Greymouth Holdings Limited v Jet Trustees Limited HC Auckland CIV-2011-404-5309
[2011] NZHC 2083
•19 December 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-5309
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 LIMITED
Third Defendant
CIV-2011-404-5442
NZHC [2012] 100
AND BETWEEN JOHN GILBERT STURGESS Plaintiff
ANDROBERT MARK PATRICK DUNPHY First Defendant
ANDPETER HANBURY MASFEN Second Defendant
ANDGREYMOUTH PETROLEUM HOLDINGS LIMITED
Third Defendant
Hearing: 13 December 2011
Counsel: JA Farmer QC, MD O'Brien and RL Pinny for Plaintiffs in CIV-2001-
404-5309 and Defendants in CIV-2011-404-5442
WGC Templeton and MA Karam for Plaintiffs in CIV-2011-404-5442
GREYMOUTH HOLDINGS LIMITED V JET TRUSTEES LIMITED HC AK CIV-2011-404-5309 19
December 2011
and Defendants in CIV-2011-404-5309
Judgment: 19 December 2011
JUDGMENT OF RODNEY HANSEN J
This judgment was delivered by me on 19 December 2011 at 3.00 p.m., pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Stafford Klassen Solicitors, P O Box 29185, Auckland 1347
Bell Gully, P O Box 4199, Auckland 1140
Introduction
[1] The parties to these two proceedings are shareholders and directors of Greymouth Petroleum Holdings Limited (the Company). Differences have arisen between the directors. Mr Dunphy, who is the Executive Chairman, and Mr Masfen are at odds with Mr Sturgess, who is the Chief Operating Officer. Mr Dunphy has issued a notice purporting to suspend Mr Sturgess’ management contract.
[2] Both sides have issued proceedings seeking remedies under s 174 of the Companies Act 1993 (the Act). Mr Dunphy and Mr Masfen brought their proceedings in the Commercial List. Mr Sturgess filed proceedings in the ordinary list. Both sides are now also seeking leave to bring a derivative action on behalf of the Company under s 165 of the Act.
[3] There are five interlocutory applications before the Court:
(a) By the defendants in the Commercial List proceeding for joinder of the Company as a defendant;
(b)By the plaintiffs in the Commercial List proceedings for leave to bring proceedings in the name of the Company;
(c) By the plaintiffs in the Commercial List proceeding for an interim injunction requiring production of company property;
(d)By the plaintiffs in the Commercial List proceedings for consolidation of the two proceedings; and
(e) By the plaintiffs in the ordinary list proceeding for leave to bring proceedings on behalf of the Company.
[4] The last mentioned application was not filed until 1 December. It was not included in directions made by Potter and Venning JJ for the hearing of the other applications. The Dunphy/Masfen interests had not anticipated its being heard and
had not filed evidence in opposition. In the circumstances, I ruled that the hearing of that application must be deferred.
Further background
[5] The shares in the Company are held by three groups. 52.144 per cent are held by Group 1, including Greymouth Holdings Limited, the first plaintiff in the Commercial List proceeding, and other interests associated with Mr Dunphy. Group 2 comprises 13.856 per cent of the shares and are held by Mr Sturgess and Jet Trustees Limited, the first defendant in the Commercial List proceedings. The remaining 34 per cent of the shares are in Group 3 and are beneficially owned by Mr and Mrs Masfen.
[6] The shareholders are parties to an agreement which provides for each group to appoint a director. Mr Dunphy was appointed by Group 1, Mr Sturgess by Group
2 and Mr Masfen by Group 3. All shareholders’ resolutions and resolutions of the
Board of the Company must be unanimous.
[7] Mr Dunphy and Mr Sturgess were appointed to their executive positions in the company through management contracts with their respective management companies, Greymouth Holdings Limited and John Sturgess & Associates Limited.
[8] During 2010 relations between Mr Dunphy and Mr Sturgess became strained. Mr Dunphy, supported by Mr Masfen, says that Mr Sturgess has misconducted himself and acted negligently in his roles as a director and company executive. Their complaints include failing to report to the Board adequately and honestly or at all; negligence and mismanagement of operations; committing the Company to unauthorised and inappropriate expenditure without obtaining the proper approvals; inappropriate or improper recruitment of staff; improper and unlawful related party transactions and dealings; unprofessional treatment of personnel and contractors; and failing to provide company data and computers.
[9] These concerns led to Mr Dunphy, on 4 February 2011, issuing a notice suspending the management contract with John Sturgess & Associates Limited. The
initial suspension of three months was subsequently extended indefinitely. Mr Sturgess has now been advised that his fellow directors consider him to have repudiated the management contract.
[10] Mr Sturgess describes Mr Dunphy’s version of events as inaccurate or exaggerated. He claims that Mr Dunphy has sought to gain control of the Company in order to achieve a commercial advantage. He says that during 2010 Mr Dunphy sought to assert dominance over him, contrary to the founding principle that each would have an equal say in running the Company. He says this has caused the dissension and difficulties between them. Mr Sturgess contends that the notice of suspension was unlawful and unauthorised. He also accuses Messrs Dunphy and Masfen of making it as difficult as they can for him to function as a director of the Company.
The proceedings
[11] As earlier mentioned, the proceedings in the Commercial List and the ordinary list were initially brought seeking relief under s 174 of the Act which provides:
174 Prejudiced shareholders
(1) A shareholder or former shareholder of a company, or any other entitled person, who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the court for an order under this section.
(2) If, on an application under this section, the court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—
(a) requiring the company or any other person to acquire the shareholder's shares; or
(b) requiring the company or any other person to pay compensation to a person; or
(c) regulating the future conduct of the company's affairs; or
(d) altering or adding to the company's constitution; or
(e) appointing a receiver of the company; or
(f) directing the rectification of the records of the company; or
(g) putting the company into liquidation; or
(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.
(3) No order may be made against the company or any other person under subsection (2) of this section unless the company or that person is a party to the proceedings in which the application is made.
[12] Although s 174 is usually invoked to protect the interests of minority shareholders, there is no requirement that relief is available only to minorities. In Vujnovich v Vujnovich1 it was accepted that the behaviour of a minority towards the majority could constitute behaviour which justified the exercise of the jurisdiction under s 209 of the Companies Act 1955, the predecessor of s 174. There seems to be no reason why the plaintiffs in the Commercial List proceedings cannot resort to s 174 on the basis that, as Mr Sturgess effectively has a veto power at Board level, his actions may be oppressive, unfairly prejudicial and discriminatory to the
plaintiffs.
[13] For his part, Mr Sturgess claims that the conduct of the majority has been oppressive, unfairly discriminatory and unfairly prejudicial to him by, among other things, unlawfully suspending him from his position as Chief Operating Officer; excluding him from decision-making; refusing to pay him management fees; failing to provide Group 2 shareholders with information in a timely manner or at all; and by Mr Dunphy acting in a high-handed and autocratic manner.
Application to join defendant to Commercial List proceeding
[14] Mr Templeton submits that it has been settled for over 24 years that, in applications brought in the Commercial List under s 174, the Company should be
named as a defendant. He relies on directions given by Barker J in Money v Ven-Lu-
1 Vujnovich v Vujnovich [1988] 2 NZLR 129 (HC).
Ree.2 Barker J issued guidelines for those wishing to avail themselves of the right to enter the Commercial List with proceedings under s 209 of the Companies Act 1955, the first of which read:
(1) Applications may be commenced by statement of claim (and not petition) citing the company as a First Defendant and the directors and shareholders with whom the Plaintiff is in contention as Second Defendants; ...
[15] Mr Templeton submits that joinder of the Company is also required by s 174(3) which provides that no order may be made against the Company unless it is a party to the proceeding. He also points out that by r 31.3(2) of the High Court Rules, an application under s 174 must be made by statement of claim in form C 2, which assumes that the Company will be a defendant.
[16] For the plaintiffs, it is submitted that the Company is not required, either as a matter of law or common practice, to be joined as a party. Mr Farmer QC characterises the decision in Money v Ven-Lu-Ree as simply a directions judgment on an issue which appears not to have been argued and should not be regarded as a precedent. He says it simply provided clarity on the procedure for s 209 claims which was not otherwise provided for in the High Court Rules or Companies (Winding-Up) Rules 1956.
[17] It was further argued for the plaintiffs that s 174(3) (which post-dates Money v Ven-Lu-Ree) is inconsistent with the proposition that the Company must always be a party; where no orders are sought against the Company, there is no obligation to join it. Mr Farmer points to a number of cases in which relief was sought under s 174 (or its predecessor) and the Company was not joined as a party. They include
Vujnovich v Vujnovich,3 Latimer Holdings Ltd v Sea Holdings New Zealand Ltd4 and
Johnson v Sneyd.5
[18] Under r 4.56 of the High Court Rules, a Judge may order the name of a person to be added as a defendant because either the person ought to have been
2 Money v Ven-Lu-Ree HC Auckland CL23/87, 30 June 1987.
3 Vujnovich v Vujnovich, above n 1.
4 Latimer Holdings Ltd v Sea Holdings New Zealand Ltd (2004) 17 PRNZ 552 (SC).
5 Johnson v Sneyd HC Wellington CIV-2004-435-84, 7 December 2005.
joined or the person’s presence before the Court may be necessary to adjudicate on and settle all questions involved in the proceeding. In my view, the addition of the Company is warranted under both heads, notwithstanding the opposition of the plaintiffs. Their opposition to joinder is a factor to be considered but not a bar to joinder.6
[19] I accept that joinder is not mandatory. Section 174(3) plainly contemplates the possibility of the Company not being a party. On the other hand, r 31.3(2) and form C 2 assume that the Company will be joined and that seems to me to be the preferred course. Joinder of the Company ensures that the Court’s ability to grant a remedy is unhindered. It is otherwise precluded by s 174(3) from making orders against the Company. I regard that as undesirable having regard to the broad discretion conferred on the Court by subsection (2) of s 174 to make such order as it thinks fit if it considers it just and equitable to do so.
[20] The cases relied on by the plaintiffs in which the company was not joined are exceptional. In Latimer Holdings the plaintiffs were minority shareholders in a publicly listed company. They sought orders that the majority shareholder acquire their shares at the net asset backing per share. No relief was sought against the company and, given the narrow compass of the matters in issue, none was likely to be sought. Similarly, in Johnson v Sneyd the only relief sought was that the defendants’ shares be transferred to the plaintiff and/or that the defendant be disqualified as a director. On my reading of the reports, it is not entirely clear that the company was not a party in Vujnovich. I note that at the commencement of the hearing, counsel for the plaintiff sought and was granted leave to amend by adding an alternative prayer for relief seeking a winding up order. I doubt that such an amendment would have been permitted if the company were not joined as a defendant. In all other cases to which I was referred, the company was named as a
defendant. Notably for present purposes, they include Vrij v Boyle7 which I will
discuss in more detail later in relation to the plaintiff’s application to bring a
derivative action.
6 Mainzeal Corp Ltd v Contractors Bonding Ltd (1989) 2 PRNZ 47 (HC) and see generally
McGechan on Procedure at [HR4.56.12].
7 Vrij v Boyle [1995] 3 NZLR 763 (HC).
[21] In this case the plaintiffs seek a range of orders, including an order regulating the future conduct of the Company pending the transfer of shares; an order requiring the defendants to pay to the company compensation; and an order for an account and delivery up of company property in the possession of the defendants. For the plaintiffs, it was said that the orders sought related to the shareholders, not the Company, and for the purpose of clarification an amendment would be sought to amend the prayer for relief to seek an order against the shareholders affecting the terms of the Shareholder Agreement rather than an order regulating the future conduct of the Company.
[22] The foreshadowed amendment underlines my concern that, depending on the way the proceeding develops, it may be appropriate to make an order which affects the Company and in respect of which, independently of its shareholders, it should be heard. It confirms my view that it is preferable for the usual course to be followed and the Company joined as a defendant.
Plaintiffs’ application for leave under s 165
[23] The plaintiffs in the Commercial List proceeding seek leave under ss 165 and
167 of the Act to bring proceedings in the name and on behalf of the Company against the second and third defendants by adding the Company as a fourth plaintiff to the proceedings. They also seek orders authorising the plaintiffs to control the conduct of the intended proceeding. A draft amended statement of claim sets out the causes of action against the proposed defendants.
[24] Section 165 relevantly provides:
165 Derivative actions
(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 proceedings 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.
...
[25] The leading authority on the test to be applied by the Court under s 165 is Vrij v Boyle.8 Mr Vrij and Mr Boyle were shareholders in a company. After differences arose between them, Mr Vrij brought proceedings against Mr Boyle which included an application for the relief of an oppressed minority under s 209 of the Companies Act 1955. As earlier mentioned, one of the named defendants was their company. Mr Vrij applied for leave to bring a derivative action in the name of the company
against Mr Boyle which would be brought by way of a cross-claim between defendants.
[26] 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
8 Ibid. See also John Farrar et al, Companies and Securities Law in New Zealand (2008) (Brookers, Wellington, 2008) at [22.2.1].
it is under s 165) the likelihood of the proceedings succeeding. In that regard he said:9
I adopt in that regard the useful test suggested in a slightly different context in Smith v Croft [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.
[27] In Frykberg v Heaven10 Heath J suggested a different test, based on a prudent trustee. However, Fisher J’s approach has been preferred11 by other judges and Heath J has since said he was ―content‖ to follow ―the prudent business person‖ test, albeit only ―for present purposes‖.12 In Needham, Venning J observed the ―prudent business person‖ test could be applied, not just to the likelihood of the proceedings succeeding, but to all factors set out in s 165(2),13 a view with which I respectfully agree, and which was endorsed by Asher J in Peters v Birnie who said:14
There is no need for a test which varies depending on the nature of the cause of action. In all cases the court needs to address the specific factors set out in subs (2). The court then needs to stand back and decide whether on an overview, taking into account those factors and any other relevant matter, a prudent business person using his or her own funds would choose to proceed.
The likelihood of the intended amended proceeding succeeding
[28] The proposed claims in the derivative action are substantially the same as those relied on for the purpose of the s 174 claim. Indeed, the draft amended statement of claim incorporating the proposed derivative action makes only minor amendments to the original pleading. The proposed claim is that Mr Sturgess and his company, John Sturgess & Associates Limited, through which he was appointed as
Chief Operating Officer of the Company, are in breach of the contract for
9 Vrij v Boyle, above n 7, at 765.
10 Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC).
11 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 HC Auckland CIV-2009-404-8119,
22 April 2010.
12 Re Mega-Merger Housing Ltd HC Auckland CIV-2004-404-3674, 16 November 2004.
13 Needham, above n 11 at [23].
14 Peters v Virnie, above n 11, at [29].
management services and that Mr Sturgess has breached his duties as a director of the Company. In summary, the breaches are alleged to arise from Mr Sturgess:
(a) Repeatedly failing or refusing to report appropriately, honestly and accurately to the Executive Chairman or the Board in relation to drilling activities, issues and decisions;
(b)Failing to exercise appropriate care, skill and diligence in the management of the Company’s operations. As a result of the mismanagement, it is alleged that the Company incurred substantial wasted expenditure and lost significant opportunities.
(c) Committing the Company to capital or project expenditure outside the limits of his authority and without Board or Executive Chairman approval and authorisation leading to expenditure that would not otherwise have been undertaken.
(d)Arranging the recruitment of personnel for positions within the Company who were not appropriately qualified or experienced and who had family or personal connections with him.
(e) Engaging in a series of transactions with Company property or interest for his personal benefit and without the prior knowledge or approval of the Executive Chairman or the Board.
(f) Since his suspension, refusing to provide the Company with computers provided to him for use for Company business and withholding electronic data required for Company operations.
(g)Since his suspension, declining to support or promptly support proposed resolutions for the ordinary conduct and intended benefit of the Company.
An estimate of damages set out in a schedule to the draft amended statement of claim indicates a potential damages claim of the order of $40 million.
[29] The various claims are supported by a substantial body of evidence in affidavits by Messrs Dunphy and Masfen and Dr Robert Brady, a petroleum geologist who works for the Company.
[30] All of the claims are denied in the statement of defence to the s 174 proceeding and Mr Sturgess has himself filed extensive evidence. His evidence in opposition includes an affidavit by Mr Epere Ruwhiu who worked for the Company from 2001 until 2010. As Taranaki Manager, he reported primarily to Mr Sturgess. Mr Ruwhiu’s evidence is a testament to Mr Sturgess’ skills, industry and dedication. He describes Mr Sturgess as a hard taskmaster, demanding but always fair. He praises him as an innovative engineer largely responsible for the success of the Company. He disputes many of the allegations of misconduct and bad practice made by the plaintiffs. He supports Mr Sturgess’ position that he has done nothing to harm the interests of the Company.
[31] In submissions Mr O’Brien (who argued this part of the case for the plaintiffs) pointed to inconsistencies between Mr Sturgess’ evidence and contemporary documents which cast doubt on his credibility. There are indications that, as Mr Sturgess’ relationship with Mr Dunphy deteriorated, he became somewhat obstructive and secretive. This may help to explain some of the questions raised about his credibility and, ultimately, many of the allegations made against him. It may be that he will be able to refute allegations of breach of duties owed to the Company. That said, 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.
The costs of the proceedings in relation to the likely relief to be obtained
[32] The plaintiffs have responded to concerns that their motive was to use the Company ―to bankroll their personal litigation‖ by undertaking to meet the costs of the derivative action, leaving the issue of costs to be dealt with by the trial Judge. Mr Templeton points out that by s 166 of the Act, the prima facie position is that the Company itself should bear the costs of the derivative action. That is, however,
subject to the important proviso that such an order will not be made if the Court considers that it would be unjust or inequitable for the Company to bear the costs. Should the derivative action prove to be unmerited, it is unlikely that the Company would be required to bear the costs.
[33] The additional costs of the derivative action are, in any event, unlikely to be significant. The factual issues, and many of the legal issues also, will coincide with those raised in the s 174 proceedings. All parties are agreed that, however constituted, the proceedings should be heard together. The additional costs of the derivative action seem unlikely to be great relative to the compensation sought.15
Any action already taken by the Company to obtain relief
[34] Mr Templeton says the Company has already taken three actions:
It purported to suspend Mr Sturgess as Chief Operating Officer and has
withheld emoluments.
The proceedings under s 174, including a claim for compensation against
Mr Sturgess, are said to be effectively a form of corporate action ―in disguise‖.
Mr Sturgess’ own application for leave to bring a derivative action is said
also to be a step taken on behalf of the Company.
[35] The first of these is certainly an action purported to have been taken on behalf of the Company (although its lawfulness is disputed) but it is somewhat fanciful to characterise the shareholders’ proceedings as taken on behalf of the Company. 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 because of the requirement for unanimity.
15 See also the comments of Fisher J in Vrij v Boyle, above n 7, at 767.
The interests of the Company
[36] 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 to the ordinary list litigation and I have directed that it become a party to the Commercial List proceeding. I can see no material disadvantage to its further involvement as claimant.
Discretion to grant leave
[37] The requirements of s 165(3) are readily satisfied. The Company does not intend to bring the proceedings and the conduct of the proceedings could not be left to the directors or the shareholders as a whole. Having regard to the mandatory considerations in s 165(2), I am satisfied that the prudent business person test is satisfied. It remains for me to consider Mr Templeton’s submission that the proceedings would involve an unnecessary ―duplication‖ of the issues which will be litigated under the s 174 procedure. He referred me to Martin v Martinborough
Brewing Co Ltd16 to support his submission that, where the dispute is essentially
between shareholders and/or directors or the proposed cause of action is essentially for the benefit of a shareholder, proceedings under s 174 are the appropriate vehicle and the Court will not allow the shareholder to pursue a claim through the offices of the company.
[38] It is the case that the two claims rely substantially on the same factual allegations of misconduct by Mr Sturgess. It is also the case that in both proceedings compensation is sought for damages allegedly suffered as a consequence. But the claim in the s 174 proceeding is for harm done to Messrs Dunphy and Masfen and their 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. There is
overlap but there is not duplication. As Fisher J said in Vrij v Boyle,17 in response to
a similar argument:
16 Martin v Martinborough Brewing Co Ltd (2007) 10 NZCLC 264,269 (HC) and Catley v Waipa
Corp Ltd [2010] NZCCLR 24 (HC).
17 Vrij v Boyle, above n 7, at 767.
It seems to me that in principle one could have a situation in which a plaintiff allows the company to recover in the company’s own name compensation for losses which have been suffered due to breach of fiduciary duty owed to the company and the plaintiff simultaneously sues the same defendants for quite independent wrongs done not to the company, but to the plaintiff direct. In those circumstances there would be no duplication.
Form of proceedings
[39] In Vrij v Boyle, where the company was already a defendant in the proceeding, Fisher J directed that the derivative action be taken by way of a cross- claim between defendants. That seems to me to be the appropriate course in this case also with the plaintiffs’ solicitors acting at this stage to lodge the cross-claim. Mr Templeton says that the conduct of any derivative action should be placed in the hands of independent counsel appointed by the Court to be indemnified from the assets of the Company but I see no reason why the plaintiffs’ solicitors should not act at this stage. Further directions can be sought if it appears that the Company needs to be independently represented. The situation may need to be reviewed, for example, if the Sturgess interests succeed in their application to bring derivative proceedings.
Interim injunction
Background
[40] The plaintiffs seek an order against Mr Sturgess and his company requiring the production of all computer files in their possession and computers supplied to them by the Company for the purpose of copying the data and drives on the computer. They complain that Mr Sturgess has used computers provided to him for Company purposes and, since his suspension, has refused to return the computers and make available e-mails and electronic data stored on the computer, some of which are important to the continuing operations of the Company.
[41] According to the plaintiffs, between February 2006 and May 2010, Mr Sturgess was supplied with four laptop computers by the Company – a Toshiba, a Hewlett Packard and two Apple computers. In the suspension notice issued to him
on 4 February 2011, he was asked to deliver computer files and electronic data regarding the business of the Company and the laptops to the Company. On 7
February he delivered the Toshiba laptop and some 30 CD Roms. Eighteen of the
CD Roms contained information dating to around 2007. The other 12 were blank.
[42] Mr Sturgess admits to having one Apple laptop in his possession which he says has no technical or operation data stored on it. He says that the Hewlett Packard laptop and the other Apple laptop were left at the Company’s Newmarket office. The position is not, however, entirely clear as in a recent letter, Mr Sturgess appears to be saying that he has an Apple laptop owned by his company as well as the Company laptop. He is accused of deliberately misleading and obfuscating the position.
[43] For Mr Sturgess, it is said that the application for an interim injunction is simply a ―fishing expedition‖ to find out what he has in his possession. Mr Templeton points out that, apart from 19 technical reports identified by Dr Brady in his affidavit, there is nothing to show that Mr Sturgess is withholding data properly belonging to the Company. Mr Templeton says that discovery processes will be adequate to identify any data and particular discovery can be sought if other parties are dissatisfied with the level of disclosure made on discovery.
Serious question
[44] The plaintiffs’ right to interim relief is said to derive from the power of the Court under s 174 to make such orders as it thinks fit. The plaintiffs say there is a serious question that Mr Sturgess and his company hold Company laptops and data to which the Company is being wrongfully denied access. Mr Sturgess acknowledges he has a Company computer, though disputes that it holds ―technical or operational‖ data.
[45] The evidence of Mr Dunphy and Dr Brady provide grounds for thinking Mr Sturgess may be mistaken in this regard. He sent and received emails and reports on Company computers which are not recorded or cannot be located elsewhere in Company records. There seems little doubt, for example, that Mr Sturgess received
technical reports which cannot be traced on electronic records in the possession of the Company. I consider there is a serious question that Mr Sturgess is in possession of and wrongfully withholding information belonging to the Company to which his fellow directors are entitled to have access.
Balance of convenience
[46] It appears that the Company has been functioning without the missing data, though suboptimally. It is said to have caused operational difficulties which give rise to, among other things, health and safety implications. Against that, Mr Sturgess says that he needs his computer to carry out his duties as a director and shareholder and to assist with preparation of his case. He also says that his computer holds privileged and personal information which should be protected.
[47] On the face of it, the Company and the plaintiffs should not be denied access to Company information held on the computer provided Mr Sturgess’ legitimate concerns can be met. With that caveat, the balance of convenience favours disclosure.
Form of relief
[48] The interim relief sought – the delivery up of electronic records and the computer – is a mandatory injunction, a form of relief granted only in special circumstances.18 However, I consider the circumstances warrant the grant of the relief sought in order to ensure that the interests of the Company and majority shareholders are not unfairly prejudiced pending trial. It would be analogous to an order for the preservation of property which would be available under r 7.55. With appropriate safeguards, the orders sought would not require any greater level of disclosure than would arise on discovery.
[49] I am prepared to make orders generally as sought but subject to further conditions to ensure that Mr Sturgess’ rights and responsibilities as a director and
18 McGechan on Procedure at [HR7.53.23(2)]..
shareholder are not compromised and private and privileged communications are protected. These conditions are to include:
(a) That the computer or computers and computer files are delivered to an appropriately qualified independent third party;
(b) They are not to be held for more than five days; and
(c) There is a protocol which protects personal and private communications and records from disclosure. That could include a requirement that the third party file a report setting out a list of the files copied and a stipulation that no disclosure occurs until Mr Sturgess has had the opportunity to identify any files or data to which the Company and the plaintiffs have no right of access.
[50] I will defer making any formal order to give the parties an opportunity to agree on terms. I reserve leave to apply for further directions.
Application for consolidation
[51] Rule 31.25 permits consolidation of proceedings commenced in respect to the same company under r 31.3. Had both proceedings remained simply applications under s 174, that may well have been the appropriate course. But with the derivative action now grafted onto the Commercial List proceeding, and the possibility that there will be a derivative action by the company in the other proceeding, I am satisfied consolidation would not be appropriate. It would create more problems than it solves.
[52] However, it is equally clear that the two sets of proceedings should proceed through their interlocutory stages in tandem and be heard at the same time. For that purpose, it will be necessary for both to be in either the Commercial List or the ordinary list. The two sides, perhaps predictably, thought the appropriate list was the one in which they had filed. Either would be suitable but, on balance, I think the Commercial List is where the proceedings should be. That is where the proceeding
first in time was filed. The combined proceedings have the potential to be of more than usual complexity. They raise commercial issues of considerable importance. The amounts at stake are substantial. The progress of the proceedings will benefit from the close level of supervision offered by the Commercial List.
[53] Accordingly, I make orders:
(a) Transferring the proceeding brought by Mr Sturgess (CIV-2011-404-
5442) to the Commercial List.
(b)The proceedings be managed together through their interlocutory stages.
(c) The proceedings be heard together.
I expressly reserve leave to apply to modify orders (b) and (c).
Result
[54] In summary:
(a) I make an order joining Greymouth Petroleum Holdings Limited as fourth defendant to proceeding CIV-2011-404-5309.
(b)I grant leave to the plaintiffs in CIV-2011-404-5309 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.
(c) For the transfer of proceeding CIV-2011-404-5442 to the Commercial
List and the other orders set out in [53] above.
[55] The proceedings are to be listed for mention in the Commercial List on
10 February for further directions in relation to outstanding matters, including the application in proceeding CIV-2011-404-5309 for an interim injunction. The application under s 165 in proceeding CIV-2011-404-5442 is to be allocated a half day fixture on the earliest available date in 2012.
1
1