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Kimbe Nivani Properties Ltd [1-11424], Re [2017] PGNC 422; N7696 (3 August 2017)

N7696

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS 777 of 2015

IN THE MATTER OF
THE COMPANIES
ACT 1997

AND:
IN THE MATTER OF
KIMBE NIVANI PROPERTIES
LIMITED [1-11424]

Waigani: Hartshorn J.
2017: 3^rd August

Application for leave pursuant to s. 143 Companies Act

Cases Cited:
Papua New Guinea Cases

Nil

Overseas Cases

He v. Chen [2014] NZCA 153
Nobilo v. Nobilo [2015] NZCA 54

Counsel:

Mr. I.R. Molloy and Mr. S. Nutley, for the Applicant
Mr. H.J. Leahy, for the Respondent

3^rd August, 2017
1. HARTSHORN J: This is a decision on a contested application for leave to be granted to the applicant, Jason Matthew Cherrett as a shareholder of Kimbe Nivani Properties Limited (KNPL), to bring proceedings in the name of and on behalf of KNPL against Nivani Limited and David John Stein. The application is made pursuant to s. 143 Companies Act.

Applicant’s claim

2. The applicant claims that Mr. Stein breached his fiduciary duty to KNPL because while he was a director of KNPL, he set up his own rival company under the same name, transferred KNPL’s assets to his own company, caused a migration of the customers and goodwill of KNPL to his company, and ostensibly continued to trade under the auspices and name of KNPL, thereby depriving KNPL of its assets, customers, goodwill and future business. Mr. Stein is also allegedly guilty of various statutory breaches as a director contrary to the Companies Act which the applicant argues, also gives rise to claims for damages against him at the suit of KNPL.

3. The applicant further claims that Nivani Ltd, the proposed second defendant, was the alter ego of Mr. Stein and the knowing participant in, and beneficiary of, his misconduct. Nivani Ltd is therefore liable with Mr. Stein for his breaches and accountable for the property and other benefits it received.

Respondent’s position

4. KNPL the respondent, contends that:

a) The proposed second defendant, Nivani Ltd, formerly Glendower Ltd, was not a shelf company and had actively traded since 1998;

b) At the material time, being 1^st November 2000, KNPL was in financial difficulty;

c) There was a commercial sale agreement at or about 1^st November 2000, for the sale of assets by KNPL to Nivani Ltd;

d) Stamp duty was assessed and paid on the sale of assets agreement. Stamp duty was assessed at the rate levied on the transfer of real property;

e) In compliance with the Companies Act, David Stein disclosed his interests in the sale of assets agreement (ss. 118 and 118(2));

f) Nivani Ltd paid KNPL in full for the assets the subject of the sale agreement;

g) There was a shareholders resolution for the sale of assets in KNPL. The sale was approved by 51% of the shareholders of KNPL;

h) The transaction was not a major transaction requiring a special shareholders resolution or 75% of the votes of eligible shareholders in KNPL.

The Law

5. Section 143 Companies Act is as follows:

“143. Derivative actions.

(1) Subject to Subsection (3), the Court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—

(a) bring proceedings in the name and on behalf of the company or any related company; or

(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.

(2) Without limiting Subsection (1), in determining whether to grant leave under that subsection, the Court shall have regard to—

(a) the likelihood of the proceedings succeeding; and

(b) the costs of the proceedings in relation to the relief likely to be obtained; and

(c) any action already taken by the company or related company to obtain relief; and

(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.

(3) Leave to bring proceedings or intervene in proceedings may be granted under Subsection (1), only where the Court is satisfied that either—

(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.

(4) Notice of the application shall be served on the company or related company.

(5) The company or related company—

(a) may appear and be heard; and

(b) shall inform the Court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.

(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.”

6. The applicant submits that on a leave application an applicant does not have, “to prove the substantive issue (for example, that a director has breached a duty). The applicant is only required to show that proceedings should be commenced. The criterion is designed to prevent frivolous claims”: Ford, Austin & Ramsay’s Principles of Corporations Law at [10.240.9].

7. Further, the applicant submits that he has the same relatively low threshold to surmount as in the case of an application for an interlocutory injunction: Swanson v. R.A. Pratt Properties Pty Ltd [2002] NSWSC 583.

8. The case and text upon which the applicant relies concern s. 237 Corporations Act 2001 (Cth), Australia. However, s. 143 Companies Act, Papua New Guinea, is almost the same as s. 165 Companies Act 1993 of New Zealand.

9. It is apparent that there is a different emphasis between s. 237 Corporations Act 2001 (Cth) on the one hand, and s. 143 Companies Act, Papua New Guinea, and s. 165 Companies Act 1993 New Zealand, on the other. In s. 237(2) the court must grant an application for leave to bring or to intervene in proceedings if five criteria are satisfied, where in s. 143 and s. 165, leave may only be granted in two scenarios, and it is mandatory for the court to have regard to four factors.

10. Notwithstanding that decisions on s. 237 Corporations Act 2001 (Cth) are persuasive in this jurisdiction, as the wording of our s.143 and s.165 Companies Act 1993 New Zealand, are almost identical, the interpretation by New Zealand Courts of s.165 is of particular relevance as to the interpretation of s.143.

Consideration

11. Pursuant to a company extract from the Registrar of Companies in evidence, the applicant is a shareholder of KNPL and therefore has standing to bring this application: s. 143(1).

12. As to s. 143(2) Companies Act, it is mandatory. In the New Zealand Court of Appeal case of He v. Chen [2014] NZCA 153, the Court said at [29] and [30] as to s.165(2), the equivalent of s.143(2) Companies Act, Papua New Guinea:

“[29] We turn to consider the main issue, namely whether leave should have been granted for the proposed derivative action as the appellant argues. Section 165 (2) provides that in exercising its discretion the court is required to have regard to:

(a) the likelihood of the proceedings succeeding:

(b) the costs of the proceedings in relation to the relief likely to be obtained:

(c) any action already taken by the company or related company to obtain relief:

(d) the interests of the company or related company in the proceedings being commenced, ....

[30] This section requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim.” It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s. 165 (2) (a). It has also consistently informed the Court’s assessment of the remaining three criteria. While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.”

Any similar action taken by KNPL

13. As to s. 143(2)(c), in this instance there is no evidence that KNPL has taken or proposes to take any action similar to that proposed by the applicant.

The likelihood of the proceedings succeeding

14. Section 143(2)(a) is, “the likelihood of the proceedings succeeding.” After considering the allegations contained in the draft statement of claim, the evidence filed in support of those allegations and the evidence filed on behalf of the respondent, David Stein does not dispute that the name of the proposed first defendant was changed to the name of Nivani Ltd by adopting the original name of KNPL and that property was transferred from KNPL to Nivani, that Nivani continued to trade under the original business name of KNPL and that the applicant and Glen Cherrett, being respectively a 49% shareholder and a director of KNPL, were not aware of these events before they occurred.

15. If David Stein’s contentions are accepted, that amongst others, the sale transaction did not require a shareholders special resolution, that the directors of KNPL have not been prosecuted for breaches of the Companies Act, that KNPL received full payment for the sale of its assets, that the sale was necessary because KNPL may not have been able to pay its debts as and when they became due, and that there was no intention to keep the sale of assets secret, there is however, no explanation for the change in the company names. I am of the view that the applicant has demonstrated at least an arguable case. Given this, I am of the view that a prudent business person would pursue the proposed proceeding.

The costs of the proceedings in relation to the relief likely to be obtained

16. Section 143(2)(b) Companies Act is, “the costs of the proceedings in relation to the relief likely to be obtained.” As was stated in He v. Chen (supra) at [55], generally, pursuant to s. 166 Companies Act 1993, New Zealand, (s. 144 Companies Act, Papua New Guinea), the costs of the proposed proceedings are to be met by the company, here KNPL, unless the court considers it unjust or inequitable for the company to bear the costs.

17. Further, it is, “.... necessary to make an assessment of the costs as against the likely benefit to address the issue of whether a prudent business person would actually pursue the proposed claim(s).” In He v. Chen (supra), the Court found in that case, that it was difficult to carry out a cost/benefit analysis as a proposed claim was not quantified and further, no precise attempt had been made to estimate the costs of the proceedings. The Court stated at [58]:

“[58] NZPIL may have an arguable (but confined) claim against Mr Chen Snr for breach of fiduciary duty, but when consideration is had to the current confused state of the pleading and the costs of the proceedings we are not at all satisfied that a reasonably prudent business person, acting in pursuit of his or her own interests, would decide to pursue the proposed claim on the information currently before the Court.”

18. The applicant submits that in this instance, a detailed analysis of the likely costs is not called for but what is called for is a cost/benefit consideration. If the costs of the proceedings are likely to exceed the likely benefit then the court would be unlikely to grant leave. In this instance, it is submitted that the claim is substantial as the proposed defendants have taken KNPL’s property, goodwill and business. The assets supposedly bought at book value were effectively obtained at “no cost”.

19. There is no indication at all from the applicant as to what constitutes “substantial”. The respondent however, submits that the amount at stake is K1,656,209. This sum relates to the sale of assets in KNPL to Nivani which was partly funded by a loan from KNPL to Nivani of K585,056.

20. If the amount of K1,656,209, being the respondent’s estimation as to what is at stake, is accepted, and if KNPL is successful in obtaining that amount, to my mind it is unlikely that legal costs would exceed one third of that amount. This is an extremely rough and general calculation but there is nothing else provided upon which the court can attempt a cost/benefit consideration. Based on this very rough calculation, I am satisfied that the prudent business person would pursue a claim on such a cost/benefit consideration.

The interests of KNPL in the proceedings being commenced

21. As to s. 143(2)(d), “the interests of the company or related company in the proceedings being commenced, continued, defended or discontinued, as the case may be.”; given my comments in regard to s. 143(2) (a), (b) and (c), I am satisfied that it is in the interests of KNPL for the proposed proceeding to be commenced as there is a likelihood that it may benefit considerably in financial terms. I am also satisfied that KNPL does not intend to bring the proposed proceeding, and it is in the interests of KNPL that the conduct of the proposed proceeding should not be left to the directors or to the determination of the shareholders as a whole.

22. Consequently, I am satisfied that the applicant is entitled to the relief that he seeks.

Orders

23. The formal orders of the Court are:

a) The relief sought in paragraphs 1 and 3 of the originating summons is granted;

b) Time is abridged.
_____________________________________________________________
Fiocco & Nutley Lawyers: Lawyers for the Applicant
Pacific Legal Group Lawyers: Lawyers for the Respondent