Focus 2000 Limited v Beanland HC Auckland CIV 2007-404-598
[2007] NZHC 1645
•21 February 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2007-404-000598
BETWEEN FOCUS 2000 LIMITED First Plaintiff AND
THE CEREBRAL PALSY SOCIETY OF
NEW ZEALAND INCORPORATED
Second Plaintiff
AND
WALTON LESLIE BEANLAND
First Defendant AND
CHRISTINE WILLIAMSON Second Defendant
AND
NIKKI PYE
Third Defendant AND
ANNE MURPHY Fourth Defendant
AND
JOHN THORPE
Fifth Defendant AND
SANDRINGHAM TRUSTEE SERVICE LIMITED
Sixth Defendant AND
COYLE TRUSTEE SERVICES LIMITED Seventh Defendant
Hearing: 21 February 2007
Appearances: Mr P McPherson for Plaintiffs
J C LaHatte for 1st to 3rd and 5th to 7th Defendants
S Dench for Fourth Defendant
Judgment: 21 February 2007
JUDGMENT OF VENNING J
This judgment was delivered by me on 21 February 2007 at 4.45 p.m., pursuant to Rule 540(4) of the
High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Hesketh Henry, Auckland
Ellis Law, Auckland
Copy to: J C LaHatte, Auckland
S Dench, Auckland
FOCUS 2000 LIMITED AND ANOR V WALTON LESLIE BEANLAND AND ORS HC AK CIV 2007-404-
000598 21 February 2007
Introduction
[1] These proceedings concern the establishment of an Endowment Foundation and transfer of a substantial sum (five million dollars) to that Foundation and the actions of the defendants in relation to the establishment of the Foundation and transfer of funds. Given that all parties seek to advance the interests of cerebral palsy sufferers it is unfortunate that the matter has to come before the Court.
Background
[2] The first plaintiff (Focus) carries on business as a health service provider. The second plaintiff is an incorporated society (the Society). The Society is the sole shareholder of Focus. The first to fifth defendants were at material times directors of Focus.
[3] The sixth and seventh defendants are the trustees of the Cerebral Palsy Endowment Foundation (the Foundation). The Foundation is a charitable trust established by trust deed dated 30 October 2006.
[4] The plaintiffs’ contentions, taken from the statement of claim and which at the moment have not been formally responded to by pleading are that on 22
September 2006 the Society directed Focus to transfer five million dollars to its solicitor’s trust account for the establishment of an endowment fund and to hold further monies pending further instruction from the Society.
[5] The then directors of Focus (the defendants) declined to do so. Instead, on 26
October 2006, at a meeting attended by the five defendants a resolution was passed to establish an endowment fund to be named the Cerebral Palsy Endowment Foundation and to set aside five million dollars and invest those funds in a term deposit as seed money for the Foundation. Subsequently, in accordance with the resolution, the Foundation was established by a trust deed and the sixth and seventh defendants were appointed trustees. On or about 30 October 2006 the sum of five million dollars was transferred from an account held in the name of Focus to an account for the Foundation.
[6] The plaintiffs allege that the resolution was invalid but that even if it was valid the transfer of the funds was an effective conversion of Focus’ funds by the first to fifth defendants. Alternatively, by way of second cause of action Focus claims that in passing the resolution and implementing the establishment of the Foundation and transferring five million dollars to it, the first to fifth defendants acted in breach of the duties they owed to Focus under the Companies Act 1993 as directors. Next, in relation to the first, second and fourth defendant the Society says they acted in breach of their duty to disclose their interests in the transaction arising from their position as shareholders of the sixth and seventh defendants. Finally the plaintiff alleges knowing receipt and conversion against the sixth and seven defendants.
[7] It is notable and relevant that the plaintiffs’ claims against the first to fifth defendants are claims against them personally arising from their actions as directors of Focus.
Procedural matters
[8] The plaintiff has sought interim relief by way of injunction. The object of the interim relief is to freeze or secure the five million dollars paid to the Foundation.
[9] The matter first came before the Court on 14 February 2007. At that time the first to third and fifth to seventh defendants gave an undertaking to hold the fund of five million dollars and to make no disbursement from that for seven days. The fourth defendant is in a slightly different position having dealt direct with the plaintiffs. The Court also directed that all defendants (excluding the fourth defendant) were to file an affidavit as to assets and liabilities at the Foundation. The affidavits have been filed. The funds that have been invested by the sixth and seventh defendants as trustees have been invested through BNZ. A substantial portion has been invested in a portfolio investment. There is, in addition, a term deposit of $200,000 and a balance of approximately $26,400 in a current account. From that sum there are some expenses due of approximately $7,000 apart from legal expenses.
[10] When the matter was last before the Court it was anticipated that given all parties were interested in advancing the interests of cerebral palsy sufferers that some resolution might be achieved. Unfortunately that has not been possible.
[11] The issues before the Court today are:
a) The plaintiff’s application for interim injunction, effectively for mareva injunction.
b) The issue of legal expenses. The defendants (with the exception of the fourth defendant) whose position is reserved, seek an order enabling them to have their legal expenses paid from the fund and further directions for the conduct of the hearing.
The injunctive relief sought
[12] Mr LaHatte emphasised that the defendants’ position is that they have acted properly. They deny the allegations against them. They have suggested that the control of the endowment fund be handed to an independent trust company Guardian Trust and have approached Guardian Trust to confirm its availability. The defendants consider no interim orders are necessary.
[13] I acknowledge the position taken on behalf of the defendants. As the matter stands, however, the Foundation has been established and seeded by a sum of five million dollars, transferred from Focus. If the parties are unable to agree then these proceedings will resolve whether that was effective at law or not. Until the proceedings are resolved the fund should be maintained and controlled. There is little point in the appointment of Guardian Trust as it simply would hold the funds. There should be no action taken in relation to the funds in terms of reinvestment or the like until the determination of the substantive issue. If the plaintiffs are successful in the proceedings then any alternative trustee would simply have to return the funds at the direction of the Court. The involvement of Guardian Trust at this stage of the proceedings would therefore not add anything to the matter other than perhaps a further layer of cost.
[14] Given the indication that the Court considered it desirable that the funds be held counsel have responsibly agreed an appropriate form of undertaking.
The defendants’ costs
[15] That leaves the issue of costs. The defendants (with the exception of the fourth defendant - Mr Dench advised he did not have direct instructions from the fourth defendant on this issue) seek an order permitting their legal costs to be paid from the endowment fund. That is opposed by the plaintiffs. The plaintiffs submit the defendants should not be entitled to have their legal costs paid from the fund.
[16] Ultimately the incident of costs and whether they should be full indemnity costs or fixed in accordance with scale will be determined by the Court at the conclusion of the proceedings. The issue is whether in the interim the defendants ought to have access to the Foundation’s funds for payment of their legal costs.
[17] In my judgment the sixth and seventh defendants as trustees of the endowment fund ought to have their legal costs paid for by the fund for which they are trustees, at least until the proceedings are either settled or resolved by order of the Court. The general rule is of course that a trustee is entitled to costs out of the trust fund. Trustees are entitled to be paid out of the trust property their full costs of legal proceedings which they have properly defended. Of course, if ultimately the sixth and seventh defendant trustees are found to have acted in breach of trust, then in the exercise of the Court’s discretion and depending on the view taken as to such breach the sixth and seventh defendants may not be entitled to be indemnified and may be required to pay back their costs to the fund. However, in the interim I see no reason to depart from the general rule that the sixth and seventh defendants as trustees of the fund should be entitled to have their legal costs paid, at least in the first instance, from that fund.
[18] The position of the first to third and fifth defendant is however different. The claim against them arises out of their actions at a time they were directors of Focus and is primarily based on the allegation they acted wrongly as directors in the actions they took in establishing the Foundation and transferring the funds to it. The
allegations are of personal breaches as directors. The claim is an in personum claim against the defendants as directors. I am not able to accept Mr LaHatte’s submission that the directors’ position is so closely interwoven with that of the sixth and seventh defendants that they should also have access to the Foundation funds for their costs at this stage. The sixth and seventh defendants have a different status to that of the first to third and fifth defendant.
[19] I conclude that the first to third and fifth defendants ought not to have access to the endowment fund for payment of their legal expenses in this matter. As I have noted the issue is one of funding their defence. Ultimately if they are successful in defending the proceeding they may be entitled to recovery, even full recovery of solicitor client costs against the plaintiffs. That however must be for the Court on another day. In the interim I am not prepared to have the fund, given the purpose for which it has been established, further reduced by legal costs on behalf of the first to third and fifth defendants.
Conclusion
[20] I record the undertaking by the first to third and fifth to seventh defendants as follows:
a) The first to third and fifth to seventh defendants agree to hold the funds as described in paras 1 to 3 of the affidavit of Christine Williamson dated 16 February 2007 and any income earned, without disbursement save for the payment of legal expenses incurred by the sixth and seventh defendants in the defence of these proceedings until settlement of these proceedings between all parties or judgment or further order in the proceedings by the Court.
b) I allow the sixth and seventh defendants’ application that their legal costs and expenses associated with the defence of these proceedings are to be paid in the first instance from the funds of the endowment fund subject to the ultimate incidence of costs being determined by
agreement between the parties or the Court at the conclusion of the substantive hearing.
c) The first to third and fifth defendants’ application for access to the fund for payment of legal costs in the interim is declined.
d)The costs of the appearances this morning are reserved (noted at a quarter of a day).
Timetable directions
[21] By consent the following directions are to apply to the determination of the substantive issues:
a) The defendants are to file and serve statements of defence by 2 March
2007.
b) Verified lists of documents are to be filed and served by 16 March
2007.
c) Inspection to be completed by 30 March 2007.
d) Any further interlocutory applications to be filed and served by
13 April 2007.
e) A case management conference to be convened with an Associate
Judge as soon as possible after 16 April 2007.
[22] Despite the position that matters are at the moment I urge the parties again to consider the issue of mediation. Certainly the issue of a settlement conference will be addressed at the case management conference if the parties have not gone to
mediation prior.
Venning J
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