Totara Properties Whangarei Ltd v Cochrane and Others

• Jurisdiction: New Zealand
• Judge: Ronald Young J
• Judgment Date: 05 July 2013
• Neutral Citation: [2013] NZCA 283
• Docket Number: CA844/2012
• Court: Court of Appeal
• Date: 05 July 2013

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

[2013] NZCA 283

Judge

Ellen France, Wild and Ronald Young JJ

CA844/2012

IN THE SUPREME COURT OF NEW ZEALAND

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.

Counsel:

A P Holgate for Appllent

A Browne for Respondent

• 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.

JUDGMENT OF THE COURT

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 within the constitution.

11 Clause 2.2 provides:

2.2

Class of Shares

The shares of the Company shall be divided into the following classes: Class A consisting of 1 share and Class B consisting of 100 shares. Both classes of shares shall enjoy the rights and be subject to the limitations conferred or imposed by the Constitution of the Company save and except as to voting powers thereof in which respect; Class A share shall entitle the holder to 300 votes at all meetings of the Company or on any resolution requiring shareholder vote. Class B shares shall entitle the holder or holders thereof to one vote per share at all meetings of the Company or on any resolution requiring shareholder vote.

12 The second appellant, Snow, also pointed to cl 2.4 as supporting the proposition that he had wide powers as director to govern and control the company.

13 Clause 2.4 provides:

2.4 While the said Alexander Reginald Cochrane or his appointee shall hold office as a permanent director the full government and control of the Company shall be vested in him or his appointee and he or his appointee (as the case may be) may exercise all the powers and authorities and discretions vested in the directors generally and notwithstanding that he or his appointee may be the sole director holding office he or his appointee may exercise all the powers of the Company which are not by statute required to be exercised by the Company in a general meeting and any minute entered in the minute book of the Company's proceedings signed by the said Alexander Reginald Cochrane or his appointee (as the case may be) shall in any matter not expressly required by statute to be done by the Company in a generally meeting have the effect of a resolution of the Company and all other directors for the time being of the Company shall be under the control of the said Alexander Reginald Cochrane or his appointee (as the case may be) whose opinion shall prevail in the event of any difference of opinion and they shall be bound to conform to his directions in regard to the Company's business and accordingly all clauses of these articles shall be read subject to this clause.

14 The appellants accept the equal sharing principle is confirmed in cls 4.1(1)(b) and 4.1(2). However, the appellants say the important aspect of these clauses is that equal dividend rights may be “negated” or “altered” by the constitution. These clauses provide as follows:

• 4.1. (1) Subject to subclause (2), a share confers on the holder-

• …

• (b) Subject to part 8 and clauses 18.4 and 18.5, the right to an equal share in dividends authorised by the board.

• …

• (2) Subject to clause 18.2 [Dividends payable pari passu], the rights specified in subclause (1) may be negated, altered, or added to by this constitution, whether in part 2 or elsewhere, or in accordance with the terms on which the share is issued under clauses 14.3 [Issue of other shares] or

• 14.4 [Shareholder approval for issue of new shares].

15 The appellants say cl 4.2(2)(b) specifically allows unequal dividends for different classes of shares and, therefore, the “right” to equal dividends is thereby negated by the constitution.

16 Clause 4.2 of the constitution provides as follows:

• 4.2. (1) Different classes of shares may be issued by the company.

  • (2) Without limiting subclause (1), shares may:

    • (a) Be redeemable within the meaning of clause 4.3 [Redeemable shares]; or

    • (b) Confer preferential rights to distributions of capital or income; or

    • (c) Confer special, limited, or conditional voting rights; or

    • (d) Not confer voting rights.

17 Finally, the appellants refer to cl 18.1(1):

18.1. (1) The board may (if it is satisfied on reasonable grounds that the company will, immediately after the distribution, satisfy the solvency test) subject to clause 18.2 [Dividends payable pari passu] and subject to any restrictions in this constitution, authorise a distribution by the company at...