Sheikh v Sawhney Enterprises Limited [2025] NZHC 392 (5 March 2025)

Sheikh v Sawhney Enterprises Limited [2025] NZHC 392 (5 March 2025) Home | Databases | WorldLII | Search | Feedback High Court of New Zealand Decisions You are here: NZLII >> Databases >> High Court of New Zealand Decisions >> 2025 >> [2025] NZHC 392 Database Search | Name Search | Recent Decisions | Noteup | LawCite | Download | Help Sheikh v Sawhney Enterprises Limited [2025] NZHC 392 (5 March 2025) Last Updated: 20 March 2025 IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE CIV-2023-404-2958[2025] NZHC 392 BETWEEN AZAD AHMAD SHEIKH and SAIEDAH BANO SHEIKH Plaintiffs AND SAWHNEY ENTERPRISES LIMITED First Defendant KARANVIR SAWHNEY Second Defendant Hearing: 3 March 2025 Counsel: E Taia / A M Hey for the Plaintiffs K D Puddle/ A Govind for the Second Defendant Judgment: 5 March 2025 JUDGMENT OF ASSOCIATE JUDGE BRITTAIN This judgment was delivered by me on 5 March 2025 at 12 midday. Pursuant to Rule 11.5 of the High Court Rules. ....................... Registrar/Deputy Registrar Solicitors: Franklin Law, Auckland Resolute Lawyers, Auckland SHEIKH v SAWHNEY ENTERPRISES LTD [2025] NZHC 392 [5 March 2025] Introduction [1] The plaintiffs, Mr and Mrs Sheikh, owned a property in Papatoetoe. In February 2022, they signed an agreement for sale and purchase (the contract) to sell the property to the first defendant, Sawhney Enterprises Ltd (SEL). The terms of the contract were negotiated by Mr and Mrs Sheikh’s son, Zeead Sheikh, and SEL’s sole director, the second defendant, Karanvir Sawhney (Mr Sawhney). [2] SEL failed to pay the deposit due under the contract and failed to settle. Mr and Mrs Sheikh cancelled the contract and resold the property. In this proceeding, they seek to recover the loss on the resale and related losses. They claim against SEL for breach of the contract. [3] Mr and Mrs Sheikh also claim that SEL made the contract knowing that SEL was not able to perform its contractual obligations. They allege that: (a) Mr Sawhney misrepresented that SEL had the means to settle, and they signed the contract in reliance on that misrepresentation, which was misleading and deceptive conduct by SEL and Mr Sawhney; and (b) Mr Sawhney induced SEL to breach the contract (the tort claim). [4] Mr Sawhney has applied to strike out the tort claim. The sole issue for determination is whether Mr and Mrs Sheikh’s cause of action alleging that Mr Sawhney induced SEL to breach the contract is tenable as a matter of law. Legal principles — pleadings and strike out [5] The correct approach to pleading in New Zealand was summarised by the Court of Appeal in Price Waterhouse v Fortex Group Ltd.1 In complex cases, properly drawn and particularised pleadings are an essential road map for the Court and the parties. The Court and opposite parties are entitled to be fairly informed of the essential basis of a claim or defence, and all necessary ingredients of it. A statement of claim must be sufficiently detailed to state a clear issue and inform the opposite 1 Price Waterhouse v Fortex Group Ltd CA179/98, 30 November 1998 at 17–19. party of the case to be met to enable a reasonable degree of pre-trial briefing and preparation. This requires a common-sense judgment of what the pleadings convey, in the context of the case, to a sensible legal mind. [6] Pursuant to r 15.1(1) of the High Court Rules 2016, the Court may strike out all or part of a pleading if it: (a) discloses no reasonably arguable cause of action; or (b) is likely to cause prejudice or delay; or (c) is frivolous or vexatious; or (d) is otherwise an abuse of the process of the Court. [7] The principles governing strike-out applications are summarised in the Court of Appeal decision in Attorney-General v Prince and Gardner:2 (a) A strike-out application is to proceed on the assumption that the facts pleaded in the statement of claim are true unless those pleaded facts are entirely speculative and lack any foundation. (b) It is only where, on the facts alleged in the statement of claim, however broadly they are stated, no private law claim of the kind or kinds advanced can succeed that it is appropriate to strike out the proceedings at a preliminary stage. (c) The threshold for strike-out is high. Before a proceeding may be struck out the causes of action must be so clearly untenable that they cannot possibly succeed. (d) The jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it has the requisite material. 2 Attorney-General v Prince and Gardner [1997] NZCA 349; [1998] 1 NZLR 262 (CA) at 267. (e) The fact that an application to strike out raises difficult questions of law, and requires extensive argument, does not exclude the jurisdiction. Mr and Mrs Sheikh’s pleadings [8] The first cause of action in the statement of claim dated 4 December 2023 (the claim) is an orthodox claim against SEL for breach of the contract. [9] The second cause of action alleges that SEL and Mr Sawhney, while acting in trade during the negotiation of the contract, represented that SEL had the financial means to settle the contract and that this representation was false. These allegations are interwoven with allegations that Mr Sawhney was the alter-ego of SEL and assumed personal responsibility for SEL’s performance of the contract. [10] The third and final cause of action is the tort claim. The critical allegations are confined to three paragraphs: Mr Sawhney knew that by failing to ensure that SEL was capable of complying with its obligations under the Agreement either when it entered into the Agreement, and/or when the Deposit became due for payment on the Deposit Date, and/or at the Settlement date under the Agreement, that SEL would be in breach the Agreement. Mr Sawhney engaged in conduct which induced the breach of the Agreement by SEL and that he knew that his conduct would induce the breach of the Agreement. Particulars (a) He caused SEL to enter into the Agreement and make it unconditional when he knew or should have known that SEL would not have the means to settle in accordance with the terms of the Agreement and could not perform its obligations under the Agreement. (b) He failed to ensure that SEL had the financial means to settle the Agreement or pay the Deposit at material times in accordance with the terms of the Agreement. (c) By way of the letter from Khan & Associates dated 8 December 2022, it was confirmed that SEL did not have the means to settle the Agreement, and that the Sheikhs either agreed to a reduced purchase price as well as an extension of the Settlement Date, or SEL would be placed into liquidation. Mr Sawhney failed to act in good faith and not in the best interests of SEL, and that as a director of SEL, he: (a) executed the Agreement and caused SEL to enter into the Agreement which created a substantial risk of serious loss to the Sheikhs. (b) incurred an obligation by entry into the Agreement without believing on reasonable grounds that SEL was able to perform the obligation when it was required to do so. Legal principles — inducing a breach of contract [11] Inducing a breach of contract is an intentional tort requiring deliberate conduct. A successful claim requires that:3 (a) there be a legally enforceable contract in existence; (b) the defendant engaged in conduct which in fact induced a breach of the contract; (c) the defendant knew that his or her conduct would induce the breach; and (d) the defendant’s conduct, inducing the breach, caused loss or damage to the plaintiff. [12] If all other elements of the tort are made out, pre-contractual conduct may be considered in addition to post-contractual conduct.4 [13] If a director’s deliberate actions in extricating the company from a contract are done in the best interests of the company, the director will be immune from tortious Diver v Loktronic Industries Ltd [2012] NZCA 131, [2012] 2 NZLR 388 at [30], citing OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 (HL). See also Colville v Colville [2023] NZHC 2659 at [21]; and Puka v Attorney-General [2023] NZHC 2686 at [103].4 Dargaville Farms Ltd v Webster [2017] NZHC 1790 at [42]. liability.5 However, liability may arise where the director acted in bad faith, not in the best interests of the company and outside the scope of their responsibility.6 [14] Bad faith requires something more than a lack of good faith or a director knowing and intending that their acts would amount to a breach of contract.7 Fraud or an improper motive point to a lack of bona fides.8 The bona fide enquiry relates to the director’s conduct and intention in relation to their duties owed to the company — not the claimant.9 [15] In England and Wales, the Court of Appeal confirmed there is no bright dividing line between cases where a director will and will not be found liable for inducing the company to breach a contract.10 Ultimately, it is a fact-based assessment. The key question is whether the director was properly acting to promote the success of the company, taking account of the director’s statutory duties.11 [16] In Singapore, the Court of Appeal concluded that directors should be protected from tortious liability if their acts, in their capacity as directors, are not in themselves a breach of any fiduciary or other personal legal duties owed to the company.12 [17] However, not every instance of inducing a company to breach a contract will involve a director breaching their statutory duties. Similarly, not every instance of a director breaching their statutory duties will amount to bad faith.13 5 Said v Butt [1920] 3 KB 497; Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd HC Christchurch CIV-2008-409-1406, 21 October 2009 at [27]–[33]. Cook Strait Skyferry Ltd (in rec and liq) v Dennis Thompson International Ltd [1993] 2 NZLR 72 (HC) at 78; Dargaville Farms Ltd v Webster, above n 4, at [45]; and Green Acres Franchise Group Ltd v L & K Ferrick Ltd [2021] NZHC 997 at [73].7 Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd, above n 5, at [30]. 8 Lathia v Dronsfield Bros Ltd [1987] BCLC 321 (QB) at 326. 9 Antuzis v DJ Houghton Catching Services Ltd [2019] EWHC 843 (QB) at [114], citing Ridgeway Maritime Inc v Beulah Wings Ltd [1991] 2 Lloyd’s Rep 611. 10 Northamber Plc v Genee World Ltd [2024] EWCA Civ 428 at [91]. 11 IBM United Kingdom Ltd v Lzlabs GmbH [2022] EWHC 884 (TCC) at [36]. Arthaputra v ST Microelectronics Asia Pacific Pte Ltd [2018] SGCA 17, [2018] 1 SLR 818 at [62]. Northamber Plc v Genee World Ltd, above 10, at [91]–[92], citing IBM United Kingdom Ltd v Lzlabs GmbH, above n 11, at [36]. [18] Australian authority offers limited guidance on the type of conduct that can constitute bad faith.14 [19] The position in New Zealand is largely unexplored. In Dargaville Farms Ltd v Webster, Associate Judge Bell considered that directors overpromising the number of livestock to be supplied under a contract was shabby and bad management but did not amount to bad faith.15 In Cook Strait Skyferry Ltd (in rec and liq) v Dennis Thompson International Ltd, Master Kennedy-Grant was unwilling to strike out a claim alleging a director was acting in bad faith by taking secret commissions.16 [20] A mere assertion in a pleading of a lack of bona fides is not enough. Particulars must be given.17 Analysis [21] Mr Sheikh and Zeead Sheikh have filed comprehensive affidavits in opposition to the application for strike-out, setting out the background to the transaction in detail. This is not an application by Mr Sawhney for summary judgment. The application to strike out stands or falls on the pleadings. [22] There is no doubt that the contract was legally enforceable. There is no issue taken with the form of the pleading in para 55 of the claim, which alleges that Mr Sawhney’s conduct caused Mr and Mrs Sheikh’s loss on the resale. That allegation is denied. [23] The pleadings of the elements of the tort that are criticised as inadequate are: (a) the conduct by Mr Sawhney induced SEL’s breach of the contract; (b) Mr Sawhney’s actual knowledge that his conduct would induce SEL’s breach (ought to have known is not enough); and See for example Knights Capital Group Ltd v Bajada and Associates Pty Ltd [2016] WASC 69 at [80]–[82].15 Dargaville Farms Ltd v Webster, above n 4, at [45]. 16 Cook Strait Skyferry Ltd (in rec and liq) v Dennis Thompson International Ltd, above n 6, at 78. 17 Lathia v Dronsfield Bros Ltd, above n 8, at 324. (c) Mr Sawhney’s conduct was in bad faith and not in the interests of SEL. [24] It is possible to glean the first two of these elements of the tort in the pleadings in paras 52 and 53 of the claim, partly by implication. Based on my reading of the claim and the affidavits filed by Mr Sheikh and Zeead Sheikh, and the submissions of counsel for Mr and Mrs Sheikh, my understanding of the allegations is: (a) SEL was not capable of complying with its obligations under the contract when the contract was made, when the deposit was due and when settlement was due; (b) at the time that the contract was made, Mr Sawhney knew that SEL was not capable of complying with its obligations under the contract; (c) after the contract was made, Mr Sawhney failed to ensure that SEL acquired the means to perform its obligations when they fell due; (d) Mr Sawhney’s conduct in knowingly committing SEL to a contract it could not perform, and then failing to ensure SEL subsequently acquired the means to perform it, induced SEL to breach the contract; and (e) Mr Sawhney knew that his conduct in committing SEL to a contract it could not perform, and then failing to ensure SEL subsequently acquired the means to perform it, would induce SEL to breach the contract. [25] These allegations include conduct at the time that SEL made the contract and conduct post-contract. These pleadings should be more clearly expressed. However, the thrust of the allegations is sufficiently evident so that Mr Sawhney can understand the case against him. [26] The most significant issue is whether Mr Sawhney acted in bad faith. Paragraph 54 of the claim contains the allegation that Mr Sawhney failed to act in good faith and in the interests of SEL. This allegation should have been cast as an allegation of conduct in bad faith and not in the interests of SEL. A lack of good faith is insufficient to found the tort. [27] Counsel for Mr Sawhney, Mr Puddle and Mr Govind, submitted that the pleading in para 54 appears to comprise allegations of breaches by Mr Sawhney of his duties owed to SEL under ss 135 and 136 of the Companies Act 1993 (the Act). These statutory duties relate to reckless trading and agreeing to a company incurring an obligation when a director does not believe on reasonable grounds that the company can perform the obligation. [28] Counsel argued further that these allegations are in substance an allegation that SEL’s decision to make the contract was a bad business decision, which cannot amount to bad faith in the context of a director inducing a breach of contract by the company. [29] Mr Puddle and Mr Govind submitted that an assimilation of bad faith with a breach of a director’s duties under the Act may undermine the statutory framework of liquidations and the subsequent pursuit of directors under s 301 of the Act.18 [30] The parameters of bad faith in the context of a tort claim for inducing a breach of contract have not been definitively stated by the New Zealand courts. Determining the standard of conduct required for a finding of bad faith involves policy arguments that should not be resolved on an application for strike-out, without the benefit of findings of fact. [31] It remains arguable that conduct by a director that is in breach of a director’s duties under the Act may amount to conduct that is in bad faith and not in the interests of the company, rendering the director liable for inducing a breach of contract by the company. A case-by-case approach is required. 18 See Yan v Mainzeal Property and Construction Ltd (in liq) [2023] NZSC 113, [2023] 1 NZLR 296 at [163], where the Supreme Court confirmed that s 301 allows for a post-liquidation direct claim by creditors against a company director for breaches of ss 135 and 136, for losses that they have suffered as a result of those breaches. [32] Mr and Mrs Sheikh’s claim against Mr Sawhney for inducing SEL’s breach of contract may be difficult to prove in fact, and face difficult legal issues, but it is tenable as a matter of law. [33] The courts have repeatedly cautioned against the inefficient use of resources on partial strike-outs.19 Mr Sawhney’s application is a classic example of an application for a partial strike-out which could never have disposed of the proceeding. Mr and Mrs Sheikh’s second cause of action for misleading and deceptive conduct, which includes a claim against Mr Sawhney, would proceed in any event. [34] There is little prejudice to Mr Sawhney if the third cause of action also proceeds. The second cause of action already requires SEL and Mr Sawhney to give discovery of documents relevant to SEL’s financial position and ability to perform the contract. The scope of the evidence required at trial will be much the same. [35] Mr and Mrs Sheikh’s claim requires re-pleading to make all allegations express, without reliance on implications, and to clearly separate out the allegations of: (a) the conduct by Mr Sawhney that induced SEL’s breach of the contract; (b) Mr Sawhney’s actual knowledge that his conduct would induce SEL’s breach; and (c) why Mr Sawhney’s conduct was not bona fide and in the interests of SEL. [36] Mr and Mrs Sheikh should provide further particulars of their allegations of bad faith, which appear to be limited to alleged breaches of Mr Sawhney’s duties under the Act. 19 For example, see Whitman v Airways Corp of New Zealand Ltd [1994] NZHC 1591; (1994) 8 PRNZ 155 (HC). [37] Mr Sawhney’s application to strike out the third cause of action has failed, however, the plaintiffs’ pleadings are deficient and this contributed to Mr Sawhney’s decision to apply for strike-out. [38] Costs on the interlocutory application should be fixed now. I accept the submission of counsel for Mr and Mrs Sheikh that costs should lie where they fall. Orders [39] The defendant’s application to strike out the third cause of action in the statement of claim dated 4 December 2023 is declined. [40] The plaintiffs shall file and serve an amended statement of claim by 21 March 2025, complying with the direction in [35] of this judgment and giving any further particulars of bad faith relied upon. [41] The proceeding is adjourned to Associate Judge Sussock’s next chambers list after 21 March 2025. The parties shall file a joint memorandum, or separate memoranda, three working days before the call dealing with all outstanding matters in sch 5 to the High Court Rules 2016. Associate Judge Brittain NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback URL: http://www.nzlii.org/nz/cases/NZHC/2025/392.html