Principles under Thomas v. H.W. Thomas Ltd.
In the case of Thomas v. H.W. Thomas Ltd, 1 NZLR 686 (1984), the court liberalised the application of Section 209 of the Companies Amendment Act 1980 (now section 174 of the Companies Act 1993[1]) by allowing resort to the oppression remedy without a need to prove “illegality, lack of probity or want of good faith towards the petitioner”. However, the petitioner must be able to show that the actions of the defendant are unreasonable and unfair to the end that they would cause detriment to the petitioner or frustrate his reasonable expectations from the business relationship. The court is given the discretion to determine what is “just and equitable” under all the given circumstances and weigh the interests involved in the case to suit such standard. If the court finds that the actions of the petitioner go against the standard of fair dealing and justice, then the oppression remedy must be allowed.
In short, it must be shown that: 1) the effect or object of the acts committed must lead to a condition that is oppressive, unfairly prejudicial and unfairly discriminatory; 3) the reasonable expectations of the parties are not being met and 2) the use of the remedy is just and equitable.
Applying Thomas to the Cornes case
In Cornes v. Kawerau Hotel, 8 NZCLC 261,815 (1994), the court applied the case law set by Thomas by saying that a partner who is removed from the partnership in a manner that is inconsistent with fair dealing is considered “oppressive, unfairly discriminatory or unfairly prejudicial” pursuant to section 174 of the Companies Act 1993.
I. Effects were oppressive, unfairly prejudicial and unfairly discriminatory
The effects of the actions done by Mr. Taylor and Mr. Finnigan, namely, firing Mr. Cornes as manager of the hotel, excluding him from the company as a director and ejecting him from his home were oppressive, unjustly prejudicial and unfairly discriminatory. Mr. Cornes had rights as a shareholder of the company and as the manager of the hotel and these rights had to be properly addressed in the proper manner. As a shareholder, Mr. Cornes should have been properly informed of the meetings and of the decision to remove him from the company and his home. It is of common sense that he should have been given adequate notice of company decisions, especially if they would leave him jobless and homeless. If they truly wanted him out of the business relationship, they should have just offered to buy him out of the company without deceiving him or leaving him “out in the cold”.
All these actions were resolved in irregularly held meetings of which Mr. Cornes was never given adequate notice.
In the August 14 meeting, he was not given the minimum 10-day notice that was mandated by the company’s own constitution, thereby breaching company policy. Mr. Cornes was, likewise, not informed of the nature and the purpose of the meeting, forcing him to participate in it “blind” while the other two shareholders were fully aware of the agenda. This is a highly irregular and discriminatory practice since the agenda for company meetings had always been announced in the past. Lastly, the resolution to remove Mr. Cornes and the announcement of the second meeting was passed after he had left the first meeting. This shows that the defendants had the intent to withhold the information from the petitioner, especially because it involved his removal from the company.
In the second meeting, notice was even more irregular. There was no evidence presented to show that Mr. Cornes was ever given actual notice that the second meeting was to take place, much less its purpose of removing him from the company. The only allegation presented was that a note was slipped under his flat’s door on August 22 but the alleged notice bore the date August 29 when the meeting actually took place on August 28. These acts show deceptive or dishonest motive on the part of the defendants. If the allegations are to be believed, not only did the defendants try to withhold information from Mr. Cornes, they actively misinformed him of the meeting date so that he would be unable to participate in it. These acts by both Mr. Finnigan and Mr. Taylor were contrary to fair dealing and proper business practices and they failed to respect the rights of Mr. Cornes because of a baseless suspicion of theft and pilferage.
Although it is true that a partner may be excluded from the partnership when he is no longer trusted by the rest of the group’s members, he must be given proper notice and a chance to explain himself consistent with the principles of fair play and due process. The collapse of the original and purpose or intent of the partnership will inevitably lead to its dissolution anyway. But there was no need to deceive, oppress or discriminate against Mr. Cornes in order to make him leave the company when there are proper modes of doing so.
The unfair acts done in this case were even graver than in the Thomas case where the detriment only resulted from poor management. The acts done to Mr. Cornes in this case undoubtedly fall under the definition of “oppressive, unfairly discriminatory or unfairly prejudicial” because, not only did they cause unfair detriment to the petitioner, they were also done intentionally and in bad faith. There was no evidence that Mr. Cornes was of such a threat to the other two partners that he had to be expelled from the hotel premises like a guilty criminal.
Another important point in the case has to do with the signing of the documents executed in July 23, 1997 where Mr. Cornes was not given a chance to obtain independent advice before signing the same. In retrospect, it could be inferred that there was ill-motive on the part of Mr. Finnigan to trap Mr. Cornes into signing documents that he represented to be something else. This deception led to a series of transactions in anticipation of the dissolution of the partnership. In the end, the two partners left Mr. Cornes alone to answer for certain loans made by the company. He was left in the dark in several business decisions and later, he would be to take responsibility over the liabilities that the partners should have divided among themselves.
This case is very similar to Jervis v. Edgeworth Engineering Ltd., MCLR 232 (1993) where the petitioner left the business because he anticipated that the remaining shareholders would use their combined voting power to cause him discrimination. The court allowed the use of section 209 of the old law. In this case, there was actual oppressive use of the combined voting power of Mr. Taylor and Mr. Finnigan to bully the petitioner into walking away from the business without receiving his rightful share in the fruits and the assets of the company.
Mr. Cornes was discriminated against because he was the only shareholder not given proper notice of the meetings. He was removed from his flat at such a short notice and he was left individually liable for certain company debts that he was not even aware of. These acts were deliberate and done in bad faith, if not criminal, and clearly led to a situation where Mr. Cornes was treated with discrimination, prejudice and oppression. Not only was his rights violated as a shareholder and manager of the company, he was also violated in his rights as a human being.
II. The reasonable expectations were frustrated
It was clear that Mr. Cornes had reasonable legitimate expectations from the business relationship with Mr. Taylor and Mr. Finnigan. These expectations form part of the partnership contract and should have been completely satisfied. Since he was the manager of the hotel, he had the expectation to earn income from his work and for the hotel to provide him with a home. By expelling him from the hotel and removing him from management, the other two partners not did not only frustrate these expectations but took them away in such a manner that Mr. Cornes had little chance of defending himself. His dismissal and ejection were totally premature and unnecessary. The defendants broke the law in two respects when the removed Mr. Cornes from the business. First, they failed to dismiss him from his work in accordance with employment and labour laws and second, they failed to remove him from the company as a stockholder in accordance with the Companies Act 1993. Their behavior was blatantly oppressive, prejudicial and discriminatory to the plaintiff and they frustrated every expectation that he had that he would be treated fairly and legally.
These events are reminiscent of the situation found in Lusk v. Archive Security Ltd, MCLR 176 (1991), where the original expectations of the members of the company regarding the development and future of the business have been breached. In this present case, the original company’s purpose was to own and operate a hotel. It would be Mr. Cornes task to manage the hotel while Mr. Taylor would manage his own separate liquor store. The agreement was that Mr. Cornes would keep a manager’s flat and maintain it as his home while running the day-to-day operations of the hotel while Mr. Taylor would be free to operate his liquor business in the vicinity. This was acceptable to both men and so they established their business relationship.
When Mr. Cornes was excluded from the management and participation in the business, the original purpose and intent of the parties had already collapsed and there was no more reason to continue the partnership. Nevertheless, even if the partnership had disintegrated, there was no reason to remove Mr. Cornes as director of the company since he still controlled a substantial amount of stock. Although he might have failed in his capacity as a business partner and manager, there was no reason to kick him out in his capacity as a shareholder. He was entitled to the all the rightful benefits and expectations from the company.
To end a partnership is one thing. To remove a shareholder from a company is another. The procedure for removing a director or shareholder from a company is set forth in the Companies Act 1993 and must be strictly complied with before any removal may be given legal effect. In this case, Mr. Cornes was never legally removed as a shareholder of the company due to the lack of compliance.
III. The use of the remedy is just and equitable
The oppression remedy set forth in section 174 is the most reasonable solution to the situation. The business relationship among the three partners could no longer continue as it did and the relationship had to be ended. However, it would be unwise to cause the winding up of the business itself because there was no need for it at the moment. What is “just and equitable” presupposes the balancing of the opposing interests of the party. Mr. Taylor and Mr. Finnigan had the interest of continuing the business because it was still making money while they wanted Mr. Cornes out of the business because they no longer trusted him. Mr. Cornes, on the other hand, had an interest in his fair share of the fruits and assets of the company which he helped built. Because he could no longer work with the two defendants who deliberately deceived him, he wanted to leave the company but only after he is paid the fair value of his shareholdings.
In this case, the most prudent solution would be for Mr. Cornes to leave the company subject to the payment of the fair value of his share in the assets by the remaining stockholders. In other words, Mr. Finnigan and Mr. Taylor has to buy him out of the company by paying his a reasonable and fair amount to be determined by the court. There was no need to end the business altogether just because the relationship between the defendants and the petitioner collapsed. If the defendants are able to pay Mr. Cornes, then they may be able to continue the business without him. However, if they fail to do so, Mr. Cornes would be allowed to compel the winding up of the businesses so that he may claim his proportionate share in the business assets.
Mr. Cornes was treated unfairly and must be allowed to resort to section 174 of the Companies Act 1993 to compel Mr. Finnigan and Mr. Taylor to buy him out of the company at a reasonable price if they choose to continue the business. Mr. Cornes deserves his fair share of the profits and the assets of the company and he must not be “left in the cold” just because the business relationship turned sour in the end. Accounts have to be settled and each person must be given what is due to him.
Other applications of the Thomas decision
There are many other applications of the Thomas decision that would fall short of actual fraud or bad faith. The main element to consider is the presence or absence of fair dealing. General principles of equity and fair play must be used to shed light on any situation that has deals with section 174 of the Companies Act 1993. For instance, a partner in a firm could claim the remedy if his other partners are not doing their part in the business. This is a clear case where the reasonable expectations of each individual partner are not being met because what is expected of a partner is the contribution of funds or industry in the maintenance of a business relationship.
More obvious examples would involve acts of deliberate mismanagement or any criminal activity that would invade on the rights of an individual stockholder or that of the group as a whole. Basically, what the Thomas case tells us is that if a stockholder or a partner in business organization is being treated unfairly or if his reasonable expectations from the business relationship are being frustrated, then he has the recourse of using the oppression remedy to compel the other stockholders to purchase his share in the company so that he may be free from these “oppressions”, whether they are deliberate or not.
Conclusion
The Thomas decision allowed a more liberal application of section 174 (formerly 209) by saying that evil intent on the part of the defendant need not be prove. The important thing to consider is that the petitioner suffers damage or an evil, which prompts him to leave the business relationship and sell his interests therein or to petition the court to put the company under liquidation, as the case may be. This allows the shareholders more leeway in deciding what they want to do with their investments and to walk away from a business organisation if they feel that their money is not being managed according to their legitimate expectations.
The most important element is that each shareholder is being dealt with fairly or equitably to the end that no act or omission by management will cause unexpected injury or prejudice to his investment. Essentially, section 174 is an equitable remedy that must be resorted to when all other extra-judicial remedies have been exhausted. This means that if there are other less costly and less complicated modes by which the shareholder may exit the business relation, he must resort to the same before going to court. Before the petitioner resorts to section 174, he must show to the court that he is “locked in” the company and that he is given no other option by which to protect his own interests, otherwise, coming to court would be considered premature and unnecessary.
Bibliography
Cases
Cornes v. Kawerau Hotel, 8 NZCLC 261,815 (1994)
Jervis v. Edgeworth Engineering Ltd., MCLR 232 (1993)
Lusk v. Archive Security Ltd., MCLR 176 (1991)
Thomas v. H.W. Thomas Ltd., 1 NZLR 686 (1984)
Statutes
Companies Act 1993, 1993 No. 105, Retrieved January 9, 2007, from http://www.legislation.govt.nz/libraries/contents/om_isapi.dll?clientID=87991&infobase=pal_statutes.nfo&jump=a1993-105%2fs.174&softpage=DOC#JUMPDEST_a1993-105/s.174
[1] 174 Prejudiced shareholders
(1)A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.
(2)If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a)Requiring the company or any other person to acquire the shareholder’s shares; or
(b)Requiring the company or any other person to pay compensation to a person; or
(c)Regulating the future conduct of the company’s affairs; or
(d)Altering or adding to the company’s constitution; or
(e)Appointing a receiver of the company; or
(f)Directing the rectification of the records of the company; or
(g)Putting the company into liquidation; or
(h)Setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3)No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.
