Beverley v DC One H1 Limited
[2024] NZHC 1303
•23 May 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2022-485-157
[2024] NZHC 1303
BETWEEN ANTHONY AND WENDY BEVERLEY & ORS
PlaintiffsAND
DC ONE H1 LIMITED & ORS
Defendants
CIV-2023-485-47 BETWEEN
DRYLANDCARBON GP ONE LIMITED & ORS
Plaintiffs
AND
WILLIAM JAMES WATERHOUSE LECKIE & ORS
Defendants
CIV-2024-485-152 BETWEEN
PHEASANT TAIL HOLDINGS LIMITED
Plaintiff
AND
ANTHONY MONTGOMERY BEVERLEY & ORS
Defendants
Hearing: 15 May 2024 Counsel:
M G Colson KC and M R M Gale for Plaintiffs (CIV-2022-485- 157 and CIV-2023-485-47) and for Defendants (CIV-2024-485- 152)
A S Olney and O C Gascoigne for Defendants (CIV-2022-485-157 and CIV-2023-485-47) and for Plaintiff (CIV-2024-485-152)
Judgment:
23 May 2024
JUDGMENT OF RADICH J
BEVERLEY v DC ONE H1 LTD [2024] NZHC 1303 [23 May 2024]
[1] Mr and Mrs Beverley, in their own names (in CIV-2022-485-157) and through a derivative action (in CIV-2023-485-47) bring claims against Mr Leckie and Mr Morrison, and entities associated with them, relating to the alleged diversion of corporate opportunities.
[2] Now, Mr Leckie and Mr Morrison, through their company Pheasant Tail Holdings Ltd, bring proceedings against Mr and Mrs Beverley, and a company with which they are all associated (in CIV-2024-485-152). They apply for it to be heard at the same time as the other proceedings. The Beverleys say that it should not be heard at the same time because it should not be heard at all. It is, it is said, an abuse of process.
[3] This decision considers whether the new proceeding should proceed and, if so, whether it should be joined with the existing proceedings.
The factual background and the three proceedings it has given rise to
The underlying factual background
[4] The factual background to the three proceedings is described in my decision in Drylandcarbon GP One Ltd v Leckie, issued last week.1 For the purposes of this decision, it can be summarised again in the following way: Anthony Beverley, William Leckie and Christopher Morrison established a carbon afforestation fund to produce carbon credits for the fund’s investors (the Drylandcarbon venture).
[5] They established Drylandcarbon GP One Ltd (the General Partner), Drylandcarbon One Management Ltd (the Manager) and DC One H1 Ltd (H1) for that purpose (together, the Drylandcarbon companies).
[6] H1 is the holding company for the other Drylandcarbon companies and is owned as to 50 per cent by Mr and Mrs Beverley and as to 50 per cent by Pheasant Tail Holdings Ltd, a company in which Messrs Leckie and Morrison are directors and shareholders.
1 Drylandcarbon GP One Ltd v Leckie [2024] NZHC 1239.
[7] Messrs Leckie and Morrison established another fund, through Lewis Tucker Forest Partners Ltd, Lewis Tucker FP Investment Ltd, Forest Partners GP Ltd and Lewis Tucker FP Management Ltd (the Forest Partners venture) with a similar purpose. It is alleged by the Beverleys that, in doing so, a corporate opportunity belonging to the Drylandcarbon companies was diverted.
The Beverley proceeding
[8] The Beverley proceeding (CIV-2022-485-157) is a claim under s 174 of the Companies Act 1993. It is alleged that Messrs Leckie and Morrison, through H1, acted in an oppressive, discriminatory and prejudicial manner in diverting a business opportunity from the Drylandcarbon venture in establishing the Forest Partners venture and in removing Mr Beverley as a director from the Drylandcarbon companies.
[9] The Beverleys seek declarations about Mr Beverley’s removal as a director of the Manager and General Partner, orders requiring the reinstatement of Mr Beverley as a director or the purchase of his interests or requiring the sale or receivership or liquidation of the Drylandcarbon companies, together with orders preventing Messrs Leckie and Morrison from proceeding with the Forest Partners venture.
The Drylandcarbon proceeding
[10] In November last year, the Court of Appeal upheld a decision of the High Court in which the Beverleys were granted leave under s 165 of the Companies Act to bring this proceeding on behalf of the Drylandcarbon companies.2 In broad terms, it alleges that Messrs Leckie and Morrison unlawfully misused company information and diverted a corporate opportunity belonging to the Drylandcarbon companies such as to breach statutory and fiduciary duties owed to the Drylandcarbon companies. Causes of action are advanced for a breach of the duty of good faith under s 131 of the Companies Act, misuse of corporate information under s 145, breach of the duty of loyalty in failing to act with due care, diligence and skill under s 137 and a breach of
2 Leckie v Beverley [2023] NZCA 570 [Derivative action Court of Appeal decision] upholding the decision of the High Court in Beverley v Drylandcarbon GP One Ltd [2023] NZHC 3606.
fiduciary duty in allegedly preferring their own interests to those of the Drylandcarbon companies.
[11] It is said that the first to eighth defendants assisted in the process, dishonestly, and breached obligations of confidence. And it is alleged that Lewis Tucker and Company Ltd breached a management services agreement between it and the Manager. The Drylandcarbon companies seek damages, an account of profits and declarations as to a constructive trust.
The Pheasant Tail proceeding
[12] Pheasant Tail Holdings, in which Messrs Leckie and Morrison are the shareholders and directors, allege that, in their carriage of the Drylandcarbon proceeding, the Beverleys have caused the affairs of the Drylandcarbon companies to be conducted in an oppressive and unfair manner in terms of s 174 of the Companies Act.
[13] Because it is this proceeding that Pheasant Tail seeks to combine with the other proceedings – and which the Beverleys say should be struck out altogether – the allegations here are considered in a little detail.
The alleged duties
[14]Three primary underlying duties are alleged:
(a)That Mr Beverley, as a party to the Drylandcarbon joint venture, owes an obligation of good faith to Messrs Leckie and Morrison as shareholders of Pheasant Tail Holdings (the duty to Messrs Leckie and Morrison).
(b)That Mr Beverley, as a director of H1, owes a fiduciary duty to H1 – in which Pheasant Tail Holdings has a 50 per cent interest (the duty to H1).
(c)That Mr and Mrs Beverley, in pursuing the derivative action in the Drylandcarbon proceeding, owe a fiduciary duty to the Drylandcarbon companies and to their shareholders to act properly and in the best interests of the Drylandcarbon companies (the duty to the Drylandcarbon companies).
The alleged breaches
[15]Three primary breaches are alleged:
(a)It is said that Mr Beverley breached the duty to Messrs Leckie and Morrison and the duty to H1 in seeking leave to bring the derivative action on a premise that was known to be false. The allegedly false premise is that the Drylandcarbon companies had rights to “company information” that were sufficient to restrain the use of that information by Mr Beverley, Mr Leckie or Mr Morrison in subsequent ventures (the company information breach).
(b)That Mr Beverley breached the duty to Messrs Leckie and Morrison, the duty to H1 and the duty to the Drylandcarbon companies in seeking leave to bring the Drylandcarbon proceeding without disclosing that he had conducted himself in such a way as to show that he did not believe that the Drylandcarbon companies had the rights to the “company information” and that, rather, he believed that any of him, Mr Leckie or Mr Morrison could pursue a new carbon afforestation fund in their individual capacities (the failure to disclose breach).
(c)That the Beverleys breached the duty to Messrs Leckie and Morrison, the duty to H1 and the duty to the Drylandcarbon companies, in seeking the costs order under s 166 of the Companies Act in the Drylandcarbon proceedings on the premise that the Drylandcarbon companies were in a financial position to meet the costs of the Drylandcarbon proceeding when he knew that:
(i)they would not have sufficient funds; and
(ii)what funds they would obtain were to be distributed to Messrs Beverley, Leckie and Morrison as part of their financial returns for participating in the Drylandcarbon joint venture.
The cause of action
[16] It is alleged that, in their carriage of the Drylandcarbon proceeding in these circumstances, the Beverleys have caused the affairs of the Drylandcarbon companies to be conducted in an oppressive and unfair manner in terms of s 174 of the Companies Act because, in conducting the proceeding as they have, the payments that Messrs Leckie and Morrison would have received have gone into funding the proceeding.
Should the Pheasant Tail proceeding be heard at all?
[17] The Pheasant Tail proceeding focuses on the consequences of the carriage of the Drylandcarbon proceeding for Messrs Leckie and Morrison. It starts with the allegation that, contrary to the basis upon which the Drylandcarbon proceeding was brought, it is not the Drylandcarbon companies that have the rights to the company information in question. Mr Beverley knew, it is said, that the information could be used by Messrs Beverley, Leckie or Morrison individually but he failed to disclose that. As a result, the Drylandcarbon proceeding has continued in such a way as to cause the Drylandcarbon companies to be without funds, denying Messrs Leckie and Morrison the returns to which they claim to be entitled.
[18] The Beverleys say that these allegations are unsustainable altogether. Not only, they say, should this proceeding not be joined with the Drylandcarbon proceeding and the Beverley proceeding, but it should be struck out altogether or, at least, stayed pending the outcome of the Drylandcarbon and Beverley proceedings. They say that for two reasons.
[19] The first reason is that the High Court has already found that the Drylandcarbon proceeding is a sound proceeding, that it should be brought on a
derivative basis and that its costs should be met by the Drylandcarbon companies.3 Its decision was upheld on appeal. Those proceedings were hard-fought. Messrs Leckie and Morrison had every opportunity, it is said, to advance (and in material respects did advance) the factual and legal allegations that are made in this proceeding. They are matters, it is said, that are relevant to their defences in the Drylandcarbon and Beverley proceedings. To raise them here is said to amount to a collateral attack on decisions that have already been made by the High Court and the Court of Appeal such that they must be an abuse of process.4
[20] In reaching their decisions, the High Court and the Court of Appeal considered the arguments that Pheasant Tail now raises to the effect that the derivative proceeding should not proceed because the Drylandcarbon companies had no right to the “company information” identified in what was then the draft statement of claim in the Drylandcarbon proceeding. That is clear from the submissions made in those Courts, to which I was taken during the course of this hearing. Those arguments were rejected in both Courts, with the Court of Appeal finding that valuable information is likely to have been gained by Messrs Leckie and Morrison in their capacities as directors of the Drylandcarbon companies.5
[21] Moreover, it is said, Messrs Leckie and Morrison sought to adduce further evidence on these points in the Court of Appeal.6 But the Court of Appeal said that the evidence could not have any material bearing on the outcome of the appeal and, therefore, was not cogent.7
3 Furthermore, in my decision of 17 May 2024, I directed that the costs order in the Drylandcarbon proceeding, as varied, should stay in place for a further three months – Drylandcarbon GP One Ltd v Leckie, above n 1.
4 The Beverleys say that the way in which the proceeding has been brought should be seen as an abuse too. The claim was, at the outset, brought as a counterclaim in the Beverley proceeding. The counterclaim was filed on 22 December 2023 without the leave that was needed having been sought. Cooke J, in his minute of 5 February 2024 agreed that issues of abuse could arise. Subsequently, this proceeding was filed instead. But I accept Mr Olney’s point that there was no abuse and that the course of action became necessary as it came to be realised that the plaintiff needed to be Pheasant Tail Holdings Ltd.
5 Derivative action Court of Appeal decision, above n 2, at [70].
6 Evidence about actions on Mr Beverley’s part (a meeting and an email) said to be inconsistent with the premise in the Drylandcarbon proceeding that the opportunity belonged to the Drylandcarbon companies.
7 Derivative action Court of Appeal decision, above n 2 at [49].
[22] These are not, the Beverleys say, matters that can be reopened through this proceeding, which makes the same points.
[23] There is some force in these submissions. However, the force is not enough in my view to rise above a strike-out hurdle. The conclusions of the High Court and the Court of Appeal are firm. They show that, in the face of the allegations that are made in this proceeding – about company information being able to be used by Messrs Leckie and Morrison individually – the High Court and the Court of Appeal thought that the proposed derivative claim, which has a contrary premise, is strong. But that is not necessarily the final word. As the Court of Appeal put it, it was conducting a “preliminary” assessment of “whether the derivative claims are sufficiently arguable to warrant pursuit”.8
[24] While the points that Pheasant Tail raises in its proceeding can and should be used in defence of the Beverley proceeding and the Drylandcarbon proceeding, they might be able to go further; far enough to show that, not only can the derivative proceeding be defended successfully, but the very basis for bringing the proceeding in the first place was fundamentally flawed in ways not considered fully by the Courts in granting leave to bring the Drylandcarbon proceeding.
[25] The decisions of the High Court and the Court of Appeal are not challenged – they were made on the basis of the affidavit evidence then before the Courts and on the relevant statutory tests. But, when the substantive allegations are tested at trial through an examination of documents, evidence-in-chief and cross-examination of witnesses, a broad range of outcomes are possible despite the threshold findings made to date.
[26] In considering whether – in strike-out terms – there is any prospect of the claim succeeding, it could be said that the forensic examination that a trial will bring could have the potential to lead to a finding that to pursue the derivative claim in light of a
8 At [50], having made the point, earlier in that paragraph that the High Court, in allowing the derivative action, “was not conducting a mini trial” and could not “do more than make a preliminary assessment based on the affidavits filed and without any of the evidence being tested”.
state of affairs revealed through the subsequent trial was not just erroneous but oppressive.
[27] Moreover, the Pheasant Tail proceeding is not just about that but, in an inextricably linked way, it is about actions subsequent to the commencement of the Drylandcarbon proceeding – the way in which costs have been incurred to run it; costs, Pheasant Tail says, that have had a material adverse effect on the financial position of the Drylandcarbon companies and, therefore, on Messrs Leckie and Morrison. The focus here is on the ongoing conduct of the derivative action.
[28] Although the costs orders of the Court under s 166 of the Companies Act have tested the appropriateness of the Drylandcarbon companies meeting the costs, that does not prevent the allegation from being made.
[29] I do not, as has been suggested for the Beverleys, see the ability to pursue a proceeding of this sort as having a chilling effect on derivative proceedings generally. The duties that are alleged here, and whether they could amount to a remedy under s 174, are matters that are yet to be tested.
[30] The second reason that is advanced by the Beverleys in support of the submission that the proceeding should not continue, is that the duties alleged to be owed to the shareholders must all be owed to the Drylandcarbon companies and that, therefore, none of the duties alleged in the proceeding could be sustainable. Otherwise, it is said, it would cut across s 169(3) of the Companies Act, which provides that directors’ duties of good faith and related duties are owed to the company.
[31] However, the duties alleged here are broader than the Companies Act duty of good faith. And it is open to Pheasant Tail to advance a case theory that the opportunity to pursue a subsequent fund belongs to the shareholders and that fiduciary duties in conducting the derivative proceeding (rather than duties in pursuing the subsequent fund) can flow from that.
[32] I turn to consider in a little further detail each of the duties pleaded using a lens containing the strike-out principles.
[33] The duty to Messrs Leckie and Morrison (see [14](a)] above) can be expressed in relatively broad terms. A joint venture is capable of creating fiduciary duties. As Elias CJ said in Chirnside v Fay, where parties join together in a joint venture with a view to sharing the profit obtained, their relationship is inherently fiduciary within the scope of the venture and while it continues.9 Where a fiduciary relationship is found to exist, a fiduciary must act with the utmost good faith. However, a duty of good faith can be required in the absence of a fiduciary relationship. For example, there have been cases in which it has been held that a commercial relationship has elements of a fiduciary relationship giving rise to duties requiring a lower level of good faith than “utmost good faith”. For example, in Kiwi Gold No Liability v Prophecy Mining No Liability, the Court of Appeal held that the relationship there was not enough to establish a fiduciary obligation but that both parties were under duties to act reasonably and in good faith towards each other.10
[34] The second duty pleaded is the duty to H1 (see [14](b)] above). Directors do owe fiduciary duties to the companies they direct, both under s 131 of the Companies Act and at common law.11 The Pheasant Tail proceeding is not brought in the names of the companies. But it is alleged that, in breaching those duties, a cause of action arises for the shareholders under s 174.
[35] The duty to the Drylandcarbon companies through their shareholders (see [14](c)] above) relates to the way in which the derivative action is pursued. At a broad level, as Tipping J said in Chirnside v Fay,12 whether a relationship can be classified as fiduciary depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so classified.
9 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [40]. See also at [74], [80] and [90].
10 Kiwi Gold No Liability v Prophecy Mining No Liability CA30/91, 18 July 1991.
11 For example, in Pascoe Ltd v DFC Overseas Investments Ltd [1994] 3 NZLR 627 at [635] it was said that a director of a company has a duty “to act bona fide for the benefit of the company as a whole”.
12 Chirnside v Fay, above n x, at [75]and [80].
[36] At a more specific level, Venning J held in McCulloch v Quinn that an action brought by shareholders under s 174 of the Companies Act about the conduct of a derivative proceeding was arguable.13 That case concerned an allegation that a derivative proceeding was brought improperly so that the parties who had obtained leave could, through controlling the derivative proceeding, sell their shares to the defendants at a substantial overvalue. It was found that the “affairs” of the company under s 174 extend to anything generally concerning the company, including “decisions as to the conduct of its litigation or proceedings pursued by it”.14
[37] Accordingly, whether through the broad duties alleged in the proceeding, or more specifically through the alleged s 174 breach in the prayer for relief, I do not see it as being able to properly be said that the claims bear no prospect of success. The journey towards making them out has a long way to go but the vehicle to be used is not so hopelessly broken that it needs to be parked or taken off the road altogether.
[38] It is not a situation that would require the proceeding to be regarded as an abuse or as legally untenable and to be dealt with accordingly.
Should the Pheasant Tail proceeding be heard alongside the Drylandcarbon and Beverley proceedings?
[39] In circumstances in which the proceeding has been cleared to continue, I do not believe there to be any real resistance to the notion that by far the most efficient way of doing so is for it to be heard at the same time as the Drylandcarbon and Beverley proceedings.15
[40] The Court has a broad discretion under r 10.12 of the High Court Rules to consolidate proceedings, to order that they be tried at the same time or one immediately after another or that they be stayed.16
13 McCulloch v Quinn [2012] NZHC 2469. In that case, the funding interests in a derivative proceeding sold their shares in the derivative plaintiff to defendants in the proceeding. Other shareholders then brought an action under s 174 against the defendants for conducting the proceeding in that way.
14 At [41].
15 The Beverleys accepted in their submissions that, on its own face, there is a significant commonality of relevant facts between the three proceedings but resisted the application on the basis of the arguments discussed already.
16 Fairway Holdings Ltd v McCullagh [2019] NZCA 535 at [6].
[41] The three proceedings all relate to the same subject matter. The facts are common to them all. The documents that would need to be discovered in the Pheasant Tail proceeding, in addition to the documents already discovered in the Drylandcarbon and Beverley proceedings, will be limited. The Beverley proceeding and the Pheasant Tail proceeding are both claims under s 174 of the Companies Act, each brought by the holders of 50 per cent of the shares in H1. Underlying all of the proceedings are alleged fiduciary duties.
[42] The relief sought in each of the proceedings interact in a practical sense: orders will be needed following findings on the breaches (one way or the other) across all three proceedings.
[43] It would not in these circumstances be efficient for any one of the proceedings to be heard separately.
Outcome
[44] I make an order that the Pheasant Tail proceeding be tried at the same time as the Drylandcarbon proceeding and the Beverley proceeding.
[45] Costs on this application, and on the s 166 application, were not addressed in submissions. I do not see it as being necessary to determine costs on the applications at this stage but, if counsel have a different view, memoranda may be filed for both parties within five working days and in reply within a further five working days. Any memoranda filed should be limited to five pages in length.
Radich J
Solicitors:
Bell Gully, Wellington
Mallett Partners, Wellington
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