Drylandcarbon GP One Ltd v Leckie

[2024] NZHC 3531

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 3531

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

continued …

Hearing:

4 October 2024

Counsel:

M G Colson KC, 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:

25 November 2024

RESULTS JUDGMENT OF RADICH J

(Approval of litigation funding agreement)

DRYLANDCARBON GP ONE LTD & ORS v LECKIE & ORS [2024] NZHC 3531 [25 November 2024]

… continued

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]    This judgment – on the application by Mr and Mrs Beverley on behalf of the plaintiff companies for approval of a litigation funding agreement – is given on a results basis only at this stage for reasons I come on to describe.

[2]It follows:

(a)this Court’s December 2022 decision in which derivative action orders were made under s 165 of the Companies Act 1993 and in which orders were made, under s 166, that the reasonable costs of the proceeding are to be met by the plaintiffs;1

(b)the November 2023 decision of the Court of Appeal in which the  High Court’s decision was upheld;2

(c)this Court’s order in December 2023 approving by consent an interim variation of the costs orders under which (by way of summary) the Beverleys are to meet the plaintiff companies’ costs in the proceeding

1      Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606 [2022 High Court decision].

2      Leckie v Beverley [2023] NZCA 570 [Court of Appeal decision].

on the basis that they are entitled to recover those costs from the plaintiffs as and when the plaintiffs have the means to pay them;3

(d)my decision of 17 May 2024 which, following resistance to the continuation of the interim varied orders by the defendants, extended the orders to 30 August 2024,4 and my decision of 5 September 2024 which extended the orders to 4 October 2024, when this application was heard.5

[3]    At the conclusion of the hearing on 4 October, the parties asked that a decision on the application not be made available within two weeks of the hearing.   On      18 October, a direction was made at the request of the parties that preparation of a judgment would be deferred until either, or both, of the parties requested by memorandum that it be prepared.

[4]    In a 12 November memorandum, counsel for the defendants asked that I commence preparation of the judgment and in their 13 November memorandum, supporting the request that a judgment be prepared, the plaintiffs suggested (in light of an indication I gave at the hearing on 4 October that a results judgment could be made available) that a results judgment ahead of reasons would be preferable now because it would provide timing advantages for any appeal.

[5]    On 14 November, I issued a minute in which I said that I would issue a results decision as soon as possible the following week. However, in the consequential orders made  in  that  minute,  I  granted  leave  for  the  defendants  to  file  Mr  Leckie’s  12 November updating memorandum and I granted leave for the plaintiffs to file a brief affidavit in reply.

[6]    However, the documents that were then filed were not limited to that affidavit in reply. The affidavit in reply from Mr Beverley was filed on 19 November. On the same day, counsel for the defendants filed a memorandum in which concerns about

3      Drylandcarbon GP One Ltd v Leckie HC Wellington CIV-2023-485-47, 21 December 2023 (minute of Cooke J). The varied costs orders are set out in full in my May 2024 decision, Drylandcarbon GP One Ltd v Leckie [2024] NZHC 1239 at [17] [May 2024 decision].

4   Drylandcarbon GP One Ltd v Leckie, above n 3.

5      Drylandcarbon GP One Ltd v Leckie [2024] NZHC 2544 [September 2024 decision].

the scope of Mr Beverley’s affidavit were raised, having regard to the terms on which leave was granted for the filing of the affidavit. Rather than object, the defendants filed a rejoinder affidavit from Mr Leckie of 19 November 2024. Counsel for the plaintiffs then filed a further memorandum that day, taking issue with points raised in the memorandum for the defendants and raising further concerns.

[7]    Unfortunately, I was not aware that any of the documents had been filed until 22 November and so, as I said in a minute issued on 22 November, given the extent of the further material filed, this decision is being released today.

[8]    The decision explains why, in broad terms, I will grant the plaintiffs’ application. A substantive decision will follow at the earliest opportunity.

The terms of the application

[9]Mr and Mrs Beverley, on behalf of the plaintiffs, have applied for orders that:

(a)The High Court approve and authorise Mr and Mrs Beverley (the Beverleys) as the individuals with the control of the conduct of CIV-2023-485-47 on behalf of the Plaintiff Companies, to enter into a litigation funding agreement with LPF Litigation Funding No. 36 Limited (LDF) on behalf of the Plaintiff Companies for the purposes of providing those companies with the funding required to pursue this proceeding.

(b)If such approval and authorisation is given:

(i)the control of the conduct of the proceeding extends to the funding of the derivative proceeding such that the Beverleys are those with the sole capacity to make decisions in respect of the funding, to deal and interact with LPF;

(ii)leave be given to the Beverleys to seek further ancillary orders from the Court in the event those are necessary to facilitate the entry into, execution of and compliance with the litigation funding agreement.

(c)In the period between the date of the hearing and the determination of this application, the varied costs order be extended for that further, limited period of time.

(d)The costs of this application shall be paid by the defendants, in the event that they oppose it.

(e)In the event that the Court does not grant the order sought at paragraph 1(a), an order that the varied costs order be extended permanently from the date that the order at paragraph 1(a) is not granted until the final conclusion of these proceedings.

(f)Orders be made protecting the confidential and commercially sensitive information contained in the affidavits of Anthony Montgomery Beverley dated 30 August and 13 September 2024 filed in support of this application (particularly in respect of the proposed litigation funding arrangements).

[10]There are two primary issues to be addressed:

(a)Whether the Court has jurisdiction to make an order approving and authorising a litigation funding agreement in a derivative action.

(b)If it does, whether the Court should make an order in this case.

Does the Court have jurisdiction to make the orders?

[11]   I have concluded that the Court does have jurisdiction to make the orders sought in the application in terms of the broad remit provided in s 167 of the Companies Act and under the Court’s inherent jurisdiction. I have reached that conclusion for the following reasons:

(a)Derivative actions are procedural devices to ensure wrongs do not go without a remedy and they need to be managed flexibly to serve the interests of justice.6

6      Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch), [2013] Ch 551 at [24]; and 2022 High Court decision, above n 1, at [54].

(b)As I said in my 17 May decision,7 the broad discretion afforded by s 167 is largely unfettered so long as it is exercised having regard to the interests of the company. It is consistent with the Court’s supervisory role in derivative proceedings.8

(c)While no case is directly on point, authorities dealing with comparable issues assist. As the Court of Appeal concluded in Simons v ANZ Bank New Zealand Ltd, the Court has jurisdiction under r 4.24 of the High Court Rules 2016 and s 146(4) of the Senior Courts Act 2016 to grant common fund orders (which involve litigation funding) alongside its powers as a court of equity to do justice between the parties including through regulating the financial relationship between the plaintiff and the litigation funder; particularly where, without the funder, there is little prospect of a representative proceeding progressing.9 These conclusions are supported more directly by Australian authorities.10

Should the orders be made?

[12]   The primary consideration in the exercise by the Court of its discretion under s 167 is the interests of the company.11

[13]In considering whether the order sought is in the best interests of the company

– and the directly related issue under s 166 of whether it would be unjust or inequitable for the company to bear the costs of the derivative action through the proposed funding agreement – three primary considerations are relevant.

7      In response to a submission for the defendants that there is no general ability for the Court to determine the contractual or other arrangements a company may choose in order to fund activities, including litigation.

8      May 2024 decision, above n 3, at [25]–[28].

9      Simons v ANZ Bank New Zealand Ltd [2024] NZCA 330, [2024] NZCCLR 219 at [135] and [138]– [140]. By contrast with the different circumstances in Waterhouse v Contractors Bonding Ltd [2013] NZSC 89 where the Supreme Court declined to exercise supervisory control over litigation funding agreements generally.

10 See Fiduciary v Morningstar Research [2005] NSWSC 442; and De Tocqueville v Pacific Current Group Ltd [2020] FCA 172.

11 Irving v Baker Ltd v Baker HC Auckland CIV-2003-488-42, 16 March 2006 at [23].

[14]   The first is the strength of the claim. In my 5 September 2024 decision, I referred to several “bedrock” considerations that are relevant here.12 They are:

(a)The finding in the 2022 High Court decision that relevant evidence in support of the plaintiff’s claim was “quite overwhelming”.13

(b)The findings of the Court of Appeal that a prudent business person would pursue the claims in this proceeding and that, moreover, the fact that the general partner might not have the financial ability to meet costs did not mean that the claims would not be pursued having regard to the prospect of assistance being available from an external funder.14

(c)The conclusions in my May decision that cash flow insolvency and balance sheet insolvency issues raised by the defendants were not an impediment to the continuation of costs orders at that stage.15

[15]   In his supplementary affidavit of 12 November 2024, Mr Leckie has said that evidence of the proposed sale by a limited partner of its interest in the Forest Partners GP Limited Partnership provides a reliable independent indication of its maximum market value as a whole – and, correspondingly, of the management rights – at

$15.4 million. That is considerably less than the value of the claim as the High Court and the Court of Appeal understood it when making the decisions referred to in [14] above.

[16]   However, Mr Beverley, in his affidavit in reply, maintains, on the basis of the analysis in his affidavit of 27 September 2024, that the value of the limited partnership could be as high as $58.5 million. He makes the point that the competing valuations will be the subject of independent expert evidence at the trial of the proceeding in June next year.

[17]   The valuation of the limited partnership is a material factor but the differences between the parties on valuation are not such that the Court is in a position to change

12 September 2024 decision, above n 5, at [12].

13 2022 High Court decision, above n 1, at [76].

14 Court of Appeal decision, above n 2, at [73].

15     May 2024 decision, above n 3, at [66]–[71].

the conclusions it has reached previously and to find now that the funding of the litigation is not in the company’s best interests. The Court is not in a position, in advance of expert evidence at trial, to draw any firm conclusions on value.

[18]   The second consideration is the available alternatives. The alternatives here are to make the varied costs order permanent (which is the fall-back position in the Beverleys’ application) or  for  the  Beverleys  to  fund  the  litigation  personally.  Mr Leckie has, in evidence, undertaken an analysis of the respective costs of the options. However, there is no obligation on the part of the Beverleys to dip into their own pockets to fund litigation that has been found to be in the interests of the companies to pursue.

[19]   The third is the broad terms of the funding agreement. While it is not for the Court to become closely involved in the wording of the agreement, it does need to consider it to the extent that it can be satisfied that entering into it is in the bests interests of the company, or otherwise.

[20]   Under the agreement (by way of a very broad summary) the funder agrees to meet the plaintiffs’ costs associated with the litigation subject to an agreed budget, the Beverleys retain control of the conduct of the proceeding, the plaintiffs have no liability to the funder, the funder is liable for any adverse costs award made against the plaintiffs in the event that the derivative action is unsuccessful and, in the event that the plaintiffs succeed, the funder is entitled to recover the sums it has advanced plus a funder’s fee, being a percentage of the proceeds of the litigation. The funder’s payments are secured through first-ranking securities over the proceeds of the litigation. The terms are in my view reasonable as being in line with the market, and appropriate.

[21]   Ultimately, I see the funding arrangements as being in the bests interests of the company. It ensures that the litigation can be pursued without downside risk. It would indemnify the plaintiffs from potential liability for security for costs, or an adverse costs award in the event that the proceeding is unsuccessful, and will enable a return to the plaintiffs, in the event that the claim succeeds, that is consistent with the basis upon which the derivative proceeding was approved in the first place.

[22]   Finally, I am not satisfied that there is, as the defendants have suggested, a significant risk that the realisation of the funder’s rights under the proposed agreement will trigger termination for ‘change of control’ under the relevant inter-company agreements with the result that the contract which generates the benefits for the parties would be cancelled. The sequence of events upon which the submission is premised is remote and could not in my view result in the funder acquiring substantially all the income and assets of the DC external manager to an extent that would trigger the relevant provisions. It is not clear, in addition, that termination under the relevant management services agreement would result. The same is so in my view in relation to the manager of the Forest Partners GP Limited Partnership.

Orders

[23]   For these reasons, I am satisfied that the Court has jurisdiction to make, and that it is in the bests interests of the company to make, orders approving the litigation funding agreement.

[24]I make the following orders:

(a)I approve the entry into, and authorise Mr and Mrs Beverley – as the individuals with control of the conduct of this proceeding on behalf of the plaintiffs – to enter into, the proposed litigation funding agreement with LPF Litigation Funding No. 36 Ltd (LPF) on behalf of the plaintiffs for the purposes of providing the plaintiffs with the funding required to pursue the proceeding.

(b)I direct that control and conduct of the proceeding extends to the funding of the proceeding such that Mr and Mrs Beverley are those with the sole capacity to make decisions in respect of the funding to deal and interact with LPF.

(c)Leave is given to Mr and Mrs Beverley to seek further ancillary orders from the Court in the event that any such orders are necessary to facilitate the entry into, execution of and compliance with the litigation funding agreement.

[25]   In addition, I make an order protecting the confidential and commercially sensitive information contained in the affidavits of Anthony Montgomery Beverley dated 30 August, 13 September and 27 September 2024 and in the affidavits of William James Waterhouse Leckie of 20 September, 1 October and 12 November 2024 (relating in particular to the proposed litigation funding arrangements and to the sale of an interest in the Forest Partners GP Limited Partnership). Leave is reserved to the parties to amend or extend these confidentiality orders.

[26]   The proposed litigation funding agreement is not to  be  executed between  Mr and Mrs Beverley (on behalf of the plaintiff companies) and LPF until the later of:

(a)an order being granted staying execution of this judgment (subject to any application for stay of execution being made by the defendants) within 10 working days of the judgment being released; or

(b)10 working days after this judgment is released.

[27]   The varied costs order – which is in the terms set out in [17(a), (b) and (c)] of my 17 May 2024 decision – will remain in place on the terms set out in [6(a)] of my 14 November 2024 minute.

[28]   I suspect it will be appropriate for any issue of costs to await further developments and, at least, the issue of my judgment with full reasons. But, if the parties would like to address costs in any way at this stage, they should let the Court know and a timetable can be put in place for the exchange of submissions.

Radich J

Solicitors:
Bell Gully, Wellington

Mallett Partners, Wellington