TN v NK
| Jurisdiction | New Zealand |
| Judgment Date | 22 January 2013 |
| Neutral Citation | [2013] NZLCRO 3 |
| Date | 22 January 2013 |
| Docket Number | LCRO 220/2011 |
| Court | Legal Complaints Review Officer |
Concerning an application for review pursuant to section 193 of the Lawyers and Conveyancers Act 2006
And
Concerning a determination of the Canterbury-Westland Standards Committee 1
[2013] NZLCRO 3
LCRO 220/2011
Application for review of Standards Committee determination to take no further action in respect of complaint against practitioner — applicant considered practitioner's conduct had allowed fellow director and shareholder (“P”) to dismiss him as a director and unilaterally sell the company — shareholding in company was divided into voting and non–voting shares, with voting shares being held by shareholders who were qualified persons in terms of the Real Estate Agents Act 1976 — applicant was not at that time a qualified person — when relationship between applicant and P deteriorated, P was advised by practitioner that constitution allowed for resolutions to be passed in writing without the need for a meeting — P instructed practitioner to prepare necessary resolution to remove applicant as director — P then sold the assets of the company — whether Committee erred in finding practitioner's conduct did not amount to unsatisfactory conduct — whether practitioner had a conflict of interest and/or breached a duty of care to applicant.
The names and indentifying details of the parties in this decision have been changed.
TN has applied for a review of the determination pursuant to section 152(2)(c) of the Lawyers and Conveyancers Act 2006 by the Standards Committee to take no further action in respect of his complaint. He considers that NK's conduct had allowed his fellow director and shareholder to dismiss him as a director and unilaterally sell the company.
TN and TP were directors and shareholders in a real estate agency called CCE Limited.
NK's first involvement with the company was in 1993/1994 when an issue arose in connection with renewal of the Real Estate Agent's licence held by the company. As a result, the shareholding of the company was divided into voting and non-voting shares, with the voting shares being held by shareholder(s) who were qualified persons in terms of the Real Estate Agents Act 1976.
Ultimately TP and TN became the holders of an equal number of shares in the company. At that time TN was not a qualified person, but other than voting rights, the shares held by TN had all of the same rights as those held by TP.
In February 2007 the company arranged a term loan of $50,000 from ASB Bank and in August of that year it arranged a revolving credit facility of $20,000. This borrowing was guaranteed by TP, TN and his wife, and CCF Ltd which was a company owned by TN and TQ. The loans were secured over properties owned by TN and TQ and CCF Ltd but NK did not act for the company or the guarantors with regard to this borrowing.
By this time TP was operating the company's office in [town, West Coast region, South Island], while TN was operating in the office in [small town, Waimakariri District]. By October 2007 the relationship between TN and TP had deteriorated and the company was unable to pay its accounts. An injection of funding was required from the shareholders and the parties entered into negotiation.
In these negotiations both TN and TP were separately represented. Efforts to resolve matters were unsuccessful and came to a head in mid-2009 when TN paid an account due to the company's accountant out of the company funds to prevent him from proceeding to wind up the company.
On 3 July 2009 TP telephoned NK and advised him that she owned all of the voting shares in the company and wished to call a meeting to remove TN as a director of the company. NK reviewed the company's constitution and advised TP verbally that the constitution allowed for resolutions to be passed in writing without the need for a meeting.
TP then instructed NK to prepare the necessary resolution to remove TN as a director. NK attended to this and the resolution was signed by TP. A copy of the resolution was provided by NK to TN as required by the company's constitution.
Subsequently, TP sold the assets of the company and it is understood that accounting for the sale proceeds remains an issue between the parties.
TN's complaints arise out of these events.
In his letter of complaint sent in December 2010 to the New Zealand Law Society Complaints Service, TN complained that NK's actions had not been in the best interests of the company and breached a duty of care to TN. He considered that TP had been able to sell the company as a result of NK's conduct and that he had thereby been severely disadvantaged.
He also alleged that NK had a conflict of interest when TN sought assistance to resolve the differences between himself and TP in that he had previously acted for TP and her company.
After receiving the notice of the resolution terminating his appointment as director, TN contacted NK to request him to rectify the situation on the grounds that NK was aware that the shareholders were equal in responsibility, equity and ownership. In TN's view the differentiation between shares were only to meet REINZ regulations and never gave either shareholder more power within the company.
He alleged that NK had “ignored his fiduciary obligation to both directors/shareholders, breached the code of ethics due to a gross conflict of interest and [had] not only abetted the fraudulent sale of the company assets and patent … but [he had] caused [him] major health, family and financial problems which [he] felt [NK] should be held accountable for due to his conduct and actions.”
In his submissions to the Standard Committee TN also argued that NK should have advised him at the time that the constitution was entered into in 2004 to enter into a shareholders' agreement to protect him from the events which occurred. He says that NK did not do so and consequently he became “a materially inferior shareholder to
… [TP] who obtained effective control over the company by reason of her voting rights. This was not drawn to [his] attention. He [NK] should have recommended an ancillary document such as a shareholders' agreement to protect [his] rights or that both shareholders seek independent advice.”
Linked to this was TN's suggestion that NK should have made arrangements to have TN's shares converted to voting shares when he became aware that TN had become a fully qualified real estate agent.
The Standards Committee resolved that the matter should proceed to a hearing on the papers and called for submissions from the parties. Having received and considered these the Committee came to the view that it was “not credible for [NK] to say that he was only acting for the company when there is no conceivable way that both of the directors would have instructed him to prepare a resolution removing one of them from office. That being the case, the Committee concludes that NK did not have valid instructions to prepare the resolution.”
The Committee considered that it would be “unhelpful to speculate what may have happened if NK had refused to act and had instead alerted TN to the possibility of him being removed without notice as a director.”
After weighing all of the material before it, the Committee determined that “the complaint is justified and that NK ought to have refused to act on the instructions of only one director when he knew that the relationship between them was dysfunctional.” However, the Committee did not consider that by so acting NK's conduct had reached the threshold of unsatisfactory conduct.
Nevertheless, the Committee felt that the complaint was justified and resolved pursuant to section 157(2) of the Lawyers and Conveyancers Act 2006 to order that NK pay to the New Zealand Law Society the sum of $500 in respect of the expenses of and incidental to the investigation.
Although NK has not himself applied for a review of this determination, a review concerns all aspects of the Standards Committee investigation and determination and as a result, the costs order is also open to review.
In his application for review, TN noted that he did not think the Standards Committee took into account the “gross conflict of interest by NK…as he was actively solicitor for TP…and he also acted for a company TP owned named [CCG].” TN considers that NK had acted on behalf of TP and oppressed him as a co-director and shareholder.
A review hearing was held in Christchurch on 15 November 2012 with both parties being accompanied by a support person.
The two issues which required to be addressed in this review are:
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• Did NK have a conflict of interest?
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• Has NK breached a duty of care to TN?
TN alleged that NK had acted for TP in her personal capacity and on behalf of her company. NK does not deny this but states that he acted for TP and her company on matters unrelated to TN and CCE Limited. He advises that he or his firm have acted similarly for TN on unrelated matters.
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