Drylandcarbon GP One Limited v Leckie
[2024] NZHC 1239
•17 May 2024
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 1239
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 PlaintiffAND
WILLIAM JAMES WATERHOUSE LECKIE
First Defendant
CHRISTOPHER GORDON LEWIS MORRISON
Second DefendantLEWIS TUCKER AND COMPANY LIMITED
Third Defendantcontinued …
Hearing: 3 May 2024 and further submissions on 8 and 10 May 2024 Counsel:
M G Colson KC and M R M Gale for Plaintiffs
J B M Smith KC, A S Olney and O C Gascoigne for Defendants
Judgment:
17 May 2024
JUDGMENT OF RADICH J
(Costs of derivative action)
DRYLANDCARBON GP ONE LTD v LECKIE [2024] NZHC 1239 [17 May 2024]
… continued
PHEASANT TAIL HOLDINGS LIMITED
Fourth DefendantLEWIS TUCKER FOREST PARTNERS LIMITED
Fifth DefendantLEWIS TUCKER FP INVESTMENTS LIMITED
Sixth Defendant
FOREST PARTNERS GP LIMITED
Seventh DefendantLEWIS TUCKER FP MANAGEMENT LIMITED
Eighth Defendant
[1] This derivative action is brought in the names of, and on behalf of, the first, second and third plaintiffs by Anthony and Wendy Beverley as ultimate beneficial owners of those companies.1 In making the derivative action orders under s 165 of the Companies Act 1993, the High Court 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
[2] The defendants say that the original costs order should be rescinded because the plaintiffs are now insolvent and no long-term funding solution has been secured. It is said that, to use the language of s 166, it is unjust and inequitable to require the plaintiffs to continue to meet the costs of the proceeding.
1 Together with William Leckie and Christopher Morrison, the first and second defendants, whose interests are held through the fourth defendant, Pheasant Tail Holdings Ltd.
2 Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 [High Court derivative action decision]. This decision was upheld on appeal in Leckie v Beverley [2023] NZCA 570 [Court of Appeal derivative action decision].
[3] The plaintiffs resist rescission of the original costs order and say that it should in its varied form (which I come on to describe) be extended for three months so that a long-term funding solution can be put in place. It is said that, although the plaintiffs are experiencing liquidity issues, their longer-term financial position is sound.
The derivative action
[4] The basis for the derivative action, and its nature, is described in the decisions of the High Court and of the Court of Appeal through which orders were made, and upheld, enabling the proceeding to be brought.3 By way of overview for the purposes of this decision, Anthony Beverley, William Leckie and Christopher Morrison established a carbon afforestation fund to produce carbon credits (measured in New Zealand units, or NZUs) for the fund’s investors. The plaintiffs are the corporate vehicles through which the fund operates.
[5] Drylandcarbon GP One Ltd (the General Partner) is the General Partner of the Drylandcarbon One Limited Partnership (the Limited Partnership). The limited partners are Air New Zealand Ltd, Contact Energy Ltd, Genesis Energy Ltd, Z Energy Ltd, DC One H2 Ltd and DC One H3 Ltd.
[6] Drylandcarbon One Management Ltd (the Manager) manages the Limited Partnership under a management services agreement (the Management Services Agreement).
[7] DC One H1 Ltd (H1) is a holding company that owns all of the shares in the General Partner and the Manager. The shares in H1 are held as to 50 per cent by Mr and Mrs Beverley and as to 50 per cent by Messrs Leckie and Morrison through Pheasant Tail Holdings Ltd.
[8] The benefit of the scheme to the Beverleys and to Messrs Leckie and Morrison is obtained through fees earned by the Manager under the Management Services Agreement and passed back to their interests through H1.
3 At [1]–[30]; and Court of Appeal derivative action decision, above n 2, at [1]–[8] and [13]–[29].
[9] It is said in the derivative action that Messrs Leckie and Morrison established a second fund, incorporating the fifth to eighth defendants for that purpose. It is alleged that, in establishing the second fund, the defendants, variously, unlawfully diverted a corporate opportunity belonging to the plaintiffs, misused company information belonging to the plaintiffs, breached statutory and fiduciary duties owed to the plaintiffs, misused confidential information and breached contractual obligations.
[10] In the High Court, Associate Judge Paulsen found the evidence to be “quite overwhelming” in establishing that Messrs Leckie and Morrison had used information available to them by virtue of their positions as directors of the plaintiffs to establish the second fund.4 He found it to be arguable that the directors’ duties had been breached in the ways that are alleged.5 He found there to be force in an argument that the second fund was not in the best interests of the plaintiffs and was advanced in the personal interests of Messrs Leckie and Morrison.6 He was satisfied that it is arguable that the other defendants in this proceeding participated in the breaches, even as strangers to the fiduciary relationships.7 The Associate Judge concluded by saying that he was satisfied that a prudent business person conducting their own affairs would commence this proceeding.8
[11]The Court of Appeal agreed with the Associate Judge.9 It said:
[73] The derivative claims have high potential value and the expected costs of pursuing them are not disproportionate to the amounts realistically in issue. We consider that a prudent businessperson acting in their own interest would pursue the claims. It is helpful to consider the likely response if, for example, an independent director of any one or more of the derivative plaintiffs (if there had been one) had chosen to exploit the opportunity to establish a second fund using company information. It seems unlikely that the Beverleys and Messrs Leckie and Morrison would have been content to stand by, allow that to happen, and not cause the derivative plaintiffs to pursue claims against the independent director for breach of fiduciary and other duties owed to the relevant company or companies.
4 At [76].
5 At [72].
6 At [83].
7 At [85].
8 At 103].
9 Court of Appeal derivative action decision, above n 2, at [64], [67], [70] and [73].
Costs of the derivative action
[12]Section 166 of the Companies Act is in the following terms:
166 Costs of derivative action to be met by company
The court shall, on the application of the shareholder or director to whom leave was granted under section 165 to bring or intervene in the proceedings, order that the whole or part of the reasonable costs of bringing or intervening in the proceedings, including any costs relating to any settlement, compromise, or discontinuance approved under section 168, must be met by the company unless the court considers that it would be unjust or inequitable for the company to bear those costs.
[13] Accordingly, if there are grounds for a derivative action to be brought under s 165 then the starting proposition is that the company will meet the costs of the proceeding. That will be the case unless the Court considers that it would be unjust or inequitable for the company to do so.
[14] In the High Court, it was found that no good reason had been advanced as to why it would be unjust or inequitable for the derivative plaintiffs to bear the costs of a proceeding brough for their benefit.10
[15] The Court of Appeal approached the question of costs on the basis that the claims in the derivative action are pursued for the benefit of the derivative plaintiffs and, therefore, on the face of it, it does not appear to be unjust or inequitable for the plaintiffs to meet the costs of the proceeding, at least in the first instance.11
[16] The Court went on to say that the fact that the General Partner may not have assets or income available to meet the cost does not mean that a prudent business person in its position would not pursue the claims.12 It referred to the funding the General Partner receives from the Manager and H1 – derived from income under the Management Services Agreement – and to the prospect of assistance being available from an external funder.
10 High Court derivative action decision, above n 2, at [112].
11 Court of Appeal derivative action decision, above n 2, at [74].
12 At [75].
[17] The costs order has been varied since the Court of Appeal’s decision. In a joint memorandum of counsel of 20 December 2023, solvency concerns on the part of the plaintiffs were explained in broad terms and, consequently, the parties sought what was termed as an “interim variation of the original costs order” by consent. The variation of the original costs order was, as expressed in the memorandum, to be on the following terms:
(a)The Beverleys will meet the plaintiff companies’ costs in the derivative proceeding (that is, the costs of Bell Gully, Mike Colson KC, Wilson Harle and McGrath Nicol (the Derivative Proceeding Costs)), which are invoiced in the period from the date upon which this order is made, until 23 February 2024 (the Interim Funding Period) (at which point, absent further order of this Court, the original costs order shall resume its effect);
(b)Subject to the parties’ differing views as to the meaning of the qualifier “in the first instance”, the Beverleys will be entitled to recover from the plaintiff companies any Derivative Proceeding Costs which they meet during the Interim Funding Period, save that the Beverleys will only be entitled to recover such costs as and when the plaintiff companies (or any one of them) have the means to pay them; and
(c)Derivative Proceeding Costs invoiced to the plaintiff companies prior to commencement of the Interim Funding Period (that is, to the end of November 2023) remain payable by the plaintiff companies, unless, following provision of up-to-date balance sheets and supporting information for the plaintiff companies, it is apparent that the plaintiff companies cannot meet the invoices in question, in which case such Derivative Proceeding Costs are deemed to be treated as if they had arisen in the Interim Funding Period.
[18] A varied costs order on those terms was made by Cooke J in a minute of 21 December 2023 (the varied costs order).
[19] In a joint memorandum of 21 February 2024, it was proposed that the operation of the varied costs order be extended until 19 April 2024. An order to that effect was made by Cooke J on 23 February 2024. It has been extended by consent on three occasions since then (most recently during the hearing of this application) such that, to the extent that it is in place by consent, that consent will not continue beyond 17 May 2024.
The issue that arises
[20] The issue that arises is whether things have changed to such an extent that this Court should, in the face of the Court of Appeal’s conclusions on the appropriateness of the original costs order, now rescind it – both in its original form and as varied.
[21] The defendants say that things have changed to that extent. They say that, in the Beverleys’ submissions in support of the application leading to the original costs order, it was said that the plaintiff companies are likely to have sufficient funds to fund the derivative action. Mr Beverley’s evidence was that the Manager’s base fee (then, an average of $18,250 a month), performance fee (through the distribution of NZUs), and cash reserves would be sufficient to fund the derivative action, which was then expected to cost up to $1 million. The position was, it is said, repeated in the Court of Appeal. It is said that, now, payment of the performance fee has been deferred, there are no cash reserves and that, realistically, the derivative action will cost at least
$2 million. External funding, it is said, is most unlikely.
[22] Is, then, the financial position of the plaintiffs is such that the costs order should now be rescinded or should, as the plaintiffs say, it stay in place for a little bit longer so that longer-term funding solutions can be pursued?
The breadth of the Court’s jurisdiction under s 166
[23] The terms of s 166 are broad. The Court may order that “the whole or part” of the costs of the proceedings be met by the company. They require the Court, in considering whether the s 166 presumption should not apply, to consider justice and equity.
[24] Moreover, the provision appears under a subheading, “Derivative actions” within pt 9 of the Companies Act. Under that subheading, ss 165–168 provide a scheme for derivative actions to be brought and conducted. Section 165 itself contains broad discretions.13 As the Court of Appeal said, a conclusion that a derivative proceeding is in order can lead in and of itself to a conclusion under s 166 that it is not unjust or inequitable for the companies to meet the costs of the proceeding.14
[25] Under s 167, the Court may, at any time, make any order that it thinks fit in relation to a derivative proceeding. The broad discretion afforded by s 167 is largely unfettered so long as it is exercised having regard to the interests of the company.15 It is consistent with the Court’s supervisory role in derivative proceedings.
[26] Equally, as the defendants have submitted, s 166 must be applied broadly.16 As has been said for the defendants, there is nothing to prevent the Court dealing with costs issues at a later stage of a derivative proceeding even where the Court has, as here, already made a costs order. The Court may be asked to rescind or vary it.
[27] However, despite that analysis in the defendants’ written submissions, it was said during the hearing that the varied costs order was able to be made only because both parties consented to it and that, in absence of that consent – which extends only to 17 May 2024 (see [19] above) – the Court does not have the power to impose a s 166 costs order on terms and conditions such as those contained within the variation. In supplementary submissions it was put on the basis that there is no general ability for the Court to determine the contractual or other arrangements a company may choose to undertake to fund activities, including litigation. If that is the case then, from 18 May, the company would have to meet the cost of the litigation itself.
[28] I do not think that can be the case. As mentioned above, the discretion provided by s 166 and the provisions related to it is broad. It could not permit only of a boilerplate order. The nature of any costs orders must follow from the exercise of the
13 Although s 165(2) of the Companies Act 1993 requires the Court to have regard to certain matters, it sits within the broad discretion provided in s 165(1).
14 Court of Appeal derivative action decision, above n 2, at [74].
15 Irving Baker Ltd v Baker HC Auckland CIV-2003-488-42 16 March 2006 at [23].
16 Investacorp Holdings Ltd v Quinn [2015] NZHC 1498 at [10].
Court’s discretion under s 165 and to its ability to make any related order under s 167. As the defendants have said themselves there is nothing to prevent a Court from varying an earlier costs order. Moreover, in a letter of 16 February 2024 from the defendants’ solicitors to the plaintiffs’ solicitors, a proposal was made that the varied costs order might, on certain terms and conditions, be made permanent. The Court could not have made the varied costs order in the first place unless it had the power to do so.
[29] Accordingly, the focus here is on whether or not a form of costs order should continue. Under the original costs order, the plaintiff companies would need to pay invoices for legal costs as they fall due. Under the varied costs order, the plaintiff companies remain liable but the invoices are paid by the Beverleys and only need to be repaid when the companies have the means to do so.
[30] Accordingly, the financial position of the plaintiff companies, now and in the future, needs to be considered. It needs to be considered in order to determine whether changed circumstances are such that the costs order – whether original or varied – should be rescinded on the basis that it would be unjust or inequitable for the company to continue to bear them. A basis upon which Courts have found it to be unjust or inequitable for a company to bear costs include a lack of corporate assets or funds.17
General solvency considerations
[31] As the General Manager of the Manager, Mr Jacobs, has explained in evidence, the General Partner and H1 have no assets and no revenue. Accordingly, in practical terms the costs of the proceeding need to be met from the financial resources of the Manager. As he has explained, the Manager was established to provide management services to the Limited Partnership pursuant to the Management Services Agreement. It has two revenue streams: the monthly management fee, which is now approximately
$22,845, and a performance fee which is five per cent of any distribution made to the Limited Partners – in NZUs. The NZUs must, under the terms of the Management
17 See generally the discussion in Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 682–688. The discussion there includes as other grounds the relative weakness of a derivative claim, whether a defendant is funding proceedings against themselves, the risk of giving the applicant a blank cheque and motivations for bringing the proceeding.
Services Agreement, be retained in the first instance to meet operating costs and, to the extent that there is a surplus, distributions are made to the Limited Partners. Five per cent of that distribution then is paid to the Manager as a performance fee.
[32] However, (as is discussed shortly) payment of performance fees from the 2024 NZU distribution has been deferred. That has a material impact on the Manager’s financial position. Moreover, it is said, the management rights are themselves at risk.
[33] That is because, it is said, under the Management Services Agreement, if the Manager suffers an “insolvency event”, the agreement may be terminated by the Limited Partners such that the Manager’s income streams would be lost. Equally, under the limited partnership agreement, if the General Partner suffers an insolvency event, the partnership itself will terminate.
[34] The Management Services Agreement defines “insolvency event” as where a person is, becomes, or is deemed to be, made to pay its debts, insolvent or bankrupt.
[35] Under the Companies Act, companies are required to satisfy the “solvency test” in certain circumstances. Section 4(1) is in the following terms:
4. Meaning of solvency test
(1)For the purposes of this Act, a company satisfies the solvency test if—
(a)the company is able to pay its debts as they become due in the normal course of business; and
(b)the value of the company’s assets is greater than the value of its liabilities, including contingent liabilities.
[36] Mr Smith KC says that these tests – whether under the agreements or the Companies Act – cannot be satisfied.
[37] It is said for the plaintiff companies that they are not insolvent. It is said, with reference to Yan v Mainzeal Property and Construction Ltd (in liq), that a realistic and commercial approach to assessing solvency is required and that it is important to distinguish solvency from liquidity.18 A temporary lack of liquidity may not equate to insolvency if a debtor is able to realise assets or borrow funds in order to meet
18 Yan v Mainzeal Property and Construction Ltd (in liq) [2014] NZCA 190 at [60].
liabilities as they fall due.19 It is said that the position here is very different from cases cited by the defendants in which a company’s financial position has led to findings that a costs order s 166 would be inequitable.20 Here, it is said, current liquidity issues are temporary.
[38] As Mr Colson KC has said, while the solvency tests do need to be considered here, they need to be viewed in context. It is said that:
(a)The solvency test in s 4 of the Companies Act is a term that is defined for the purpose of applying it only in prescribed circumstances under the Act, not relevant here, relating primarily to distributions and dividends, shareholder discounts and share buybacks and redemptions.21
(b)In any event, in terms of s 4(1)(a) the focus is on a company’s ability to pay its debts “as they become due” and, under the varied costs order, the litigation costs will only be recovered from the plaintiff companies when they have the means to pay them.
(c)When considering the value of a company’s liabilities for the purposes of s 4(1)(b) directors will have regard under s 4(2)(a)(ii) to whether or not they are contingent, which is the case with the legal costs for the same reasons.
(d)Similarly, when considering directors’ duties, under s 136 of the Companies Act, a director is to consider whether a company can perform obligations “when it is required to do so” and, in any event, duties such as these are owed to the company and not to its shareholders under s 169(3) of the Companies Act.
19 At [59].
20 Watts v Kawhia Offshore Services Ltd HC Hamilton M278/98, 10 August 1999 and Porritt v Weir HC Wellington CP309/97, 12 March 1998 where the companies had ceased trading and in one case was facing an application to wind it up.
21 See in particular ss 52, 55, 67, 70 and 107 of the Companies Act.
[39] That said, the financial position of the plaintiff companies does need to be considered in order to determine whether it would not be just or equitable for them to continue to be required to fund this litigation, whether now or on a deferred basis.
The cash flow solvency of the companies
[40] Mr McKay, an experienced insolvency practitioner with BDO New Zealand Ltd, has given expert evidence for the defendants. His evidence is based upon information about the financial position of the Manager outlined in an affidavit given by Mr Jacobs on 15 April 2024.
[41] Mr McKay considered two cash flow forecast scenarios prepared by Mr Jacobs. The first scenario assumes that, in May this year, the plaintiff companies will be required to reimburse the Beverleys for the litigation funding provided through the varied costs order. Under that scenario, the cash flow forecast would show a balance of -$762,170 in December this year.
[42] The second scenario assumes that the Beverleys are not reimbursed in 2024. It shows a cash flow balance in December of -$407,313.
[43] The cash flow forecasts are prepared on the basis that the Manager receives monthly receipts of approximately $119,000 from the Limited Partnership each month
– comprising approximately $96,000 towards the Manager’s costs (based upon the Limited Partnership’s budget) and base fees earned by the Manager of approximately
$23,000 per month.22
[44]Monthly payments, excluding litigation costs, range from $82,000 to
$151,000. Litigation costs, under the first scenario for the balance of the year, total approximately $900,000 and, under the second scenario, total over $546,000.
[45] Receipts exclude the performance fees of five per cent of the NZUs distributed. It is said that the Manager has proposed delaying distributions of NZUs for the period ending 30 April 2025 and selling them over time to meet the funding requirements of
22 The forecasts assume the total receipts reduce to approximately $113,000 per month from August 2024 to align with the monthly Manager costs budgeted.
the partnership. And it is said that the Advisory Committee of the Limited Partnership has decided to delay the distribution of 2024 NZUs in order for the units on hand to be sold to meet the cash flow requirements of the Limited Partnership. This means, it is said, that the Manager will not receive any performance fees from the 2024 NZU distribution until later in the year, if at all, and that the 2025 distribution is not expected until after May 2025.
[46] The deferred 2024 NZU distributions are to a value of approximately $108,000 while the 2025 NZU distributions are to an estimated value of $610,000. Mr McKay concluded that the plaintiff companies will fail the cash flow limb of the solvency test from May 2024 onwards, whether or not they are required to reimburse the Beverleys’ costs of the proceedings to date if the varied costs order was to end this month. That conclusion would be modified, he has said, if the plaintiff companies were able to enter into a further agreement by which payment obligations for litigation costs are modified to align with the cash flow cycles of the plaintiff companies.
[47] However, the fundamental issue with this analysis is that, under the varied costs order, the litigation costs paid by the Beverleys have been subordinated fully. The Beverleys are, under the terms of the varied costs order, only entitled to recover the costs they have paid “as and when the plaintiff companies (or any one of them) has the means to pay them”.
[48] If the litigation costs are backed out of the figures used by Mr McKay – as provided by Mr Jacobs – a surplus of payments over receipts for the April to December period results. And that does not include the Manager’s entitlement to the performance fee which, although deferred, is owed.
[49] Accordingly, for the purposes of a s 166 assessment, I am satisfied that the defendants’ cash flow insolvency concerns are not an impediment to the continuation of a costs order at this stage.
The balance sheet solvency of the companies
[50] Mr McKay, based upon information provided by the Manager, has said that the Manager has reported negative equity of approximately $45,000, making it balance
sheet insolvent as at 31 March 2024. However, it is to be observed at the outset that the balance sheet figures include litigation funding provided by the Beverleys to date of $311,000 which, as mentioned, is not payable until the plaintiff companies are in a position to do so.
[51] Mr Beverley, in his evidence, takes issue with Mr Jacobs’ balance sheet figures, saying that they do not accurately present the true net asset and equity position of the Manager. The main asset of the Manager, it is said, is the rights it possesses for the ongoing management of the Limited Partnership, as formalised in the Limited Partnership Agreement and the Management Services Agreement. The rights are such, it is said, that they can be traded in the New Zealand market. Reference is made to an assessment from Mr Hayward, a chartered financial analyst, which gave the Beverleys’ 50 per cent interest a value of $10.6 million as at August 2022, meaning a total value for the rights of approximately $21.2 million.
[52] Mr Smith says that there are three problems with this evidence. The first is that Mr Beverley is wrong in thinking that the management rights could be included as an asset on the company’s balance sheet. They are, it is said, contractual rather than proprietary so have no value in themselves; they cannot be provided as a security. They can, it is said, be removed by the Limited Partners as discussed in [33] and [34] above.
[53] As Mr McKay has said in his evidence in reply, any value in the management rights cannot be unlocked without a sale and it would seem illogical to sell only a portion of them. Moreover, it is said, the value of the management rights represents the intrinsic value of the company but this value is not recognised on the balance sheet. He doubts whether the rights could genuinely be considered even as an intangible asset and there is in any event, it is said, no active market for them.
[54] The second issue raised by Mr Smith is that the evidence of Mr Hayward, who provided the valuation referred to in [51],23 is said to lack independence as it relies upon the evidence of Mr Beverley. Mr Hayward’s valuation of the management rights
23 Mr Hayward’s evidence was given in support of the application to commence a derivative action in 2022.
is based upon a discounted cash flow analysis undertaken by Mr Beverley. As Mr Hayward said in his evidence, an analysis of that sort requires significant judgment.
[55] Mr Hayward, it is said, has not tested the assumptions that underline Mr Beverley’s cash flow analysis. Therefore, it is said, his evidence is tainted. Reference is made to Prattley Enterprises Ltd v Vero Insurance New Zealand in which purportedly independent evidence on the part of an expert witness was found to be inadmissible in circumstances in which the expert had previously held himself out as the ‘claims advocate’ of the party who had called him.24 It is said that impartiality, rather than pure independence, issues arise here which goes directly to the admissibility of the evidence. Ultimately, I do not see the conclusions to be reached on balance sheet solvency as turning upon Mr Hayward’s evidence. However, I would not in any event be drawn to conclude that impartiality issues arise through reliance alone upon the evidence of Mr Beverley. Accordingly, it would not in my view be a matter of admissibility. However, weight could be adjusted as a result of the expert assessment having relied upon cash flow evidence of one of the parties to the litigation.
[56] The third point that Mr Smith makes under this head is that a forward sale of the assets to which Mr Beverley refers is not available. And, as a related point, it is said that there are no available options for the company to fund the litigation.
[57] The status quo, it is said, is untenable. So, what could be done? Mr Leckie has said that an injection of capital by him and Mr Morrison was unacceptable. Despite the Court of Appeal’s findings about the prudence of the proceeding, it is said by Mr Leckie that it would amount to funding the proceeding against themselves.
[58] External funding from a third-party lender is not seen by Mr Leckie as a sustainable option as personal guarantees would be required.
[59] The forward sale of NZUs was not seen as being viable on the basis that potential counter parties who have been approached were not prepared to agree to a
24 Prattley Enterprises Limited v Vero Insurance New Zealand Limited [2016] NZCA 67, [2016] 2 NZLR 750 at [87], [93] and [99]–[101].
forward sale without security or a guarantee of future delivery being put up by either the shareholders or the Limited Partnership – and the Limited Partnership had no incentive or need to guarantee such a trade.
[60] Litigation funding is an issue for Messrs Leckie and Morrison because, as Mr Leckie has said, as defendants to the derivative proceeding, they have an inherent conflict of interest and are unable to engage with any funder on a practical level. That leaves the notion of the Beverleys funding the proceedings themselves.
[61] There is another option. The Beverleys have offered to loan money to the derivative plaintiffs to fund the litigation. A draft facility agreement and general security deed was prepared for that purpose. The loan proposal was for the sum of
$500,000 but on the basis that it could be increased or decreased in accordance with the proposed terms. Repayment arrangements in the draft documentation were structured on the basis that repayment of costs used for the derivative action would only be made to the extent that the plaintiffs have sufficient funds to pay – both in terms of progressive payments or final repayment.
[62] The Manager, having had the proposed lending arrangement reviewed by Chapman Tripp,25 rejected the proposal. Mr Smith put it on the basis that, quite apart from points made by Chapman Tripp, it would not be in the defendants’ interests for an agreement of that sort to be in place because a repayment obligation would arise even if the litigation was to come to an early end – whether through insolvency of the plaintiffs or otherwise – with no benefit to be derived. It would be better, it is said, for the Beverleys simply to fund the litigation without a s 166 costs order on the basis that costs could be claimed under the High Court Rules (on an uplifted basis if grounds are made out) if the claim succeeds.
[63] Mr Colson, on the other hand, says that, in circumstances where the Court of Appeal has said that the case is one that an independent director would pursue, even in the absence of assets or available income, the negative views of the defendants to the proposed lending arrangement must be treated with caution.
25 Privilege having been waived over the instructions to and advice from Chapman Tripp.
[64] For all of that, there are in my view two fundamental points when considering the plaintiff companies’ balance sheet solvency:
(a)When the litigation costs funded by the Beverleys are removed from the balance sheet figures for the Manager, as at 31 March 2024,26 a positive net asset position of over $250,000 results.
(b)Taking Mr Jacobs’ analysis of the value of the Manager’s potential performance fee over the period to 2029,27 net income will by 30 June 2025 be over $650,000. By June 2026, it will be over $1.43 million and, by June 2027, over $2.4 million. By mid-2029, it is projected to be over $4.7 million.
[65] Accordingly, for the purpose of a s 166 assessment, I do not see the concerns raised by the defendants as being an impediment to the continuation of a costs order at this stage.
Conclusions on solvency concerns
[66] I come back to the comments of the Court of Appeal in Yan v Mainzeal Property and Construction Ltd (in liq) to the effect that a temporary lack of liquidity may not amount to insolvency if steps can be taken within a relatively short time frame in order to meet liabilities as they fall due.28 There is no getting away from the fact that the plaintiff companies have liquidity issues. But the companies’ cash flow and balance sheet positions are both 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 plaintiff companies have the means to pay for them.
[67] In addition, the companies’ medium-term position is sufficiently comfortable through the performance fees it expects to receive. It can afford the litigation in the longer term but not in the immediate term.
26 Provided in Mr Jacobs’ 15 April 2024 evidence.
27 Set out in his 15 April 2024 affidavit and using the NZU prices on Carbon Match from 22 April 2024, inflation adjusted at two per cent.
28 Yan v Mainzeal Property and Construction Ltd (in liq), above n 18, at [60].
[68] To the Court of Appeal’s comments in Yan, the conclusions that the Court made in upholding the derivative action orders in this proceeding can be added. A prudent business person would, the Court said, pursue the claims in this proceeding. The Court added that it does not appear to be unjust and inequitable for the companies to meet the costs if they can, despite asset and income concerns. The prospect of funding from an external funder was raised.
[69] For all of these reasons, short to medium-term solutions should be pursued further before the Court goes so far as to rescind the varied costs order that in place, or the original costs order that preceded it.
[70] It was only three months ago that the solicitors for the defendants, in correspondence with the solicitors for the plaintiffs, proposed that the varied costs order should be made permanent, subject to the provision of evidence and to obtaining independent advice. The proposal was that, consistent with the varied costs order, the Beverleys would only ever be entitled to recover costs as and when the plaintiff companies have the means to pay them. It was suggested that leave be reserved for the Beverleys to apply to discharge the order at any time if an appropriate alternative funding arrangement is found. While that proposal is no longer on the table, its general tenor does in my view remain sound at this stage.
[71] Accordingly, I see it as appropriate for the Court to extend the varied costs order for a further, and limited, period of time to allow viable long-term funding options for the plaintiff companies to be explored further. I do not see it as being unjust or inequitable for the company to bear those costs, in the terms of the varied costs order, for that further period of time. And, for the reasons given in [28], I am satisfied that the Court has the power to make an order under s 166 on the same terms as those of the varied costs order.
Result
[72] An order is made 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)] above until 5 pm on Friday, 30 August 2024.
[73] Counsel should liaise, ahead of the expiry of the order, on any extensions or variations to the order or over whether hearing time is needed to address issues upon the expiry of the order. Hearing time should in due course be arranged with the Registry if need be.
[74] In paras 3.26 to 3.28 of its submissions of 22 April 2024, counsel for the plaintiffs have sought a further variation of the terms of the order such that all obligations of the plaintiff companies in the proceeding – including obligations to Lewis Tucker and/or Mallett Partners – are included within the terms of a revised order. If a revision of this sort is made, the plaintiffs say that costs incurred by the defendants, and which they seek to have the derivative plaintiffs pay, should be subject to the costs review mechanism instituted by Cooke J in his judgment of 1 September 2023 in relation to the derivative plaintiffs’ fees. That is not something that was addressed during the hearing of this application and has not been the subject of a response for the defendants. Accordingly, counsel for the plaintiffs should advise counsel for the defendants on whether that variation is still sought and, if so, counsel for the defendants may file a memorandum by 5 pm on Wednesday, 22 May 2024.
Radich J
Solicitors:
Bell Gully, Wellington
Mallett Partners, Wellington,
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