Kyle Kyle v Huapai Enterprises Ltd

• Jurisdiction: New Zealand
• Judge: Wylie J
• Judgment Date: 10 March 2015
• Neutral Citation: [2015] NZHC 463
• Docket Number: CIV-2013-404-002685
• Court: High Court
• Date: 10 March 2015

Between

Kyle Kyle

Plaintiff

and

Huapai Enterprises Limited (In Liquidation)

First Defendant

and

Dean Barrington Benjamin Herring

Second Defendant

[2015] NZHC 463

CIV-2013-404-002685

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

Application by liquidators under s298 Companies Act 1993 (CA) (transactions for inadequate or excessive consideration with directors and certain other persons) to recover in excess of $560,000 from trustees of a director's family trust — director was one of two shareholders — following a dispute the other shareholder filed proceedings for oppressive conduct — agreement was entered into between shareholders which led to property being transferred to the trustees — Court ordered liquidation of the company — proceedings had been brought as an interlocutory application notwithstanding that substantive proceedings had been finally determined — whether it had been appropriate to bring the proceedings as an interlocutory application — whether the transfer was intended to defeat the company's creditors — whether the value of the property exceeded the value of any consideration received — if so, whether the transfer to the trustees was within s298(2) CA (classes of person to whom property disposed of) — whether the transfer was a distribution to shareholders.

Appearances:

B M Hojabri for the Liquidators

L A B Kemp for Second Defendant and for P G Reeve

No appearance by or for the Plaintiff

This judgment was delivered by Justice Wylie on 13 March 2015 at 3.00 pm Pursuant to r 11.5 of the High Court Rules

RESERVED JUDGMENT OF Wylie J

Wylie J

Introduction

1 The liquidators of the first defendant, Huapai Enterprises Limited (Huapai), seek to recover the sum of $567,816.09 from the second defendant, Dean Herring (Mr Herring), and from a Mr Peter Reeve. The application has been brought pursuant to s 298 of the Companies Act 1993.

2 The amount sought by the liquidators is said to represent the value of a property at 156F Main Road, Kumeu, Auckland, which was transferred by Huapai to Mr Herring and Mr Reeve as trustees of Mr Herring's family trust on 3 October 2013. The liquidators say that Huapai received no consideration for the transfer, and that the transfer took place within the three years preceding Huapai's liquidation.

Factual background

3 Huapai was incorporated in 1966 by the late Mr B J Herring. He built the company up over the years, and it acquired various properties in Kumeu.

4 When Mr B J Herring died IN September 2009, his shares in the company passed to his two children, Mr Herring, and his sister, Andrea. In addition, both Mr Herring and his sister were directors of Huapai. Mr Herring had been appointed a director on 9 November 2009, and his sister became a director on 18 January 2012.

5 Andrea Herring died in April 2012, and her shareholding passed to the plaintiff — Mr Kyle, as the executor of her estate. He then became a director of Huapai.

6 At the time of Mr B J Herring's death, Huapai owned two factory units situated at 156 Main Road, Kumeu. One was known as 156B, and the other as 156F. The two units were of different sizes, and they had different rent prospects. Both were unencumbered.

7 There were differences between Andrea Herring and Mr Herring in relation to their late father's estate, and Mr Kyle, in his capacity as Andrea Herring's executor, commenced proceedings against Mr Herring in May 2012. He alleged oppressive conduct by Mr Herring under s 174 of the Companies Act.

8 It was eventually agreed between Mr Kyle and Mr Herring that the property at 156B would be sold, that Andrea Herring's estate would be paid out and that Mr Herring would take a transfer of the property at 156F. It was anticipated that the property at 156B was more valuable than the property at 156F and any difference in the value of the two properties was to be adjusted when 156B was sold. A formula was put in place in this regard. Any additional cash payment due to Mr Herring was to be held in a solicitor's trust account pending resolution of the proceedings commenced by Mr Kyle. Those proceedings were to be adjourned, and the matters in dispute in those proceedings were to be submitted to arbitration. If it was ultimately determined that Mr Herring was liable to Huapai, then the monies held by the solicitor were to be applied to satisfy the resulting debt either in whole or in part. If the monies were insufficient, Mr Herrring was to be liable for the balance personally. The company was to be wound up and any resulting tax liability was to be shared equally between Mr Herring and his late sister's estate.

9 It is common ground that this agreement was recorded in an email dated 29 July 2013 sent by Mr Kyle's solicitors to Mr Herring's solicitors. It was also common ground that the agreement was intended to settle all matters in dispute between Mr Herring and his sister's estate.

10 The agreement was implemented in part:

• (a) Huapai sold 156B for $760,000. That was 87 per cent of its then Government valuation. The Government valuation of 156F was $650,000. Applying the same percentage, the value of 156F was fixed at $567,816.09.

• (b) The difference in value between the two properties was $192,183.91. Each parties' half share of the difference was $96,091.95.

• (c) Andrea Herring's estate was paid out half of the net proceeds of the sale of 156B less $96,051.95 — a total of $629,870.36.

• (d) Mr Herring placed the sum of $96,091.95 into the trust account of the independent solicitor pending resolution of the proceedings which had been brought against him by Mr Kyle.

• (e) On 20 September 2013, Mr Herring nominated himself and Mr Reeve, as trustees of the Dean Herring Trust, to take the transfer of the property at 156F from Huapai.

• (f) The property at 156F was transferred by Huapai direct to Mr Herring and Mr Reeve on 3 October 2013.

11 Mr Herring and Mr Reeve, in their capacity as trustees of the Dean Herring Trust, entered into an acknowledgement of debt in favour of Mr Herring. The acknowledgement was for the total sum attributed to the property at 156F — namely $567,816.09. Mr Herring has since forgiven the debt.

12 There is little information about the trust before the Court. A copy of the trust deed has not been made available. Mr Herring in his affidavit deposed that the beneficiaries of the trust include his children and grandchildren. He confirmed that Mr Reeve is a trustee of the trust, but not a beneficiary, and that he (Mr Herring) does not have an interest in the trust assets. Rather, Mr Herring said that he is a discretionary beneficiary of the trust.

13 I was not told what happened to the proposed arbitration, but in the event the substantive proceedings were dealt with by way of formal proof on 20 August 2014. Andrews J ordered that Huapai should be wound up, that a Mr Dalton and a Mr Kemp should be appointed as liquidators, that all of Huapai's property should be transferred to them as liquidators, and that Mr Herring should pay compensation to the liquidators in the sum of $341,973 (excluding costs). 1 This represented rental

owing in respect of the units for the period September 2009 to September 2013, rental not accounted for, and unapproved wages and drawings taken by Mr Herring

The interlocutory application

14 These proceedings have been brought by way of interlocutory application. I do not consider that that was appropriate. The substantive proceedings have been finally determined. Judgment has been given and it has not been appealed. Once a final decision has been made, the Court is, subject to certain exceptions, functus officio. 2

15 An interlocutory application is an application seeking an interlocutory order, and an interlocutory order is an order or a direction of the Court that is made or given for the purposes of a proceeding or an intended proceeding, or which concerns a matter of procedure or grants some relief ancillary to that claimed in a pleading. Once a proceeding has been finally determined, no interlocutory order can be made in the context of those proceedings. There is nothing for any order to be interlocutory to.

16 It seems to me that there should have been separate proceedings filed, or alternatively an originating application. Although an application under s 298 of the Companies Act is not expressly covered by r 19.2 in the High Court Rules, a liquidator can seek direction from the Court by way of originating application under r 19.4(a). Further leave can be sought that any proceeding not mentioned in rr 19.2 to 19.4 be commenced by way of originating application. 3

17 Neither party, however, raised this issue. Indeed, Mr Kemp, appearing for Mr Herring, was prepared to accept that the proceedings were appropriate, notwithstanding Mr Reeve is not named in the same.

18 In the circumstances, and given that I heard full argument from the parties, I am prepared to treat the application as being an originating application, and to deal

with it accordingly. Any additional filing fee is to be paid by the liquidators to the Registrar

19 The application was filed on 16 December 2014. Mr Herring filed a notice of opposition on 10 February 2015. Mr Reeve has taken no steps, but Mr Kemp confirmed that Mr Reeve was served and he entered an appearance on behalf of both Mr Herring and Mr Reeve when the matter was called before me.

20 The application is made pursuant to s 298 of the Companies Act. Relevantly, it provides as follows:

• …

• (2) Where, within the specified period, a company has disposed of a business or property, or provided services, or issued shares, to–

  • (a) a person who was, at the time of the disposition, provision, or issue, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or

    …

    the liquidator may recover from the person, relative, company, or related company, as the...