Totara Properties Whangarei Ltd v Cochrane and Others

CourtCourt of Appeal
Docket NumberCA844/2012
JudgeRonald Young J
Judgment Date05 Jul 2013
JurisdictionNew Zealand
Neutral Citation[2013] NZCA 283

[2013] NZCA 283

IN THE SUPREME COURT OF NEW ZEALAND

Judge

Ellen France, Wild and Ronald Young JJ

CA844/2012

BETWEEN
Totara Properties Whangarei Limited
First Appellant
Alexander Reginald Cochrane
Second Appellant
and
Grant Alexander Cochrane, Noel Brent Cochrane and Larry Peter Cochrane
First Respondents
Alexander Reginald Cochrane, Maq Trustees 2011 Limited and Mac Trustee Services Limited as Trustees of the Snow Cochrane No 1 Trust and Maree Joyce Cochrane, Maq Trustees 2011 Limited and Sharee Mildred Cochrane as Trustees of the Maree Cochrane No 1 Trust
Second Respondents
Counsel:

A P Holgate for Appllent

A Browne for Respondent

Appeal against a High Court decision that a company constitution provided that all shareholders had a right to share equally in any share distribution — company consisted of class A and class B shares — second appellant, controlling director, caused company to pay dividend to himself as class A shareholder but none to class B shareholders — whether the constitution authorised unequal distribution of dividends between the classes of shares — whether a provision could be implied into the constitution to authorise unequal distribution of dividends — whether second appellant (rather than company) ought to meet the costs of the appeal personally if appeal unsuccessful.

The issues were: whether the constitution of the company authorised the unequal distribution of dividends between classes of shares; whether a provision could be implied in the constitution that authorised unequal distribution of dividends; and whether the second appellant ought to meet the costs of the appeal personally if the appeal was unsuccessful.

Held: The company's constitution did not authorise the unequal distribution of dividends between classes of shares. Clause 2.2 of the constitution divided the shareholding of the company into A and B shares and provided that the shares enjoy equal rights “save and except as to voting powers”. The clause therefore did not authorise unequal dividends but required equal rights for each share except voting rights.

The other relevant clauses in the constitution all mirrored provisions in the Companies Act 1993. Clause 2.4 was concerned with directorial powers. It did not authorise S as the controlling director to approve unequal divided sharing in the absence of authority in Totara's constitution. Clause 4.1(1)(b) specifically dealt with dividend rights for each share and confirmed equal rights. In addition, cl 4.4 clearly provided that the company could not take action that affected the rights attached to shares unless that action was approved by a special resolution of each interest group. This reinforced that S could not unilaterally affect the rights of equal sharing of dividends attached to the class B shares without the agreement of the holders of those shares.

S submitted that cl 18.1(1) of the constitution allowed S as the “board” to authorise the payment of a dividend to any shareholder he chose. S said this provision therefore authorised his payment to himself (as the only class A shareholder) without an equivalent payment to the other shareholders. Clause 18.1(1) was subject to restrictions in the constitution. Clauses 4.1 and 4.2 made it clear that there was to be equal sharing of dividends between shareholders. These were restrictions on the board's authority to pay a dividend to any shareholder it thought fit under cl 18.1(1) and therefore restricted the scope of cl 18.1(1). Unequal payment of dividends was therefore not authorised by cl 18.1(1) of the constitution.

The constitution of the company expressed the general principle that shareholders were to share equally in any distributions by Totara. There was nothing in the constitution which provided for unequal sharing of dividends. The only unequal arrangements identified in Totara's constitution were the voting arrangements as between the class A and class B shares.

The drafters of Totara's constitution clearly provided for unequal rights between class A and class B shares in voting power but did not expressly include a provision for unequal sharing of dividends. In those circumstances, the prerequisites for consideration of an implied term in a company constitution did not exist.

By analogy with costs award decisions in derivative actions, a company need not bear the costs of litigation pursued for the benefit of one of the company's directors and/or shareholders as opposed to the company's interests. The costs enquiry focussed on the motive of the litigant who caused the proceeding to be brought in the name of the company. Where the true interest in the benefit of the litigation was an individual shareholder(s) rather than the company, then the shareholder would need to meet the costs.

Also relevant was the approach to costs in shareholder prejudice cases where a similar principle regarding costs had been developed. Where the true interest in the benefit of the litigation was an individual shareholder(s) rather than the company, then the shareholders should meet the costs.

If costs were calculated on the basis of entitlement to dividends declared by Totara, then the first respondents were correct in submitting that they would effectively bear 60/101ths of any costs order made against Totara. That would be unfair to them, as it would have the effect that they would have to meet 59.4 per cent of a costs order that was intended to be in their favour.

However the judgment in the HC arose from the first respondents' challenge. All parties benefited from the HC judgment, including the company as an important question on the interpretation of the constitution of Totara was resolved by the HC judgment. It had been appropriate to order costs jointly and severally against S and Totara.

However, the present appeal was intended to benefit solely S rather than clear up any remaining ambiguity or uncertainty in Totara's constitution. The appeal was for the benefit of S as the controlling shareholder of Totara and therefore, it would be unfair for Totara's funds to be expended in meeting the costs of the appeal.

Appeal dismissed. Costs awarded against second appellant alone

JUDGMENT OF THE COURT
  • A The appeal is dismissed.

  • B The second appellant must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.

REASONS OF THE COURT

(Given by Ronald Young J)

Introduction
1

“Snow” (the second appellant) and Maree Cochrane have four children, Sharee, Larry, Noel and Grant. Totara Properties Whangarei Ltd (Totara) was incorporated in 1973. It owns a working forest at Poroti. Prior to June 2011 Totara had one class A share owned by Snow and 100 class B shares divided equally (20 each) between Maree and the four children.

2

The class A share by Totara's constitution had 300 votes; the class B shares, one vote per share. The three boys, Grant, Noel and Larry issued proceedings in the High Court against Totara, their father Snow and trustees of the various family trusts arising from the way in which Totara has been managed.

3

Part of these proceedings allege that Snow caused Totara to pay a dividend to himself (as the class A shareholder) but none to the holders of the class B shares. Grant, Noel and Larry allege that this was contrary to the company's constitution and the Companies Act 1993. The High Court ordered the lawfulness of this payment be decided before the other issues in the proceedings. 1 The facts were agreed, the issue between the parties was one of interpretation of the constitution. In the High Court Lang J concluded that the constitution of Totara prevented it from paying a dividend to the class A shareholders without the class B shareholders sharing equally in the dividend. 2

4

The appellants challenge this conclusion. They submit a correct interpretation of the constitution would allow unequal dividends between share classes, or if it did not, such a provision should be implied into the constitution.

The High Court judgment
5

The Judge concluded that the proper interpretation of Totara's constitution meant that all shareholders had a right to share equally in any share distribution. His Honour considered the wording of cl 2.2 of the constitution was determinative. 3

That clause preserved equal rights attaching to all shares except voting rights. His Honour said cl 4.1(1)(b) confirmed the right of all shares to share equally in any authorised distribution. 4

6

Finally, his Honour concluded that cl 18.1 did not authorise such unequal sharing of dividends because it was subject to cls 2. 2 and 4.1(1)(b) which specifically required equal sharing. 5

7

However, the appellants say that if Totara's right to declare a dividend in favour of class A shares alone is not readily apparent, then it is a term capable of ready implication through the constitution itself.

8

The parties agree that the issue for this Court is:

Under the terms of the constitution and the Companies Act 1993 is the company lawfully entitled to pay a dividend in respect of the class A share only and not pay any dividend in respect of the class B shares?

The appellants' case
9

The appellants' case begins with s 52(1) of the Companies Act which they submit authorises any form of distribution by the company including to any shareholders it thinks fit. Section 52(1) provides as follows:

  • Board may authorise distributions

  • (1) The board of a company that is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test may, subject to section 53 of this Act and the constitution of the company, authorise a distribution by the company at a time, and of an amount, and to any shareholders it thinks fit.

10

As to the constitution, (to which s 52(1) is subject) the appellants say that while cl 2.2 expresses the principle of equal rights between classes of shares, this in turn is subject to other limitations...

To continue reading

Request your trial