Greymouth Holdings Limited v Jet Trustees Limited
[2012] NZHC 471
•2 March 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-5309 [2012] NZHC 471
BETWEEN GREYMOUTH HOLDINGS LIMITED First Plaintiff
ANDROBERT MARK PATRICK DUNPHY Second Plaintiff
ANDPETER HANBURY MASFEN AND JOANNA ALISON MASFEN
Third Plaintiffs
ANDJET TRUSTEES LIMITED First Defendant
ANDJOHN GILBERT STURGESS Second Defendant
ANDJOHN STURGESS & ASSOCIATES Third Defendant
Hearing: 24 February 2012
Counsel: J A Farmer QC and M D O'Brien for plaintiffs
W G C Templeton for defendants
Judgment: 2 March 2012
Reasons: 20 March 2012
REASONS OF POTTER J
for judgment on application for leave to appeal
Solicitors: Bell Gully, Auckland – [email protected]
Stafford Klaasen, Auckland – [email protected]
Copy to: J A Farmer QC, Auckland – [email protected]
W G C Templeton, Auckland – [email protected]
GREYMOUTH HOLDINGS LIMITED V JET TRUSTEES LIMITED HC AK CIV-2011-404-5309 [2 March
2012]
Introduction
[1] In my judgment dated 2 March 2012 I declined the defendants’ application dated 23 December 2011 for leave to appeal against that part of the judgment of Rodney Hansen J dated 19 December 2011 (the judgment) granting leave to the plaintiffs under s 165 of the Companies Act 1993 (the Act) to bring proceedings on behalf of the company Greymouth Petroleum Holdings Limited (the company) against the defendants. I said my reasons would follow. These are the reasons.
[2] To avoid confusion, in this judgment I shall refer to the defendants/intended appellants as the Sturgess interests, and to the plaintiffs/intended respondents and the Dunphy interests.
General approach to application for leave
[3] Section 24G of the Judicature Act 1908 provides that no appeal shall lie from an interlocutory decision of the High Court in respect of any proceeding entered on the Commercial List unless leave to appeal to the Court of Appeal is given by the High Court.
[4] The Commercial List is designed to secure the expeditious completion of the interlocutory stages of a commercial proceeding and so minimise the delays in its ultimate disposition.1
[5] The Court of Appeal said in Meates v Taylor that:
… leave will not be granted as a matter of course, but only where the particular circumstances clearly warrant incurring the further delay that will be involved … as a generalisation it can be said that error of fact or law is not enough; the case must be such as to create if not injustice at least real detriment … if not corrected; or it may be as to an important question of law; or it may touch upon a matter of general or public importance.
[6] The desirability of minimising delay in the ultimate disposition, is pertinent in this case. The proceeding has a firm fixture in October of this year for five weeks.
1 Meates v Taylor (1992) 5 PRNZ 524, 526 (CA).
The board of directors is deadlocked because of a requirement for unanimity in decision-making by both directors and shareholders, and there are assets and business goodwill of considerable value at stake (the company’s claim in damages is potentially in the vicinity of $40m). Clearly it is in the interests of all parties that the dispute be brought before the Court and determined as expeditiously as possible. All interlocutory steps need to be directed to that end.
Background
[7] The parties to this proceeding and CIV-2011-404-5442, which are proceeding in tandem in the Commercial List, are shareholders and directors of the company. Differences have arisen between the Sturgess interests and the Dunphy interests. Both sides have issued proceedings seeking remedies under s 174 of the Companies Act claiming unfair prejudice as shareholders.
[8] Further detail of the factual background is set out in the judgment2 and need not be repeated here.
The judgment
[9] The application of the Dunphy interests for leave under ss 165 and 167 of the Act to bring proceedings in the name of and on behalf of the company is dealt with in the judgment at [23]-[39]. At [54](b) Rodney Hansen J granted leave to the Dunphy interests:
… to bring proceedings in the name and on behalf of Greymouth Petroleum Holdings Limited against the second and third defendants by way of a cross- claim against them, the cross-claim to be lodged by the plaintiffs’ solicitors who, pending further order of the Court, may have the conduct of the cross- claim.
[10] In addressing the question of leave the Judge set out s 165 of the Act:
2 Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, CIV-2011-404-
5442, 19 December 2011 at [5]-[10].
165 Derivative actions3
(1) Subject to subsection (3) of this section, the Court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a) Bring proceedings in the name and on behalf of the company or any related company; or
(b) Intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2) Without limiting subsection (1) of this section, in determining whether to grant leave under that subsection, the Court shall have regard to—
(a) The likelihood of the proceedings succeeding:
(b) The costs of the proceeding in relation to the relief likely to be obtained:
(c) Any action already taken by the company or related company to obtain relief:
(d) The interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1) of this section, only if the Court is satisfied that either—
(a) The company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) It is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
(4) Notice of the application must be served on the company or related company.
(5) The company or related company—
(a) May appear and be heard; and
(b) Must inform the Court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.
3 The Judge included only subsections (1), (2) and (3) of s 165 but I have included the remaining subsections because paragraph (5) in particular, was referred to in submissions before me.
(6) 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.
[11] He then considered the test to be applied by the Court under s 165 as set out by Fisher J in the leading authority of Vrij v Boyle.4 Fisher J noted that in determining whether to grant leave, the first matter the Court is required to have regard to was (under s 209X of the Companies Act 1955, as it is under s 165) the likelihood of the proceedings succeeding. In that regard he said:5
I adopt in that regard the useful test suggested in a slightly different context in Smith & Ors v Croft & Ors [1986] 1 WLR 580. It is not for me to conduct an interim trial on the merits. The appropriate test is that which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, likely costs and the prospect of executing any judgment.
[12] Hansen J noted6 that in Frykberg v Heaven7 Heath J had suggested a different test, based on a prudent trustee, but that Fisher J’s approach in Vrij v Boyle had been preferred by other Judges8 and Heath J had since said he was “content” to follow “the prudent business person” test, albeit “for present purposes”.9 The Judge went on to observe that in Needham v EBT Worldwide Ltd, Venning J considered the “prudent business person” test could be applied, not just to the likelihood of the proceedings succeeding, but to all the factors set out in s 165(2).10 He said that was a view with which he agreed and noted that it had been endorsed by Asher J in Peters v Birnie.11 Asher J said that in all cases the Court needs to address the specific factors set out in s 165(2) and then to stand back and decide, on an overview and taking into account those factors and all other relevant matters, whether “… a prudent business person using his or her own funds would choose to proceed”.
[13] The Judge then considered each of the s 165(2) factors:
4 Vrij v Boyle [1995] 3 NZLR 763 (HC).
5 At 765.
6 At [27] of the judgment.
7 Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC).
8 See, for example, Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 (HC); Presley v
CallPlus Ltd [2008] NZCCLR 37 (HC) and Peters v Birnie [2010] NZAR 494.
9 Re Mega-Merger Housing Ltd HC Auckland CIV-2004-404-3674, 16 November 2004.
10 Needham v EBT Worldwide Ltd at [23].
11 Peters v Birnie at [29].
(a) The likelihood of the intended amended proceeding succeeding. The Judge noted that the proposed claims in the derivative action are substantially those relied on in the s 174 claim by the Dunphy interests – that Mr Sturgess and his company are in breach of the contract with the company for management services and that Mr Sturgess has breached his duties as a director of the company. Applying the test in Vrij v Boyle he concluded:12
… the evidence put forward by the plaintiffs is cogent and sufficient to establish that, on their view of the world, there have been serious breaches of duty. There are causes of action available to the Company based on credible evidence which offers at least a reasonable prospect of ultimate success.
(b)Costs of the proceedings. The Judge noted that the plaintiffs have given an undertaking to fund the derivative action, in response to concerns from the Sturgess interests that the motive of the plaintiffs was to use the company (of which they control 86 per cent) “to bankroll their personal litigation”. He further observed that the additional costs of the derivative action were, in any event, unlikely to be significant because the factual issues and many of the legal issues will coincide with those raised in the s 174 proceedings.
(c) Any action already taken by the company to obtain relief. The Judge said that for practical purposes no action has been taken by the company to obtain relief for the alleged breaches by Mr Sturgess and his company, nor could any action be taken without leave of the Court, because of the requirement in the agreement between the parties for unanimity in decision-making.
(d)The interests of the company. The Judge said the proceeding has the potential to reap substantial financial benefits for the company with
minimal risk of exposure to costs if unsuccessful. It is already a party
12 At [31] of the judgment.
to the other proceeding (CIV-2011-404-5442) and by Court order has become a party to this proceeding as a defendant.
(e) Discretion to grant leave. The Judge held that the requirements of s 165(3) were readily satisfied. As to the mandatory considerations in s 165(2) he was satisfied in this case that the prudent business test was met. He turned to a submission from Mr Templeton for the Sturgess interests that the derivative action would involve unnecessary “duplication” of the issues to be litigated under the s 174 proceedings. He concluded that while there was some overlap in the proceedings, in this case there was not duplication. The claims by the shareholders and the company rely substantially on the same factual allegations of misconduct by Mr Sturgess, and in both proceedings compensation is sought for damage allegedly suffered as a consequence, but the claim under s 174 is for the harm done to the Dunphy interests in their capacity as shareholders, whereas in the derivative action the right to recover arises out of alleged breaches of duty to the company.13
Submissions - the Sturgess interests
[14] The grounds relied on by the Sturgess interests in seeking leave to appeal are principally:
(a) Whether in assessing the leave application under s 165 to bring a derivative action the relevant legal test is the “prudent business person” test as preferred by the High Court in recent years or the “prudent trustee” test, or “prudent fiduciary” test. It is submitted that none of these tests have been the subject of appellate review and that such is warranted.
(b) Whether the test of “duplication” as opposed to “appropriateness” is
the correct legal test when determining whether leave should be refused under s 165 in circumstances where there are concurrent
13 At [38] of the judgment.
proceedings under both s 165 and s 174 and both sets of proceedings are based on the same factual allegations, claims and issues, with the result that there is overlap between them.
(c) That the inability on the part of the company to establish both its corporate intention in terms of s 165(3)(a) and inform the Court in terms of s 165(5)(b) reinforces the point that where “deadlock” exists at board level because of the need for unanimity, s 165 is inappropriate and disputes are better resolved under s 174.
[15] The Sturgess interests submit that these are important questions of law and matters of commercial significance that justify the granting of leave to appeal in this case. It is claimed that granting leave would not delay the proceeding but in any event the issues have public importance such that they should be determined by the Court of Appeal, irrespective of delay.
Submissions - the Dunphy interests
[16] The Dunphy interests refer to the observations of the Court of Appeal in Meates v Taylor and submit that none of the circumstances identified by the Court of Appeal are present in this case. In particular, there can be no injustice or real detriment to the Sturgess interests. It is submitted that the effect of the s 165 order made by Hansen J is to ensure that there is ultimately no issue around remedy if the claims about the conduct of Mr Sturgess and his company are made out, but that the order will not have any substantive effect on the factual issues in evidence at trial or affect the length of trial. Further, that none of the three issues on which the Sturgess interests focus in support of their application for leave, singularly or cumulatively, are sufficient to override the policy of discouraging appeals from Commercial List interlocutory orders.
[17] I turn to consider the three principal limbs of the argument for the Sturgess interests.
Is the “prudent business person” the appropriate test?
[18] Mr Templeton said that the “prudent business person” test adopted by Fisher J in Vrij v Boyle14 in assessing the likelihood of the proceedings succeeding under s 165(2)(a) has not been endorsed by the Court of Appeal. He submitted that it is a commercially significant point which needs consideration by the Court of Appeal.
[19] In oral submissions he advanced six reasons for uncertainty relating to the
“prudent business person” test:
(a) The English decision Smith v Croft15 from which Fisher J adopted the test did not concern whether a shareholder should be granted leave to bring derivative proceedings in the name of the company, but whether the shareholder should be indemnified by the company for the costs of the proceedings.16
(b)There is no consistency as to the standard the merits of the substantive claim must reach before leave is granted.
(c) Heath J suggested in Frykberg v Heaven17 that the fiduciary position of a director and his role as a quasi-trustee might justify a higher test than the “prudent business person” test (this was not argued before Heath J).
(d)If a “fiduciary” or a “prudent trustee” test were adopted the threshold under s 165(2)(a) for granting leave would be higher.
(e) The test in Australia is a higher one: whether the Court is satisfied that it is in the best interests of the company that leave be given.18
14 Vrij v Boyle.
15 Smith v Croft [1986] 1 WLR 580.
16 See Watts, Campbell & Hare Company Law in New Zealand (LexisNexis, Wellington, 2011) at
[20.4.3].
17 Frykberg v Heaven.
18 Swansson v RA Pratt Properties Pty Ltd (2002) 42 ACSR 313; and see Farrar Companies and
Securities Law in New Zealand (Brookers, Wellington, 2008) at [21.1].
(f) The Judge did not limit the application of the “prudent business person” test to his assessment under s 165(2)(a), which is the context in which Fisher J articulated the test in Vrij v Boyle, but applied it to all factors set out in s 165(2).19 Counsel submitted that this “fundamental change” should be tested in a higher court.
[20] Vrij v Boyle was the first application to bring a derivative proceeding following the enactment of the Companies Act 1993. The test articulated by Fisher J has since been consistently adopted and applied in numerous cases. Despite Heath J’s suggestion of a different, more stringent, test in his 2002 decision in Frykberg v Heaven, the Court has preferred Fisher J’s approach in later cases,20 as noted by Hansen J in the judgment. Heath J has expressed himself as “content” to follow the “prudent business person” test “for present purposes”.21
[21] The extension of the “prudent business person” test to all factors in s 165(2) was adopted by Venning J in Needham v EBT Worldwide Limited and approved and applied in subsequent High Court decisions.22
[22] In Vrij v Boyle, Fisher J said that a “prudent business person” in the conduct of his or her own affairs, when deciding whether to bring such a claim, would need to consider matters including the amount at stake, the apparent strength of the claim, likely costs and the prospect of executing judgment. Thus, Fisher J saw application of the test as incorporating the s 165(2)(b) factor, costs of the proceedings. The s 165(2)(c) factor, action already taken by the company, is non-evaluative. The s 165(2)(d) factor, the interests of the company, is appropriately assessed by the “prudent business person” test rather than the Court assuming the role of the board of directors (as fiduciaries). Rather than a “fundamental change” as submitted by Mr Templeton, this approach promotes a consistent, logical overview by the Court in the
exercise of its discretion under s 165.
19 See Watts, Campbell & Hare Company Law in New Zealand (LexisNexis, Wellington, 2011) at
[20.4.3].
20 See for example, Needham v EBT Worldwide Ltd and Peters v Birnie.
21 Re Mega-Merger Housing Ltd.
22 Presley v CallPlus Ltd and Peters v Birnie.
[23] Further, I accept the submission of the Dunphy interests that even if the more stringent test were adopted, this is unlikely to have changed the outcome of the application in this case. Hansen J considered the evidence put forward by the plaintiffs in support of their s 165 application was “cogent” and sufficient to establish that there have been serious breaches of duty by the defendants. He found the company claims were “based on credible evidence which offers at least a reasonable prospect of ultimate success.”23
Alleged “duplication” of issues
[24] Hansen J considered Mr Templeton’s submission that if leave were granted under s 165 for the company to bring proceedings, there would be unnecessary “duplication” of the issues to be litigated in the s 174 proceeding, in the context of the exercise of his discretion under s 165. He distinguished the claim in the s 174 proceeding for harm done to the Dunphy interests as shareholders, from the company’s claim for damages arising out of alleged breaches of duties owed to the company by Mr Sturgess and his company. He said there is overlap but not duplication.24
[25] Mr Templeton submits that an “appropriateness” test is to be preferred, “whereby the Court assesses which of the two remedial jurisdictions is the more appropriate for determining the particular shareholder dispute”.
[26] This submission disregards or overlooks the distinction between the two types of proceedings. This case involves not only a shareholder dispute, though that is at the heart of the matter, but also a significant claim by the company. While the factual allegations of misconduct by Mr Sturgess and his company are essentially the same in both proceedings, if those claims are made out, then the proper plaintiffs need to be before the Court so the appropriate remedy may be awarded to the appropriate party or parties. Mr Templeton’s insistence in submissions that the Dunphy interests, being the 86 per cent majority shareholders, “which effectively are
GBHL”, seems to involve lifting the corporate veil in a situation where there is not
23 At [31] of the judgment.
24 At [38] of the judgment.
identity of interest between the shareholders and the company. Relevantly, the company, not its shareholders, is the party to the management contract with Mr Sturgess and his company of which breaches are alleged. Hansen J said that the s 165 proceeding has the potential to reap substantial financial benefits for the company with minimal risk of exposure to costs if unsuccessful. 25
[27] Section 174 provides a procedure for shareholders who claim to be prejudiced. It gives the Court a wide discretion to make such orders as “it is just and equitable to do so”. They include in s 174(2)(b), “Requiring the company or any other person to pay compensation to a person”. If the plaintiffs are successful, the Court would be able to make orders under s 174 to compensate them as shareholders but that would not enable the company to be compensated if it were also to be successful. That would entail the company having resort to the successful shareholders, a route Mr Farmer QC rightly described as “cumbersome”.
[28] Similarly, in a derivative action the Court has a wide discretion. Under s 167(d), the Court has power to:
Make an order directing that any amount ordered to be paid by a defendant in the proceedings must be paid, in whole or part, to former and present shareholders of the company or related company instead of to the company or the related company.
[29] This provision enables the Court to ensure that the proper parties receive the benefit of any compensation awarded.
[30] The company needs to be a party so the appropriate orders can be made. Mr Templeton’s concerns about “double recovery” can be readily met by the Court tailoring any awards that it ultimately makes to achieve a just and equitable outcome.
[31] Mr Templeton referred to three decisions. In two of these: Martin v Martinborough Brewing Co Ltd,26 and Catley v Waipa Corporation Ltd27 the Court was not called upon to exercise its discretion under s 165 because the threshold in
s 165(2)(a) was not met. The observations in those two cases, and the decision in the
25 At [36] of the judgment.
26 Martin v Martinborough Brewing Co Ltd (2007) 10 NZCLC 264, 269 (HC).
27 Catley v Waipa Corporation Ltd [2010] NZCCLR 24 (HC).
third, Presley v CallPlus Ltd,28 support the approach taken in Vrij v Boyle and by
Hansen J in this case.
Inability of the company to meet the requirements of s 165(3)(a) and s 165(5)(b)
[32] The Sturgess interests contend that the Judge was wrong in finding that the company does not intend to bring the proceedings and that the conduct of the proceedings could not be left to the directors or the shareholders as a whole, thereby satisfying the requirements of s 165(3).29
[33] They submit that on its face, s 165(3)(a) requires a “positive decision” by the relevant company not to pursue the proceedings that the Dunphy interests are seeking to bring derivatively, rather than a mere “inability” to act in that regard.
[34] They claim this is supported by two aspects:
(a) Section 165(5)(b) which imposes a mandatory requirement on the company to inform the Court whether or not it intends to bring, continue, defend, or discontinue the proceedings; and
(b)The alternative in s 165(3)(a) that it is in the interests of the company that the conduct of the proceeding should not be left to the directors or to the determination of the shareholders as a whole. They criticise lack of reasoning by the Judge on this latter point.
[35] I agree with the submission of the Dunphy interests that the purpose of s 165 is to ensure that applications for derivative actions are only made where the company is not in a position, or does not intend, to seek relief itself. In the circumstances of this case the obvious reality is that the company does not intend to bring proceedings, because it is not in a position to do so. This is because of the deadlock between the shareholders and directors in a situation where the agreement between
them requires unanimity in decision-making. In that situation I consider it is also
28 Presley v CallPlus Ltd.
29 At [37] of the judgment.
plain that it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. They cannot agree. That could only result in the company being put into liquidation and deprive the company of remedies that may be available to it.
[36] I consider s 165(5) must be interpreted in the light of the purpose of s 165(3) and the section as a whole. It makes no sense to suggest that in a deadlock situation where the company is incapable of reaching decisions and passing resolutions, s 165 should be rendered ineffective because of the obvious inability of the company to meet the procedural requirement in s 165(5) to notify, when the reason for the absence of formal notification is glaringly obvious in the substance of the dispute that brings the matter before the Court.
[37] This point is not one that gives rise to an important question of law which favours leave to appeal being granted.
Conclusion
[38] I find that there are no questions of fact or law arising from the judgment which are of such importance in the context of this case, or of general or public importance, that they ought to be considered by a higher Court. Nor do I consider that any real detriment will result for the Sturgess interests the absence of appellate review of these particular issues. As stated in the judgment, the proposed claims in the derivative action are substantially the same as those relied on for the purpose of the s 174 claim. The interests of all parties will best be served by all these issues being before the Court, and the appropriate parties being joined in the proceedings to ensure that any relief that is ultimately granted may be awarded to the appropriate party or parties.
[39] In considering the issue of any detriment to the Sturgess interests in leave being granted for a derivative action by the company, I echo the observations of Hansen J30 that given the undertaking by the plaintiff to meet the costs of the
derivative action, and the discretion of the Court to award costs on a just and
30 At [32] of the judgment.
equitable basis, there is little likelihood that the company would be required to bear the costs should the derivative action prove to be unmerited.
[40] For these reasons leave to appeal was declined.
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