilometre radius and that the centre is not to be branded as a Lollipops Centre. He also notes that his instructions are that the Ascot Centre is due to open on Tuesday next with three children.Balance of convenience[18] In any event on the balance of convenience I do not accept Mr Hutcheson'ssubmission that damages will be difficult to assess in this case.[19] The cause of action now identified by Mr Hutcheson during submissions is essentially a breach of a best faith fiduciary obligation. The remedy for such breach is to strip the defendant of profits. It should be relatively straightforward to assess the profits of the defendant in the event the plaintiff ultimately succeeds.[20] The damages will also only be apparent over time. The need for urgency is not established. The centre will only have three children when it opens next week.[21] There is no suggestion the defendants will not be able to pay damages.[22] In the circumstances I decline the application for interim relief.Costs[23] I reserve the issue of costs.Review[24] For management purposes this file is to be called with the other file CIV- 2012-404-7389.__________________________ Venning J