Fruit Shippers Ltd v Petrie
[2020] NZHC 749
•28 April 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2819
[2020] NZHC 749
BETWEEN FRUIT SHIPPERS LIMITED
Plaintiff
AND
ALISTAIR DOUGLAS PETRIE
First Defendant
LUIS A NOBOA
Second DefendantBARTEL HOLDINGS LTD
Third Defendant
Hearing: 2 and 3 December 2019 Appearances:
D J Friar, B A Keown and G S A Morrison for the Plaintiff D Cooper and E Armstrong for the Defendants
Judgment:
28 April 2020
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 28 April 2020 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Bell Gully (David Friar), Auckland for the Plaintiff
Lee Salmon Long (Tim Mullins/Emma Armstrong), Auckland for the Defendants
Counsel:
David Cooper, Barrister, Auckland
FRUIT SHIPPERS LTD v PETRIE [2020] NZHC 749 [28 April 2020]
CONTENTS
Paragraph
Introduction [1]
Fruit Shippers Limited’s case [3]
Fruit Shippers Limited’s causes of action [15] The cause of action against Mr Petrie – breach of fiduciary duty [15] First cause of action against Mr Noboa – breach of fiduciary duty [19] Second cause of action against Mr Noboa – debt [21] Third and fourth causes of action against Mr Noboa
– money had and received/unjust enrichment [23]
Mr Petrie’s strike out application [25]
Derivative claims – general [27]
Can Fruit Shippers Ltd bring a derivative claim against Mr Petrie? [48]
Mr Noboa’s alleged wrongdoing
[51]
Mr Petrie’s alleged wrongdoing [62]
Control [66]
Standing [68]
Alternative remedies [69]
Joinder of Bartel Holdings Ltd as a defendant [77]
Mr Petrie’s challenge to Fruit Shippers Ltd’s compliance with
pleading requirements [80]
Mr Petrie’s summary judgment application [88]
Clause 16.1 [100]
Clause 16.4 [112]
Fruit Shippers Ltd’s application to set aside Mr Noboa’s appearance
under protest [117]
Serious issues to be tried [119]
First cause of action against Mr Noboa – breach of fiduciary duty [120]
Second cause of action against Mr Noboa – debt [122]
Third and fourth causes of action – restitution [124]
The gateways in r 6.27 of the High Court Rules [129]
Necessary or proper party [131]
Claim under an enactment [133]
Restitution claim [135]
Real and substantial connection with New Zealand [136]
New Zealand the appropriate forum [137]
Outcome [140]
Orders [143]
Costs [144]
Introduction
[1] This case is about alleged defalcations from a company by its director. He is in Florida and protests this court’s jurisdiction to hear this case. Another director, a New Zealander, is sued, but the plaintiff does not allege that he took any money for himself. The company from which the funds were taken is not a party to the proceeding. This decision is on interlocutory applications:
(a)the New Zealand director applies for strike out and summary judgment;
(b)the plaintiff applies to set aside the Florida director’s protest to jurisdiction; and
(c)the plaintiff applies to join the company as a defendant.
For some of its causes of action, the plaintiff is suing derivatively. The defendants challenge its standing to do so.
[2] I find that the plaintiff may sue derivatively, even though its case does not come within s 165 of the Companies Act 1993. The company on whose behalf the plaintiff sues is joined as the third defendant. There are procedural defects in the plaintiff’s statement of claim, but they can be cured, and directions are given for that. The plaintiff has also sued the New Zealand director for breach of trust. In his summary judgment application the director invokes two exemption clauses in the trust deed. One of them does not apply. The other may be overridden if the trustee’s breach of trust is dishonest or he knowingly breaches the trust. The plaintiff’s pleadings do not address that point but should. It is directed to file an amended reply. The Florida director’s appearance protesting the jurisdiction is set aside as the plaintiff has met the requirements for serving him outside New Zealand and this is the appropriate jurisdiction to hear the case.
Fruit Shippers Ltd’s case
[3] For decades Ecuador exported the Bonita brand of bananas to New Zealand. The people behind the business, the Noboa family, of Guayaquil, Ecuador, run the Grupo Noboa, a group of companies and other businesses that deal internationally in bananas and other products. The plaintiff, Fruit Shippers Limited, a Bahamas company, is the ultimate holding company. Snr Alvaro Noboa Pontòn is said to head the group. He is the uncle of Luis Noboa, the second defendant.
[4] Bartel Holdings Limited is a New Zealand company through which Fruit Shippers Limited invested in Turners & Growers Ltd, now known as T&G Global Ltd, whose business included importing and distributing bananas. As its name suggests, Bartel Holdings Ltd is a holding company.
[5] The sole shareholder of Bartel Holdings Limited is the Dossor Trust, a discretionary trust established by a deed of 28 March 1995. The settlor and original trustee was Mr M Dossor. He retired and was replaced by Mr Petrie, the first defendant, on 16 January 2016. On 6 November 2017 another trustee was appointed, Mr R C Carpenter of the Bahamas.
[6] Under the trust deed, trustees must act unanimously. Fruit Shippers Ltd has express power to appoint, but not to remove trustees. The discretionary beneficiaries of the trust are Fruit Shippers Ltd, subsidiaries in which it has 50% voting control and entities established on any reconstruction or amalgamation of Fruit Shippers Ltd. The trustees have the usual discretionary powers found in such trusts to distribute capital and income among such of the beneficiaries as they think proper. For this case Fruit Shippers Ltd is the only effective beneficiary. The trust is governed by New Zealand law.
[7] Mr Dossor was the original director of Bartel Holdings Ltd. Mr Luis Noboa, the second defendant, an American citizen living in Florida, was appointed director of Bartel Holdings Limited in January 2012. Mr Petrie, the first defendant, was appointed director on 18 January 2016 when Mr Dossor retired. Mr Noboa’s directorship came to an end in November 2017. He was also a director of Fruit Shippers Ltd, but that also finished at the same time. Mr Carpenter replaced him as
director of Bartel Holdings Ltd.1 Mr Petrie and Mr Carpenter remain Bartel Holdings Ltd’s sole directors.
[8] Fruit Shippers Limited says that while he was a director of Bartel Holdings Limited, Mr Noboa syphoned off funds for his own benefit and his family. I set out its case, but I am not required to decide on the facts whether Mr Noboa is liable for taking the money. He says that he was entitled to it. Later I make a provisional assessment of the strength of the case for Fruit Shippers Ltd.
[9]Bartel Holdings Ltd declared dividends for the Rossor Trust in 2007 for
$12,000,000 and in 2010 for $4,270,499, apparently following tax advice of its accountants. The dividends were not paid to the trust but were recorded as an asset of the Rossor Trust in its accounting records and as a liability of the company.
[10] Between 2008 and 2016 Mr Noboa was paid $10,040,395. The money came from Bartel Holdings Ltd but was recorded in the trust’s financial statements as an asset of the trust, that is, Mr Noboa was a debtor of the trust. He received a further
$614,732.03 in June 2016. In 2017 he received payments totalling $1,877,741.80 from the company. All up, that is $13,732,473.83 between 2008 and 2017.
[11] In September 2016 Bartel Holdings Ltd sold almost all its shares in T&G Global Ltd to a Chinese corporation for $38,818,017.50.2 The shares were the company’s major asset and had been held for more than 20 years. Mr Noboa and Mr Petrie did not however tell Fruit Shippers Ltd before the sale. It found out only afterwards and began an investigation, including into the proceeds of sale. That unearthed the payments to Mr Noboa up to 2016. In March 2017 Mr Villacis, a director of Fruit Shippers Ltd and the effective CEO of Grupo Noboa, instructed Mr Petrie and Mr Noboa that they were not to sell, divest, transfer or endorse shares and not to withdraw, use, move or affect any funds or financial instruments of the trust, Bartel Holdings Ltd or any subsidiary. Later in 2017 with the assistance of Bartel Holdings Ltd’s accountants Mr Petrie and Mr Noboa had the financial statements of the company retrospectively adjusted to show operating expenses of $11,240,000
1 A Mr JHR Walker was a director for three months in 2018.
2 It retained its investment in Turners Automotive Group Ltd, its other key asset.
between 2008 and 2016. Whereas the payments to Mr Noboa had formerly been shown as an asset of the trust, they were now shown as expenses of the company. Fruit Shippers Ltd denies that these were legitimate expenses, but Mr Petrie and Mr Noboa insist that they were.
[12] Fruit Shippers Ltd also says that Mr Noboa has used company funds to benefit his family or himself by payments to Wasabi Investments Inc, a Panama corporation founded by his brother, Leon. His mother is the president. When the sale of the shares in T&G Global was contemplated, Bartel Holdings Ltd made a broker agreement with Wasabi Investments Inc to provide commercial advice and services for the sale. Bartel Holdings Ltd would pay Wasabi ten per cent of the share sale price, but if less than
100 per cent of the shares were sold, Wasabi would pay Bartel Holdings Ltd
$2,000,000. Bartel Holdings Ltd paid Wasabi $3,881,801.80 on the sale of the shares, but as not all the shares were sold, Wasabi repaid $2,000,000. Fruit Shippers Ltd says that Bartel Holdings Ltd did not receive any legitimate services under the broking agreement. It claims a net loss of $1,881,801.80. Bartel Holdings Ltd also made a consulting agreement for Wasabi to give it commercial advice and services in connection with potential transactions. Bartel Holdings Ltd paid Wasabi three monthly fees of $40,000 under the agreement. Fruit Shippers Ltd says that Bartel Holdings Ltd did not receive any legitimate services under the consulting agreement.
[13] Fruit Shippers Ltd says that Mr Noboa diverted from Bartel Holdings Ltd and directly or indirectly received $15,734,275.63:
Purported Bartel operating expenses $11,240,000.00 June 2016 payment
$614,732.03
2017 payments
$1,887,741.80
Wasabi broker agreement
$1,881,801.80
Wasabi consulting agreement
$120,000.00
[14] While Bartel Holdings Ltd is said to have lost the funds, it has not sued. The board is deadlocked. While Mr Carpenter wants the company to take proceedings to
recover the missing funds, Mr Petrie does not. The trustee shareholders will not remove Mr Petrie as director. The trustees are required to act unanimously, but Mr Petrie as trustee will not agree with Mr Carpenter to take any action on behalf of the trust to recover the funds. Fruit Shippers Ltd has not taken any steps to have Mr Petrie removed as trustee.
Fruit Shippers Ltd’s causes of action
The cause of action against Mr Petrie – breach of fiduciary duty
[15] Fruit Shippers Ltd sues Mr Petrie for breach of fiduciary duty to Bartel Holdings Ltd and to itself. His breaches are said to be his involvement in these payments while a director of Bartel Holdings Ltd:
2015 purported operating expenses $1,421,000.00 2016 purported operating expenses
$1,234,000.00
June 2016 payment
$614,732.03
2017 payments
$1,877,741.80
Wasabi broker agreement
$1,881,801.80
Wasabi consulting agreement
$120,000.00
Total
$7,149,275.63
[16] Mr Petrie’s fiduciary duty is also said to require him as trustee of the Dossor Trust to recover from Mr Noboa the money improperly paid to him.3 This aspect did not appear in the original statement of claim but was pleaded in a draft amended statement of claim. Fruit Shippers Ltd says that it may increase the amount of its claim under this new head.
[17] While the breach of fiduciary duty is pleaded as a single claim, it combines two causes of action:
3 Relying on Re Brogden, Billing v Brogden (1888) 38 Ch D 546 (EWCA) and Spencer v Spencer
[2013] NZCA 449, [2014] 2 NZLR 190 (CA) at [56]-[64].
(a)Fruit Shippers Ltd as beneficiary is suing Mr Petrie as trustee of the Dossor Trust;
(b)Fruit Shippers Ltd as beneficiary is suing Mr Petrie as director of Bartel Holdings Ltd for breach of duty owed to the company.
In the first, Fruit Shippers Ltd is making a direct claim; it is suing in its own right. In the second, it is making a derivative claim; it is suing on duties owed to another. It is asserting a claim that would otherwise be made by the company, even though it is not a director or shareholder of the company. In the cases this is called a “double- derivative” or “multiple-derivative” claim.
[18] Combining distinct causes of action as one is irregular. Under High Court r 5.17, distinct causes of action and distinct grounds of defence, founded on separate and distinct facts, must if possible be stated separately and clearly. Keeping the causes of action separate is important, as they raise different substantive issues and will require different responses.
First cause of action against Mr Noboa – breach of fiduciary duty
[19] Mr Noboa as director of Bartel Holdings Ltd is alleged to owe fiduciary duties to the company and to Fruit Shippers Ltd. He breached that duty by arranging and receiving all the payments for which Mr Petrie is said to be liable plus sums claimed to be operating expenses for 2012, 2013 and 2014. The total is $10,488,275.63.
[20] Again, the claim consists of more than one cause of action. Fruit Shippers Ltd claims in its own right that Mr Noboa breached a fiduciary duty he owed it directly. It also claims that he breached the fiduciary duty that he owed the company as director. The second is a double derivative claim.
Second cause of action against Mr Noboa – debt
[21] This alleges that Mr Noboa is indebted to Bartel Holdings Ltd and Fruit Shippers Ltd for $15,734,275.63, as set out in paragraph [13] above. Fruit Shippers
Ltd relies on Mr Noboa’s misappropriations to allege that a creditor-debtor relationship arose.
[22] Again, this cause of action involves more than one claim. Fruit Shippers Ltd is claiming in its own right that Mr Noboa owes it the sum claimed. As beneficiary it is suing on a debt said to be due to Bartel Holdings Ltd, a double derivative claim.
Third and fourth causes of action against Mr Noboa – money had and received/unjust enrichment
[23] Although there are drafting differences, these two causes of action are based on the same facts and law. In one Mr Noboa is said to have received $15,734,275.63 at the expense of Bartel Holdings Ltd. In the other he is alleged to have enriched himself to that amount at the expense of Bartel Holdings Ltd and Fruit Shippers Ltd. In so far as both claims allege that Mr Noboa received funds at the expense of Bartel Holdings Ltd, the duplication does no more than cater for different tastes in describing restitutionary claims, fondness for the traditional “money had and received” or for the more recent “unjust enrichment”. Both Bartel Holdings Ltd claims are derivative. The claim that Mr Noboa received funds at the expense of Fruit Shippers Ltd is a direct claim.
[24] In all the causes of action, Fruit Shippers Ltd seeks judgment for itself, not for Bartel Holdings Ltd.
Mr Petrie’s strike out application
[25]For his strike out application, Mr Petrie raises two matters:
(a)The statement of claim does not give adequate particulars of the capacity in which he is sued, the duties he is alleged to owe Fruit Shippers Ltd and the acts giving Fruit Shippers Ltd claims against him as director or trustee; and
(b)Fruit Shippers Ltd has no right to enforce any duty he owes as director of Bartel Holdings Ltd.
[26] The second is about whether Fruit Shippers Ltd can sue Mr Petrie derivatively for breaches of his fiduciary duty to Bartel Holdings Ltd. Once that is decided, the first can be addressed, which goes to Fruit Shippers Ltd’s compliance with pleading rules and practice. To meet some of the procedural objections, Fruit Shippers Ltd tendered its draft amended statement of claim.
Derivative claims - general
[27] Normally only the person whose rights have been breached may sue for relief. Only they can decide whether to sue, to enforce or to settle. That makes for efficiency in resolving disputes. There are exceptions. One of those is derivative claims,4 under which one person may sue for breach of another person’s rights. A common example is s 301 of the Companies Act 1993. When a company is in liquidation, the liquidator, a creditor, or a shareholder may bring a proceeding against a promoter, director and others, who
has misapplied, or retained, or become liable or accountable for, money or property of the company, or been guilty of negligence, default, or breach of duty or trust in relation to the company,
In such a proceeding the plaintiff enforces the company’s rights. The section is therefore mainly a procedural device5 under which the company’s rights are enforced by someone else.6
[28] Derivative proceedings have come up in the administration of trusts and estates. Normally only the trustee or executor may enforce rights for the trust or estate, yet proceedings by beneficiaries have been brought, but only in special circumstances. In Hayim v Citibank NA Lord Templeman reviewed older cases and said:7
These authorities demonstrate that a beneficiary has no cause of action against a third party save in special circumstances which embrace a failure, excusable or inexcusable, by the trustees in the performance of the duty owed by the trustees to the beneficiary to protect the trust estate or to protect the interests of the beneficiary in the trust estate.
4 Another is subrogated claims.
5 Arataki Properties Ltd (in liq) v Craig [1986] 2 NZLR 294, Benton v Priore [2003] 1 NZLR 564.
6 There is a substantive difference in that in a common law claim by the company, relief is available as of right, whereas under the section the court has a discretion as to relief.
7 Hayim v Citibank NA [1987] 1 AC 730 (PC) at 748.
In Roberts v Gill & Co, Lord Collins said:8
The special circumstances which were identified in the earliest authorities as justifying a beneficiary’s action were fraud on the part of the trustee, or collusion between the trustee and the third party, or the insolvency of the trustee, but it has always been clear that these are merely examples of special circumstances, and that the underlying question is whether the circumstances are sufficiently special to make it just for the beneficiary to have a remedy.
[29] These are simple derivative claims. They may involve overriding objections or unwillingness of trustees or executors to take proceedings and to that extent are more than a procedural device. While special circumstances must be pleaded and proved, leave to bring a derivative proceeding is not required. The trustee or executor is joined as a party.9
[30] As for companies, Foss v Harbottle set restrictions on the rights of shareholders to bring derivative proceedings for a corporation.10 In Edwards v Halliwell Jenkins LJ explained the rule:11
First, the proper plaintiff in an action in respect of a wrong alleged to be done to company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter for the simple reason that, if a mere majority of the members of the company or association is in favour of what has been done, then cadit quaestio. No wrong had been done to the company or association and there is nothing in respect of which anyone can sue. If, on the other hand, a simple majority of members of the company or association is against what has been done, then there is no valid reason why the company or association itself should not sue. In my judgment, it is implicit in the rule that the matter relied on as constituting the cause of action should be a cause of action properly belonging to the general corporators or members of the company or association as opposed to a cause of action which some individual member can assert in his own right.
The cases falling within the general ambit of the rule are subject to certain exceptions. It has been noted in the course of argument that that in cases where the act complained of is wholly ultra vires the company or association the rule has no application because there is no question of the transaction being confirmed by any majority. It has been further pointed out that where what has been done amounts to what is generally called in these cases a fraud on the minority and the wrongdoers are themselves in control of the company, the rule is relaxed in favour of the aggrieved minority who are allowed to bring
8 Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240 at [46].
9 Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240.
10 Foss v Harbottle (1843) 2 Hare 461.
11 Edwards v Halliwell [1950] 2 All ER 1064 (CA) at 1066.
what is known as a minority shareholders' action on behalf of themselves and all others. The reason for this is that, if they were denied that right, their grievance could never reach the court because the wrongdoers themselves, being in control, would not allow the company to sue. Those exceptions are not directly in point in this case, but they show, especially the last one, that the rule is not an inflexible rule and it will be relaxed where necessary in the interests of justice.
Although the conduct may not be strictly fraudulent, derivative proceedings have been allowed when directors have exercised their powers in a manner which conferred personal benefits on themselves at the expense of the company and other shareholders.12 In Wallersteiner v Moir (No 2) Lord Denning MR explained the rationale for allowing these derivative proceedings:13
But suppose it is defrauded by insiders who control its affairs – by directors who hold a majority of the shares – who then can sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise proceedings to be taken against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.
As that case illustrates, English courts did not take the point that the plaintiff in such a proceeding was a shareholder of a holding company rather than the shareholder of the subsidiary which had suffered the wrong.14 A derivative claim was allowed where the wrongdoer had control of both a holding company and a subsidiary and a minority shareholder of the holding company wished to bring a claim on behalf of the subsidiary.
[31] The fraud on the minority exception in Foss v Harbottle allows a minority shareholder to override the board and the majority of shareholders under resolutions in general meeting and to that extent it is more than a procedural device.
12 Alexander v Automatic Telephone Co [1900] 2 Ch 56, Cooks v Deeks [1916] 1 AC 554 (HL),
Daniels v Daniels [1978] 1 WLR 406, Abouraya v Sigmund [2014] EWHC 277 (Ch).
13 Wallersteiner v Moir (No 2) [1975] QB 373 (CA) at 390.
14 Other cases are Halle v Trax BW Ltd [2000] BCC 1020, Trumann Investment Group v Société Générale SA [2003] EWHC 1316 and Airey v Cordell [2007] Bus LR 391.
[32] In New Zealand the rule in Foss v Harbottle no longer applies to derivative claims by company shareholders, although it still applies to other corporate entities.15 Instead under s 165 of the Companies Act 1993 the court may grant leave to a director or shareholder to bring proceedings on behalf of the company or a related company. Under s 165(6) a shareholder may not bring a proceeding in the name of or on behalf of the company or a related company except in accordance with the section. Under the definition in s 2(3)(a) a “related company” includes a subsidiary.
[33] While its case involves bringing claims on behalf of Bartel Holdings Ltd against its directors, Fruit Shippers Ltd does not apply under s 165, as its case does not come within the section. It is not a director or shareholder of Bartel Holdings Ltd. Bartel Holdings Ltd is not a related company of Fruit Shippers Ltd as defined, because the Dossor Trust stands between the two companies. The section does not say that beneficiaries of trustee shareholders may apply for leave to sue on behalf of the company.
[34] There are cases which are said to be authority that a person who is not registered as a shareholder but is no more than a beneficiary of a trustee shareholder does not have standing to bring a derivative proceeding under Foss v Harbottle: Maas v McIntosh, Svanstrom v Jonasson, Hooker Investments Ltd v Email Ltd, Fulloon v Radley and Ruralcorp Consulting Property Ltd v Pynery Pty Ltd.16
[35] On the other hand, it was submitted for Fruit Shippers Ltd, a discretionary beneficiary of a trust holding shares in the company, that the common law allows a derivative proceeding, under which it can sue Mr Petrie and Mr Noboa on behalf of Bartel Holdings Ltd for breaches of their fiduciary duties to the company. The law recognises such “double-derivative” or “multiple-derivative” claims.
15 Small v Body Corporate 324525 [2018] NZHC 19 at [28].
16 Maas v McIntosh (1928) 28 SR (NSW) 441, Svanstrom v Jonasson [1977] CILR 192 (Cayman Islands), Hooker Investments Ltd v Email Ltd (1986) 10 ACLR 443, Fulloon v Radley [1992] 2 Qd 290 and Ruralcorp Consulting Property Ltd v Pynery Pty Ltd (1996) 21 ACSR 161.
[36] The Great Western Railway Company v Rushout is an early case where beneficiaries of a trust with shares in a company were held entitled to bring a derivative claim on behalf of the company.17 Parker V-C said:
With reference to that question, I think they have an interest to maintain this suit. There is a valid trust, beyond all doubt valid, on which these shares are held for the Great Western Railway Company, they are the only persons who, under that trust, are interested in the shares. They have therefore an interest in what is sought by this bill to protect the property and concerns of this company.
[37] The Hong Kong Court of Final Appeal has given a leading decision, Waddington Ltd v Chan Chun Hoo Thomas.18 The plaintiff was a minority shareholder of a holding company with a subsidiary and sub-subsidiaries. The chairman and executive director of the holding company and of all the subsidiaries was alleged to control them all. The plaintiff claimed that the chairman arranged for the sub- subsidiaries to enter into transactions that were uncommercial and for his personal benefit. Although the plaintiff was not a shareholder of the sub-subsidiaries, the court held that it could bring a derivative claim to challenge the transactions. It applied the common law. Giving the leading judgment, Lord Millett NPJ saw the issue as one of standing:19
On a question of standing, the court must ask itself whether the plaintiff has a legitimate interest in the relief claimed sufficient to justify him in bringing proceedings to obtain it. The answer in the case of a person wishing to bring a multiple derivative action is plainly “Yes”. Any depletion of a subsidiary’s assets causes indirect loss to its parent company and its shareholders. In either case the loss is merely reflective loss mirroring the loss directly sustained by the subsidiary and as such is not recoverable by the parent company or its shareholders for the reasons stated in Johnson v Gore Wood & Co [2002] 2 AC 1 (HL). But this is a matter of legal policy. It is not because the law does not recognise the loss as real loss; it is because if creditors are not to be prejudiced the loss must be recouped by the subsidiary and not recovered by its shareholders. It is impossible to understand how a person who has sustained a real, albeit reflective loss which is legally recoverable only by a subsidiary can be said to have no legitimate or sufficient interest to bring proceedings on behalf of the subsidiary.
… The very same reasons which justify the single derivative action also justify the multiple derivative action. To put the same point another way, if wrongdoers must not be allowed to defraud a parent company with impunity, they must not be allowed to defraud its subsidiary with impunity.
17 The Great Western Railway Company v Rushout (1852) 5 De G & Sm 290 at 306-307.
18 Waddington Ltd v Chan Chun Hoo Thomas (2008) 11 HKCFAR 370.
19 At [74] and [75].
He rejected a submission that a multiple derivative proceeding is two or more derivative proceedings consolidated into one. It was instead a single proceeding on behalf of the company with the cause of action.20 He also rejected an argument that a shareholder’s right to bring a derivative proceeding is an incident of their shareholding.21 He distinguished some of the cases in paragraph [34] above.22
[38] Jafari-Fini v Skilglass Ltd was decided under Foss v Harbottle but is a forerunner of the approach in later cases. The plaintiff unsuccessfully sought leave to bring a derivative proceeding against a financier in the name of a company, where the financier had legal title to the shares, but they were held beneficially for the plaintiff. At first instance, the judge discussed whether the plaintiff required legal title to the shares to bring the proceeding and, after reviewing authorities (including those in [34] above), said:23
The purpose of the exception to the rule in Foss v Harbottle is to allow the grievance, (at least certainly one affecting a person with an interest in the company) to reach the court which would not otherwise reach it because, and this is the essential element, of the wrongdoer’s control. In exceptional circumstances, where the alleged wrongdoer exercising control is also allegedly wrongly conducting himself against the beneficial owner of the shares, to deny the beneficial owner the standing to bring a derivative action, may frustrate at least the efficient and expeditious bringing of the company’s grievance to court.
Without prejudice to the question whether in this particular case the claimant should be permitted to bring such action, I hold that he should not be excluded from doing so because his interest is beneficial only.
[39] While the United Kingdom has replaced the rule in Foss v Harbottle with a statutory provision, unlike New Zealand and some other jurisdictions,24 its legislation does not allow derivative proceedings by shareholders of holding companies on behalf of subsidiaries. Like Hong Kong, English courts have considered whether derivative claims may be brought by those who are not shareholders of the affected company.
20 At [70].
21 At [76].
22 At [71].
23 Jafari-Fini v Skilglass Ltd [2004] EWHC 3353 (Ch) at [42]-[43]. The application failed for other reasons. On appeal, the Court of Appeal did not review the standing question – Jafari-Fini v Skilglass Ltd [2005] EWCA Civ 356 at [56].
24 Australia – Corporations Act 2001, s 236(1)(a) (Cth); Canada – Business Corporations Act 1985, ss 238 and 239; Singapore – Companies Act (Cap 50), s 216A(1)(c).
[40] In Universal Project Management Services Ltd v Fort Gilkicker Ltd25 Briggs J followed Waddington Ltd v Chan Chun Hoo Thomas. The claimant was one of two members of a limited partnership, formed for a property development joint venture. The limited partnership was the sole shareholder of a company that was proposing a development. The other partner, also the sole director of the development company, incorporated another company to take over the proposed development to the exclusion of the claimant. The claimant alleged misappropriation of a business opportunity and successfully sought leave to bring a derivative proceeding in the name of the development company.26 It could not bring a shareholder’s derivative claim as it was not a shareholder. Keeping with Lord Millett, Briggs J said:27
In my judgment the common law procedural device called the derivative action was, at least until 2006, clearly sufficiently flexible to accommodate as the legal champion or representative of a company in wrongdoer control a would-be claimant who was either (and usually) a member of that company or (exceptionally) a member of its parent company where that parent company was in the same wrongdoer control. I would not describe that flexibility in terms of separate forms of derivative action, whether headed “ordinary”, “multiple” or “double”. Rather it was a single piece of procedural ingenuity designed to serve the interests of justice in appropriate cases calling for the identification of an exception to the rule in Foss v Harbottle.
[41] He was also required to consider the effect of s 260 of the Companies Act 2006, which provided for derivative claims by members of a company, including:
This Chapter applies to proceedings … by a member of a company –
(a)in respect of a cause of action vested in the company, and
(b)seeking relief on behalf of the company. This is referred to in this Chapter as a “derivative claim”.
(2)A derivative claim may only be brought –
(a)under this Chapter or
(b)in pursuance of an order of the court in proceedings under s 994 (proceedings for protection of members against unfair prejudice).
25 Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] Ch 551.
26 Leave was required under the English Civil Procedure Rules 19.9.
27 At [26].
It was submitted that s 260 was a comprehensive code that barred any derivative claims outside it. Briggs J rejected that:28
… there was before 2006 a common law procedural device called the derivative action by which the court could permit a person or persons with the closest sufficient interest to litigate on behalf of a company by seeking for the company relief in respect of a cause of action vested in it. Those persons would usually be a minority of the company’s members, but might, if the company was wholly owned by another company, be a minority of the holding company’s members. These were not separate derivative actions, but simply examples of the efficient application of the procedural device, designed to avoid injustice, to different factual circumstances.
In 2006 Parliament identified the main version of that device, namely where locus standi is accorded to the wronged company’s members, labelled it a “derivative claim” and enacted a comprehensive statutory code in relation to it. As a matter of language, section 260 applied Chapter 1 of Part 11 only to that part of the old common law device thus labelled, leaving other instances of its application unaffected.
Applying the well-established relevant principle of construction, Parliament did not expressly abolish the whole of the common law derivative action in relation to companies, even though by implication from the comprehensiveness of the statutory code it did do so in relation to derivative claims by members (as defined) of the wronged company. Beyond that, the assertion that the remainder of the common law device was abolished fails because abolition was neither express nor a clear or necessary implication.
[42]The equivalent New Zealand provision, s 165(6) of the Companies Act, says:
Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
While s 165 applies more widely than the English act, as it provides for derivative claims on behalf of a related company and for claims by directors as well as shareholders, Briggs J’s judgment is persuasive guidance in interpreting the New Zealand provision. Section 165 is limited to derivative proceedings by shareholders and directors. Parliament did not allow for the circumstances of this case, a claim by a beneficiary where both the company and the trustee shareholder are in the control of the alleged wrongdoers, but that does not mean that s 165 is to be read as a code barring derivative claims by non-shareholders. The bar under s 165(6) is limited to proceedings by shareholders and does not extend more widely to derivative proceedings by non-shareholders with the requisite interest. While s 165 allows
28 At [44]-[46].
directors to seek leave to bring a derivative claim, they are not caught by the bar in s 165(6). Non-shareholders may proceed under the common law.
[43] In Abouraya v Sigmund29 the principles in Waddington Ltd and Universal Project Management Services Ltd were followed when a fifty per cent shareholder of a Hong Kong company sought leave to bring a derivative proceeding on behalf of a British subsidiary against the sole director of both companies. Leave was however refused, one reason being that the transactions in issue were not for the personal benefit of the director.
[44] Popely v Popely is a complex case.30 The Popely family had been litigating for 16 years in England, St Vincent, France, Ireland and Gibraltar. The point of interest is that it involved a derivative claim by beneficiaries of a trust to sue a director on behalf of a company in which the trustee was a shareholder. The company, Casterbridge Properties Ltd, had interests in a time share resort in Northern Cyprus. Its shareholders were two trusts, the Blue Ridge Trust with a 30 per cent shareholding and the Mars Trust with a 70 per cent shareholding. They had the same trustee, but different beneficiaries. The Blue Ridge beneficiaries contended that Richard Popely, the man behind the Mars Trust, had run the company to benefit the Mars Trust at the expense of the Blue Ridge Trust. On an appeal against a decision allowing the claim to go ahead, it was contended that the master erred in how he applied the “special circumstances” test in Hayim v Citibank NA and Roberts v Gill & Co. The appeal failed, with the judge finding that the master had correctly been satisfied that the case met both the test for a corporate derivative claim and for special circumstances for a derivative claim by a beneficiary.31 With due respect, under Lord Millett’s approach in Waddington Ltd the issue is whether the plaintiff has standing to bring a derivative claim on behalf of the company. There are not two consolidated derivative claims. Where company shares are trust assets under the control of the alleged wrongdoers, beneficiaries of the trust may have standing to bring a claim on behalf of the company against the wrongdoers. It is not also necessary to show special circumstances under Roberts v Gill & Co. All the same, Popely v Popely is an example of beneficiaries of
29 Abouraya v Sigmund [2014] EWHC 277 (Ch).
30 Popely v Popely [2018] EWHC 276 (Ch).
31 At [107].
a trust holding shares having standing to sue an alleged wrongdoer on behalf of the company.
[45] Zabusky v Virgtel Ltd was a derivative proceeding involving a Nigerian company whose director and son were alleged to have misappropriated company money and assets and invested them in Queensland. It was argued that only registered shareholders could bring a derivative proceeding.32 Plaintiffs had been added, who it was argued were not registered shareholders. Because the case involved a foreign unregistered corporation, the common law applied instead of the Australian statutory provisions for derivative proceedings.33 The Queensland Court of Appeal considered the authorities on the question, including Waddington Ltd, but not the more recent English decisions. It declined to follow the cases in [34] above. It held that there was no rule that a plaintiff in a derivative proceeding had to be registered as a shareholder. Instead the law had to allow for flexibility and pragmatism.34 That is consistent with the approach in Waddington Ltd and the English cases.
[46] Where the cases in [34] above have been considered, they have not been followed. I gratefully adopt the reasons given for not following them. In the light of Waddington Ltd and the related cases, it is not sound law that only a registered shareholder of the company affected by wrongful conduct may bring a derivative proceeding. That may lead to a denial of justice. Instead the interest test under Waddington Ltd gives flexibility to ensure that proceedings against wrongdoers in control of a company may be heard. Mr Cooper submitted that the cases I have considered may be distinguished. For example, Jafari-Fini v Skilglass Ltd was about steps taken to challenge enforcement by a creditor; in Zabusky v Virgtel Ltd the question was whether the plaintiffs were disqualified because there was a dispute whether they were registered as shareholders. While there may be differences, the common thread in these cases is a willingness to allow standing to someone with sufficient interest if it is required to see that justice can be done.
32 Zabusky v Virgtel Ltd [2012] QCA 107, [2012] 1 Qd R 285.
33 Corporations Act 2001 (Cth) Part 2F.1A. The law of the place of incorporation applies:
Konamaneni v Rolls-Royce Power (India) Ltd [2002] 1 WLR 1269 at [50].
34 Zabusky v Virgtel Ltd at [35], [47] and [48].
[47] Counsel did not cite any New Zealand authorities on the question and I am not aware of any. As the cases above establish a general common law principle, there is no reason why New Zealand should not follow them. Most of the cases in [34] are Australian, but since Zabusky v Virgtel Ltd they are no longer good authority there. That suggests they should not be applied in New Zealand. Moreover, circumstances in New Zealand suggest that it would be prudent to allow standing for common law derivative claims in cases outside s 165 of the Companies Act. Shares are frequently held through trusts. Beneficiaries of those trusts should not be in a worse position than shareholders when wrongdoers in control of the company and the trust assets breach their fiduciary duties. As in this case, there is often an international element in trusts holding shares. The standing requirements need to be flexible enough to cater for the variety of arrangements that come with trusts and company shareholdings, including those governed by foreign laws.35
Can Fruit Shippers Ltd bring a derivative claim against Mr Petrie?
[48] There is a preliminary question. Does Fruit Shippers Ltd need leave to bring a derivative proceeding? The matter was not discussed in depth. Fruit Shippers Ltd did not make a formal application for leave, but Mr Friar said that if leave was required, it was sought. On the other hand, Mr Cooper did not submit that leave was required. The point arises because of the English Court of Appeal’s judgment in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2):36
In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v. Harbottle.
The English courts consistently followed that. Now the Civil Procedure Rules require a claimant to seek leave to bring a derivative proceeding.37 In Waddington Ltd the Hong Kong Final Court of Appeal held that that was a requirement of Hong Kong law as well.38 It appears however that there is room for procedural flexibility. The plaintiff
35 Although it was not a derivative proceeding, as an example see the facts in Griffin Trust AG v Global Oil Services Ltd [2019] NZHC 3418.
36 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 221-222.
37 CPR 19.9.
38 Ribeiron PJ’s judgment is about only that question.
is not necessarily required to make a formal application for leave. In Waddington Ltd Ribeiro PJ said that a challenge to the plaintiff’s standing generally takes the form of an application by the defendants to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf, but that it can arise in other procedural contexts.39 Accordingly, Mr Petrie’s strike out application provides an appropriate procedure to decide whether Fruit Shippers Ltd may make its derivative claim. The Supreme Court has held that a strike out application may be used to test the cogency of a plaintiff’s case in another context, a proceeding alleging that a judgment was fraudulently obtained:40
So where a defendant in a proceeding involving the fraud exception applies to strike it out, the plaintiff is required to discharge the onus of showing it has a case with an evidential foundation amounting to a prima facie case of fraud.
In a similar way, Fruit Shippers Ltd has the onus of establishing that it can bring a derivative proceeding. Allowing the plaintiff’s case to be tested by a strike out application or by hearing the matter as a preliminary issue may be more efficient than requiring a plaintiff to obtain leave at the outset. The defendants decide whether to test the plaintiff’s case. They have the option of leaving the matter to be decided later at a final hearing and may do that for tactical reasons. A plaintiff beginning a derivative proceeding is not put to the expense of a leave application at the outset but will appreciate that they may be tested by a strike out application. The strike out application may filter out vexatious and unworthy claims. Defendants will appreciate that they should apply promptly. Delay in applying for strike out may count against them.41 Mr Petrie applied in good time in this case.
[49] The next question is: to what standard should the plaintiff make out its case on a strike out application? In Prudential Assurance Co Ltd v Newman Industries Ltd the English Court of Appeal adopted the prima facie case standard as a half-way house between trying the entire case to see if leave should be given and assuming that the plaintiff will be able to prove what it has pleaded.42 The English courts have continued to apply that standard. In this context, a prima facie case is more than an arguable
39 At 89.
40 Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013] 1 NZLR 804 at [33].
41 Just as delay in applying for security for costs may count against the applicant.
42 Smith v Croft (No 2) [1988] Ch 114 at 138-139.
case. A plaintiff will be entitled to judgment if the defendant offers no defence. The court considers all the evidence on the application.43 On the other hand, in New Zealand there is a different standard for applications to begin a derivative proceeding under s 165 of the Companies Act. In Vrij v Boyle Fisher J adopted a prudent businessman test for the issue under s 165(2)(a) – the likelihood of the proceedings succeeding.44 Would such a person in the conduct of their affairs decide whether to sue? They would consider matters such as the amount at stake, the apparent strength of the claim, likely costs and the prospect of enforcing a judgment. He drew on Smith v Croft (No 1), an English decision on an application for prospective costs in a derivative proceeding. Walton J said:45
Of course there is no room for a mini trial, of course the court has no ability at this stage to decide the truth of the plaintiffs' allegations. What, however, it can and should do is to look at all the facts, first those which are common ground, then those alleged by the plaintiff but denied by the company, and then those alleged by the company but denied by the plaintiff, and make up its mind. The standard suggested by Buckley L.J. in Wallersteiner v. Moir (No.
2) [1975] QB 373, 404, was that of an independent board of directors exercising the standard of care which prudent businessmen would exercise in their own affairs. Would such an independent board consider that it ought to bring the action?
[50] The test in Vrij v Boyle has been applied in many cases.46 It makes sense to use the learning developed in those cases in the associated matter of a common law derivative claim for a company. It would be awkward to use one standard for cases under s 165 and another for common law cases. There are benefits in a consist approach using the same test for both. Under a prima facie case approach, there is a greater risk of the application becoming a mini-trial. In Abouraya v Sigmund, David Richards J held that once the prima facie threshold has been met, the court then considers whether a reasonable board of directors would take the proceeding.47 It is simpler to apply the single test instead of two. Accordingly, I use the prudent businessman test for the strike out application. In this case the assessment is made on the evidence, not on the pleadings.
43 Abouraya v Sigmund at [53].
44 Vrij v Boyle [1995] 3 NZLR 763 at 765.
45 Smith v Croft (No 1)[1986] 1 WLR 580.
46 See the extensive cases referred to in The Companies Act 1993 (online looseleaf ed, Westlaw) at [s165].
47 Abouraya v Sigmund at [26].
Mr Noboa’s alleged wrongdoing
[51] Mr Noboa, not Mr Petrie, is alleged to have taken money belonging to Bartel Holdings Ltd, although Mr Petrie is said to have been involved. It is accordingly necessary to consider the case against Mr Noboa before dealing with Mr Petrie. The misappropriation of funds by a director is a paradigm for wrongdoing under the fraud on the minority exception in Foss v Harbottle.
[52]Fruit Shippers Ltd says that Mr Noboa received payments totalling
$10,040,395 between 2008 and 2016. At this stage it has not produced accounting records, except for end of year financial statements for the Dossor Trust recording totals paid each year. Mr Noboa is shown as a debtor of the trust. Mr Petrie and Mr Noboa do not say that those payments were not made. There was a payment of
$614,732.03 on 9 June 2016. Fruit Shippers Ltd has a record of that payment but is not sure whether the payment is included in the total payments of $860,176 for 2016. In its statement of claim, it has treated it as an extra payment. For the payments to Mr Noboa of $1,877,741.80 during 2017, Fruit Shippers Ltd has put in evidence copies of bank statements recording the payments. All but the first of these payments were made after the instruction of Mr Villacis of 19 March 2019 that there were to be no further payments. Mr Petrie and Mr Noboa do not deny those payments.
[53] Fruit Shippers Ltd says that the reconstruction of accounts at the end of 2017 came when Mr Petrie and Mr Noboa were under scrutiny and was carried out to give an appearance of legitimacy to the payments to Noboa as operating expenses. The original financial statements showed Mr Noboa as a debtor of the trust and accordingly accountable for the funds he had taken. The reconstruction was intended to change that. Bartel Holdings Ltd as a holding company had little in the way of day-to-day operating expenses. Nor did it have a general treasury function for the Grupo Noboa.
[54] The Wasabi broker and consulting agreements are said to be illusory arrangements under which payments could be made to Mr Noboa or his family. The agreements are brief and perfunctory and lack the detail expected in commercial agreements negotiated at arm’s length. Each has only three clauses and is vague about what Wasabi was to do. Mr Noboa signed the agreements for Bartel Holdings Ltd.
[55] Ms Duncan, a solicitor for Fruit Shippers Ltd, met Mr Noboa on 11 and 13 July 2017 in Florida. In the first meeting he told her (among other things) that Bartel Holdings Ltd’s payments to him were for salary for his work for it and Fruit Shippers Ltd and reimbursement for company expenses incurred for Fruit Shippers Ltd in New Zealand and overseas. Before 2008 Bartel Holdings Ltd had paid him a salary but he had been paid by other companies in the Grupo Noboa. In 2008 he decided that Bartel Holdings Ltd would pay his salary, he would decide how much it would be, he should be paid for his contribution to the company’s profitability, no other company had paid him salary for his work for the group, he claimed his expenses from Bartel Holdings Ltd even if they were for another company in the group, Mr Dossor approved the payments. In the second meeting he told her (among other things) that he paid himself a salary from Bartel Holdings Ltd because he could not live on the salary he was receiving from Pacific International Services Ltd, another company in the group. He took his expenses out of Bartel Holdings Ltd because he was under too much scrutiny from accountants in Fruit Shippers Ltd. He did not discuss these matters with Fruit Shippers Ltd or seek its approval. He acknowledged that he should have done so and what he had done was “incorrect and out of order”. He would repay Bartel Holdings Ltd if he were compensated for his contribution to the New Zealand business.
[56] Ms Duncan says Mr Noboa did not have a formal employment agreement with Bartel Holdings Ltd, there are no board minutes approving his salary or expenses and no correspondence between Mr Dossor and Mr Noboa. Mr Noboa said that he had some documents to support his expenses, but not all. Although asked to, he has not provided any such documents.
[57] Mr Noboa’s response gives an outline background to the establishment of Fruit Shippers Ltd. He used to be a director of that company but was removed in 2017. He had sold his shares to Álvaro Pontòn, but he has not been paid in full and says that he therefore has an equity interest in the company. Bartel Holdings Ltd was established in 1991. He outlines his involvement in Grupo Noboa from 1994. He oversaw developing the banana market in the Pacific, especially New Zealand and Japan. The sales to Japan and New Zealand in his time came to over $1.5 billion. He worked with other Grupo Noboa companies. His role included identifying investment opportunities. The investment in Bartel Holdings Ltd had been successful, with an
initial investment of $5 million increasing to $64.5 million. He reported to Grupo Noboa headquarters in Guayaquil. He has claims against Fruit Shippers Ltd relating to his sale of shares (US$4.5 million in promissory notes) and claims for US$825,000 for other promissory notes. He believes the current proceeding is contrived to reduce Fruit Shippers Ltd’s liability to him. He and his siblings have issued other proceedings against other companies owned by Álvaro Pontòn. As for the claims against him in this case, he says no more than that Bartel Holdings Ltd paid expenses on behalf of other Grupo Noboa entities and refers to Mr Petrie’s affidavit.
[58] Mr Petrie’s background was working for Turners and Growers Ltd in importing bananas. He came to know Mr Noboa as Fruit Shippers Ltd’s New Zealand representative. Mr Dossor briefed him when Mr Petrie took over as trustee of the Dossor Trust and a director of Bartel Holdings Ltd. Among other things, Bartel paid Mr Noboa a monthly salary of US$35,000 and reimbursed him for global expenses he incurred in his work for Grupo Noboa. Bartel Holdings Ltd also made payments to other Grupo Noboa entities, including Pacific Fruit Limited to manage the importing of bananas and Mr John Walker, a global sales and marketing executive. Controllers of Grupo Noboa were aware that Bartel Holdings Ltd paid not only its own operational expenses, but also Mr Noboa’s salary and expenses.
[59] From 2008, Bartel Holdings Ltd’s accountants had put payments to Mr Noboa into a suspense account until further information was provided as to the nature and purpose of the payments. That was finally done in 2017. $102,032 was found to have been incurred by Mr Noboa personally.
[60] Mr Petrie’s evidence is that payments made by Bartel Holdings Ltd to Mr Noboa and at his directions continued a practice that had been going on since Mr Dossor’s time. He gives examples how Bartel Holdings Ltd continues to pay certain expenses of Grupo Noboa executives and entities with the approval of Fruit Shippers Ltd.
[61] The payments to Mr Noboa require an explanation. The answer is general only, that the payments were for the legitimate expenses of Bartel Holdings Ltd and other Grupo Noboa entities. A fuller and more detailed explanation, supported with records,
will be required. Until that is given, Fruit Shippers Ltd has a case that Mr Noboa should account for the sums in Fruit Shippers Ltd’s claim. These aspects give ground to suspect that Mr Noboa may not be able to:
(a)Mr Noboa has not so far produced any records, although he has been invited to;
(b)Ordinary business expenses would be recorded in the accounts as they were incurred. That was not done. Instead there was the unusual step of treating payments to Mr Noboa as an advance from the Dossor Trust, repayable by him;
(c)The reconstruction took place only after Fruit Shippers Ltd began investigating; and
(d)Both Wasabi transactions look like shams.
Mr Noboa may show that the payments to him were legitimate, but at this stage there is a sound case that he is liable for very substantial sums paid by Bartel Holdings Ltd.
Mr Petrie’s alleged wrongdoing
[62] Mr Petrie was apparently involved in approving payments requested by Mr Noboa, approving financial statements recording payments to Mr Noboa and approving the reconstruction of accounts, all while he was a director of Bartel Holdings Ltd. He received an agreed salary and was reimbursed for his own expenses, but there is no complaint about that. There is no allegation that he benefited personally from the payments to Mr Noboa. His liability may turn on his knowledge and whether he was innocent in trusting Mr Noboa. If he did no more than what Mr Noboa asked and trusted Mr Noboa without knowing or suspecting that he was authorising illegitimate payments, it is hard to see him being held liable for breach of duty. In Re City Equitable Fire Insurance Co Ltd Romer J said:48
48 Re City Equitable Fire Insurance Co Ltd [1925] 1 Ch 407 at 429.
In respect of all duties that, having regard to the exigencies of the business, and the articles of association, may properly be left to some other official, a director is, in the absence of grounds for suspicion, justified in trusting that official to perform his duties honestly.
[63] One pointer that he should have known is that he continued to make payments after Mr Villacis’ instruction to stop. Another is that he did not question the Wasabi payments, even though he was apparently involved in the sale of the T&G Global shares and would have known whether Wasabi had any input into the sale.
[64] Mr Petrie has answers: the payments were for legitimate expenses of Bartel Holdings Ltd and other Grupo Noboa entities and he provided supporting information and documents to another Grupo Noboa executive when inquiries were made.
[65] If he was complicit with Mr Noboa in paying him money to which he was not entitled, the wrongdoing is at a level which would allow a fraud on the minority claim. On the other hand, a case of unintentional mismanagement may not be suitable for a Foss v Harbottle derivative claim. The case against Mr Petrie is not as strong as that against Mr Noboa, but there is enough in it to warrant going on.
Control
[66] As Bartel Holdings Ltd has two directors, the board can only decide on a matter if both agree. Similarly, the Dossor trust deed requires trustee unanimity on decisions. As one of two directors and trustees, Mr Petrie has been asked to agree to Bartel Holdings Ltd being joined as a plaintiff in this proceeding. In reply to Mr Carpenter’s letter of 29 July 2019, Mr Petrie declined, saying that he did not consider that Fruit Shippers Ltd’s claims had any merit. Mr Petrie can and has blocked Bartel Holdings Ltd from bringing a claim against him and Mr Noboa. As Abouraya v Sigmund illustrates, a fifty per cent voting power does not count against a derivative claim, if the other fifty per cent can stymie the proceeding.
[67] That is however not enough by itself to count as control under the exception to Foss v Harbottle. Under the general rule, if a company has suffered actionable loss, a decision not to sue by those with control, directors or the majority of shareholders, will stand. Those wanting to make a derivative claim will not be allowed to override
the decision not to sue. The exception applies when those liable for the required wrongdoing have control of the company and use that control to stop any proceedings. Mr Noboa, who has allegedly used his position as director to benefit himself, is no longer a director of the company and cannot exercise any formal power relating to the company’s decision to sue or not. Mr Petrie can however be tied to Mr Noboa. They are associated in the payments made to Mr Noboa, where the circumstances suggest that co-operation from Mr Petrie was required for Mr Noboa to be paid and the amounts and numbers of payments would raise questions in the mind of an ordinary director. The co-operation in unusual transactions can be seen in the reconstruction of the accounts and Mr Petrie’s seeming indifference to whether the Wasabi payments were appropriate. They have retained the same lawyers, a sign of their ongoing association. Mr Petrie’s refusal to allow Bartel Holdings Ltd to sue is wrongdoer control under the exception in Foss v Harbottle.
Standing
[68] Fruit Shippers Ltd is a discretionary beneficiary of the Dossor Trust and as such does not have a property interest in the trust assets.49 That does not however mean that it is disqualified from having standing under the approach in Waddington Ltd. No other discretionary beneficiaries have been identified, for example, any other Grupo Noboa entity. Any other beneficiaries would be linked to Fruit Shippers Ltd. The trust is the vehicle through which Fruit Shippers Ltd has invested in Bartel Holdings Ltd and its New Zealand investments. It has the greatest interest in maintaining the value of its investment in Bartel Holdings Ltd. That gives it standing to bring a derivative claim on behalf of the company to recover losses to the company that have reduced the value of its investment.
Alternative remedies
[69] Some English cases have held that available alternative remedies may count against allowing a derivative claim. This comes from a statement of principles in Peter Gibson LJ’s judgment in Barrett v Duckett, including:50
49 Hunt v Muollo [2003] 2 NZLR 322 (CA) and Foreman v Kingstone [2004] 1 NZLR 841 (HC).
50 Barrett v Duckett [1995] 1 BCLC 243 at 250. In Jafari-Fini v Skilglas the plaintiff was held to have an alternative remedy, a direct claim against the defendant. On the other hand, alternative remedy arguments were rejected in Universal Project Management Services Ltd v Fort Gilkicker Ltd at [55]-[57] and Popely v Popely at [68]-[78].
The shareholder will be allowed to sue on behalf of the company if he is bona fide bringing the action bona fide for the benefit of the company for wrongs to the company for which no other remedy is available. Conversely if the action is brought for an ulterior purpose or if another adequate remedy is available, the court will not allow the derivative action to proceed.
In my view the availability of an alternative remedy is a relevant consideration in the reasonable businessman assessment, but not a condition precedent to bringing a derivative proceeding. In Konamaneni v Rolls-Royce Industrial Power (India) Ltd Lawrence Collins J commented:51
This is not the occasion to express a final view, but it seems to me that the notion that there must be no alternative remedy expressed in Barrett v Duckett [1995] 1 BCLC 243, 250 is not an independent bar to a derivative action, but simply an example of a case where there will be no relevant wrongdoer control.
For Mr Petrie, it was submitted that there are alternative remedies:
(a)Fruit Shippers Ltd’s claim against Mr Petrie as trustee, and
(b)Mr Carpenter as director of Bartel Holdings Ltd could seek leave to bring a derivative claim under s 165 of the Companies Act.
[71] As to the first, while Fruit Shippers Ltd has sued Mr Petrie for breach of trust, that claim has an additional hurdle, provisions in the trust deed that limit a trustee’s liability. I deal with that in Mr Petrie’s summary judgment application. Bartel Holdings Ltd is not a trust beneficiary and Mr Petrie cannot invoke provisions of the trust deed to defend a claim that he breached his duty to the company as director. As it is a weaker remedy, the claim for breach of trust is not a reason for barring the derivative claim.
[72] And for the second, alternative remedies are those available to the plaintiff, not to others. The fact that someone else may also be able to bring another derivative claim does not mean that Fruit Shippers Ltd cannot make its claim. Mr Carpenter is aligned with Fruit Shippers Ltd, but he cannot be identified as the same person as it.
51 Konamaneni v Rolls-Royce Industrial Power (India) Ltd [2002] 1 WLR 1269 at [29].
[73] The apparent purpose of restricting derivative claims when alternative remedies are available is to spare the company from unnecessary costs. That purpose is not served when one derivative claim is substituted for another.
[74] A practical matter is Mr Carpenter’s health. In his letter of 29 July 2019 to Mr Petrie Mr Carpenter said that he had suffered recent bouts of ill health and proposed the appointment of one more director. That suggests a risk that Mr Carpenter may not be able to continue as director of Bartel Holdings Ltd for long or may not be able to manage litigation. It is a better litigation strategy for Fruit Shippers Ltd to bring the proceeding itself, which will avoid any difficulties with changes in personnel. The suggested derivative proceeding by Mr Carpenter is not a better alternative.
[75] Another alternative, not suggested by Mr Cooper, is to apply to court to remove Mr Petrie as a trustee and perhaps replace him with another, so that the trustees can use their shareholder power to remove Mr Petrie as a director and replace him with a New Zealand resident director. The directors would then have the company begin a proceeding against the former directors. I accept Mr Friar’s response that that would be less efficient.
[76] In summary, Fruit Shippers Ltd has established the basis for bringing a derivative proceeding. A reasonable businessman would assess that the sums in issue are significant. Success is not assured but the case is sound. The costs of the proceeding will be high because of the international factors and because of the need for discovery and analysis of accounting documents with associated costs of expert witnesses. Total success may not be likely, as the defendants may be able to justify some of the payments to Mr Noboa. Even so, a reasonable businessman would decide that it is worth taking the derivative proceeding. Accordingly, this part of Mr Petrie’s strike out application fails. This does not of course bar him from opposing the derivative claim on its merits at trial, including whether the exception in Foss v Harbottle applies.
Joinder of Bartel Holdings Ltd as a defendant
[77] This is a convenient point to deal with Fruit Shippers Ltd’s application to join Bartel Holdings Ltd as a defendant. The company is a necessary party for the derivative cause of action. In Roberts v Gill & Co, Lord Collins explained:52
A derivative action is brought in representative form, and the company is joined as a defendant in order for it to be bound by any judgment and to receive the fruits (if any) of the judgment, and because the action has not been authorised by its board or general meeting: Spokes v Grosvenor and West End Railway Terminus Co Ltd [1897] 2 QB 124, which is the leading authority on the joinder of the company in derivative actions. AL Smith LJ said at 126:
“That in the circumstances of this case the company are necessary parties to the suit I do not doubt, for without the company being made a party to the action it could not proceed”.
Chitty LJ said, at 128-129:
“To such an action as this the company are necessary defendants. The reason is obvious: the wrong alleged is done to the company, and the company must be party to the suit in order to be bound by the result of the action and to receive the money recovered in the action. If the company were not bound they could bring a fresh action for the same cause if the action failed, and there were subsequently a change in the directors and in the voting power. Obviously, in such action as this is, no specific relief is asked against the company; and obviously, too, what is recovered cannot be paid to the plaintiff representing the minority, but must go into the coffers of the company. It was argued for the appellants that the company were made a party for the purpose of discovery only, and authorities were cited to shew that when no relief is asked against a party he cannot or ought not to be compelled to make discovery. But this argument and these authorities have no bearing on the present case, where, as already shewn, the action cannot proceed in the absence of the defendant company, and the defendant company are interested in and will be bound by the results.”
[78] Both limbs in r 4.56(1)(b) of the High Court Rules apply. Bartel Holdings Ltd ought to have been joined as a defendant at the outset. Its presence is required to adjudicate on and settle all questions in the proceeding. It is now joined as a third defendant.
52 Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240 at [56]-[57].
[79] Mr Cooper accepted that if the derivative claim were allowed, the company had to be joined. He submitted that if there were no derivative claim, the joinder was not required. It is not necessary to deal with that aspect.
Mr Petrie’s challenge to Fruit Shippers Ltd’s compliance with pleading requirements
[80] It is little wonder that Mr Petrie applied to strike out the cause of action against him. His lawyers would have had difficulty working out the basis for the claim against him. The statement of defence at least recognises that Mr Petrie was being sued in two capacities, as trustee of the Dossor Trust and as director of Bartel Holdings Ltd. As I pointed out in paragraph [18] above, two claims should not have been combined in one pleaded cause of action.
[81] The claim against Mr Petrie as director is pleaded as a direct claim by Fruit Shippers Ltd. There is nothing to say that he is being sued derivatively. Instead Fruit Shippers Ltd seeks judgment for itself. That is inconsistent with a derivative claim under which the plaintiff seeks relief in favour of the company on whose behalf it is suing. A claim of breach of a director’s duty owed by Mr Petrie to Fruit Shippers Ltd is misconceived. Some cases have held that directors may owe shareholders a direct duty,53 as when they propose to buy their shares while withholding relevant information, but that is not this case. Fruit Shippers Ltd cannot directly sue on directors’ duties owed to the company. They are not actionable by shareholders and, even more so, not actionable by beneficiaries of trustee shareholders.54 Fruit Shippers Ltd can only enforce the director’s duties by suing derivatively, but its pleading does not show that.
[82] In a derivative claim the plaintiff must make it clear that it is suing derivatively. In Waddington Ltd Ribeiro PJ referred to the formula “on behalf of himself and the other shareholders other than the defendants.”55 Obviously that will need to be changed to meet the circumstances of this case. It is also necessary to plead the facts
53 Coleman v Myers [1977] 2 NZLR 298 (CA), Holmes v Kiriwai Consultants Ltd [2015] NZCA 149, (2015) 11 NZCLC 98-032.
54 Companies Act, s 169.
55 Waddington Ltd at 89.
that allow the plaintiff to sue derivatively. In Oates v Consolidated Capital Services Ltd Campbell JA said:56
To summarise, a plaintiff who seeks to bring a derivative action under the general law must allege, in the initiating process, facts which show that he or she falls within a recognised exception to the prima facie rule that the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is the corporation itself. If the initiating process fails to make these allegations, it is liable to be struck out …
In its draft amended pleading, Fruit Shippers Ltd added a paragraph pleading that Mr Petrie had not taken and will not take any action to recover the payments made to Mr Noboa and Wasabi Inc. It should go further and say in that part of its pleading setting out its derivative claim what conduct of the defendants allows the fraud on the minority exception to be invoked and what matters give the wrongdoers control to bar the company bringing a claim against them. Further, it should not seek relief for itself but for Bartel Holdings Ltd. The derivative cause of action should be pleaded separately from the direct claim against Mr Petrie for breach of trust.
[83] Mr Petrie also says that other pleading requirements are not met: the duties he is alleged to owe are not specified nor are the acts which are said to be in breach of those duties. Those objections are sound. They apply to both the claim for breach of trust and the claim for breach of director’s duty. Their purpose is to ensure that Mr Petrie is properly informed of the case against him.
[84] Fruit Shippers Ltd has pleaded generally that Mr Petrie owes fiduciary duties to Bartel Holdings Ltd and to Fruit Shippers Ltd, but the pleading needs to specify what those duties entail for this case. While this requirement also applies to the pleading against Mr Noboa, it is important for Mr Petrie as the case against him is based on his participation in Mr Noboa’s alleged wrongdoing. He is entitled to have the particular requirements of his fiduciary duty specified clearly in the pleading against him. It may be useful to set out when Mr Petrie came under particular duties. For example, in its draft amended statement of claim Fruit Shippers Ltd says that Mr Petrie was under a duty to recover Dossor Trust property. Did he come under that duty when he became trustee or was it triggered only later? If so, what triggered it?
56 Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 at [105].
[85] A matter of terminology. I have referred to the claim against Mr Petrie as trustee as a breach of trust as well as a breach of fiduciary duty. While a trustee is a fiduciary, he owes other duties including a duty of care, diligence and skill. I am not sure that all the wrongs alleged against Mr Petrie are breaches of fiduciary duty, for example, the breach of the alleged duty to recover trust property.
[86] The statement of claim does not specify the particular acts by Mr Petrie alleged to be in breach of his duties. In paragraph [62] above I set out what I understood Mr Petrie to have done. I gleaned that from reading his affidavits, not from the statement of claim. Paragraph 55 of the statement of claim says:
By the conduct set out in paragraphs 19-52 above, the first defendant has breached his duty to act in the best interests of Bartel and FSL.
Paragraphs 19 to 52 narrate events before the causes of action are set out. Many of the events go back before Mr Petrie was made a director and trustee. Only one paragraph states an action by Mr Petrie, paragraph 28, which alleges that Mr Petrie acknowledged receipt of Mr Villacis’ instructions of 19 March 2019. That is not enough to inform Mr Petrie what he is alleged to have done in breach of duty. Clarity is required to make sure that allegations of misconduct by Mr Petrie are set out separately from allegations against Mr Noboa. As an example, Fruit Shippers Ltd says that Mr Petrie is liable for payments to Mr Noboa during 2015. Mr Petrie says that the company’s financial year ends on 31 December and he was not appointed until 2016. The pleading should therefore state what conduct makes him liable for payments made before he was appointed.
[87] The defects in the statement of claim are procedural and can be cured. As the pleading is not a total write-off, it will not be struck out. Instead Fruit Shippers Ltd may file and serve an amended statement of claim. There are also defects in the pleading against Mr Noboa, in Mr Petrie’s statement of defence and the reply. I will come to them later.
Mr Petrie’s summary judgment application
[88] For his summary judgment application, Mr Petrie relies on provisions of the Dossor Trust deed which he says exclude or limit his liability, cl 16.1 and 16.4:
16 TRUSTEES’ LIABILITY
16.1 Liability for Loss: in the professed execution of the trusts of this deed no Trustee shall be liable for any loss to the Trust Fund arising:
16.1.1Investment: by reason of any improper or imprudent investment made by any Trustee in good faith; or
16.1.2Agent: from the negligence or fraud or delay of any agent instructed by any Trustee in good faith (notwithstanding that the instruction of such agent was not necessary or expedient and notwithstanding any statutory provision or rule of law to the contrary); or
16.1.3Mistake: by reason of any mistake or omission made by any Trustee in good faith; or
16.1.4Delay: by reason of any delay caused by any Trustee; or
16.1.5Deposit of funds: by reason of all or part of the Trust Fund being lawfully deposited in the hands of any banker or solicitor; or
16.1.6Security: by reason of the insufficiency or deficiency of any security upon which all or part of the Trust Fund may be invested:
16.1.7General: any other act of any Trustee:
unless attributable to that Trustee’s dishonesty or to the wilful commission or omission of any act known by that Trustee to be a breach of trust.
…
16.4 Receipt of Monies: Subject to subclauses 16.1 and 16.2, a Trustee shall be chargeable only for such monies as shall have been received by that Trustee. For the purposes of this subclause a Trustee shall be deemed to have received monies even if not actually paid to that Trustee if those monies have been credited in account, reinvested, accumulated, capitalised, carried to any reserve, sinking or insurance fund, or otherwise dealt with on that Trustee’s behalf.
[89] Clause 16.2, which is subject to cl 16.1, replaces the duty under s 13C of the Trustee Act 1956 with the duty to use the care, diligence and skill that a prudent person of business would exercise in managing the affairs of others.
[90] These provisions of the trust deed can give a trustee a defence only to a claim by a beneficiary for a breach of trust. A trustee who is also a director of a company owes separate duties to the company, which is not bound by the trust deed. The trust deed provisions are accordingly no defence to the derivative proceeding on behalf of Bartel Holdings Ltd. As a defendant’s summary judgment application is required to establish that the plaintiff cannot succeed on all the causes of action in the statement
of claim, the summary judgment application must fail.57 I will instead deal with the matter as an application to strike out the cause of action for breach of trust.
[91] The establishment of an affirmative defence may give ground to strike out a cause of action as frivolous, vexatious or an abuse of procedure. The leading decisions are on limitation defences, but they provide a framework for considering other affirmative defences. In Murray v Morel & Co Ltd Tipping J said:58
Read as a whole my judgment in Matai can be seen as holding that the onus is on the defendant to show that a claim, or at least part of it, is statute-barred, unless the plaintiff is able to rely on some extension of the ordinary limitation period or some postponement of the commencement of that period. The question which arises in this case concerns what the plaintiff must do to resist the striking out of a claim which, subject to matters of postponement and extension, is clearly statute-barred.
[110] The new statement of claim by Fruit Shippers Ltd will need a new statement of defence by Mr Petrie. He will need to amend his responses to paragraphs 43 and 50 of the current statement of claim. They plead that Bartel Holdings Ltd did not receive any legitimate services from the Wasabi agreements. Mr Petrie’s current statement of defence gives bare denials. That is unsatisfactory. He will need to specify what services Wasabi provided to Bartel Holdings Ltd under the agreements.
[111] While the summary judgment will be dismissed, that will be without prejudice to Mr Petrie reviving the strike out application if Fruit Shippers Ltd cannot file a sound new statement of claim or reply. That can be kept under review during case
management. Some judges have been wary of determining finally the effect of an exemption clause in an interlocutory application.75 That outcome remains open in this case.
Clause 16.4
[112]Here is the clause again:
16.4 Receipt of Monies: Subject to subclauses 16.1 and 16.2, a Trustee shall be chargeable only for such monies as shall have been received by that Trustee. For the purposes of this subclause a Trustee shall be deemed to have received monies even if not actually paid to that Trustee if those monies have been credited in account, reinvested, accumulated, capitalised, carried to any reserve, sinking or insurance fund, or otherwise dealt with on that Trustee’s behalf.
Mr Petrie says that as he did not receive any of the money allegedly improperly paid, the clause gives him a defence.
[113] That is not how the clause works. The trust deed has a comprehensive definition of “Trust Fund” to cover all manner of property settled on the trust. It means:
the initial amount of FIVE HUNDRED DOLLARS ($500) held on trust, and all moneys, property and investments of whatever nature and kind hereafter transferred to the Trustees and directed to be held on the trusts of this deed and any further moneys, property and investments of whatever nature and kind which may be otherwise paid to or held under the control or vested in or acquired by the Trustees from any source whatsoever and whether by way of gift, bequest, devise, purchase, exchange or otherwise howsoever for the purposes of the said trusts and the moneys, property and investments of whatever nature and kind from time to time representing the same and the income therefrom.
Notwithstanding the wide definition of trust fund, clause 16.4 limits the assets in the trust fund for which a trustee may be chargeable, that is, accountable. A trustee is not accountable for assets outside the clause. No claim for breach of trust may be made in respect of trust assets which the trustee has not “received” under the clause. “Monies” covers all trust assets, just as the definition above refers to trust assets as a “fund”. Unlike cl 16.1, to which it is subject, the clause does not limit the kinds of
75 Ferrer-Aza v NZONE Race Management Ltd [2016] NZHC 885, Ivanishvili v Credit Suisse AG
[2019] NZHC 1755 at [42].
claims that might be made against a trustee for breaches in respect of those assets. Claims might be variously for misapplication, misappropriation, improvident investment, mismanagement, waste and so on.
[114] The clause can be usefully compared with s 38(1) of the Trustee Act 1956, which has a similar purpose, although different terms:
A trustee shall be chargeable only for money and securities actually received by him, notwithstanding his signing any receipt for the sake of conformity, and shall be answerable and accountable only for his own acts, receipts, neglects, or defaults, and not for those of any other trustee, nor for any bank, broker, or other person with whom any trust money or securities may be deposited, nor for the insufficiency or deficiency of any securities, nor for any other loss, unless the same happens through his own wilful default.
[115] The purpose of provisions such as cl 16.4 and s 38(1) is to shield a trustee from liability for the actions of their co-trustees. That is the general rule anyway.76 As Mr Petrie was the sole trustee at relevant times, the clause does not help him.
[116] The shares in Bartel Holdings Ltd are part of the trust fund as defined. Mr Petrie became sole shareholder when he replaced Mr Dossor as trustee in 2016. With his shareholding he was able to appoint himself director of the company and has acted as director ever since. He could not have done so unless he had “received” the shares under cl 16.4. He is accountable to the trustees for his management of the shares during his trusteeship, including for any reduction in their value because as director he was involved in improper payments to Mr Noboa. Fruit Shippers Ltd accordingly has an arguable response that cl 16.4 does not protect Mr Petrie.
Fruit Shippers Ltd’s application to set aside Mr Noboa’s appearance under protest
[117] Mr Noboa was served in Florida. Fruit Shippers Ltd did not obtain leave to serve outside the jurisdiction, relying instead on two gateways under r 6.27(2) of the High Court Rules. Mr Noboa entered an appearance protesting the jurisdiction of this court to hear Fruit Shippers Ltd claims against him. His appearance gives grounds:
76 The principle was first established in Townley v Sherborne (1633) Bridg.
(a)Fruit Shippers Ltd got his name wrong in the proceeding. His correct name is Luis Adolfo Noboa, not Luis Noboa Icaza, as he is called in the statement of claim;77
(b)Fruit Shippers Ltd’s case does not come within the gateways in r 6.27 it has cited;
(c)The court should not assume jurisdiction because the statement does not disclose a seriously arguable claim against him; and
(d)New Zealand is not the appropriate forum.
[118] Under r 5.49 of the High Court Rules a defendant who has entered an appearance protesting the jurisdiction may apply to dismiss the proceeding (r 5.49(3)) or the plaintiff may apply to set aside the appearance (r 5.49(5)). Here Fruit Shippers Ltd has applied. On such an application the court must dismiss the proceeding unless the plaintiff establishes that it has a good arguable case that its claim falls wholly within one of the gateways in r 6.27, the claim has a real and substantial connection with New Zealand, there is a serious issue to be tried on the merits, New Zealand is the appropriate forum for the trial and any other relevant circumstances support New Zealand hearing the case.78 It also has the option of showing that if it had applied for leave under r 6.28, it would have got it and any failure to apply for leave should be excused.79 Fruit Shippers Ltd’s application comprehensively addresses the grounds in Mr Noboa’s appearance and adds another gateway under r 6.27 to justify its service without leave.
Serious issues to be tried
[119] In the hearing the main issue was whether Fruit Shippers Ltd had shown a serious issue to be tried on the merits. That calls for Fruit Shippers Ltd’s causes of action to be considered. As there is some overlap with the claims against Mr Petrie, it is not necessary to repeat the analysis of the overlapping parts.
77 This is a quibble and I will not deal with it further.
78 High Court Rules, rr 6.28(5) and 6.29(1).
79 Rule 6.29(1)(b).
First cause of action against Mr Noboa – breach of fiduciary duty
[120] This is the claim for breach of fiduciary duty against Mr Noboa as director of Bartel Holdings Ltd. He was never a trustee of the Dossor Trust and there cannot be a claim against him for breach of trust. As noted above, the pleading incorrectly combines two claims as a single cause of action, a direct claim by Fruit Shippers Ltd and a derivative claim on behalf of Bartel Holdings Ltd. The reasons why Fruit Shippers Ltd can bring a derivative claim against Mr Petrie on behalf of the company also apply to its derivative claim against Mr Noboa, save that the case against him appears stronger than the claim against Mr Petrie. The reasonable businessman assessment on the strike out application shows that there is merit in the claim. Just as the derivative claim against Mr Petrie for breach of fiduciary duty is pleaded badly, this cause of action will need to be amended, but that does not go against this court hearing the claim.
[121] On the other hand, the direct claim is not seriously arguable. There is nothing to show that Mr Noboa as director owed Fruit Shippers Ltd directly a fiduciary duty. This case is outside the line of cases such as Coleman v Myers and Holmes v Kiriwai Consultants Ltd where directors were held to owe shareholders directly a duty.80 The absence of duty owed to the Dossor Trustees and to Fruit Shippers Ltd preserves the rule barring claims for reflective loss. Just as a shareholder cannot sue for a reflective loss,81 nor can the beneficiary of a trustee shareholder.
Second cause of action against Mr Noboa - debt
[122] This is the claim in debt. Mr Noboa is said to owe both Bartel Holdings Ltd and Fruit Shippers Ltd $15,734,275.63. It combines direct and derivative causes of action. As already noted, there cannot be a direct claim by Fruit Shippers Ltd for any debt that Mr Noboa owes Bartel Holdings Ltd. There is no pleading showing that Mr Noboa came to be a debtor of Fruit Shippers Ltd. Any derivative claim on behalf of Bartel Holdings Ltd alleging debt is also misconceived. At present Bartel Holdings Ltd is no more than a prospective creditor of Mr Noboa. Fruit Shippers Ltd alleges
80 Coleman v Myers [1977] 2 NZLR 298 (CA), Holmes v Kiriwai Consultants Ltd [2015] NZCA 149, (2015) 11 NZCLC 98-032.
81 Companies Act 1993, s 169(2).
claims based on his misappropriating company funds. Those claims have not been proved yet. If they are, the court will give judgment, which will establish that Bartel Holdings Ltd is a creditor of Mr Noboa, but until then Fruit Shippers Ltd cannot plead that it is a creditor of Mr Noboa. And if Fruit Shippers Ltd obtains judgment on its other claims, it may enforce them and will not need to rely on a debt cause of action. The debt claim therefore adds nothing to the case and Mr Noboa should not have to deal with it.
[123] There is a possible debt claim. The Dossor trustees may have a claim in debt against Mr Noboa based on the debts recorded in the original financial statements of the trust, before the reconstruction. If Fruit Shippers Ltd were to sue on it, that would be a simple derivative claim and would require special circumstances. Fruit Shippers Ltd has not however pleaded that. I also note the defendants’ position that Bartel Holdings Ltd should make any claim, as Mr Noboa received its money.
Third and fourth causes of action - restitution
[124] Where a director has improperly removed funds, companies and liquidators commonly make a common law restitution claim, money had and received. A restitution cause of action is appropriate here. Apart from terminology there is no practical difference between calling the cause of action money had and received or unjust enrichment. The court will apply the same rules. “Unjust enrichment” has sometimes been criticised as inviting the court to exercise a loose discretion to do what it considers just between the parties, but it is nothing of the sort. In Lipkin Gorman v Karpnale Ltd, Lord Goff said:82
The recovery of money in restitution is not, as general rule, a matter of discretion for the court. A claim to recover money at common law is made as a matter of right; and even though the underlying principle of recovery is the principle of unjust enrichment, nevertheless, where recovery is denied on the basis of legal principle.
[125] I see no need for Fruit Shippers Ltd to plead two matching restitutionary claims for the same payments by Bartel Holdings Ltd to Mr Noboa. One should be deleted.
82 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 at 578. See also Lord Reed’s judgment in Investment Trust Companies v Revenue and Customs Commissioners [2017] UKSC 29, [2018] AC 275 at [38]-[42].
[126] The restitutionary claim is Bartel Holdings Ltd’s, but Fruit Shippers Ltd can bring it on its behalf for the same reasons that it can sue Mr Petrie on behalf of the company. Fruit Shippers Ltd does not however have a direct claim in its own right to be paid the money Mr Noboa received from Bartel Holdings Ltd, again for the same reasons that Fruit Shippers Ltd cannot sue Mr Petrie and Mr Noboa for breaches of directors’ duties.
[127] What I have said above assumes that New Zealand law governs the restitutionary claim. That is not necessarily the case. In a restitutionary money claim arising out of a cross-border transfer of an asset or money, the law of the place of enrichment applies. The authorities, such as they are, are referred to in MacMillan Inc v Bishopsgate Investment plc (No 3).83 In this case that would be Florida law. I leave it to the parties to decide whether they want to go there.
[128] There are two causes of action against Mr Noboa raising serious issues to be tried: a derivative claim on behalf of Bartel Holdings Ltd for breach of director’s duty and another one on behalf of the company for restitution. The others do not and are struck out. While Fruit Shippers Ltd is the plaintiff, it cannot seek judgment for itself, but must seek relief for Bartel Holdings Ltd. Fruit Shippers Ltd will need to file a new statement of claim addressing these matters.
The gateways in r 6.27 of the High Court Rules
[129] In its notice of proceeding Fruit Shippers Ltd relied on two gateways under r 6.27(2) to serve Mr Noboa without leave:
(h)when any person out of the jurisdiction is –
(i)a necessary or proper party to proceedings properly brought against another defendant served or to be served (whether within New Zealand or outside New Zealand under any other provision of these rules), and there is a real issue between the plaintiff and that defendant that the court ought to try;
(l) when a claim is made for restitution or for the remedy of constructive trust and the defendant’s alleged liability arises out of acts committed within the jurisdiction:
83 MacMillan Inc v Bishopsgate Investment plc (No 3) [1996] 1 WLR 387 (CA) at 397.
In its application to set aside Mr Noboa’s appearance, it added another:
(j)when the claim arises under an enactment and either –
(i)any act or omission to which the claim relates was done or occurred in New Zealand; or
(ii)any loss or damage to which the claim relates was sustained in New Zealand; or
(iii)the enactment applies expressly or by implication to an act or omission that was done or occurred outside New Zealand in the circumstances alleged; …
[130] Mr Cooper did not object to the new ground being added and I am satisfied that Mr Noboa has not been prejudiced.84 He has been given adequate opportunity to address it. The new ground is added. In the hearing Mr Cooper did not strongly contest the grounds, but regardless of that, I set out my reasons in case this goes further.
Necessary or proper party
[131] This ground applies to both causes of action against Mr Noboa. Fruit Shippers Ltd’s case is that both defendants were involved in depriving Bartel Holdings Ltd of its funds, Mr Petrie in New Zealand and Mr Noboa in Florida. Mr Noboa is the recipient, but he could not have received the payments made during Mr Petrie’s directorship without Mr Petrie’s assistance. At this stage there is an adequate evidential basis for that. The claims against Mr Petrie for his participation, for breach of trust and for breach of director’s duty, are properly brought. In Ivanishvili v Credit Suisse AG, Venning J said:85
Provided there is a good arguable (not contrived) claim against the anchor defendant the fact that the decision to sue the anchor defendant is predominantly due to a desire to reach a better funded foreign defendant is no answer to the plaintiffs’ claim on this point.
That applies here.
84 McConnell Dowell Constructions Ltd v Lloyds Syndicate 396 [1988] 2 NZLR 257 at 270, Turn & Wave Ltd v Northstar Accounts Pty Ltd HC Auckland 23 December 2010, CIV 2010-404-2268.
85 Ivanishvili v Credit Suisse AG [2018] NZHC 1755 at [29].
[132] As the recipient of Bartel Holdings Ltd’s money, Mr Noboa is an obvious person to sue for its recovery. There is a real issue to be tried. If Fruit Shippers Ltd had sued Mr Petrie but not Mr Noboa, it would not be surprising if Mr Petrie joined Mr Noboa as a third party to recover any amounts for which he might be found liable. If Mr Noboa were in New Zealand, both he and Mr Petrie would be proper parties to the proceeding.86 Fruit Shippers Ltd has a good arguable claim under this head.
Claim under an enactment
[133] The enactment is s 131 of the Companies Act 1993, which imposes on directors a duty when exercising powers or performing duties, to act in good faith and in what the director believes to be the best interests of the company. This gateway accordingly applies only to the claim for breach of director’s duty.
[134] The acts of Mr Noboa relied on are his arranging for payments from Bartel Holdings Ltd’s bank accounts to himself. For that he had to communicate with people in New Zealand, Mr Dossor and Mr Petrie. In Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd the Court of Appeal considered whether r 6.27(h)(i) was met in a claim under the Fair Trading Act, when overseas defendants had made representations by email to people in New Zealand.87 It held that that was conduct within New Zealand. Similarly, Mr Noboa’s communications to New Zealand to arrange for payments from New Zealand are relevant conduct in New Zealand under the rule. He arranged for others to act on his behalf in New Zealand. Rule r 6.27(h)(ii) is satisfied because the damage was sustained in New Zealand, the depletion of Bartel Holdings Ltd’s funds. And r 6.27(h)(iii) applies because the duties imposed on a director under the Companies Act apply whether the director is inside or outside New Zealand.88 The good arguable case test has been met.
Restitution claim
[135] The rule allows service outside the jurisdiction for restitution claims, where “the defendant’s alleged liability arises out of acts committed inside the jurisdiction”.
86 Massey v Heynes & Co (1888) 21 QBD 330 (CA) at 338.
87 Wing Hung Printing Co Ltd v Saito Offshore Pty Ltd [2010] NZCA 502, [2011] 1 NZLR 754 at [106].
88 Re Capital Hospitality Holdings Ltd, Grant v Pandey [2013] NZHC 2844,f [10]-[17].
I take that as meaning that, whatever the law governing the restitutionary claim, leave is not required if the acts giving rise to the claim were committed in New Zealand. On the basis of the Wing Hung decision at least some of Mr Noboa’s acts took place in New Zealand, namely, his instructions sent to New Zealand requesting payment. In case I am wrong on that and leave were required, I would if necessary apply r 6.29(1)(b) in favour of Fruit Shippers Ltd. That would not be necessary because there is another gateway available for the restitution claim, the necessary or proper gateway under r 6.27(2)(h)(i).
Real and substantial connection with New Zealand
[136] The case concerns a trust established in New Zealand governed by New Zealand law with assets in New Zealand, shares in a New Zealand company, and the conduct of its New Zealand-resident trustee in New Zealand. It also concerns that company, incorporated in New Zealand and governed by New Zealand law, with assets in New Zealand, investments in New Zealand companies and funds in New Zealand bank accounts, and the conduct of its directors under New Zealand law. The events in issue, the depletion of the company’s assets, took place mostly in New Zealand. There are foreign connections: Fruit Shippers Ltd, the only active beneficiary of the trust, is a Bahamas company, but that country has little to do with the case. The trust was established at the behest of Fruit Shippers Ltd, which can accordingly be taken to have accepted that disputes relating to the trust would be decided in New Zealand according to New Zealand law. Mr Noboa lives in Florida and that is the place of enrichment. But as director of a New Zealand company, he cannot complain against the application in New Zealand of New Zealand law to the performance of his functions as director.89 While there are some foreign connections, this is mainly a New Zealand case.
New Zealand the appropriate forum
[137] Normally in a forum non conveniens dispute the party protesting New Zealand’s assumption of jurisdiction proposes an alternative law area where the case may be heard according to Spilidia principles.90 Mr Noboa has not however done so, leaving the default position that New Zealand is the appropriate forum.
89 Re Capital Hospitality Holdings Ltd, Grant v Pandey [2013] NZHC 2844 at [17].
90 Spilidia Maritime Corporation v Consulex Ltd [1987] AC 460 (HL).
[138] Fruit Shippers Ltd has satisfied the good arguable case test for all the causes of action where there is a serious case to be tried and has shown that the court should assume jurisdiction on the factors in r 6.28(5). But even if its case did not get through one of the gateways in r 6.27(2), I would still allow the case to continue in New Zealand because of the overwhelming factors favouring New Zealand and the absence of any viable alternative. Accordingly, Mr Noboa’s appearance protesting the jurisdiction is set aside.
[139] Before concluding, I note one matter I have not addressed: enforcement of any judgment. That might be relevant in a reasonable businessman assessment for the derivative claims. Those considering suing foreigners in New Zealand need to work out whether a New Zealand judgment will be enforceable in the foreigner’s home jurisdiction. There was no evidence as to Florida’s law as to the recognition and enforcement of foreign judgments. I assume that Fruit Shippers Ltd has worked out its litigation strategy and I do not have to advise it on that. As for Mr Petrie, he lives in New Zealand. There is no evidence that he is a man of straw.
Outcome
[140]I summarise the matters to be addressed in new pleadings.
(a)The amended statement of claim is to show separate causes of action against Mr Petrie, one a direct claim for breach of trust and the other a derivative claim on behalf of Bartel Holdings Ltd for breach of director’s duty.
(b)The pleading should state the facts for the derivative claim, including wrongdoing, wrongdoer control and interest.
(c)For both causes of action against Mr Petrie, the statement of claim should the particular duties alleged against him, for example, not just a general duty to act in the interests of Bartel Holdings Ltd, but what that duty required in this case.
(d)If Fruit Shippers Ltd alleges that Mr Petrie owed separate duties, one to act in the interests of beneficiaries and another to recover trust assets (which may be no more than a management duty), they should be pleaded separately.
(e)For both causes of action, the statement of claim should state what actions or conduct on his part are in breach of his duties as trustee and director, giving appropriate particulars.
(f)For relief in the derivative cause of action, Fruit Shippers Ltd should seek relief for Bartel Holdings Ltd.
(g)For any causes of action for breach of trust, the relief should seek restoration of the trust fund, not a money judgment for Fruit Shippers Ltd.
(h)The amended statement of claim is to show separate causes of action against Mr Noboa, one a derivative claim on behalf of Bartel Holdings Ltd for breach of director’s duty and the other a derivative claim in restitution.
(i)The pleading should state the facts for the derivative claims, including wrongdoing, wrongdoer control and interest.
(j)For the cause of action against Mr Noboa for breach of director’s duty, the statement of claim should the particular duties alleged against him, for example, not just a general duty to act in the interests of Bartel Holdings Ltd, but what that duty required in this case. The statement of claim should state what actions or conduct on his part are in breach of his duties as director, giving appropriate particulars.
(k)Fruit Shippers Ltd is not to plead more than one cause of action in restitution alleging the same facts and relying on the same law.
(l)The causes of action against Mr Noboa should seek relief on behalf of Bartel Holdings Ltd, not a money judgment for Fruit Shippers Ltd.
(m)The statements of defences by Mr Petrie and Mr Noboa should not be evasive. If a negative assertion is contested, a substantial answer is required.
(n)Any reply by Fruit Shippers Ltd to an affirmative defence relying on cl 16.1 of the trust deed should give a substantive response. If Fruit Shippers Ltd alleges dishonesty or other reprehensible conduct, it must give a properly particularised pleading showing a prima facie case of the alleged misconduct.
[141] I have given timetabling directions allowing standard times. If the COVID-19 pandemic causes delays, reasonable requests for extensions of time will be considered.
[142] Ahead of the first case management conference, I expect counsel to confer and agree on discovery directions.
[143]I make these orders:
(a)Mr Noboa’s appearance protesting the jurisdiction is set aside;
(b)Bartel Holdings Ltd is joined as third defendant;
(c)Fruit Shippers Ltd’s causes of action against Mr Noboa in debt and for breach of a fiduciary duty to it are struck out;
(d)Fruit Shippers Ltd is to file and serve an amended statement of claim addressing the requirements in [140] above within 20 working days of delivery of this decision;
(e)The defendants are to file and serve statements of defence within a further 20 working days, again complying with the directions in [140] above.
(f)Fruit Shippers Ltd is to file and serve a reply to the statement of defence within a further 15 working days.
(g)The registrar is to convene a case management conference no earlier than 50 working days after delivery of this decision.
(h)Mr Petrie’s application for summary judgment is dismissed but his strike out application remains alive to monitor Fruit Shippers Ltd’s compliance with the directions for amended pleadings.
(i)Leave is reserved to apply for further directions.
[144]Counsel are to confer on costs. If they cannot agree, memoranda may be filed.
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Associate Judge R M Bell
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