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Chen & Anor v Butterfield 8: Anor Click to ogn document in a browser (1995) 7 NZCLC 251,085 High Court Christchurch, GP 30. Hearing: 5 Feb 1996:...

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Find the attached case Chen v Butterfield (1996) 7 NZCLC 96-697 

and state the facts of the case, the outcome/ finding of the court and the legal principles.

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Chen & Anor v Butterfield 8: Anor Click to ogn document in a browser (1995) 7 NZCLC 251,085
High Court Christchurch, GP 30.94.
Hearing: 5 Feb 1996: Judgment: 16 Feb 1995. . Company law— Corporate veil — Premises let to couple operating furniture business — Landlord agreeing to lease to shell
company as tenant — Premises sold — insufficient questions asked by buyer of shell company arrangement — Arrears in rent
payments, shell company wound up — New landlord seeking future rentowing to end of term — Whether tenants liable lbr
outstanding rent— Whether company's corporate vei' should be lifted. Mr and Mrs Butterfield operated a furniture shop as partners. Clydebank Holdings Ltd (Clydebank) owned premises which,
because of the level of borrowing secured against the property, it wanted to rent. The Butterfields agreed to rent the premises,
although they did not want to be exposed to any personal liability nor did they want to jeopardise their existing business.
Clydebank agreed to share some of the risk by agreeing to a company being set up as the tenant. It was clear that the company
was a shell, and that the Butterfield's business was to continue to operate as a partnership. A lease agreement was drawn up in June 1989. For two years no steps were taken to form the company. In March 1991
Clydebank sold the premises to the Chens, subject to the Chens‘ solicitors‘ approval of the lease. The solicitors for Clydebank
indicated that a formal lease would be signed. that the Butterfields were trading from the premises as partners, that a company
was to be tom-led and that the directors of the company would not be personally guaranteeing the company‘s obligations under
the lease. No questions were directed to the Butterfields. The Chens approved the company as lessee. The company was
formed, but had no bank account or employees. The lease was signed. Difficulties with payments from the Butterfields led to the
Chens winding up the company. The Chens claimed that the Butterfields personally owed $155,400, consisting of rent arrears and
the outstanding rental (ie, damages for breach of the covenant to pay) owing to the end of the term of the lease, June 1995. They
alleged that the company was a sham or facade used as a device for the Butlerfields to avoid personal liability. The Butterfields agreed that they were liable as sublessees from the company to the date of liquidation and had made some
payments to the Official Assignee as liquidatior of the company. Hold: claim dismissed. 1. There would not have been any prospect of Clydebank succeeding in piercing the corporate veil. Clydebank was fully aware
that the company was formed simply to take the lease. Incorporation was not being used to conceal the true facts, nor did it in fact
conceal the true facts. The Butterfields were perfectly entitled to say to Clydebank that they would only take the lease through a
company whose obligations they would not guarantee. 2. There was not the slightest foundation for any suggestion that the Butterfields misled the Chens. 3. The Chens who purchased the lease with the freehold were essentially the authors of their own misfortune. They chose to act
on an assumption rather than upon inquiry. They could not now complain about the existence of the corporate veil. If it was lifted
in these circumstances, the Court would be eroding the security of conventional legal structures and principles to the general
disadvantage of commerce. 4. The fact that Mr and Mrs Butterfield personally took the benefit of the lease because they had actual occupation did not alter
the fact that the true and intended lessee was the company. 5. There was no basis on which the Chens could recover what they had lost, whether it be classified as rent or damages, from the
Elutterfields personally as there was no privity of contract or privity of estate between themselves and the Elutterfields. 6. Obiter. The case was dealt with on the basis on which it was pleaded and argued, namely on the premise that Lord Keith‘s
formulation in Woolfson v Strathclyde Regronal Council 1978 SC (HL) 90 should be regarded as the test. Having considered the
somewhat different approach of the Court of Appeal in Savril v Chase Holdings (Wellington) Ltd [1989) 4 NZCLC 64,908; [1989] 1
NZLR 25?, based largely as it was on what Lord Keith said in Woolston, the “facade concealing the true facts” approach was not
entirely satisfactory. In essence the corporate veil should be lifted only if in the particular context and circumstances its presence
would create a substantial injustice which the Court simply could not countenance. (Richmond P in Re Securilibank Ltd (No 2)
[1973] 2 NZLR 136 preferred to the Court of Appeal in Savill v Chase Holdings (Wellington) Ltd [1989) 4 NZCLC 54 908', [1989] 1
NZLR 257.) T. Obiter. Even if it had othenrvise been a case for lifting the corporate veil. the Chens would have been in difficulty by dint of their
affirmation of the existence of the company after they became aware of what they regard as the true facts. If a party wished to
attempt to lift the corporate veil steps should be taken promptly after the circumstances said to give grounds to do so became
known. [Headnote by the CCH Editors]
0G Paulsen for the plaintiffs.
MJ Stewart-Wallace for the defendants.
Before: Tipping J. Tipping J: ® OCH

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Introduction This case concerns the circumstances in which the Court may lift the corporate veil. To succeed it is
necessary for the Plaintiffs, Mr and Mrs Chen, to show that is appropriate to lift the corporate veil of a
Company called Christchurch Furniture Warehouse Ltd (the Company). Thereby the Chens seek to make
the two shareholders of the Company, the Defendants Mr and Mrs Butterfield, liable for arrears of rental
in respect of premises situated in Bealey Avenue, Christchurch. Mr Butterfield was the sole director of the
Company and Mrs Butterfield was its secretary. Factual background In March or April 1989 Mr and Mrs Butterfield were operating a furniture business, as partners, from
premises in Lichfield Street. A man called O'Donnell came into the shop and suggested to Mr Butterfield that his business would suit premises which were available for lease in Bealey Avenue. Mr O'Donnell was
representing a company called Clydebank Holdings Ltd which owned those premises. A rental of $50,000.00
per annum was suggested but Mr Butterfield said that $40,000.00 per annum would be more acceptable to
him. Mr O'Donnell was concerned to have a high rental return for the property so that he could satisfy his
bank that the income from the property was high enough to sustain the level of borrowing secured against the property. Mr Butterfield informed Mr O'Donnell that he was not prepared to enter into a lease of Clydebank's premises
at the level of rental suggested if this was going to expose him to any personal liability for payment of the rent. He said that if the deal was to proceed he would form a company to be the tenant. He told Mr
O'Donnell that as far as he was concerned he was risking a perfectly good business which was operating
from adequate premises and that the shift to the Bealey Avenue property could jeopardise that business. Mr
O'Donnell agreed to share some of that risk by having a company as the tenant. Mr Butterfield said, and I
accept, that it was plain to Mr O'Donnell that the company would be simply a shell formed for the purpose of taking the lease and that the business would not be transferred to the company. The intention was that
the business should continue to be operated by Mr and Mrs Butterlield personally as partners. This is indeed
what happened. An agreement to lease was drawn up ostensibly between the Company and Clydebank. In fact at this time,
2 June 1989, the Company had not been formed but the document was treated as being an agreement on
behalf of a company to be form ed. In the document there was a provision whereby the Company, as lessee,
agreed, if required to do so by Clydebank as lessor, to obtain the personal guarantee of its directors. This
was expressly deleted on the basis that Mr Butterfield had made it clear to Mr O'Donnell that he and his wife
were not prepared to enter into any personal guarantee of the Company's obligations for rent. Matters rested
on the agreement to lease for nearly two years. No steps were taken to form the Company. On 28 March 1991 Clydebank sold the premises to the Chens. The contract of sale and purchase contained
a special condition to the effect that it was subject to and conditional upon "the purchasers' solicitors'
approval of Ihe existing lessee, rent & lease details within 5 working days Giving evidence on behalf of
the Chens their solicitor, Ms CJ \Mlkinson who had drafted the agreement for sale and purchase, indicated
that she had made enquiries of the solicitors acting for Clydebank. Amongst the material provided to her
was a copy of the agreement to lease between Clydebank and the Company. Ms Wilkinson was advised by
Clydebank's solicitors that the Buttertields had been trading from the premises in partnership but that the
intended Company was to be incorporated and a formal deed of lease would be signed before settlement.
Ms Wilkinson was also expressly advised that the directors of the Company to be formed would not
personally guarantee the Company's obligations under the deed of lease. In spite of that intimation, no enquiries were made of the Butterfrelds in relation to their own financial
circumstances or, more importantly, about the structure, capital and intended financial circumstances of the
Company which was to be the tenant. For reasons which it is not necessary to discuss, Ms Wilkinson was
nevertheless instructed to signify approval of the Company as lessee and duly did so. Ms Wilkinson deposed that it was her understanding and implicit in her discussions with the Chens'
representative, that the furniture retailing business which had been carried on by the Butterfields in
partnership would thereafter be carried on from the premises by the Company. She said that if she had been (E3 OCH

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aware that the Butterfrelds intended to carry on the business personally in partnership rather than through
the Company that factor, when coupled with the Butterfields' unwillingness to guarantee the lease, would
have been sufficient for her to decline approval of the agreement for sale and purchase on the basis that
she was not satisfied with the Company as the proposed lessee. I am bound to say, however, that nothing
which emanated from the Butterfields or from any representative of theirs gave Ms Wilkinson any reason to
think that the business was going to be transferred from the Butterfields to the Company. This was simply an
assumption which was made without enquiry and without any attempt at confirmation. The Chens' purchase from Clydebank was settled on 28 June 1991. The formal deed of lease was signed
between Clydebank and the Company the day before. The Company had been formally incorporated in the meantime. There were diffficulties over payment of the rent almost immediately. As a result Chens took
various steps including notices under s 218 of the Companies Act 1955 directed to the Company. In the
end, after various payments had been made, there remained ever increasing arrears. On 11 October 1993
the Company was wound-up on the application of the Chens. They lodged a proof of debt with the Offficial
Assignee claiming $168,379.77. This figure was reached on the basis of rental both in arrears and accruing
to the end of the term of the lease which was due to expire on 30 June 1995. This date was the expiry of the
original six year term which commenced on 1 July 1989. In the present proceedings the essential allegation which the Chens make is encapsulated in para 4 of their
statement of claim which reads: "The Company was a sham or facade used as a device by the Defendants [the Butterfields] to avoid
any personal liability that might arise as a consequence of [their] taking the lease of the premises in
their own names." Various particulars in support of that allegation were then set out. The Company's nominal share capital was
$500.00 divided into 500 $1.00 shares. It was fully paid at the outset, the shares being divided between Mr
Butterfield as to 251 and Mrs Butterfield as to 249. Mr Butterfield, with whose candour l was impressed, indicated that the Company had been formed for the
sole purpose of taking the lease. It was in a sense a shell company because it operated no business. It had
no bank account and no employees. The Butterfrelds, as partners in the business, regarded themselves as
informal sub-lessees from the Company but all payments to the landlord were made direct and this must
have been apparent to the landlords or their representatives. The Chens now say that Mr and Mrs Butterfield
should be ordered personally to pay the arrears of rent and other charges such as rates and insurance
pertaining to the lease. Those are the essential facts against which the legal issues must be determined. Legal principles There is no doubt that in some circumstances the Court can lift the corporate veil and hold shareholders of a
company liable for its obligations. The starting point, however, and this is elementary, is that a company is a
different and separate legal entity from its shareholders and officers. The most recent New Zealand decision
directly addressing the circumstances in which the corporate veil may be lifted is the decision of the Court of
Appeal in Savili v Chase Holdings (Wellington) Ltd; Savill v Concept investments Ltd (No 2) {198814 NZCLC
64 628; [1989] 1 NZLR 257. This, coincidentally, was an appeal from a judgment of my own. My decision not
to lift the corporate veil in that case was upheld and the decision of the Court of Appeal was itself upheld by
the Privy Council: see (1989) 4 NZCLC 64,908; [1989] 1 NZLR 257. The Court of Appeal (see McMullin J at
(1988) 4 NZCLC at p 64,586; [1989] 1 NZLR at p 306 and Casey J at (1988) 4 NZCLC at p 64,592; [1989] 1 NZLR at p 312) referred to the approach of Lord Keith in the House of Lords in Woolfson v Strathclyde
Regional Council 1978 SC 90 at p 96. His Lordship said: it is appropriate to pierce the corporate veil only where special circumstances exist indicating that it
is a mere facade concealing the true facts." The Court indicated that this approach accorded with its earlier decision in Secun'fibank Ltd (No 2) [1978] 2 NZLR 136 where Richmond P, following Salomon v Salomon & Co Ltd [1 897] AC 22 and Lee v Lee's Air
Fanning [1961] AC 12 had cautioned against too ready a departure from ordinary principles of company law.
I myself emphasised the same point in Bentley Poultry Farm Ltd 8. Ors v Canterbury Poultry Partners Co-
operative Ltd (No 2) [198914 NZCLC 64 780 at p 64,790. ® OCH

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In this case the corporate veil came into being during Clydebank's time. It is appropriate therefore to look first
at what the position would have been as between Clydebank and the Company. I do not think there would
have been any prospect of Clydebank succeeding in piercing the corporate veil. I am satisfied from what Mr Butterfield told me that Clydebank, through Mr O'Donnell, was fully aware that the Company was to be
formed simply to take the lease. It cannot be said for a moment that, as against Clydebank, incorporation
was either a sham or a facade. Nor can there be any suggestion that it was being used to conceal the true
facts. Nor did it in fact conceal the true facts. The evidence satisfies me that Clydebank must have known full
well the purpose for which the Company was incorporated and the consequences of that incorporation. Mr
O'Donnell was not called to suggest the contrary. A document will be a sham when it is deliberately drawn so as to give the appearance of creating legal
consequences different from those which the parties intend. If the difference is inadvertent then, of course,
it may be a case for rectification. But for the document to be a sham it is necessary that the parties have in mind legal consequence A but deliberately, for whatever reason, draw their document so as to appear to create legal consequence B. If the parties contract each intending that the liability on one side is to be
that of a company and not that of its human members, such an arrangement is neither a sham nor a facade
concealing the true facts. The document simply reflects what the parties intend and that is the end of the
matter. This, on the evidence, is undoubtedly the position as it was between the Company and Clydebank. If there is any element of complexity in this case it derives from the fact that the Chens purchased the
freehold from Clydebank and thus became the lesscrs. Do they thereby stand in any better position than
Clydebank? There is not the slightest foundation for any suggestion that the Butterfields misled the Chens. It appears that no enquiry was made of the Butterfields before the Chens satisfied themselves about the
Company as lessee. When asked to state precisely what were the true facts which the corporate veil
concealed in the present case, Mr Paulsen said that the corporate veil concealed the fact that the real tenant
was the business owned and run by Mr and Mrs Butterlield as partners. While the Chens may have assumed that the Company was to own and operate the business nothing which
the Butterfields said or did gave any foundation for that assumption. The Butterfields were perfectly entitled
to say to Clydebank that they would only take the lease through a company whose obligations they would
not guarantee. The wisdom of accepting such an arrangement was for Clydebank. The Chens were told by
Clydebank's solicitors that the Butterfields would not guarantee the Company's obligations. They elected to
proceed with the clear knowledge that they could not look to Mr and Mrs Buttertield personally for the rent
and the other lessee's obligations. They had the opportunity to make enquiry about the intended financial
structure of the Company and the business but made no such enquiry. When the corporate veil was first put in place I am, as I have said, fully satisfied that it cannot possibly be
said to have been a sham or a facade to conceal the true facts. If the corporate veil was neither a sham nor a
facade at the outset, it would be a curious case indeed it it became such at a later stage without any relevant
conduct on the part either of the Company or its officers or shareholders. I need not discuss the proposition
that the corporate veil can sometimes be lifted in cases of fraud, sharp practice and unconscionable conduct
because those possible grounds are not relied on. Mr Paulsen relied on the decision of the Labour Court in New Zealand Seamans Union fUOW& Ors v
Shipping Corporation of New Zealand Ltd(1989) 2 NZELC 96,708 per Horn CJ. That case is, however,
distinguishable because it was held that companies were being used simply as a device to avoid the
consequences of industrial awards. It was a case where the award strictly bound the parent and it was
suggested that the employer subsidiaries were not bound. Similarly the decision of the English Court of Appeal in DHN Food Distributors Ltd v London Borough of Tower Hamlets [1976] 1 WLR 852 (CA) may be thought distinguishable, dealing as it did with the question of compensation and companies in a
group. Technically the company which owned the land taken did not operate the business on the land but
nevertheless the Court held that compensation was payable for disturbance to the business. Even in spite of
the obvious justice of that conclusion in a compensation context, it is to be noted that in Wooffson Lord Keith
doubted its correctness. There is a recent English case where the Court of Appeal held that if the parties clearly intend on each
side that the contract should be with a company, and with that company alone, the corporate veil should
not be lifted: see Hilton v Piusfitle Ltd & Another [1989] 1 WLR 149. There the plaintiff landlord had let a (£3 OCH

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flat to a company with a view to enabling a shareholder and director to occupy the flat. The purpose was to
avoid creating a statutory tenancy entitled to legislative protection. The human occupant had deliberately
purchased a shell company to contract with the landlord. He refused to leave at the end of the term. The
Court of Appeal held that the transaction was perfectly genuine. The lease was not a sham because it
accorded precisely with what the parties intended. Thus the occupant had to go, there being no question of
statutory protection. Conclusions I have considered the various points carefully made by Mr Paulsen on behalf of the Chens. Neither
individually nor collectively do they persuade me that this is a case for lifting the corporate veil. The fact
that the Company was created as a shell simply to take the lease may well invite enquiry but on closer
examination it is apparent that the original parties to the lease knew and understood full well what was
happening. There was no concealment of the true facts. Nor was there any sham or facade. The Chens who purchased the lease with the freehold are, in my judgment, essentially the authors of their
own misfortune. They had the opportunity to look into the lessee's circumstances, its financial position and
all other relevant factors. They chose to act on an assumption rather than upon enquiry. They cannot now
complain at the existence of the corporate veil. If I allowed it to be lifted in these circumstances I would be
eroding the security of conventional legal structures and principles to the general disadvantage of commerce. The fact that Mr and Mrs Butterlield personally took the benefit of the lease because they had actual
occupation does not, in my judgment, alter the fact that the true and intended lessee was the Company. It is possible that if the Chens had looked into the matter they might have been able to complain about what
was in essence an informal sub-lease but that is not a point which I am called on to consider. The sub-lease
was not so informal that the Official Assignee, in conducting the liquidation of the Company, did not call on
Mr and Mrs Butterfield to pay the Company appropriate sub-rental. They have agreed that they are liable in that respect, ie as sub-lessees from the Company and have indeed made some payments. That is the
appropriate method by which Mr and Mrs Chen can receive some further payment. The Official Assignee
has in the meantime held his hand in collecting the balance of the sub-rental accrued due to the date of
liquidation because of the proceedings with which I am now concerned. The absence of any formal document of sub-lease does not matter in view of the Butterflelds'
acknowledgement of their liability for sub~rental to the Company up to the date of liquidation. Thereafter,
strictly speaking, the Chens' claim is not really for rent but for damages for breach of the covenant to pay.
The Chens were unable to re~let during the currency of the term. There is no basis upon which they can
recover what they have lost, whether it be classified as rent or damages, from the Butterlields personally,
there being no privity of contract or privity of estate between themselves and the Buttertields. Corporate veil generally I have dealt with this case on the basis on which it was pleaded and argued, namely on the premise that Lord
Keith's formulation should be regarded as the test. Both McMullln J and CaseyJ in Chase referred to Lord
Keith‘s "facade concealing the true facts" approach. However, their Honours also referred to that approach
being consistent with the earlier decision of our Court of Appeal in Re Secun'tfbank. In my judgment in Chase
| relied upon what Richmond P had said in Re Securftfbank when summarising my views about the lifting of
the corporate veil. Having reflected on the matter subsequently and considered the somewhat different approach of the Court
of Appeal in Chase, based largely as it was on what Lord Keith said in Woolfson, I respectfully suggest that
the "facade" approach is not entirely satisfactory. It involves an enquiry into the "true” facts and whether the
corporate veil conceals them. On this approach, amongst other issues, is the issue whether it must be shown
that the veil was intended to conceal the true facts or whether it is enough that it simply has that effect. I
touched on this issue in Bentley. I would prefer to go back to Richmond P's approach in Re Securflfbank
which, in my view, captures what the Court is really looking for. In essence the corporate veil should be lifted only if in the particular context and circumstances its presence
would create a substantial injustice which the Court simply cannot countenance. Whether that is so must be © OCH

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judged against the fact that corporate structures and the concept of separate corporate identity are legitimate
facets of commerce. They are firmly and deeply engrained in our commercial life. If they are genuinely and
honestly used they should not be set aside. In any event something really compelling must be shown to go
behind them. In the present case such an approach would certainly not have altered the result. As with almost any test
there will be some uncertainty and flexibility. This is inevitable but I think this approach captures the essence
of what the Court is concerned with. As I said in Chase I think that in a contractual context it will usually be
necessary to show dishonesty or at least some form of sharp practice before the corporate veil is lifted. Affirmation Even if this had otherwise been a case for lifting the corporate veil I consider the Chens would have been in
difficulty by dint of their affirmation of the existence of the Company after they became aware of what they
regard as the true facts. Quite early in the piece Mr Butterfield told the Chens' solicitors exactly what the
position was and that the Company was essentially a shell. The Chens did not then claim that the veil should
be lifted. They continued to treat the Company as a valid entity. Indeed they issued statutory notices against
it and proceeded to have it wound«up. Following that they filed a proof of debt. Although in the circumstances it is not necessary for me to explore the point further, I consider that if a party
wishes to attempt to lift the corporate veil steps should be taken promptly after the circumstances said to give
grounds to do so become known. While it may not be affirmation in the true sense, by a combination of what
one might call afiirmation and estoppel a party who knowingly treats a company as a valid legal entity can
hardly later turn round and suggest it was not. Format orders The Chens' claim is accordingly dismissed. I reserve all questions of costs. Pn'ma facie the Butterfields will
be entitled to costs, they having succeeded. Counsel may be able to agree. If there are any problems and an
order of the Court is required memoranda may be tiled. © OCH

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