Cameron v Coleman HC Wellington CIV-2010-485-2151

[2011] NZHC 724

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2010-485-2151

IN THE MATTER OF     an application pursuant to s 165 of the

Companies Act 1993

BETWEEN  LAWRENCE JOHN CAMERON Applicant

ANDJANE ELIZABETH COLEMAN First Respondent

ANDPAUL JOHN ROSSITER Second Respondent

Hearing:         16 May 2011

(Heard at Wellington)

Counsel:         J. Sumner and J. Parry - Counsel for Applicant

R. Harley - Counsel for Respondents

Judgment:      22 June 2011 at 3:15 PM

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 22 June 2011 at 3.15 pm under r 11.5 of the High Court Rules.

Solicitors:           Ford Sumner, Solicitors, PO Box 25 299, Wellington

Max Tait Legal, Solicitors, PO Box 50 565, Porirua 5240

LAWRENCE JOHN CAMERON V JE COLEMAN HC WN CIV-2010-485-2151 22 June 2011

Introduction

[1]      The  applicant  (Mr  Cameron)  applies  to  this  Court  under  s  165  of  the Companies Act 1993 (the Act) for leave to bring a derivative action in the name of Allied Tours and Transfers Limited (Allied Tours).  Mr Cameron is a director and shareholder of Allied Tours (he holds 3 out of 900 shares) and as such, he has standing to bring this application.  A co-shareholder, the Lawrence Cameron Family Trust (the Trust), (which holds 297 shares) supports Mr Cameron’s application.  Mr Cameron seeks to bring the action against two of his co-shareholders and directors Ms Coleman and Mr Rossiter (the defendants).   A draft statement of claim against the defendants accompanying the present application alleges five causes of action against each of the defendants.

[2]      The claims allege breaches of ss 129, 131, 134 and 137 of the Act along with breaches of a shareholders’ agreement, fiduciary duties and a confidentiality and restraint  of  trade  agreement.    As  relief  for  those  breaches,  Mr  Cameron  seeks

$510,491.00 in damages.

[3]      The defendants oppose this s 165 application.  Before turning to consider the

plaintiff’s application, it is useful to set out the background to this claim.

Background

[4]      Allied Tours was incorporated on 19 December 2005.  Mr Cameron and the defendants  are  the  only  directors  of  Allied  Tours.     Mr  Rossiter,  the  second respondent, is Mr Cameron’s cousin.   Mr Rossiter and Ms Coleman, the first respondent, live together, it appears in a defacto relationship.   The trustees of the Trust are Mr Cameron’s father and sisters.

[5]      Both defendants have an extensive history in Wellington taxi transport.  Mr Rossiter was a director and chairman of Hutt and City Taxis Limited (Hutt and City Taxis).  Ms Coleman is, and was at the time of Allied Tours’ incorporation, the sole director and shareholder of Regency Cabs Wellington (2004) Limited (Regency), which operates a taxi transport service.   Allied Tours it seems was established to provide factoring services to Regency, but the extent of those services is in dispute. Ms Coleman sold Regency on 1 June 2008.

[6]      As I have noted, Allied Tours was formed primarily to factor taxi chits, credit card receipts and surcharged accounts (such as the Greater Wellington Regional Council’s mobility support taxi chits), although some further business ideas were viewed as options.   Nevertheless, Allied Tours was never GST registered (as it operated solely as a financial services company and it was not required to register).

[7]      As a factoring operation, Allied Tours would purchase chits, receipts and surcharged accounts from, for example, taxi drivers for a percentage of their worth (visa and master card receipts were apparently purchased at 95 per cent of face value).  Allied Tours would then invoice the debtor (in the case of credit cards, visa and master card) and recover the debt owed, making a profit from the difference between the purchase value of the chit or receipt and the recovered face value.

[8]      Mr  Cameron  it  seems  was  to  be  the  financier  of  Allied  Tours  and  the defendants were to run the day-to-day operations of the business.  Mr Rossiter was to set up Allied Tours by establishing operating systems such as the company’s invoicing mechanism.   As I understand it, the method that he established for processing chits and receipts, meant that each chit or receipt received from a driver was stamped with that seller’s assigned unique number and the chits were then ordered according to type of chit (ie they were placed into larger piles with chits from other sellers of the same type).

[9]      As Mr Rossiter was a director of Taxi Charge and Hutt and City Taxis at the time that Allied Tours was incorporated he was offered an independent contractor’s agreement with Allied Tours on 19 December 2005 to enable him to begin his work establishing the company.  Until he resigned as a director of Taxi Charge and Hutt and City Taxis, his shares in Allied Tours were held on trust for him.  Mr Rossiter was then appointed a director of Allied Tours on 15 May 2006.

[10]     On 19 December 2005 Mr Cameron, Ms Coleman, Mr Rossiter and two of the trustees of the Trust signed restraint of trade and confidentiality agreements with Allied Tours.  On that same day, a shareholders’ agreement was also signed.

[11]     On 20 February 2006 Ms Coleman, as director of Regency, entered into a lease  of  premises  in  Hataitai  as  tenant.    Mr  Cameron  alleges  that  the  money advanced for this purpose, $2,340, were funds of Allied Tours.   A sublease was

never entered into with Allied Tours.   Rather, Allied Tours simply occupied the premises in Hataitai on an informal basis.   Subsequently, one half of that money advanced was repaid to Allied Tours.  When Regency was sold in June 2008, Ms Coleman became the lessee of the Hataitai property.    Then, on 17 April 2009 the lease was transferred to Hutt and City Taxis.

[12]     On 31 March 2006 the defendants bought In Style Travel Limited (In Style Travel) and became co-directors and equal share holders in that company.   That company operated a luxury taxi service.   Three years later, on 27 March 2009 the defendants sold In Style Travel to Hutt and City Taxis for $10,000.00.   The Agreement for Sale and Purchase of this business, described the business sold as “the vendor’s interest in the factoring operation”.

[13]     It appears also that not all of In Style Travel’s and Regency’s factoring

income may have been directed through Allied Tours.

[14]     On  8  June  2008,  the  defendants  incorporated  another  company,  Taxis Combined  Limited  (Taxis  Combined),  and  became co-directors  and  equal  share holders in that company.  That company it seems has never traded, however.

[15]     Earlier, around November 2007 the defendants, on behalf of Allied Tours, entered into a contract described as an “Agreement for Agency Services” with Hutt and City Taxis (the Agency Agreement).   In its introduction that Agency Agreement provided for a combined agency services company between Hutt and City Taxis and Allied Tours.  The Agency Agreement provided that the agency services’ factoring would operate from the Hataitai property, leased by Regency (at that time I understand Ms Coleman may have been the lessee).  Allied Tours was to process all vouchers received and factoring was to be completed by Hutt and City Taxis at their premises.  All funding for the joint venture it seems was to come from Hutt and City Taxis (ie for payment to drivers for chits).  All profits from the joint venture were to be split 50/50.

[16]     At this time, relations were deteriorating between the defendants on the one hand, and Mr Cameron on the other, and on 20 December 2007 Mr Cameron sent a letter to the defendants airing his concerns.  Those concerns were:

1.  That  Mr  Rossiter  had  set  up  unsatisfactory operating  systems  for  Allied

Tours;

2. The lease for Allied Tours’ premises was in Regency’s name but Allied Tours’ funds were used to secure the lease.  The lease was for premises in a strategic location but Allied Tours was provided with no guarantee to secure that location (ie by way of sub-lease).   Ms Coleman used her position to obtain a pecuniary advantage to the detriment of Allied Tours;

3. The defendants purchased In Style Travel which appeared to be in direct competition with Allied Tours; and

4.  That Allied Tours had entered into a factoring agreement with Hutt and City

Taxis without shareholder approval.

[17]     On 25 January 2008, the defendants replied to Mr Cameron’s letter.   That letter denied Mr Cameron’s allegations outlined in [16] 2, 3 and 4 above and advised that the “employment” dispute would be dealt with later.  Mr Cameron sent a reply to that 25 January 2008 letter recommending that the parties should attempt to settle their dispute.

[18]     Discussions continued and then mediation was attempted in the week of 10-

14 November 2008 in accordance with the shareholders’ agreement, but this was unsuccessful.  Subsequent, attempts to resolve the impasse were also unsuccessful.

[19]     Then, on 31 March 2009, Allied Tours ceased trading with the consent of all directors and shareholders.  It is said that the business had become unprofitable due (at least in part) to a decrease in the use by taxi companies’ of chits and the fact that other companies, such as Green Cabs had started up their own factoring operations and thus the services of Allied Tours were no longer required.

Counsels’ submissions and my decision

[20]     Section 165 of the Act provides that a court may grant leave for a shareholder or director to bring proceedings in the name and on behalf of the company only if the court is satisfied either:

(a)      The company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or

(b)It is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as  a whole.  – s 165(3).

[21]     It is common ground in this case that Allied Tours the company, does not intend to bring the proceedings in question and thus s 165(3)(a) is met.

[22]     In considering whether I should exercise the Court’s discretion noted in s

165(1) to grant leave for Mr Cameron to bring these proceedings in the name of the company, s 165(2) goes on to provide the following four matters which I must have regard to:

(a)      The likelihood of the proceedings succeeding:

(b)The costs of the proceedings in relation to the relief likely to be obtained:

(c)      Any action already taken by the company or related company to obtain relief:

(d)The interests of the company .......... in the proceedings being commenced.

[23]     While the Court is not to conduct an interim trial on the merits of the case in applications such as the present, the generally accepted test from Vrij v Boyle [1995]

3 NZLR 763 at 765 adopted in cases of this type (e.g. Peters v Birnie, HC, Auckland

CIV-2009-404-8119, 22 April 2010; Presley v Callplus Ltd [2008] NZCCLR 37) is:

that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, likely costs and the prospect of executing any judgment.

[24]     In determining whether a prudent business person would bring the claim the following factors are relevant:

Where a lot of the ground work for the case has already been completed such that the remaining cost of bringing the proceeding in low, and outweighed by the amount potentially to be recovered: Wright v Baker, HC, Whangarei CIV-

2003-488-42, 29 July 2004.

Where there are allegations of breaches of fiduciary duty, that will be a powerful factor: Bridge v M B Cook & Co Ltd HC Christchurch CP53/99, 16

September 1999; Wright v Baker, HC, Whangarei CIV-2003-488-42, 29 July

2004; Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57.

Where  there  is  an  alternative  dispute  resolution  clause  in  a  company’s

constitution: Torrice v Hayhow, HC, Auckland CIV-2003-485-1995, 14 May

2004.

Where the company is no longer trading: Torrice v Hayhow, HC, Auckland CIV-2003-485-1995, 14 May 2004; Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,706.

Mere claims for misappropriated funds it has been suggested might be better dealt with in the course of liquidation (contrast that with claims for breach of fiduciary duty): Torrice v Hayhow, HC, Auckland CIV-2003-485-1995, 14

May 2004; Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,706.

Where a company is no longer trading, the likelihood (or otherwise) of a liquidator  pursuing  claims:  Needham  v  EBT  Worldwide  Ltd  (2006)  3

NZCCLR 57.

Ulterior motive on the part of the applicant: Torrice v Hayhow HC Auckland

CIV-2003-485-1995, 14 May 2004.

Where failure in the action would leave the company penurious: Presley v

Callplus Ltd [2008] NZCCLR 37 at [29].

Claimsagainst directors who have misused information gained in confidence or who have breached fiduciary obligations are often brought not only to recover damages or to seek an injunction but also to act as a deterrent to

others: Frykberg v Heaven, HC, Auckland M760/02, 26 July 2002 at [52].

[25]     I now turn to consider each of the matters that I am to have regard to under s

165(2) outlined at [22] above in light of Mr Cameron’s claims.

Likelihood of the proceedings succeeding

[26]     Mr Cameron alleges, as noted above, 10 separate causes of action.   It is convenient to group those actions in the following way:

a.      Breaches of a confidentiality and restraint of trade agreement entered into by the defendants;

b.      Breaches of s 129 and the terms of the shareholders’ agreement entered

into by the defendants with Allied Tours;

c.      Breaches of the defendants’ duties as directors under ss 131, 134 and

137 of the Act and the defendants’ fiduciary duties as directors.

A.       Breach of confidentiality and restraint of trade agreements

[27]     Mr Cameron seeks to argue that the defendants breached confidentiality and restraint  of  trade  agreements  that  they  had  entered  into  with  Allied  Tours  in operating In Style and the “factoring side of” Regency noted above.

[28]     The nub  of this  claim  involves  the question  as  to  whether  In  Style and Regency were operating competing factoring businesses.  On the facts it is somewhat unclear.    On  24  February 2010  Mr  Cameron  did  obtain  a  report  he  claims  as “independent” from chartered accountants Deloittes as to the factoring operations of Allied Tours and its problems at the time relating to Mr Cameron’s complaints.  A copy of this report (the Deloittes Report) is exhibited to Mr Cameron’s affidavit sworn  28  October  2010  as  exhibit  “LJC  29”.    From  this  report  furnished  by Deloittes, whilst it is clearly shown that factoring income was received by In Style

and Regency, there is a possible argument that this may perhaps be explicable by the nature of the organisation of the three companies.

[29]     Nevertheless, on the state of the facts as they are and bearing in mind the “conclusions” reached in the Deloitte’s Report, I consider that there is an arguable case on the part of Allied Tours in this area as against the defendants.

B.       Breach of s 129 and the shareholders’ agreement

[30]     Section 129 prohibits a company entering into a “major transaction” unless the transaction is approved by special resolution of the shareholders.   The shareholders’ agreement entered into by Ms Coleman and Mr Rossiter with Allied Tours  also  provides  (at  clause  11.2(c))  that  a  unanimous  resolution  of  all shareholders  is  required  to  approve  a  Major  Transaction  (as  defined  in  the Companies Act 1993).

[31]     Major Transaction is defined by s 129(2) as:

(a)      The  acquisition  of,  or  an  agreement  to  acquire,  whether contingent or not, assets the value of which is more than half the value of the company's assets before the acquisition; or

(b)The disposition of, or an agreement to dispose of, whether contingent or not, assets of the company the value of which is more than half the value of the company's assets before the disposition; or

(c)      A transaction  that  has or is  likely to  have the effect  of the company acquiring rights or interests or incurring obligations or liabilities, including contingent liabilities, the value of which is more than half the value of the company's assets before the transaction.

[32]     Mr Cameron argues here that as the agreement with Hutt and City Taxis restricted Allied Tours’ potential future factoring income in a major way it was a Major Transaction.  Counsel for the defendants did not address this concern in any real way in her submissions.  Indeed, her submissions seem to suggest that the only

major transaction that was of issue was that where Ms Coleman entered into the Hataitai premises lease on Regency’s behalf instead of Allied Tours’.  The facts of the transaction with Hutt and City Taxis appear reasonably clear.  The transaction involved Allied Tours ceasing to operate, in effect, as a factoring company.  It was to send all chits received to Hutt and City Taxis for factoring.   Allied Tours was to retain 50 per cent of Hutt and City Taxis’ proceeds from those transactions.   In return, Hutt and City Taxis in effect, was to bank roll Allied Tours’ operation. While it is by no means certain, I consider it open to Mr Cameron to argue that this transaction may well have disadvantaged Allied Tours to the extent that it might have represented an effective disposal of company assets and interests the value of which were more than half the value of its total assets.

C.       Breaches of the defendants’ statutory duties and common law fiduciary

duties

[33]     Sections  131,  134  and  137  of  the  Act  impose  broad  obligations  upon directors.  Under s 131(1) the defendants, as directors, owed a fiduciary duty to the company, Allied Tours, to act in good faith and in its best interests.  Under s 137 directors had a clear duty of care to act as a “reasonable director” would when exercising his or her functions as a director.  Section 134 provides that a director of a company must not act, or agree to the company acting, in a manner that contravenes the Companies Act 1993 or the constitution of the company.

[34]     Mr Cameron suggests that those duties were breached by the defendants in the following ways:

a.      Using company funds to secure a lease in the name of Regency;

b.Entering into the agreement with Hutt and City Taxis without prior shareholder approval, and failing to act in accordance with the shareholders’ agreement over that transaction;

c.      Restricting Allied Tours’ future factoring income via that agreement

with Hutt and City Taxis;

d.     Competing with Allied Tour’s business through In Style and Regency;

e.      Failing to take into account minority interests when performing duties as directors; and

f.      Failing to establish adequate financial systems and to ensure proper records were kept.

[35]     With regard to his allegations of running a competing company, Mr Cameron relies  predominantly on  the  Deloittes  Report  noted  at  [28]  above.    That  report suggests that both In Style and Regency were carrying on business factoring taxi chits.  At paragraph 2.2 it notes:

Our review of [Regency’s and In Style’s] financial statements shows that factoring income was earnt by Regency and In Style during the two financial years ended 31

March 2007 and 31 March 2008, i.e. it has been recorded as income in the respective

companies’ financial statements rather than that of Allied Tours.

[36]     The Report further notes at paragraph 5 of its Executive Summary:

If factoring income from Regency and In Style was to be included in Allied Tours accounts, profit before tax would increase to $52,000 and $81,000 in the years ended

31 March 2007 and 31 March 2008 respectively. Refer to Section 2.

[37]     In Needham v EBT Worldwide Limited (2006) 3 NZCCLR 57 Venning J

notes at [27]:

The legal principles underlying the proposed claim against Mr Darby are well settled. If a director receives information or learns of a business opportunity through his position as director the right to use the information or opportunity may, in appropriate cases belong to the company, and if so it cannot be exploited by the director for his personal  benefit  or  gain  without  the  fully  informed  consent  of  the  company: Boardman  v  Phipps  [1967] 2 AC 46, page 105: Canadian  Aero  Service  Ltd  v O’Malley [1973] 40 DLR 3d 371, 382. In New Zealand see Smith (GE) Ltd v Smith [1952] NZLR 470, Pacifica Shipping Co Ltd v Andersen [1986] 2 NZLR 328; Holden v Architectural Finishes Limited (1996) 7 NZCLC 260,976.

[38]     At this early stage, the state of the evidence before me is understandably somewhat “thin” in parts which creates difficulty for me in undertaking a reasoned analysis  of  the  merits  of  this  application.    But,  what  is  clear  here  is  that  the defendants have not fully addressed in any real way all of Mr Cameron’s allegations advanced in his present application and draft statement of claim.

[39]     With regard to the lease, the defendants say that this lease was entered into by Regency to avoid Allied Tours assuming any liability in that respect.  While initially Allied Tours put forward all the funds to secure the lease, only half of this amount was later repaid.

[40]     By entering into  the lease,  while as  a matter  of fact,  Ms  Coleman  may suggest she had good reason to do as she did (ie not to incur any liability on the part of Allied Tours), it did leave Allied Tours in a vulnerable position while probably affording Ms Coleman a significant advantage.   As noted by Laurenson J in Thorrington v McCann (1998) 8 NZCLC 261,564 (HC) at 261,571 “the law imposes on [a fiduciary] a clear and onerous duty”.  As a result, I consider that there is at least an arguable case that Ms Coleman breached her fiduciary duty to Allied Tours with respect to her entry into this lease, especially as she did so at the time using Allied Tours funds.   Upon becoming a director of a company, one must accept the consequences of holding that position.

[41]     With regard to the Agency Agreement with Hutt and City Taxis, in so far as that agreement was unfavourable to Allied Tours, I cannot speculate as to the reason for the defendants entering into the agreement.   An analysis of those reasons at a later time may prove instructive.  At this point, however, I can only conclude that there may be a possible argument that, in entering into the Agency Agreement, the defendants breached their fiduciary duty to the company and their obligations under the Shareholders Agreement.

[42]     As to the allegation that the defendants were competing with Allied Tours through their interests in Regency and In Style, this aspect is also less than clear.  No real argument was made before me by the defendants as to whether they denied operating a factoring business elsewhere.   Counsel relied, instead, on a claim that Regency and In Style were not competing with Allied Tours as she contended Allied Tours did not operate a “transport service” which was what they did.  On this, Ms Coleman endeavoured to answer Mr Cameron’s allegations in this respect in a 25

January 2008 letter to him which is before the Court.  In that letter, she suggested Regency’s factoring revenue arose out of the fact that it had to bill certain customers for chits due to that customer’s requirements (and she used as examples the Greater Wellington Regional Council, Wellington Combined Taxis, Alert Taxis and Parliamentary  Services).    This  claim  by  Ms  Coleman  cannot  be  seen  here  as definitive however.   Nevertheless it also cannot be said that it is self-evident that Regency and In Style were not operating factoring services that Allied Tours could have otherwise offered.  Certainly it does seem from the material before the Court

that factoring of some kind was being undertaken at the operative time by Regency at least.

[43]     As  to  the  claim  that  the  defendant  directors  failed  to  take  into  account minority interests, there is little evidential basis before me at this point on which I can say that this claim has any reasonable prospect of success.   That remains a matter for the future.

[44]     And finally, addressing the question whether proper financial systems for Allied Tours were established, some of that work at least appears to have been undertaken by Mr Rossiter, in his capacity as a contractor prior to becoming a director.  Therefore, at this stage there is not a great evidential foundation that this would have breached his duty as a fiduciary.   Further, the defendants argue, as shown in their 25 January 2008 letter to Mr Cameron, that some of the financial systems were put in place at the insistence of Mr Cameron.  I can take this aspect no further at this early stage.

Costs of bringing the proceedings against the relief likely to be obtained

[45]     On Mr Cameron’s analysis, before me, costs of the substantive proceeding against the defendants would be approximately $50,000 on the basis that a defended trial would be likely to take between two or three days.   On the other hand, the defendants dispute this and assess costs in the order of $100,000, on the basis that any trial they say is likely to take one week.  The defendants contend that substantial expert accounting evidence would be required for both parties and this alone would account for the longer trial time required.

[46]     In  my  view,  on  balance,  I  consider  that  the  issues  in  any  substantive proceeding here would be relatively confined.  Those issues would relate mainly to factual matters.   While some expert accounting evidence is likely, the state of accounting for Allied Tours, as I understand the case, would not be the central dispute.    The  principal  dispute  is  likely  to  relate  to  the  real  purpose  for  the defendants entering into the various transactions that they did.

[47]     The legal issues are relatively clear, relating mainly to the extent of fiduciary duties  owed,  interpretations  of  the  Companies  Act  1993,  and  the  Shareholders’

Agreement relating to the definition of Major Trasaction.   In that light, the proceedings should, therefore, have a reasonably narrow compass and not take more than three days to hear.   On that basis, I am inclined towards Mr Cameron’s assessment of the likely costs.

[48] The relief claimed by Mr Cameron is $510,491. Almost $410,000 is based on the Deloittes Report noted at [28] above. The defendants argue that this figure is in error with respect to the claim for the years ended 31 March 2009, 31 March

2010, 31 March 2011 and part year 31 March 2012 for two reasons.  First, Regency was sold on 1 June 2008.   Therefore, they say no “factoring receipts and other revenue” was available from Regency after that date.   Accordingly, the total of Allied Tours’ claim it is said must be reduced by $182,000.  Secondly, Allied Tours ceased to trade on 31 March 2009 so therefore the defendants argue Allied Tours’ claim must be reduced by $182,000 to $140,491.

[49]     As  to  the  first  of  those  arguments,  I  agree  that  it  is  unlikely  that  the defendants would be liable for any factoring revenue obtained from or earned by Regency or In Style after those companies were sold.   Therefore, no recovery is likely for profits in the 2009-2010 financial year (ie $68,000).  As to the second, I am less inclined to discount proceeds sought to be recovered for the Agency Agreement entered into between Allied Tours and Hutt and City Taxis.   While I acknowledge that the company ceased trading on 31 March 2009, it is open to Allied Tours to argue that but for entering into that agreement, it would not have ceased trading (as that decision was based around a reduced level of profitability) as Allied Tours’ profits would not have suffered.  In my view, therefore, the likely maximum claim in that event would be in the order of $448,491.

[50]     Taking into account all these mattes, on balance I am satisfied that the claim clearly outweighs the costs in bringing the proceeding.

Any Action for Relief Already Taken by the Company

[51]     No action has already been taken by the company to obtain relief in terms of s 165(2)(c) of the Act.

Is it in the interests of the company that proceedings be commenced?

[52]     This is the factor which is perhaps most aligned to a consideration of what a prudent business person would do in the circumstances here.  Allied Tours has not been trading for over two years.  While in Techflow New Zealand Limited v Techflow Pty Ltd (1996) 7 NZCLC 261,138 (HC) (and Paterson J in Torrice v Hayhow HC Auckland CIV-2004-404-1453, 14 May 2004) Elias J did note that where a company is no longer trading it is necessary to consider whether s 165 is the most appropriate procedure for redress, her Honour did not go so far as to say that derivative actions were not available in cases where a company is no longer trading.

[53]     The  present  case  can  be  distinguished  to  a  certain  extent  from  those  in Techflow and Torrice.   In those decisions the claim was for recovery of monies. Here there is a claim amongst other things for breach of fiduciary duty.  As noted above, a claim for breach of fiduciary duty by a director will be a significant factor influencing a decision to consider an application.

[54]     Although, it will have been noted from my comments earlier in this judgment that I cannot express a definitive view on the merits of many aspects of the proposed claims against the defendants here, I find at this very preliminary stage that prima facie Allied Tours would have arguable claims against the defendants at least in certain areas as noted above with some possible chances of success.  If, however, Mr Cameron was ultimately unable to recover for the factoring activities of Regency and In Style, the maximum possible claim would seem to be in the region of $238,491. While that is still considerably more than the likely costs incurred, the reduced quantum is relevant to some extent.

[55]     Further, it appears that Allied Tours, having not traded for over two years, has no assets.  That would also be a significant factor weighing on the mind of “the prudent business person.”   Where an applicant him/herself will fund proceedings, however, in the absence of an ulterior motive, or where there are other means of resolution, the Court is to take that into account: Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 at [74].   Here, Mr Cameron has expressed a willingness to fund these proceedings himself.  That is significant.

[56]     On balance, I consider that leave ought to be granted here.  Arguable causes of action exist.  Those causes of action have a sufficient evidential foundation as I see it and this leads me to the conclusion that proceedings to seek damages from the defendants are justified here.   Also relevant is the fact that alternative dispute resolution processes have been attempted but failed.  There being no further dispute resolution  processes  provided for under the Shareholders’  Agreement,  and,  as  I understand it, there being no initiative to appoint a liquidator or otherwise to wind up Allied Tours, action before this court is likely to be the only way in which these matters may be aired.

[57]     The costs of the derivative action here are to be met by Mr Cameron as he confirms in para 2.11 of his 29 October 2010 application.  This is significant and in some cases is telling.   On this, Venning J at [74] in Needham v EBT Worldwide Limited noted however:

The fact an  applicant offers  to  fund  proceedings will not, in  every case,  be  a determining factor.   For instance, where the applicant has an ulterior motive or where there are other means of resolution, the Court will still likely decline leave. But that is not the case here.

As I see it, the situation Venning J described in the last sentence of his quote above is also the position in the present case.

[58]     Balancing all these matters, I am of the view that a prudent business person, faced with the opportunity to pursue the arguable cases which I have identified above on the basis the costs would be paid by another, would issue and pursue these proceedings.

Conditions on which leave is granted

[59]     As  I have already noted, in his formal application before the Court,  Mr Cameron did not seek the, often sought by applicants, further order that the costs of the intended proceedings be borne by Allied Tours under s 166 of the Act.   Mr Cameron noted specifically that he would be funding the derivative action himself.

[60]     Under s 166, on an application by a s 165 applicant, the Court must order that the company meets the costs of bringing the proceedings unless it considers it unjust or inequitable for the company to do so.  There is a clear presumption in favour of

the Court ordering that the company in question meets the costs of the proceeding. Despite this, as I note above, in the present case Mr Cameron as applicant does not seek such an order under s 166.   As noted, he indicates he will bear those costs himself.  There is, therefore, no need to consider an order being made under s 166 here.

Result

[61]     For all the reasons outlined above, Mr Cameron’s s 165 application for an order granting leave to bring proceedings in the name of Allied Tours against the defendants succeeds.

[62]     An order is now made granting leave to the applicant Mr Cameron to bring a derivative action on behalf of Allied Tours against the defendants.   This is to be founded on the causes of action set out in the draft statement of claim attached to the s 165 application filed 29 October 2010.   Further causes of action relating to the same subject matter, if appropriate, may be added.  This order is also made on the following additional terms:

(a)       Mr Cameron is to be personally responsible for all costs and disbursements incurred in bringing and prosecuting the proceeding unless the Court makes an order at a later time permitting any costs and disbursements to be reimbursed by Allied Tours.

(b)       Mr Cameron is authorised to control the conduct of the proceeding.

(c)       Leave is reserved for Mr Cameron to apply to this Court to seek any further order that any costs and disbursements incurred be reimbursed by Allied Tours.

Costs

[63]     As to costs on the present application, Mr Cameron has succeeded and I see no reason why he should not be entitled to costs in the usual way.   Costs are therefore awarded to the applicant Mr Cameron on this application on a category 2B basis together with any disbursements approved by the Registrar.

‘Associate Judge D.I. Gendall’