Drylandcarbon GP One Limited v Leckie

[2023] NZHC 2439

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

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

CIV-2023-485-47

[2023] NZHC 2439

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

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

DRYLANDCARBON GP ONE LIMITED v LECKIE [2023] NZHC 2439 [1 September 2023]

LEWIS TUCKER FP MANAGEMENT LIMITED

Eighth Defendant

Hearing:

30 August 2023

Appearances:

M G Colson KC and M R M Gale for Plaintiffs

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

Judgment:

1 September 2023

JUDGMENT OF COOKE J

(Stay, discovery, payment of invoices)

[1]    In these proceedings the plaintiff companies bring an action against their directors and associated entities alleging that the directors breached their duties to the plaintiffs in diverting corporate opportunities, using company information, and transferring employees. The claim is under the control of Anthony and Wendy Beverley (the Beverleys) as a consequence of leave being granted for them to pursue the proceedings as a derivative action under s 165 of the Companies Act 1993 (the Act). The Beverleys also pursue a separate claim against the companies for oppression under s 174 of the Act.1 There are two applications before the Court to be dealt with in this judgment:

(a)An application by the defendants to stay the proceedings pending judgment on their appeal against the High Court’s grant of leave under s 165 of the Act.

(b)The plaintiffs’/Beverleys’ application that discovery by the plaintiffs in this proceeding be controlled by the Beverleys, and for orders requiring the companies to pay outstanding invoices for the legal services in connection with the proceeding.

1      CIV-2022-485-157.

[2]    The background to the claim is outlined in the judgment of Associate Judge Paulsen granting leave pursuant to s 165.2 Very broadly the Beverleys and the first and second defendant (the Directors) entered into a joint enterprise to develop and sell a fund to produce carbon credits for entities investing into the fund. Using capital raised the fund would establish a geographically diverse forest portfolio that would produce carbon credits and tree harvesting revenue. The fund has been successfully established with the interests in Drylandcarbon LP held by Air New Zealand Ltd, Contact Energy Ltd, Genesis Energy Ltd, Z Energy Ltd and corporate entities associated with the fund.

[3]    Unfortunately the relationship between the Beverleys and the Directors broke down. After that occurred the Directors established a new enterprise, referred to as Forest Partners. The allegation is that the Directors breached their duties to the plaintiff companies by diverting the business opportunity to the new enterprise, using company information to establish and promote the new enterprise, and taking staff from the plaintiff companies to new entities for progressing the new enterprise.

Stay application

[4]    The Directors have appealed the decision of the High Court granting the Beverleys leave under s 165. The appeal was heard on 20 July 2023 and judgment is awaited. The Directors say that these proceedings should be stayed until judgment of the Court of Appeal is delivered. They point out that the appeal could be allowed and the basis to bring the proceedings could be removed, or that the conditions upon which leave has been granted could be altered. For example, the current conditions requiring the proceedings to be paid for by the plaintiff companies could change.

[5]    The application for a stay is advanced as an application for directions as to the conduct of the proceedings under s 167(b) of the Act.  A stay can be granted under   s 167.3 But here it is an application for a stay pending an appeal. For that reason I consider that r 12 of the Court of Appeal (Civil) Rules 2005 is relevant, at the very least by analogy. The relevant principles were set out by the Court of Appeal in Brook

2      Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 (CIV-2022-485-158).

3      Irving Baker Ltd v Baker HC Auckland CIV-2003-488-42, 16 March 2022 at [22]–[23].

Valley Community Group Inc v Brook Waimarama Sanctuary.4 The Court is required to balance the competing rights of the party who is entitled to the fruits of judgment against the need to preserve the appellant’s position in the event of the appeal succeeding. Relevant considerations include:5

(a)whether the appeal may be rendered nugatory by the lack of a stay;

(b)the bona fides of the appellant as to the prosecution of the appeal;

(c)whether the successful party will be injuriously affected by the stay;

(d)the effect on third parties;

(e)the novelty and importance of questions involved;

(f)the public interest in the proceeding;

(g)the overall balance of convenience; and

(h)the apparent strength of the appeal.

[6]    Here I see no basis to grant a stay. The most important point is that this Court has already carefully considered the nature of this proceeding and given leave for it to be brought as a derivative action under s 165. When doing so Associate Judge Paulsen said:6

Standing back and looking at all the matters raised in the round, I am satisfied that a prudent business person conducting their own affairs would commence the intended proceeding. In arriving at that conclusion, I note that the proposed claims are at least arguable, they are potentially very valuable and the costs of pursuing the litigation are not significant when measured against the amounts at stake. Further, I accept that it is relevant that the proceeding may determine the position that applies in the event of further funds being created.

4      Brook Valley Community Group Inc v Brook Waimarama Sanctuary Trust [2017] NZCA 377, (2017) 23 PRNZ 598.

5 At [10].

6      Beverley v Drylandcarbon GP One Ltd, above n 2, at [103].

[7]    That judgment was delivered on 22 December 2022. The proceedings were filed in February 2023. Since that time the proceedings have effectively stalled because of the arguments between the parties over the matters addressed in this judgment, and the pursuit by the Directors of their appeal. Significant proceedings of this kind should generally not be delayed in this way. When the proceedings are brought as a consequence of leave being granted under s 165, and the defendants to the proceeding are the directors of the plaintiff companies, there will also be a concern that the delays as a result of the complications arising from the relationship between the defendants and the plaintiff entities, and that these delays are not in the best interests of the companies.

[8]    A key argument advanced by Mr Smith KC for the Directors is that it is now not in the best interests of the companies to progress the proceedings when an appeal decision is pending. I accept that the Beverleys may owe fiduciary duties to the companies in pursuing the litigation.7 But such duties are contextual, and here they are subject to the Court’s control under s 167 of the Act. Mr Smith argued that prudent directors would pause and await for the appeal Court decision. I do not agree. This is a substantial claim by the companies that has been assessed as having a proper basis by the Court. It is in the best interests of the companies to progress it promptly.

[9]    A further key factor relied on by Mr Smith was the financial position of the companies. Based on the information that has been filed I accept that there are limits on the cash available to them to pay for the litigation. But I also accept the point that is made by the Beverleys that the financial position of the companies is sufficient to pay the existing invoices that have been rendered, and if necessary there are further sources that can be called upon the fund the litigation, including funding by the Beverleys. I do not consider the financial position of the company should inhibit the progress of claims for what are substantial amounts. Indeed, if anything, it may suggest the proceedings should be pushed on. In any event I do not agree that the financial position of the companies is a reason for a stay as this could lead to an increased cost of the proceeding associated with delay. I do not see it as a factor in support of a stay.

7      McCulloch v Quinn [2012] NZHC 16; and Peter Watts, Neil Campbell and Christopher Hare (eds)

Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at pp 678–680.

[10]   In terms of the other factors outlined in Brook Valley the appeal will not be rendered nugatory if a stay is not granted. I also see disadvantage to the plaintiffs from a stay given the further delay to the proceedings, and little true disadvantage to the Directors in the progress of the proceedings over and above the normal disadvantage to them of being defendants to the proceedings. They do not agree the pursuit of the proceedings against them is in the best interests of the companies, but that does not provide a basis for the grant of a stay.

[11]   The position might be different if the decision of the High Court granting leave was finely balanced, or if the Directors could persuade me that it was likely that their appeal would succeed. That might provide a basis to say that it might be better to defer progressing the proceeding giving further directions until the appeal Court decision, particularly when the decision was imminent. But even then the Court might still give directions for the progress of the proceedings in the meantime, simply because there is no disadvantage in doing so other than the cost of litigation, and it is important that significant commercial proceedings continue, including when the High Court had granted leave for them to be pursued. In any event the Directors have not persuaded that their appeal is likely to succeed.

[12]   A further factor against the grant of a stay is the late stage of the application. The proceedings were commenced in February, and whilst there has been no meaningful progress, no application for a stay was then filed by the Directors. The application for a stay was only filed on 10 August. Any application for a stay should have been made at the time when the appeal was filed. Indeed the grant of a stay at this stage, when the Court of Appeal decision can be expected in the next month or so makes little sense. There is no basis to defer the progress of a proceeding in the meantime.

[13]For these reasons the application for a stay is dismissed.

Discovery

[14]   The second issue is a little more complicated. The question is whether the discovery of the plaintiffs’ documents should be controlled by the Beverleys given that they have the conduct of the proceedings in accordance with the leave granted to them,

or whether it should be controlled by the Directors who are being sued by the companies.

[15]   The parties were unable to identify any previous case, either in New Zealand or elsewhere, which has decided who controls discovery in a derivative action in these circumstances. It is normally contemplated that directors will cooperate by providing information relating to the proceeding.8 In many derivative actions there is not an issue, but here the derivative action is against the very directors who would normally be in control of the giving of discovery by the plaintiff companies.

[16]   Given the lack of authority this matter should be considered as a matter of first principle.  Those principles are to be found in the provisions of the Act, particularly  s 167, but also in the provisions of the High Court Rules 2016 (HCR) concerning discovery. The current order granting the Beverleys the power to bring the proceedings in the name of the plaintiffs has not directly addressed the control of discovery — it is not stated that the Beverleys have the ability to search the companies’ records for the purpose of identifying relevant information discovered in the proceeding. But that is an order that the Court can make under s 167 of the Act as associated with the conduct of the proceedings.

[17]   There is a potential issue in giving the Beverleys the authority to deal with discovery by the plaintiff companies as that may give them access to irrelevant, or even privileged material which they may not be entitled to see. On the other hand there is an issue in directing the Directors to be in charge of the plaintiffs’ discovery because of the obvious conflict they have as defendants in the proceeding. I accept Mr Smith’s point that there is always a degree of conflict involved in a party being required to give discovery as doing so does not necessarily further the party’s best interests. But here the position is more acute as the Directors would be giving discovery in a claim against themselves. There is a further complication in that the separate proceedings for oppression under s 174 of the Act are brought by the Beverleys and discovery is also required to be given in that proceeding. The Directors

8      Tweedie v Packsys Ltd (2005) 9 NZCLC 263,845, (2005) 2 NZCCLR 584 (HC) at [55].

also argue that the Beverleys’ approach will give rise to duplication as they will be required to give discovery in any event.

[18]   I consider the appropriate answer in light of these issues arises from the decision that has already been made that the Beverleys should have the authority to conduct the proceedings brought by the plaintiff companies. Discovery is an important part of the proceedings the Beverleys are so authorised to advance. In the normal course of things they should have the responsibility to ensure the plaintiff companies meet their discovery obligations. The fact that the Directors happen to be the defendants does not change that. In any case where a company brings a claim against its directors there will be an overlap in the documents disclosed by the parties on discovery.

[19]   The issue concerning the Beverleys’ access to materials that are not relevant to the proceedings only goes so far in their case given their significant beneficial interest in the companies. But in any event I consider that position is addressed by the proposal that has been made that a third party firm of solicitors be instructed by the companies to undertake the responsibility of facilitating the discovery by the plaintiff companies. For that reason I agree with the Beverleys’ proposal that Wilson Harle be instructed by the plaintiff companies to ensure that the companies meet their discovery obligations in both this proceeding, and the related proceeding concerning oppression. They will need to liaise with the Directors for that purpose, but they act on behalf of the plaintiff companies, not the Directors. One of the Directors will need to swear the affidavit of documents, as required by r 8.15 of the HCR.

[20]   I accept that duplication of discovery is to be avoided.9 But the issue of duplication is not, in the end, an issue in my view. The parties advanced argument over the extent to which directors of a company have control over the company’s records. But when a discovery order is made I consider that the directors have control over all of the company records for the purposes of identifying the materials that must be discovered as this is necessary for the conduct of the business of the company. In any event the duplication issue is addressed here by the Court giving a direction under

9      Elders Pastoral Holdings Ltd v Raptorial Holdings Ltd (in rec) (2001) 16 PRNZ 202 (HC); and

NZ Iron Sands Holdings Ltd v Toward Industries Ltd [2018] NZHC 1571 at [88].

r 8.15(2)(e) of the HCR that the Directors are not required to individually list the documents discovered by the plaintiff companies. Those documents may be within their control, but do not need to be individually listed and can be referred to as a class of documents in their own discovery. They will only be required to individually list the other documentation in their possession or control in a personal capacity. That may include copies of documents discovered by the plaintiffs, and other relevant information such as documentation held in association with the new enterprise. But they will only need to make a one-line entry in their own lists referring to their control of documents discovered by the plaintiffs. I give directions to that effect.

[21]   A further complication arises from the question raised in the memoranda of counsel filed following the hearing concerning discovery in the s 174 oppression proceedings. The consent orders that the parties have agreed to involve the proceedings being both tried together, and also case managed together given the commonality of issues. The issue arises whether the discovery by the plaintiff companies in this proceeding should extend to any discoverable documents relevant to the oppression proceeding. I consider that, for reasons of efficiency, it should. For that reason the discovery facilitated by Wilson Harle should include all documents relevant not only to this proceeding, but also the documents discoverable in the s 174 oppression proceeding. Further, I direct that the discovery provided by the parties to both proceedings should be by way of a single list of documents relating to both proceedings.

[22]   I otherwise make the orders in paragraphs [1](a), (c), and (d) of the plaintiffs’ interlocutory application dated 10 August 2023. I vary the date of the time provided for in paragraph [1](a) in the manner referred to in paragraph [33](e) below.

Outstanding invoices

[23]The final issue relates to the cost of the litigation to date.

[24]   The plaintiffs’ solicitors have rendered invoices to the plaintiff companies in the amount of approximately $133,000. None of the invoices have been paid by the plaintiffs, and the Directors consider there is insufficient information supplied to them to ascertain whether the amounts billed are reasonable. They note that not much has

happened in these proceedings apart from the filing of pleadings, and then the arguments about the further steps.

[25]   The first matter raised by the defendants is that the invoices should be addressed to the Beverleys and not the plaintiff companies. Mr Smith argued that Bell Gully was not in a professional relationship with the plaintiff companies, and that the invoices should be addressed to the Beverleys, with the plaintiff companies then reimbursing the Beverleys. I do not agree. The proceedings are brought by the plaintiff companies. The solicitors on the record for those companies are Bell Gully. The Beverleys have been given the authority by the Court to advance the proceedings brought by the companies, and the Court has made an order under s 166 of the Act that the costs of the proceeding must be met by the companies. As Associate Judge Paulsen said:10

I therefore do not consider the Directors have advanced any good reason why it would be unjust or inequitable for the intended plaintiffs to bear the costs of a proceeding brought for their benefit.

[26]   For that reason Bell Gully’s invoices are correctly addressed to the plaintiff companies. The point is illustrated by the liability for GST. The Beverleys are not registered for GST. The plaintiff companies are. GST on these costs should be met by the plaintiff companies as they have been ordered to meet these costs of the litigation they bring.

[27]   In assessing the issue relating to the reasonableness of the fees I bear in mind that the Beverleys are incentivised to keep the costs down given their ultimate beneficial interest in the plaintiff companies. But in any event the dispute about the level of the fees is appropriately resolved by the proposal initially made by the defendants, now agreed to by the Beverleys, that there be an independent senior barrister who will review the reasonableness of the fees charged.

[28]   The Beverleys suggested a protocol for the role of the independent barrister in the form of the schedule to their written submissions dated 21 August 2023. Following the hearing the defendants proposed changes to that schedule by way of memorandum.

10     Beverley v Drylandcarbon GP One Ltd, above n 2, at [112].

I do not consider the changes suggested by the defendants are necessary, or appropriate. There will now be a mechanism to review the reasonableness of the expenditure, and the senior counsel conducting that role will be able to ask for any information that is appropriate to review that question. I do not consider that the defendants need to have further information in that process. I also consider that it is undesirable for there to be complexity in the processes of reviewing the reasonableness of the fees.

[29]   There is, however, one issue that, as far as I can see, has not been directly addressed by the parties. The protocol covers future invoices as well as the current invoices. Given that the parties have agreed that this proceeding and the oppression proceeding are to be tried and case managed together, I assume there may be an issue concerning the division of future fees for which the plaintiff companies will pay for this proceeding, and the fees the Beverleys will pay on the oppression proceeding. The appropriateness of the division/apportionment of tasks to be undertaken by Bell Gully and counsel may be an issue, for example at trial. There may have been no division/apportionment issue to date as all expenditure this year may have been on this proceeding. I proceed on the basis that the apportionment is something that senior counsel can also review, and I give that direction accordingly. Senior counsel should be provided with a copy of this judgment. If I have misunderstood this issue in any way the parties have leave to apply by filing of memoranda to further address that question.

[30]   Finally, I consider there should be an interim payment so that the review by senior counsel does not further defer payment of at least some of the amounts currently due. It would not be fair to deprive the plaintiffs of payment in the meantime. Accordingly I will direct that the amount of $50,000 be paid on account of what is owed. That direction should not be taken to give any indication from the Court concerning the reasonableness of the fees rendered.

Conclusion and directions

[31]   Mr Colson KC also sought orders that this proceeding be given a fixture, suggesting that up to four weeks might be allocated towards the end of next year after consultation with counsel. Mr Smith was opposed to that course.

[32]   I will not direct the trial be set down now as it seems to me that discovery should be completed first. But I will draw the Registrar’s attention to this proceeding, and the desirability of a fixture of up to four weeks and ask that contact be made with counsel to discuss possible dates. That fixture should be confirmed at the next case management conference referred to below.

[33]   The parties were also in agreement with a range of other orders that were confirmed in a joint memorandum dated 31 August. Given that memorandum, and the matters I have addressed above, I make the following orders/directions:

(a)The defendants’ application for a stay is dismissed.

(b)There is to be an order that this proceeding will be tried and case managed together with the proceedings bought by the Beverleys in CIV-2022-485-157 pursuant to r 10.12 of the HCR. Further, any further directions of the Court in relation to the leave to bring the proceedings as a derivative action in CIV-2022-485-158 may be raised in this proceeding. The proceedings have been entered on the Commercial Panel list by the Chief High Court Judge.

(c)Each party is to give standard discovery by 4 December. That order is to be standard discovery related to both proceedings but the parties may agree on more tailored discovery in accordance with their obligation under r 8.2 of the HCR. The affidavit of documents are to be in the form described in paragraph 5.2 of the joint memorandum. The direction in [21] above applies to the discovery to be given.

(d)In relation to the plaintiffs’ discovery, orders are made in terms of paragraph [1](b)–(d) of the plaintiffs’ interlocutory application dated 10 August.

(e)In relation to the outstanding invoices the Directors are to procure an interim payment of $50,000 plus GST by the plaintiff companies by Thursday 14 September. Directions are also given that the invoices are to be subject to review by senior counsel in accordance with the protocol appended to the plaintiffs’ submissions dated 21 August and paragraph [29] above.

(f)There is to be a further case management conference before me after 11 December at a date and time to be fixed by the Registrar after consultation with counsel.

(g)Leave is reserved to the parties to apply to vary the directions by the filing of memoranda in the meantime.

(h)The plaintiffs are to have the costs of these interlocutory applications on a category 3B basis.

Cooke J

Solicitors:

Bell Gully, Wellington for the Plaintiffs

Morrison Mallett Lawyers, Wellington for the Defendants