Drylandcarbon GP One Limited v Leckie

[2024] NZHC 2544

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2023-485-47

[2024] NZHC 2544

IN THE MATTER

of s 165 of the Companies Act 1993

BETWEEN

DRYLANDCARBON GP ONE LIMITED

First Plaintiff

DRYLANDCARBON ONE MANAGEMENT LIMITED

Second Plaintiff

DC ONE H1 LIMITED
Third Plaintiff

AND

WILLIAM JAMES WATERHOUSE LECKIE

First Defendant

CHRISTOPHER GORDON LEWIS MORRISON
Second Defendant

LEWIS TUCKER AND COMPANY LIMITED
Third Defendant

continued …

Hearing:

4 September 2024

Counsel:

K J Dobbs and M R M Gale for Plaintiffs

J B M Smith KC, A S Olney and O C Gascoigne for Defendants

Judgment:

5 September 2024

JUDGMENT OF RADICH J

(Second judgment on costs of derivative action

DRYLANDCARBON GP ONE LTD v LECKIE [2024] NZHC 2544 [5 September 2024]

… continued

PHEASANT TAIL HOLDINGS LIMITED

Fourth Defendant

LEWIS TUCKER FOREST PARTNERS LIMITED
Fifth Defendant

LEWIS   TUCKER   FP INVESTMENTS LIMITED

Sixth Defendant

FOREST PARTNERS GP LIMITED
Seventh Defendant

LEWIS TUCKER FP MANAGEMENT LIMITED
Eighth Defendant

[1]  The issue for consideration in this decision is whether orders made under s 166 of the Companies Act 1993 for the payment of the plaintiffs’ costs in this proceeding in my judgment of 17 May 20241 should, on the one hand, continue or, on the other, be lifted – pending consideration of an application the plaintiffs have now filed for approval of a litigation funding agreement for the proceeding.

The current costs arrangements – a recap

[2]                 The various orders that have been made under s 166 of Companies Act, for the costs of the derivative action to be met by the plaintiffs, are described in the May decision. For context, these few paragraphs provide a brief recap.

[3]                 In December 2022, the High Court granted leave to Anthony and Wendy Beverley to bring this derivative proceeding under s 165 of the Companies Act and ordered, under s 166, that the reasonable costs of the proceeding be met in the first instance by the first, second and third plaintiffs (the original costs order).2

1      Drylandcarbon GP One Ltd v Leckie [2024] NZHC 1239 [May decision].

2      Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 [High Court derivative action decision].

[4]                 The Court of Appeal upheld that decision in November 2023 finding that, amongst other things, a prudent business person acting in their own interest would pursue the claims and that it would not be unjust or inequitable for the plaintiffs to meet the cost of the proceeding at that stage.3

[5]                 In December 2023, a varied costs order was made by Cooke J in the terms set out in [17(a), (b) and (c)] of the May decision (the varied costs order). I will not set them out again here but, in essence, given liquidity issues on the part of the plaintiffs, it was agreed that the s 166 costs orders would be satisfied through the Beverleys making advances to the plaintiffs to enable the plaintiffs to meet costs on the basis that the Beverleys will only be entitled to recover sums advanced as and when the plaintiffs have the means to pay them. The sums advanced were on an interest-free basis.

[6]                 By April 2024, the defendants’ position was that the original costs order and the varied costs order should be rescinded because of a view that the plaintiffs were insolvent and because no long-term funding solution had been secured. At that stage, the plaintiffs resisted rescission and sought, instead, that the costs orders be extended until the end of August so that a long-term funding solution could be found and put in place.

[7]                 In the May decision, I made an order under s 166 that the reasonable costs of the proceeding were to continue to be met by the plaintiffs through the varied costs order  until  5 pm  on  Friday,   30  August  2024.   That  order  was   extended  until 4 September to enable this hearing and, at the conclusion of the hearing, I extended it until today to enable this decision.

Outcomes sought

[8]                 The plaintiffs seek for the application they filed, on 30 August 2024, for approval of a litigation funding agreement, to be heard on 2 October4 and that the orders made in the May decision remain in place until then.

3      Leckie v Beverley [2023] NZCA 570 at [73] and [76] [Court of Appeal derivative action decision].

4      A date that has been scheduled for the hearing of other interlocutory applications in this proceeding.

[9]                 They say that there has been no material change to the solvency position of the plaintiffs since the May decision was made, that the funding application provides a viable long-term solution and that there is no prejudice to the plaintiff companies in the meantime in circumstances in which the Beverleys are currently funding the proceeding, where the funding is not attracting interest, and where the companies are only obliged to repay when they have the means to do so.

[10]              The defendants say that because (primarily) the funding application is incomplete, it should not be heard before mid-November and all funding orders should be lifted in the meantime, leaving the Beverleys to fund the costs incurred on behalf of the plaintiff companies in the meantime. They say that the plaintiffs remain balance sheet insolvent and will not be in a materially positive cash flow position until at least 2026. They say that there have been material delays on plaintiffs’ parts in making the litigation funding application, having been aware of the possibility of (and more recently the need for) third party litigation funding or another long-term funding solution to meet the costs of the proceeding since at least September 2023. They refer to timetabling orders that had been made to accommodate the earlier hearing of a funding application not having been met.5 They see the “further, and limited, period of time” that I saw as being tenable in extending the costs orders in the May decision as now being up.6 They are concerned about the contingent costs liability for the plaintiff companies.

Hearing arrangements

[11]              I begin my assessment of the issue described in [1] by recounting the order I made orally during the hearing yesterday – following discussions with counsel – that the plaintiffs’ application for approval of a litigation funding agreement will be heard on Friday, 4 October 2024. The 2 October fixture will be maintained for other interlocutory issues. Accordingly, the question becomes whether current orders should be extended for a further month, until that hearing.

5      It had been proposed that an application to approve a litigation funding agreement would be considered at yesterday’s hearing.

6      May decision, above n 1, at [71].

The starting point for considering the issues

[12]Several underlying findings form the bedrock for consideration of the issues:

(a)In the High Court decision, it was found that relevant evidence in support of the plaintiffs’ claim was “quite overwhelming”. 7

(b)The Court of Appeal agreed, saying that a prudent business person acting in their own interest would pursue the claims.8 Moreover, it was said that the fact that the general partner may not have assets or income available to meet the costs does not mean that a prudent business person in its position would not pursue the claims, having regard amongst other things to the prospect of assistance being available from an external funder.9

(c)In the May decision, I concluded – following an assessment of the financial information and other evidence provided – that the cash flow insolvency and balance sheet insolvency issues raised by the defendants were not an impediment to the continuations of a costs order at that stage.10 I found that, while the plaintiffs have liquidity issues, their cash flow and balance sheet positions were positive when the value of the litigation funding that the Beverleys have provided to date is seen for what it is: funding that they are only entitled to recover as and when the plaintiffs companies have the means to pay for them.11 I found the plaintiffs’ medium-term positions to be sufficiently comfortable and that they could afford the litigation in the longer term, but not in the immediate term such that at least medium-term solutions needed to be pursued further before the Court would go on to rescind the varied costs orders that are in place.12 The costs orders were extended for a limited

7      High Court derivative action decision, above n 2, at [76].

8      Court of Appeal derivative decision, above n 3, at [73].

9 At [75].

10     May decision, above n 1, at [49] and [65].

11 At [66].

12     At [67] and [69].

period to enable viable long-term funding options to be explored further.13

Analysis

Delays in bringing funding application

[13]              The defendants are concerned about the delays in bringing the litigation funding application. They expressed a concern that, because the 2 October date is needed for other matters, it would not be until a later date that the funding application could be considered. The plaintiffs responded by describing challenges faced in having the litigation funding offer finalised.

[14]              Given the availability now of hearing time on 4 October, it is not productive to address this point any further. The challenges the plaintiffs faced and the frustrations the defendants feel are both acknowledged.

Incomplete application

[15]              The defendants are concerned that the litigation funding application is incomplete such that it could not fairly and properly be determined at an early point in time. The proposed litigation funding arrangements, as presented to the Court at this stage, comprise a letter of offer from the funder and a precedent litigation funding agreement, presented by way of example, pending documentation of the current offer. Mr Smith KC has referred to certain essential details, said to be missing and as indicating that the plaintiffs are some way away from being able to present an option that could be considered properly.

[16]              The timetable arrangements that accompany the 4 October hearing (set out at the end of this decision) include the need for the plaintiffs to file any updated affidavit and application by 5 pm on Friday, 13 September 2024. Accordingly, there will be sufficient certainty of the basis upon which the plaintiffs ask the Court to consider the application and the defendants will be able to present arguments based upon details as they stand at that point in time.

13 At [71].

The need for all funding options to be considered

[17]              In its application for approval of the litigation funding agreement, the plaintiffs sought an order in the alternative, allowing a further 25 working day period to consider any further funding options. Mr Smith has said that matters cannot roll forward on an iterative basis like that and all alternative proposals must be before the Court at the same time. Ms Dobbs clarified the plaintiffs’ position in saying that no other options were being presented.14 Accordingly, the plaintiffs’ application will need to be amended to reflect the final proposal to be considered by the Court when amended documents are provided on 13 September.

The extent to which the financial position of the companies have changed since the May decision

[18]              It does not appear to me that there has been any change in the financial position of the plaintiffs of such an extent as to see the conclusions I reached in May (and referred to in [12] above) as needing to be revisited. Colin Jacobs, the second plaintiff’s general manager, filed an affidavit for this hearing to provide an update. It did not provide a current balance sheet or, for example, any unaudited financial statements. As Ms Dobbs observed, it did include an advisory committee report, dated 10 April 2024 in which it was said “at the time of writing, the manager believes that it remains solvent”.

[19]              The affidavit provides details of the fees charged to the plaintiff companies for attendances in progressing the proceeding which now total $1,408,379.44 (including GST and disbursements). $1,021,797.29 of that sum has been incurred under the terms of the interim funding order, put in place on 21 December 2023 and $472,488.76 has been incurred in the three and a half months since the extension of the interim funding order in the 17 May decision.15 Mr Jacobs has expressed the view that the second plaintiff remains balance sheet insolvent, while costs estimates from the plaintiffs’

14 Having said that, I observe that there was an exchange between counsel during the hearing over where matters ended up with the detailed proposal by the Beverleys for the provision of finance which had been the subject of advice by Chapman Tripp. Accordingly, I do not foreclose the prospect of further reference being made to that proposal.

15 The fees charged to the companies comprise those of the solicitors and counsel for the companies, of Wilson Harle, who are undertaking discovery for the plaintiff companies on an independent basis, Victoria Heine KC, who reviews the reasonableness of the solicitors and counsel for the plaintiffs and Lewis Tucker, which is providing management support.

solicitors have increased materially from the $1 million that was indicated when leave was sought to a likely $3 million in total now. Mr Smith has put it on the basis that, effectively, the company is being ordered to borrow money to pay fees such that its debt continues to accrue at a concerning rate.

[20]              These are significant costs, producing a significant debt. But, when the position is considered in the context of the bedrock considerations set out in [12] above, I do not see the extension of the orders for a period of just a little over a month to make a difference of such a nature that would warrant the rug being pulled altogether from the arrangements that are in place at the moment.

Other matters

[21]              The defendants have expressed concerns about the contingent cost liability of the plaintiff companies in the event that the derivative action fails. That is a point that, as I see it, will not tip the balance one way or another when this further month’s extension is being considered. But it may become relevant considering the litigation funding application.

[22]              The defendants have made several points about Ms Heine KC’s ongoing review of the reasonableness of invoices rendered to the plaintiff companies. These are not matters that are relevant to the issues to be considered.

Outcome

[23]              I see it as appropriate for the original costs order and the varied costs order to be extended until the plaintiffs’ application for approval of a litigation funding agreement is heard on 4 October 2024. The outcome of that application will determine the way in which this proceeding will be funded, one way or another and on a conclusive basis. I do not see it as being unjust or inequitable for the arrangement to be extended for this proportionately short period of time.

[24]              I make an order under s 166 of the Companies Act that the reasonable costs of this proceeding are to be met by the first to third plaintiffs on the terms set out in

[17(a), (b) and (c)] of my decision of 17 May 2024 until 5 pm on Friday, 4 October 2024.

[25]              The plaintiffs’ application for approval of litigation funding agreement will be heard at 11 am on Friday, 4 October 2024. The following timetable will apply:

(a)The plaintiffs are to file and serve an amended application and an updating affidavit by 5 pm on Friday, 13 September 2024.

(b)The defendants are to file any notice of opposition and any affidavits in opposition by 5 pm on Friday, 20 September 2024.

(c)The plaintiffs are to file and serve any reply evidence by 5 pm on Wednesday, 25 September 2024.

(d)The plaintiffs are to file their submissions on the application by 5 pm on Friday, 27 September 2024.

(e)The defendants are to file and serve their submissions on the application by 5 pm on Tuesday, 1 October 2024.

[26]              Any issue of costs associated with the hearing yesterday will be considered following a decision on the litigation funding application.

Radich J

Solicitors:

Bell Gully, Wellington

Mallett Partners, Wellington