Manarangi v Blue Pacific Laundry & Drycleaners Ltd [1993] CKHC 5; Plaint 79.1987 (24 November 1993)

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BLUE PACIFIC LAUNDRY &
DRYCLEANERS (1984) LIMITED
of Rarotonga
Defendant

Counsel: Mr A.M. Manarangi for Plaintiff
Mr J. Appleby for Defendant
Mr J. McFadzien for Third Party

(1) All references to "Mr Manarangi" in this judgment are to counsel, not the Plaintiff.

(2) The Attorney-General is variously described as "third party" and "second defendant" in the record. Nothing turns on it but if indeed he has been properly joined then I believe his true status would have been that of "third party". However it seems that the proper third party should be the Cook Islands Government Property Corporation and I amend the intituling accordingly.

(3) The proceedings were brought by the Plaintiff in a representative capacity on behalf of what will be referred to as the "local shareholders", being members of families who originally owned the laundry site land.

In 1977 the Cook Islands Government entered into an agreement with a Mr Stanley Cressey and Mr David Towgood concerning the formation of a laundry and dry-cleaning business in the Cook Islands. Mr Cressey was the owner of a dry-cleaning business in New Zealand and had the expertise to convert an existing run-down laundry on the Island into an economic proposition. Mr Towgood was to be the manager in Rarotonga. The agreement was that a company would be formed in which both Mr Cressey and Mr Towgood would each hold 10,000 "A" shares with the Government, through the Cook Islands Government Property Corporation holding 10,000 "B" shares.

A special provision of the company's Articles, which are dated the 8th July 1977, provided, inter alia, that the "B" shares could be transferred at any time "to any Cook Islander ordinarily resident in the Cook Islands". There was no other restriction on the rights or disposal of "B" shares. I understand that in 1980 Mr Towgood's shares were transferred to Mr Cressey. In 1984 Cabinet approved the transfer of the "B" shares to the following local shareholders:

The Plaintiff & Kathleen Manarangi (jointly)	3,333	shares
Maria Henry	667
Louise Browne	667
Manarangi Nicholas	667
Jim Nicholas	667
Tere Mataroa	667
Nga Enoka	1,666
Rei Jack	1,666
	10,000

In February 1985 a Mr J.K. Whittle of Rarotonga acquired the 20,000 Cressey shares and about a year later transferred 10,000 of them to Mr Towgood.

At a director's meeting of the 26th February 1985 it was resolved that Messrs Whittle, Towgood and Manarangi be directors of the laundry company, with Mr Manarangi being appointed secretary; and it was at that time that the name of the company was changed by adding the year "1984". It was also resolved that all three directors were to be signatories to the company's bank account with at least two signing at the same time. The above resolutions were confirmed by special resolution on the 6th March 1985.

In September 1986 Mr Whittle left Rarotonga to live in England and it appears that for some time after that Mr Towgood and Mr Manarangi operated the company's bank account. At some stage Mr Towgood began operating the bank account alone and at a directors' meeting of the 23rd October 1987, of which Mr Manarangi was not given notice, and with Mr Whittle participating by international phone call, it was resolved that the company's bank account could be operated on the sole signature of Mr Whittle or Mr Towgood. At that meeting Mr J. Nicholas, one of the local shareholders, was appointed secretary, it being noted that Mr Manarangi had been "fired because he is illegal". The reasons behind that decision, which apparently extended to Mr Manarangi's appointment as a director, will be considered later. Thereafter Mr Towgood took complete control of the company. Requests to Mr Towgood by Mr Manarangi for information about the accounts were refused.

On the 4th December 1987 the Plaintiff issued the following proceedings against the company at which time Mr Breed was counsel for the Plaintiff:

1. An action seeking orders for specific performance requiring the company to comply with its Articles and the directors confirming resolution of the 6th March 1985 concerning payments to and withdrawals from its bank account; and generally manage its affairs in accordance with its Articles.

2. An application for an interim injunction restraining the company from acting contrary to its Articles until the substantive proceedings had been heard and determined.

3. An application pursuant to s. 168 of the Companies Act 1955 of New Zealand, as applied in the Cook Islands, for the appointment of an inspector to investigate the affairs of the company.

The applications were supported by an affidavit from Mr Manarangi in his capacity as a director of the company. He made the following main points:

1. That the bank account was not being operated in accordance with the directors' resolution in that Mr Towgood was operating as sole signatory.

2. That $108,468-00 received by the company from the Cook Islands Insurance Company between March and July 1987 for cyclone damage had not been paid into the company's account.

3. That cement to a value of $630 had been paid for by the company but used in the construction of a company employee's house.

The application to appoint an inspector was heard on the 5th December 1987. There is a dispute as to whether Mr Towgood consented to an order being made but in any event an order was made by Dillon J. and there has been no appeal against it. Mr Towgood certainly signed this resolution on the 5th December, although he now claims that that was not intended as a consent to an order pursuant to s. 168.

"1. That Mr Carr be and is hereby appointed a signatory to the Company's bank account with the European Pacific Banking Company Limited.

2. That there be no withdrawal or expenditure from the Company's account without the approval or signature of Mr M. Carr.

3. That all receipts of the Company be deposited into the Company's account with European Pacific Banking Company Limited.

4. That all moneys of and belonging to Blue Pacific Laundry & Drycleaners (1984) Limited where-ever held be uplifted and deposited with the Blue Pacific Laundry & Drycleaners (1984) Limited account with the European Pacific Banking Company Limited forthwith."

"THAT by consent of the Plaintiff and the Defendant, Mr Michael Carr be and is hereby appointed pursuant to section 168 of the Companies Act 1955 of New Zealand (as applied in the Cook Islands) as Inspector to investigate the defendant, and the defendant's interests and funds in the company known as New Era Enterprises Limited and to file in this Court and serve on the Plaintiff and the Defendant on or before the 21st day of December 1987 an interim report relating to such investigation."

The Mr Carr referred to in the order was the accounting manager of Peat Marwick in Rarotonga.

1) That the antipathy that had developed between Mr Manarangi and Mr Towgood had been unhelpful in resolving the problems that existed and resulted "in some unusual management procedures". Mr Manarangi denies antipathy but it is very clear from the record that personal problems made reasonable discussion difficult.

2) He noted that the arrangement was that the Government Corporation was to pay $1.50 per share and that indeed this had been paid. (I note that there is a receipt from the company for the plaintiff's payment of $1.50 for his 3333 shares dated the 14th March 1985.) He recommended an updating of the company's register of members.

3) He reached one conclusion which is obvious on the information available to me and which I regard as the cause of most of the problems in this case.

From the outset Mr Cressey took the view that it was his company and his alone and that the "B" shares were non-voting and non-controlling with the result that the Government Corporation and later the local shareholders had no rights whatever. He concluded, and I agree, that Mr Towgood wrongly shared this view. There was never any restriction on "B" shares other than in the operation of a standard pre-emptive clause.

4) That when Mr Towgood was told by the company's bank that it would not honour cheques bearing his sole signature he banked money and paid accounts from an account held by an associated company New Era Enterprises.

It was certainly not a wise course but Mr Carr concluded that the defendant company's financial position could still be established despite the irregularity.

5) As for the insurance recoveries, these too were paid into the New Era account and dispersed from there with a balance of $41,832 being advanced by way of loan to New Era. Mr Towgood was originally a shareholder in New Era but later became secretary only with his de facto wife remaining as a shareholder. Mr Carr saw little prospect of there being any distributable profit from New Era for a number of years.

6) He dealt with the cement purchase and he found the circumstances were such that I find it unnecessary to consider it.

"1. Passed shareholders' resolutions in the minute book nor held annual meetings to approve Annual Accounts and decide on non-appointment of an auditor.

2. Passed resolutions in the Directors' minute book, approving the accounts for submission to the shareholders.

3. Ensured that accounts have been prepared promptly by the Company's Accountant in New Zealand.

and concluded that Mr Manarangi's concerns were well founded, a conclusion with which I entirely agree.

Counsel for the Defendant presented a number of issues for determination (not all of which Mr Manarangi agreed with) which he claimed required resolution at this stage.

Whether the Plaintiff is a member of/shareholder of the Defendant and whether he has locus standi.

The Defendant's case is that the Plaintiff is not and never has been a shareholder and consequently has no authority to challenge the management of the company.

What is very clear, and was well known to Mr Cressey and later Messrs Whittle and Towgood from the outset, was that the 10,000 "B" shares held by the Cook Islands Government Property Corporation were to be transferred to local shareholders. On the 11th September 1984 Cabinet approved the transfer of the 10,000 shares to the eight local shareholders. Mr Towgood has suggested that in fact there was no such Cabinet approval, or if there was it was defective in some way. I reject that. The evidence is clear. On a date unknown in 1984 eight share transfers were executed by the Government Property Corporation and the local shareholders who subsequently paid to the company, share capital of $1 per share and a share premium of 50 cents per share. Mr Towgood has acknowledged that that money is held by the company.

Both Mr Whittle and Mr Towgood have denied that the share transfers were ever lodged with the company for registration but I am informed by counsel that in the course of preparing for trial the share transfers were found among Mr Towgood's records.

These references from the Minutes of a directors' meeting of the 26th February 1985 attended by Messrs Whittle, Towgood and Manarangi are of significance:-

"Mr Manarangi was requested to have drafted the necessary resolution giving effect to the resignation as directors of Messrs Cressey and Cressey. That resolution was to contain approvals as to the transfer of shares from Messrs Cressey and Cressey to Mr Whittle. That resolution should also note the transfer of shares from the Cook Islands Government Property Corporation to those shareholders for whom Mr Manarangi acted."

Mr Whittle reported that $1.50 would have to be paid by those shareholders for whom Mr Manarangi acted. That $1.50 would be paid to the Blue Pacific Laundry and Drycleaners (1984) Limited."

The simple fact is that Messrs Whittle and Towgood wrongly determined to frustrate, or at least delay, the formal transfer of the shares to the local shareholders by reliance on technical grounds of no merit, and regrettably their efforts have in large measure succeeded through the inaction of the Plaintiff and his advisers. This matter has been allowed to drag on for years in an unacceptable manner.

I conclude therefore that the local shareholders are shareholders of the Defendant and direct that they be registered accordingly. It may be that there are some formalities to be complied with such as the payment of duty on the transfers but that should present no problem. I further hold that the Plaintiff had the standing to bring the present proceedings.

The second issue I propose to deal with, although Mr Manarangi submitted that it was irrelevant, is this:

"Whether Mr Anthony Mark Manarangi of Rarotonga, Solicitor, is a director of the company"

This requires consideration of the reasons why, at the directors' meeting of the 23rd October 1987, it was declared that Mr Manarangi had been fired "because he was illegal". Messrs Whittle and Towgood, presumably on someone's advice, justified their purported dismissal of Mr Manarangi by reliance on s. 12 of the Crown Law Office Act, which, at the relevant time, read:

"Neither the Solicitor-General nor Crown Counsel appointed under s. 8 of this Act shall engage in private practice in the Cook Islands as a Barrister or Solicitor, or other employment, whether for any fee or reward or otherwise, during the term of his employment."

At the relevant time Mr Manarangi was not engaging "in private practice" and the question is whether his appointment as a director, for which he received no remuneration, came within the term "other employment". There is clear authority for the proposition that a director is not an "employee" of a company and to be an "employee" the director must be engaged under a contract of service. (See per Bowen L.J. in Hutton v West Cork Railway Co. 23 Ch. D. 672, and In re Lee Behrens & Co. [1932] 2 Ch. 46 at p 53.) I conclude therefore that Mr Manarangi's appointment did not breach s. 12. I will go further and say that even if it did I am not satisfied that his appointment as a director became "illegal". Perhaps the better view is that it would have been his employment as Crown counsel that was at risk.

"Provided that the Solicitor-General and Crown Counsel may with the consent of the Attorney-General act as officers of a company in which Government has a principal or majority shareholding."

I must concede that it is not clear what effect that proviso has on the present problem but I conclude that it does no more than permit the Solicitor-General or Crown Counsel to be employed by a company under a contract of service in certain circumstances.

Who should meet payment of the costs of the investigation ordered pursuant to s. 168 of the Companies Act?

When Dillon J. made the order appointing Mr Carr as Inspector on the 5th December 1987 he indicated that if, in the result, Mr Towgood was shown by the inquiry to have been at fault in the management of the company then he would pay the costs of the inquiry; and if Mr Manarangi was at fault he would pay, or if both were at fault, each would contribute. It is not clear from the Judge's minute whether his reference to "Mr Manarangi" means the Plaintiff or the solicitor but because of the view I take of the matter it is not necessary to decide the matter.

I am in no doubt whatsoever that in the circumstances brought about by Mr Towgood's high-handed conduct an investigation was fully justified. That being so, s. 174 of the Companies Act determines how the expenses of the investigation shall be defrayed and s. 174(1) (b), which applies in the present case, provides:-

"(b).....the expenses shall be defrayed by the company unless the Court directs, as it is hereby authorised to do, that they shall either be paid by the applicants or in part by the company and in part by the applicants".

Although it would not be unjust to do so, I conclude that there is no jurisdiction to order Mr Towgood to pay the expenses; and there is no justification for ordering the Plaintiff to pay.

On the 1st December 1988 Dillon J. ordered that pending determination of the issues of liability and contribution the investigation costs of $3503 were to be paid by the company. I presume this was done so no further order is necessary.

Evidence was given by a Mr Ruddell, (and indeed it was the only viva voce testimony presented to me), an employee of the company, who produced a schedule of costs claimed by the company against the Plaintiff. It is truly a remarkable document. The company's claim totals $136,866. It includes "legal fees" of $32,986 (including interest); "travel expenses" for Messrs Whittle and Towgood of $20,500. A sum of $25,000 has been claimed being 25% of Mr Towgood's salary over five years for time spent on "research, recording, interviewing, briefing and analysis etc." No evidence was given to justify any of this expenditure and Mr Appleby could not help. Mr Ruddell said he relied on Mr Towgood who simply plucked accounts out of the company records which, according to Mr Ruddell, were in such a mess that he claimed $2,750 just for the cost of preparing the schedule.

The position is that Mr Towgood was substantially the author of his own misfortune in this unfortunate and largely unnecessary case. Furthermore he appears to have involved the company in many thousands of dollars of unnecessary expenditure. He has confused his personal interest with the best interests of the company.

An ounce of goodwill and common sense could have resolved the problems years ago and it is to be hoped that that can now be done. What is really needed is the intervention of a knowledgeable and firm conciliator.

Leave is reserved to the parties to apply for further directions or to seek any necessary orders, although I hope such applications will not prove necessary.

High Court of the Cook Islands

Manarangi v Blue Pacific Laundry & Drycleaners Ltd [1993] CKHC 5; Plaint 79.1987 (24 November 1993)