He v Chen
[2014] NZCA 153
•17 April 2014 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA590/2013 [2014] NZCA 153 |
| BETWEEN | YAO WEI HE |
| AND | ZHIXIONG CHEN YOUNGZHOU CHEN |
| Hearing: | 13 March 2014 |
Court: | Harrison, White and Venning JJ |
Counsel: | G J Judd QC for Appellant |
Judgment: | 17 April 2014 at 11 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant is to pay the first and second respondents costs for a standard appeal on a Band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Venning J)
Introduction
Yao Wei He appeals against a judgment of Associate Judge Doogue declining to grant him leave to bring proceedings in the name of NZ Products International Limited (NZPIL) against Zhixiong Chen (Mr Chen Snr) and Youngzhou Chen (Mr Chen Jnr).[1]
Background
[1]Chen v He [2013] NZHC 2033.
NZPIL was incorporated on 18 June 2010. Mr He and Mr Chen Jnr are its de jure directors. Mr He and his wife hold 50 per cent of the shares in NZPIL. The balance 50 per cent of the shares are held by the Chen interests through a trustee company and Mr Chen Jnr and his wife.
Prior to the incorporation of NZPIL Mr He carried on a business which involved the purchase of New Zealand made dairy and health supplements in retail stores in New Zealand and the export of them for sale into Hong Kong and China through Mr He’s contacts in those markets.
Mr He and Mr Chen Snr were known to each other. Mr He says that Mr Chen Snr suggested that they establish a commercial joint venture (CJV) to exploit the opportunity identified by Mr He. Mr Chen Snr proposed that he provide finance to increase the scale of the operation. Mr He says that Mr Chen Snr suggested that his son, Mr Chen Jnr, be a director and the Chen interests would hold 50 per cent of the shares in the joint venture company. Mr He agreed. NZPIL was incorporated to give effect to that agreement.
Mr He says that Mr Chen Snr then advanced sums totalling $300,000 to him for the purposes of the CJV. Mr Chen Snr does not agree. He says that the $300,000 advanced to Mr He was a personal loan, which Mr He is liable for.
Mr He says Mr Chen Snr also convinced him to take a minority shareholding in another company, Hong Kong Dairy International Limited (HKDIL), on the basis that company would be used to expand the business to include sales of New Zealand seafood and wine through Mr Chen’s Snr’s contacts in Hong Kong. HKDIL was incorporated in Hong Kong. Mr He says that from February 2011 onwards, Mr Chen Snr required all NZPIL’s exports to be sold to HKDIL for distribution.
Mr He alleges that Mr Chen Snr has breached the terms of the CJV in a number of ways. Of particular relevance for present purposes is Mr He’s allegation that, while he was in Hong Kong between 19 December 2011 and 26 February 2012, he discovered that Mr Chen Snr had been operating a business in competition to NZPIL. Mr He says that, unknown to him, Mr Chen Snr had been operating the same business as NZPIL and HKDIL and storing the product at two of HKDIL’s three warehouses in Hong Kong.
Further, when Mr He accessed NZPIL’s bank accounts on 6 February 2012 the accounts disclosed that the Chens had transferred almost all of NZPIL’s receipts to themselves, including a GST refund of in excess of $370,000 on 13 January 2012. Mr He says on learning that he transferred $80,000 out of an account of NZPIL’s to his own personal account.
Mr He also says that Mr Chen Snr incorporated a further Hong Kong company, New Zealand Milk Powder Limited (NZMPL) at about this time (in January 2012). He also refers to a further company incorporated by Mr Chen Snr in New Zealand, Dairy New Zealand International Ltd, although no specific allegations are made concerning that entity.
Unsurprisingly, the relationship between the parties has broken down entirely. Mr Chen Snr issued proceedings on 14 September 2012 against Mr He for the recovery of the $300,000. Mr He threatened to take proceedings against Mr Chen Snr in October 2012, but ultimately brought the application for leave to bring a derivative action in the name of NZPIL against both Mr Chen Snr and Mr Chen Jnr.
NZPIL is no longer trading. Mr Chen Jnr has applied for it to be placed in liquidation. Mr He opposes its liquidation.
Associate Judge Doogue’s judgment
Associate Judge Doogue recited the background to the proposed derivative claim from the draft pleading as supplemented by reference to the affidavits filed. He then considered the principles that apply to an application for leave under s 165(2) of the Companies Act 1993 (the Act) and the High Court decisions of Needham v EBT Worldwide Ltd and Vrij v Boyle[2] and adopted the following proposition from those cases:[3]
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.
[2]Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 (HC) and Vrij v Boyle [1995] 3 NZLR 763 (HC).
[3]Vrij v Boyle at 765.
Associate Judge Doogue estimated that NZPIL’s chances of success in an action against Mr Chen Snr for breach of fiduciary obligation are not great.[4]
[4]Chen v He, above n 1, at [32].
He concluded that the application for leave ought to be declined on the grounds that a prudent company director would not embark upon the proposed litigation. Assuming it was proved Mr Chen Snr had set up a parallel company structure to carry on a similar business to that which NZPIL was involved in, he was doubtful whether that amounted to a breach of obligations owed as a director to NZPIL. In the Judge’s view it was not clear that any information Mr Chen Snr had taken advantage of contained any confidential character.
Further, NZPIL was no longer trading. Having regard to the situation that existed between the directors, Associate Judge Doogue considered NZPIL would be a suitable candidate for liquidation. He was firmly of the view that appointment of a liquidator would represent the best approach to resolving the issues between the parties so far as NZPIL was concerned including whether NZPIL ought to pursue Mr Chen Snr for the alleged breaches of his duties as a director.
The appeal
Mr He appeals principally on the ground that the Associate Judge was wrong to conclude NZPIL did not have a good claim against Mr Chen Snr for breach of the fiduciary duty he owed the company as a de facto director. Mr He argues that Mr Chen Snr breached the fiduciary duty he owed NZPIL by diverting corporate opportunities from NZPIL to himself or to entities associated with him.
In addition to supporting the Associate Judge’s reasoning, the respondents seek to support the judgment under appeal on the following additional grounds:
(a)Mr Chen Snr was not a director of NZPIL;
(b)the relief sought in the proposed derivative action is either:
(i)relief that the appellant seeks personally;
(ii)based on the CJV between the appellant and Mr Chen Snr to which the company was not a party; or
(iii)relief that has no legal basis or which this Court has no jurisdiction to grant; and
(c)the claims in the proposed derivative action would be more appropriately dealt with by a liquidator of the company; and
(d)it would not be appropriate for the appellant to control the derivative action on behalf of the company.
The point identified at (a) raises a preliminary issue. The points at (b) are relevant to the issue of the strength of the proposed claim, while the issues at (c) and (d) are relevant to the exercise of the Court’s discretion under s 165.
Decision
Threshold requirement
The respondents raise a preliminary issue as to whether Mr Chen Snr was a director of NZPIL. However, there is another preliminary point. Section 165(3) of the Act provides that leave may only be granted if the Court is satisfied that:
(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.
Although the Associate Judge referred to s 165(3) he did not expressly discuss it. That subsection provides a threshold requirement which must be met before the court’s discretion to give leave to bring a derivative action may be exercised. Section 165(5)(b) aids the assessment by requiring a company to inform the court whether it intends to bring proceedings.[5] Even without this information, as in the present case, a court might nonetheless be satisfied the company does not intend to bring proceedings. The court may be so satisfied by drawing inferences from the evidence available to it. We consider the direction that the court be “satisfied”, without more, permits the threshold to be met in this way, if the evidence justifies it.
[5]Or, as the case may be, diligently continue, defend, or discontinue: s 165(3)(a). In the present case the relevant element is the first (bringing proceedings) so subsequent references are only to that element.
Such an exercise will be appropriate especially where the company is unable as a matter of practical reality to make the decision whether to bring proceedings. Situations in which this has proved to be the case include (1) where the company’s board is deadlocked,[6] (2) where the proposed defendants of the derivative action control the board,[7] and (3) where the company has ceased trading.[8] In these situations it would be unrealistic to suggest the absence of positive affirmation by the company as to whether it intends to bring proceedings means the threshold requirement cannot be met. Other evidence may well satisfy the court it is met.
[6]Greymouth Holdings Ltd v Jet Trustees Ltd [2012] NZHC 471 at [35]; Peters v Birnie [2010] NZAR 494 (HC) at [26]; Chappell v Morris Crock Ltd HC Auckland CIV-2003-404-2389, 5 February 2004 at [9]; Frykberg v Heaven (2002) 9 NZCLC 262,966 (HC) at [42]; Thorrington v McCann (1998) 8 NZCLC 261,564 (HC) at 261,568.
[7]Re Russley Hotel & Villas Ltd (2000) 8 NZCLC 262,399 (HC) at [17].
[8]Stichbury v One4All Ltd (2005) 9 NZCLC 263,792 (HC) at [21].
In this case we are satisfied NZPIL does not intend to bring proceedings. The management of NZPIL is effectively deadlocked. The He and Chen interests are equal shareholders. NZPIL’s directors, Mr He and Mr Chen Jnr, cannot agree on the future of NZPIL. Mr Chen Jnr is seeking a liquidation of the company. Mr He opposes that. From this evidence we infer NZPIL does not intend to bring proceedings. We are satisfied that the threshold requirement in s 165(3)(a) is met.
Is Mr Chen Snr a director of NZPIL?
The next preliminary issue is whether Mr Chen Snr is a director of NZPIL. The proposed claim is based on the allegation that Mr Chen Snr was a director of NZPIL and owed fiduciary duties to the company. Mr Campbell QC submitted there was insufficient evidence that Mr Chen Snr was a director.
Mr Chen Snr will be a director of NZPIL for the purposes of the Act if Mr Chen Jnr could be required, or was accustomed, to act in accordance with Mr Chen Snr’s directions or if the board of the company (Mr He and Mr Chen Jnr) were required or accustomed to act in accordance with Mr Chen Snr’s instructions.[9]
[9]Companies Act 1993, s 126(1)(b)(i) or 126(1)(b)(ii). See also this Court’s discussion of the application of s 126(1)(b) in Arcadia Homes Ltd (in liq) v More To This Life Ltd [2014] 2 NZLR 339, [2013] NZCA 286 at [34], [35] and [41].
Mr Campbell submitted that the only suggestion Mr Chen Jnr was subject to Mr Chen Snr’s direction was a reference in Mr He’s evidence to an incident when Mr He asked Mr Chen Snr to speak to Mr Chen Jnr about withdrawing funds from NZPIL to gamble at Sky City. He submitted that was insufficient and no more than a father being asked to bring his son into line.
However, we agree with Mr Judd QC’s submission that, taken overall, the evidence discloses that Mr Chen Jnr was effectively acting at his father’s behest and direction when acting as a director of NZPIL.
The background to the relationship between the three men and the incorporation of NZPIL is relevant. The proposal for the incorporation of NZPIL came from Mr Chen Snr. Mr Chen Snr offered to fund the expansion of Mr He’s business on the basis that NZPIL would be incorporated and the Chen interests would share in its profits. Mr Chen Snr led the discussions with Mr He. As a quid pro quo he required his son, Mr Chen Jnr, be appointed as a director of the company. Those factors support the inference that Mr Chen Jnr was effectively Mr Chen Snr’s nominee and would do his bidding.
Further, NZPIL was dependent on the funding provided by Mr Chen Snr. On Mr He’s evidence Mr Chen Snr only allocated further tranches of funding once he was satisfied that previous payments and shipments had been applied in accordance with his requirements. We consider that Mr Chen’s control went further than that of a financier as Mr Campbell suggested. Through his active control of the funding Mr Chen Snr controlled the direction of the company. Next, it is relevant that when Mr He noticed that Mr Chen Jnr had withdrawn in excess of $23,000 from the company and spent it at Sky City, he raised the matter with Mr Chen Snr, not Mr Chen Jnr. The withdrawals from the company stopped. Again the inference is that Mr Chen Jnr was subject to the direction and control of Mr Chen Snr. For all of those reasons we are satisfied that Mr Chen Snr was a director of NZPIL under s 126(1)(b) of the Act.
The mandatory considerations
We turn to consider the main issue, namely whether leave should have been granted for the proposed derivative action as the appellant argues. Section 165(2) provides that in exercising its discretion the court is required to 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, … .
This section requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “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.”[10] It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s 165(2)(a).[11] It has also consistently informed the Court’s assessment of the remaining three criteria.[12] While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.
[10]Vrij v Boyle, above n 3, at 765.
[11]The High Court has adopted this test on at least 30 occasions: see Christopher Hare “Shareholder remedies: personal rights, corporate rights and the derivative action” in Peter Watts, Neil Campbell and Christopher Hare (eds) Company Law in New Zealand (LexisNexis, Wellington, 2011) 677 at 736,n 360. See also Lynne Taylor “Derivative Action” in John Farrar and Susan Watson (eds) Company and Securities Law in New Zealand (2nd ed, Brookers, Wellington, 2013) 569 at 575–576, n 43.
[12]A sample of cases using the test in such a way appears in Taylor, above n 11, at 576, n 48.
Turning to the present case, clearly NZPIL has not taken and does not propose to take any action. The principal considerations in this case are the likelihood of the proceedings succeeding and the costs of the proceedings in relation to the likely relief. It can be accepted that in principle, if the company has an otherwise justified claim, it will be in the interests of the company to pursue it, although that does not necessarily address whether the claim ought to be pursued by a liquidator, as opposed to Mr He, an issue that we return to.
Mr Judd submitted Associate Judge Doogue was wrong to conclude that the proposed proceedings were not likely to succeed.
The draft statement of claim attached to Mr He’s application for leave contains two causes of action:
(a)The first, a personal claim by Mr He against the Messrs Chen for breach of the fiduciary duty owed by them as joint venturers under the CJV.
(b)The second, the proposed claim by NZPIL against the Messrs Chen for recovery of funds misappropriated by them and for breach of fiduciary duties.[13]
[13]As distinct claims they should be contained in two separate causes of action.
The focus in the High Court and in Mr Judd’s submissions on appeal was on the breach of the fiduciary duty Mr Chen Snr owed NZPIL. The reason Associate Judge Doogue did not consider NZPIL to be likely to succeed in that claim is found in the following passage of his judgment:[14]
… The fact that the opportunity in this case cannot reasonably be viewed as closely held information conferring a competitive disadvantage on the company would be a contra-indication against the Court finding that a fiduciary obligation had been breached when the director took steps to set up a business in the same area of activity. … It is not clear either that the company can realistically claim that knowledge of the market opportunity to buy the products in question from supermarket shelves in New Zealand and sell them at a profit in China was a special advantage that the company possessed. …
[14]Chen v He, above n 1, at [32].
The Associate Judge referred to the discussion regarding a director’s use of confidential information in Holden v Architectural Finishes Ltd[15] and did not consider the information Mr Chen Snr gained was sufficiently confidential. However, Mr Judd submitted the focus of the proposed claim was more on the doctrine of corporate opportunity. The law is summarised in the text by Professor Watts:[16]
Directors must not pursue for themselves business opportunities that would connect with the company’s business, unless the company consents. This duty, called the “corporate opportunity” duty, operates whether or not the director has used his or her position, or confidential information, to pursue the opportunity. It is, hence, a discrete head of claim.
[15]Holden v Architectural Finishes Ltd (1996) 7 NZCLC 260,976 (HC).
[16]Peter Watts "Liability for profiting" in Peter Watts, Neil Campbell and Christopher Hare (eds) Company Law in New Zealand (LexisNexis, Wellington, 2011) 495 at 497 (footnote omitted).
Vrij v Boyle is itself an example of the application of the corporate opportunity doctrine. The applicant alleged Mr Boyle had taken advantage of his position as a director of the company and the associated knowledge he had gained of the customers of the company and opportunities for future business in order to establish a competing company. He had thereby gained personal benefit for himself and his family. Fisher J accepted the company had an arguable claim against Mr Boyle.
The proposed claim in this case arises out of the alleged breach of the duties owed by Mr Chen Snr under s 131 of the Act to act in good faith and in the best interests of NZPIL. Importantly the evidence suggests that, in purchasing retail products in New Zealand, Mr He also had existing connections for distribution of the products in Hong Kong and in China. Through NZPIL Mr Chen Snr became aware of those contacts and distribution networks.
We agree that it is not for the Court on an application for leave under s 165 to make a determination on the ultimate merits of the claim.[17] But we are satisfied that there is sufficient evidence to support an arguable claim against Mr Chen Snr for breach of the fiduciary duty he owed NZPIL. Mr Chen Snr established companies which then, on Mr He’s evidence, competed with NZPIL. In establishing the companies and directing their business, it is arguable Mr Chen Snr used some of the connections he had made or was aware of through his involvement with NZPIL. The business the companies generated and the opportunities taken were arguably at the expense of NZPIL.
[17]Needham v EBT Worldwide Ltd, above n 2, at [26].
Further, even if the opportunities which Mr Chen Snr availed himself of were publicly available he was not permitted to avail himself of them because, as we have found, he was a director of a company which was itself exploiting similar opportunities: Peters v Birnie.[18]
[18]Peters v Birnie, above n 6.
In reaching the conclusion NZPIL has an arguable case against Mr Chen Snr for breach of s 131 of the Act, we do not overlook Mr Campbell’s submission that NZPIL ceased trading in February 2012. That, however, is more relevant to the consideration of the value of the claim, rather than whether NZPIL has a claim at all.
It follows that we conclude the Judge was wrong to dismiss the proposed claim against Mr Chen Snr on the basis Mr Chen Snr’s actions may not have amounted to a breach of the obligations he owed NZPIL as a director.
The form of the proposed claim
However, our conclusion that the prospects of NZPIL succeeding in a claim against Mr Chen Snr for breach of fiduciary duty were better than the Associate Judge considered them to be is not an end of the matter. There are the other issues raised by Mr Campbell and the further mandatory considerations in s 165(2).
Mr Campbell also argued that the nature of the relief sought in the proposed derivative action did not support leave being granted, because the relief was either more appropriately pursued by Mr He personally or the relief had no legal basis.
We agree that the relief sought in the proposed draft claim is confused.[19] As relevant, the prayer for relief in the second cause of action seeks:
…
(c)An order by way of declaration that [HKDIL] the HK company incorporated to directly distribute NZPIL export sales in HK and China, [HKDIL] be treated as its wholly owned subsidiary.
(d)An order by way of declaration that Chen Snr. and Chen Jnr. in their execution of the same business as [NZPIL] and [HKDIL] as they have structured through their NZ company Dairy New Zealand International Limited and the HK company controlled by them, New Zealand Milk Powder Limited, account for the export sales business and profits as made in the same manner as if all such business had been done through [NZPIL] and [HKDIL] in accordance with the terms and conditions of its shareholders’ [CJV];
(e)An order for the preparation and an audit of its accounts in line and in accordance with the orders … above;
(f)An order that Chen Snr. and Chen Jnr. are to repay to it all funds that they have withdrawn from its bank accounts to which they are not legally entitled to;
(g)An order that Chen Snr. and Chen Jnr. are to reimburse it the USD$657,570.00 of the Scampi products purchased from Sanford, as shipped to Guangzhou YingBin Trading Co of China and to account for its share of the profits from the on sale of the said products in China;
(h)Damages for losses suffered by it, to be quantified before trial;
…
[19]We note they were drawn by previous counsel, not Mr Judd.
As to the declaration sought regarding HKDIL, a New Zealand Court does not have jurisdiction over HKDIL, as it is registered in Hong Kong. Further, and more practically in terms of the prospect of any recovery, HKDIL has been wound up.
Next, to the extent the relief sought in (d) is apparently based on the CJV, NZPIL was not a party to the CJV. It is not at all clear how it is said NZPIL could enforce any rights which appear to be personal to Mr He.
The application for an order for the preparation of and audit of NZPIL’s accounts relates back to the relief claimed in (c) and (d) and would not be available in any derivative action on behalf of NZPIL.
While the claim at (f) that Mr Chen Snr and Mr Chen Jnr repay all funds wrongly withdrawn from NZPIL’s bank accounts is a claim NZPIL could properly maintain, it plainly requires an accounting exercise. It is an exercise that a liquidator could appropriately carry out. As Mr Cogswell noted, there is approximately $20,000 frozen in the company’s accounts at present which should enable a liquidator to at least commence a review of the company’s accounts.
Further, the pleadings are again not at all helpful on this aspect of the claim. While at [92] of the proposed claim it is alleged $1,701,859.15 is owing to NZPIL by the Chens, that global figure is not explained or supported elsewhere in the pleading, at least not in relation to the proposed cause of action by NZPIL. Although reference is made to the withdrawal of $4,795,000, that is in the first cause of action, which relates to Mr He’s personal claim. The general and unspecified claims by Mr He can be contrasted with the evidence of the accounts prepared by NZPIL’s accountants, although we acknowledge Mr He’s allegation the accountants were acting at Mr Chen Snr’s direction.
The basis for the relief sought in (g) relating to the scampi shipment is found in [53] to [62] of the proposed claim. It is alleged that at Mr Chen Snr’s direction NZPIL ordered and paid for scampi products (financed by HKDIL) and shipped them to Guangzhou YingBin Trading Co (a company related to Mr Chen). Guangzhou YingBin Trading Co argued that the shipment was damaged. Mr He alleges that despite this, Guangzhou YingBin Trading Co uplifted the scampi and disposed of it, but has failed to pay NZPIL for it. How that could support a claim by NZPIL against Mr Chen Snr is not at all clear. NZPIL could well have a claim against Guangzhou YingBin Trading Co but that does not equate to a claim against Mr Chen Snr.
Against that background, while we accept that the Judge may have erred in too readily finding NZPIL may not have a claim against Mr Chen Snr for breach of fiduciary duty, the present relief claimed does not support such a claim. The pleadings would have to be substantially redrawn to support any claim by NZPIL. As presently constituted the present claim is more directly concerned with Mr He’s response to the personal claim against him by Mr Chen for $300,000. That is reflected by the draft derivative claim naming NZPIL as a second plaintiff to a counterclaim, with Mr He being the first plaintiff to that counterclaim.
Mr Chen Jnr’s position
Before returning to the remaining considerations under s 165 we address the position of Mr Chen Jnr. Mr Chen Jnr’s position was not dealt with in any detail in the High Court or by the appellant before us on appeal. Mr Cogswell submitted as a preliminary point that the dispute between Mr He and Mr Chen Jnr should go to arbitration in accordance with cl 25.9 of NZPIL’s constitution. However that clause is directed at a deadlock in management. It would not prevent the company suing a director for breach of duty.
The more difficult issue for Mr He with the proposed claim against Mr Chen Jnr is that the basis of the claim is not at all clear. While Mr Chen Jnr is referred to in the prayer for relief, and relief is sought against him, the basis for the claims is not at all apparent from the preceding paragraphs of the draft claim. The direct allegations against Mr Chen Jnr seem to be limited to his removal of about $13,000 worth of red wine purchased by NZPIL.[20]
The cost/benefit analysis
[20]At [50] and [51] of the proposed claim.
We return to the mandatory considerations under s 165(2), and particularly the costs of the proposed proceeding in relation to the likely relief.
Generally, the costs of the proposed proceedings are to be met by the company unless the court considers it unjust or inequitable for the company to bear the costs.[21] However, Mr Judd submitted that in this case the cost of the proceedings was irrelevant as Mr He would fund the proceedings personally at least until judgment was obtained when he would expect to be reimbursed.
[21]Companies Act, s 166.
Despite that, we consider it is still necessary to make an assessment of the costs as against the likely benefit to address the issue of whether a prudent business person would actually pursue the proposed claim(s). A party in Mr He’s position cannot avoid the court directing itself to s 165(2)(b) (as it is required to do) by offering to underwrite the claim. The court would not, for example, allow a director to use the company to pursue a weak claim against other directors, even if the director offered to underwrite the claim.
It is difficult to carry out a cost/benefit analysis in the present case. The proposed claim for the breach of corporate opportunity is not quantified. It may be very difficult to quantify. The ambit may be limited. As Mr Campbell noted, NZPIL has not traded since February 2012. Further, no precise attempt has been made to estimate the costs of the proceedings, but even the costs of a standard fixture of three days would be in the region of $60,000 to $80,000 at a minimum. This case is unlikely to be resolved so readily.
NZPIL may have an arguable (but confined) claim against Mr Chen Snr for breach of fiduciary duty, but when consideration is had to the current confused state of the pleading and the costs of the proceedings we are not at all satisfied that a reasonably prudent business person, acting in pursuit of his or her own interests, would decide to pursue the proposed claim on the information currently before the Court.
General discretion
Finally, we note the four criteria in s 165(2) expressly apply “[w]ithout limiting subsection (1)”, which in turn provides the court “may … grant leave” to bring the derivative action. For this reason, even if Mr He was able to satisfy the Court that NZPIL has an arguable claim against Mr Chen Snr, the Court retains a discretion whether to grant leave to Mr He to pursue the claim. In the context of this appeal it is unnecessary for us to discuss the nature and extent of that discretion except to confirm its broad terms.
A major factor in this case is that the company is no longer trading. As noted, it is also subject to an application for liquidation. One of the principal areas of concern is that the Chens have taken money from NZPIL. Where the dispute is effectively over the taking of accounts of a company which is no longer trading, a derivative action may well not be appropriate.[22]
[22]Techflow (NZ) Ltd v Techflow Pty Ltd (1996) 7 NZCLC 261,138 (HC).
We consider that, given the complete falling out between the parties and the current impasse in the company, the appropriate way for the claims that have been identified to be advanced is through the liquidation process. The liquidator can carry out the accounting exercise to determine what amounts, if any, the parties may owe the company for moneys wrongfully withdrawn from it.
Further, while in an appropriate case leave might be granted to pursue a derivative action based on a breach of fiduciary duty even where the company is facing liquidation, we consider the fact the company is no longer trading is a particularly relevant factor in this case.[23] If, after taking independent advice, the liquidator determines there is a reasonably arguable claim against Mr Chen Snr (or Jnr) for breach of duty as director(s), then the liquidator could bring such a claim.
[23]Needham v EBT Worldwide Ltd, above n 2, at [57]–[60].
Standing back and looking at the matter overall we do not consider the Court should exercise its discretion and grant leave to Mr He to pursue a derivative action in this case. We consider the liquidation application should be allowed to proceed. We would not want any grant of leave to be used as a means to avoid the liquidation of the company which, on the information currently before the Court, otherwise appears appropriate.
Result
For those reasons, which are somewhat different to those of the Associate Judge, we have come to the same conclusion. The appeal is dismissed.
Costs
Costs should follow the outcome of the appeal in the usual way.
The appellant is to pay the first and second respondents costs for a standard appeal on a Band A basis and usual disbursements.
Solicitors:
B G Hong Law Firm, Auckland for Appellant
N Faigan, Auckland for First Respondent
Cogswell Law, Auckland for Second Respondent
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