Kennedy v Body Corporate 82981

[2023] NZHC 3123

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2021-485-749

[2023] NZHC 3123

BETWEEN

CY KENNEDY and

KAJSA KARIN ELEONORA BJORS
Plaintiffs

AND

BODY CORPORATE 82981

First Defendant

NEIL DOUGLAS CHARLES COOPER
Second Defendant

ANTHONY VOLPICELLI

Third Defendant

Hearing:	4 October 2023
Appearances:	I J Stephenson for Plaintiffs N S Wood for Defendants
Judgment:	6 November 2023

JUDGMENT OF ASSOCIATE JUDGE SKELTON

[1]    The plaintiffs are owners of two residential units in the mixed-use building known as the Dominion Building in Wellington. They claim breaches of statutory duty, negligence and nuisance against the Body Corporate in relation to leaks from the roof and exterior cladding.

[2]    The plaintiffs also claim breaches of statutory duty against the second and third defendants as either current or former committee members of the Body Corporate, and seek to join  two  further  persons,  Leigh  Burney  and  Diane  Burney  (Mr  and  Mrs Burney), as fourth and fifth defendants, on the basis of the same cause of action. The plaintiffs allege that, to the extent necessary, the cause of action against the second

KENNEDY v BODY CORPORATE 82981 [2023] NZHC 3123 [6 November 2023]

and third defendants, and the proposed cause of action against Mr and Mrs Burney, is brought by the plaintiffs by way of derivative action.

[3]    Before me now is an interlocutory application by the plaintiffs seeking orders as to:

(a)whether leave is required for the plaintiffs to proceed against the second and third defendants by way of derivative action;

(b)if leave is required, granting leave to continue the proceeding against the second and third defendants by way of derivative action;

(c)joinder of Mr and Mrs Burney as fourth and fifth defendants on the basis of the same cause of action.

[4]    The defendants’ position is that the plaintiffs do not have standing (whether as of right or with leave) to bring the pleaded claim against the second and third defendants or Mr and Mrs Burney by way of derivative action. The defendants say that the claim against the second and third defendants should be struck out and the application to join Mr and Mrs Burney should be dismissed.

Background

[5]    For present purposes, I adopt the background summary set out in the judgment of Grice J in Kennedy & Bjors v Body Corporate 82981:1

[3]        The Dominion Building is a Wellington unit title development comprising a total of 43 units, 31 of which are residential units and 12 of which are non-residential units (which are primarily commercial or retail.) The Body Corporate is the first defendant. A committee of eight (the Committee) has managed the building under a general delegated authority  from  the Body Corporate members for some years. The second and third defendants are a former chair and former member of the Body Corporate respectively.

[4]        Concerns about leaks, affecting particularly the top units, date back some years. Leaks are referred to in the minutes of the Body Corporate in April 2004. The plaintiffs, whose apartment is immediately under the roof and therefore most badly affected by the leaking, consider that the Body Corporate

1      Kennedy & Bjors v Body Corporate 82981 [2023] NZHC 1377 at [3]–[8].

and its members and chair at various times were aware of reports that indicated the roof should have been replaced sometime earlier than it was.

[5]         The allegations are that the second and third defendants (and perhaps others) suppressed those reports and undertook a program of patching the roof which was unsatisfactory. When the roof was finally repaired and replaced to deal with the leaking problems, substantial damage had already been caused to the plaintiffs’ unit, which necessitated them moving out and finding alternative accommodation for a period of time. The actual cost of repairing the roof and associated damage is not the issue in the substantive proceedings.

[6]        The substantive claim pleads negligence, breach of statutory duty and nuisance against the Body Corporate and breach of statutory duty against the second and third defendants. The relief sought against the Body Corporate is judgment for the costs of repairs and restoration of the internal linings of the unit to restore habitability and/or the value of the unit as well as loss of use and consequential losses, and general damages. Against the second and third defendants the plaintiffs claim under breach of statutory duty that they caused the Body Corporate to commit the breaches and are liable to the plaintiffs for the loss arising from the Body Corporate’s breaches of duty and nuisance. In addition, the plaintiffs claim against the second and third defendants the costs of temporary building work to the roof, wasted remedial, design consultancy and related professional fees, as well as escalation in repair costs (to be quantified before trial).

[7]        The relationship between the plaintiffs and the Body Corporate and its Committee has been tense for some time. Litigation was threatened by the plaintiffs in 2017, which did not eventuate. The Body Corporate insurer, AIG, covered the costs of the Body Corporate and the second and third defendants defending the threats of claims at that time. The details of the policy and particulars of what has been paid for are not before the Court at present. AIG has now refused further cover for the Body Corporate in relation to the claim filed in 2021, which led the Body Corporate to take the steps it has taken to indemnify the second and third defendants.

[8]        The second defendant has never personally owned a unit but he was a director of a company which owned a unit, and under the provisions of the Unit Titles Act he was entitled to be elected chair. The third defendant remains an owner of the unit in the building but is no longer a member of the Committee (for convenience I refer to the second and third defendants together as the Committee members).

Relevant procedural background

[6]    In the memorandum of counsel for the plaintiffs for first case management conference dated 14 March 2022, the plaintiffs sought leave:

(a)to join Mr and Mrs Burney as the fourth and fifth defendants pursuant to r 4.56 of the High Court Rules 2016; and

(b)to proceed against the second and third defendants, and against Mr and Mrs Burney, by way of derivative action as pleaded in the proposed third amended statement.

[7]    Counsel for the defendants provided a memorandum for the first case management conference dated 22 March 2023. Counsel for the defendants submitted that the plaintiffs do not have standing to bring a derivative action on behalf of the Body Corporate, and therefore the Court does not have jurisdiction to grant leave for the plaintiffs to bring (or continue) the cause of action against the second and third defendants by way of derivative action. Counsel for the defendants submitted that there is no provision in the Unit Titles Act 2010 conferring jurisdiction on the Court to grant leave to a unit owner to bring such a derivative action. He submitted that, if the plaintiffs wished to pursue the application, they would need to file a formal interlocutory application.

[8]    With regard to the proposed joinder of Mr and Mrs Burney, counsel for the defendants submitted that the application for joinder should form part of the plaintiffs’ application for leave to proceed by way of derivative action.

[9]    In a minute dated 23 March 2023, Gendall J directed that the plaintiffs’ application for leave to proceed by way of a derivative action and for joinder of Mr and Mrs Burney was to be determined by way of interlocutory application and made timetabling orders accordingly.

[10]   Subsequently, counsel for the plaintiffs filed a memorandum dated 22 May 2023 seeking directions. Counsel for the plaintiffs submitted that there was no requirement for the plaintiffs to seek leave for a derivative action in the context of a body corporate, and that the plaintiffs should not be required to incur the expense of an interlocutory application. Counsel for the plaintiffs submitted that if the defendants contend that the plaintiffs do not have standing to bring a claim on behalf of the Body Corporate then the appropriate course of action is for the defendants to apply for strike-out or for the matter to be dealt with as part of the substantive hearing of the case. Counsel for the plaintiffs submitted that in the circumstances the issue of joinder of Mr and Mrs Burney should be dealt with on the papers.

[11]   Counsel for the defendants filed a further memorandum in response dated    30 May 2023. Counsel for the defendants submitted that the appropriate way forward was for the plaintiffs to be required to file, and for the Court to hear and determine, an application seeking appropriate directions to resolve whether or not the plaintiffs need leave to bring their pleaded cause of action against the second and third defendants and, if so, whether that leave should be granted. Counsel for the defendants also submitted that as the proposed cause of action against Mr and Mrs Burney is materially the same in nature as against the second and third defendants, resolution of the issue of leave in respect of the second and third defendants would also resolve the issue of joinder in respect of Mr and Mrs Burney.

[12]   In a minute dated 6 June 2023, Grice J vacated the one-day hearing set down for 30 June 2023 as no interlocutory application had been filed by the plaintiffs at that stage, and referred the matter to a one hour case management teleconference.

[13]   The matter came before me for a case management telephone conference on 27 June 2023. As the issue of whether leave was required to bring a derivative action on behalf of the Body Corporate was in dispute between the parties, I directed in my minute dated 27 June 2023 that the plaintiffs were to file and serve an interlocutory application seeking orders/directions as to whether leave was required in respect of the cause of action against the second and third defendants, and also as to joinder of Mr and Mrs Burney, and, if so, whether leave should be granted.

Plaintiffs’ proposed cause of action in the draft third amended statement of claim

[14]   The plaintiffs allege that the second  and  third  defendants,  and  Mr  and  Mrs Burney, owed a duty of loyalty to the Body Corporate, including specific duties, and that they breached these duties and acted unlawfully and/or committed a fraud on the minority, including:

(a)jointly or severally causing the Body Corporate to commit certain breaches;

(b)preferring their own interests to those of the Body Corporate when making decisions or representations as a committee member;

(c)in respect of the second and third defendants and/or Mrs Burney, breached the duty of disclosure pursuant to reg 8(2)(h) of the Unit Titles Regulations 2011 by failing to disclose relevant information concerning repair scope; and

(d)in respect of the second defendant, breached the duty of disclosure pursuant to reg 6(4)(f) of the Unit Titles Regulations by failing to provide or disclose certain information and by directing amendment or redaction of certain reports provided to annual general meetings.

[15]   The plaintiffs allege that, as a result of these breaches, the Body Corporate has incurred unnecessary expenses and loss as particularised in sch A to the draft third amended statement of claim.

[16]   The plaintiffs allege that the Body Corporate may join the second and third defendants and Mr and Mrs Burney pursuant to s 142 of the Unit Titles Act, and in lieu of such, and to the extent necessary, the cause of action is brought by the plaintiffs by way of derivative action.

Standing

[17]   The defendants contend that the plaintiffs have no standing to bring a claim on behalf of the Body Corporate. They rely on the general rule in Foss v Harbottle.2 In Edwards v Halliwell, Jenkins LJ explained the rule as follows: 3

First, the proper plaintiff in an action in respect of a wrong alleged to be done to [a] company or association of persons is prima facie the company or the association of persons itself. Secondly, where the alleged wrong is a transaction which might be made binding on the company or association and on all its members by a simple majority of the members, no individual member of the company is allowed to maintain an action in respect of that matter …

[18]   The defendants submit that the “so-called exceptions” to the rule in Foss v Harbottle do not and should not be extended to apply to bodies corporate established under the Unit Titles Act.

2      Foss v Harbottle (1843) 2 Hare 461.

3      Edwards v Halliwell [1950] 2 All ER 1064 (CA) at 1066.

[19]These exceptions have been summarised as follows: 4

…(a) actions where the plaintiff alleges that the company is acting, or is about to act, ultra vires; (b) actions where the act in question would only be valid if passed by more than a simple majority vote of shareholders, and it has not been so passed; (c) where the plaintiff’s personal rights have been infringed;

(d) where the directors are exercising their powers as a fraud on the minority; and (e) in any other case where justice requires it.

[20]   The defendants submit that the Unit Titles Act was intended to be a comprehensive and accessible statement of the rights and responsibilities of unit owners and the Body Corporate as among themselves. The defendants submit that if Parliament had intended there to be a derivative action available in respect of bodies corporate, then Parliament would have provided for this in the Unit Titles Act.5 The defendants submit that allowing a derivative action where Parliament has not so provided would cut across the legislative framework. They also submit that allowing a derivative action would cut across the decisions that the unit owners have made about this litigation, including resolving not to claim against any present or former committee member for any act or omission the subject of this proceeding, and resolving to object to any application for leave by the plaintiffs, and to indemnify past, present and future committee members against claims.6

[21]   The plaintiffs submit that they do have standing to bring a claim on behalf of the Body Corporate. The plaintiffs refer to cases in New Zealand and Australia in support of their submission that exceptions to the rule in Foss v Harbottle apply in the context of bodies corporate, and that a common law derivative action in this context has not been precluded by Parliament.

[22]   The plaintiffs refer to the observations of Associate Judge Bell in Clarrie Lawrence Small and K M Trustee Services Ltd v Body Corporate 324525 as follows:7

4      J D Heydon and others Meagher, Gummow & Lehane’s Equity: Doctrines & Remedies (5th ed, LexisNexis, Sydney, 2014) at [21-155] (footnotes omitted).

5      The defendants give the example of ss 82 to 85 of the Limited Partnerships Act 2008 which provide for derivative actions to be brought, with the leave of the Court, on a limited partnership’s behalf by a partner.

6      See Kennedy & Bjors v Body Corporate 82981, above n 1.

7      Small and K M Trustee Services Ltd v Body Corporate 324525 [2018] NZHC 19 at [27]-[28] (footnotes omitted).

[27]      The plaintiffs say that the 33.43% -  66.57%  split  between  the  body corporate and the majority owners is a misallocation. Far more should have been paid to the body corporate. The funds the majority received on settlement should have been treated as going only towards reimbursement of repair costs. The body corporate should have received 40% of these costs, but it received less.

[28]      There may be an arguable legal basis under which the minority could sue to recover for the body corporate any amounts by which the majority have enriched themselves at the expense of the body corporate– the “fraud on the minority” exception to the rule in Foss v Harbottle. The minority has not relied on this, but I deal with it as giving a possible way for assessing the misallocation claim. For reasons I give below I do not consider that the minority’s causes of action do that. It may be objected that the rule in Foss v Harbottle is a matter of company law only, but the English courts have accepted that it may be applied to other associations – trade unions and limited liability  partnerships.  There  are   parallels   between   companies   and body corporates under the Unit Titles Act 2010. In both the entity, company or body corporate, is normally the only person who can sue for wrongs done to it. In both, general meetings (of shareholders or owners) may approve actions that would otherwise be  wrongs  to  the  company.  Estmanco  (Kilner House) Ltd v Greater London Council, which involved a non-profit, non-trading company that owned a block of apartments where each owner held one share, may be seen as linking companies and other property-owning entities. Under ss 165 and 166 of the Companies Act 1993 aggrieved shareholders may be given leave to bring a derivative proceeding in the name of the company on a wider basis than was available at common law, but that does not stand in the way of the Foss v Harbottle rule and its exceptions operating in other cases.

[23]   The plaintiffs also refer to Singh v Boutique Body Corporates Ltd, concerning a  dispute  within  a  body  corporate  under  the  Unit  Titles  Act.  In that case,

Associate Judge Bell observed:8

[44]   Ms Singh cannot sue committee members for breaches of their duties to the body corporate. Only the body corporate has standing to do so. And it would only decide to do so if a majority of owners in general meeting assented to a resolution to do so. Generally speaking, Ms Singh cannot sue derivatively for any alleged wrongs done to the body corporate. That is no more than a restatement of the rule in Foss v Harbottle. The rule is subject to exceptions

– decisions may be challenged if they are ultra vires or illegal, require a special majority or are a fraud on the minority. None of them apply here and there was no suggestion that they did. I infer that the body corporate has approved the decisions of the committee because it has raised levies under the scheme to cover additional costs of repair. Ms Singh’s liability under judgments for unpaid levies is evidence of the approval. It would not have imposed levies for costs which it did not approve.

8      Singh v Boutique Body Corporates Ltd [2019] NZHC 1707 at [44].

[24] The plaintiffs also refer to a number of earlier “strata law” cases in New South Wales decided under the Strata Schemes Management Act 1996. The plaintiffs submit that these cases also recognise exceptions to the rule in Foss v Harbottle in the context of bodies corporate.9

[25]   As noted above in relation to the procedural background, the plaintiffs contend that leave is not required to bring a derivative action at common law. The plaintiffs’ position is that if the defendants wish to raise an issue as to standing to sue on behalf of the Body Corporate, then that should be done by way of an application for strike-out or should be resolved as part of the substantive determination of the proceedings.

[26]   I propose to firstly consider whether leave of the Court is required to commence a derivative action at common law. I approach the matter in this way for two reasons. First, the plaintiffs’ application primarily seeks a determination on whether leave is required. Secondly, it seems to me, as will be developed further below, that determination of the issue of whether leave is required will assist in considering how the issue of standing should be dealt with.

Is leave required to bring a derivative action at common law?

[27]   In Small and K M Trustee Services Ltd v  Body  Corporate  324525,  Associate Judge Bell made the following brief observation regarding the issue of leave in the context of considering a derivative action on behalf of a body corporate:10

In a claim under the exception in Foss v Harbottle the court is unlikely to grant relief when any alleged misallocation is not of any great moment. Given the requirement to obtain leave by showing a prima facie case, a proceeding is unlikely to get past the leave application without showing a case with real substance.

[28]   Associate Judge Bell referred to the decision in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2)11 as authority for the requirement to seek leave. In

9      Carre v Owners Corporation – SP530320 [2003] NSWSC 397; (2003) 58 NSWLR 302 at [31]-[34]; and Eastmark Holdings Pty Ltd v Kabraji [2013] NSWSC 1763; (2013) 97 ACSR 161 at [78]; and APX Projects Pty Ltd v The Owners – Strata Plan No. 64025 [2015] NSWSC 1250 at [45]; and Tan v The Owners – Strata Plan No. 22014 (No 2) [2015] NSWSC 1920 at [91].

10 Small and K M Trustee Services Ltd v Body Corporate 324525, above n 7, at [31] (footnote omitted).

11 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (CA).

that case, the English Court of Appeal held in the context of considering a common law derivative claim on behalf of a company that:12

In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff ought at least to be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed, and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle.

[29]   However, subsequent cases have found that the English Court of Appeal in Prudential Assurance was recommending the trial of a preliminary issue of the plaintiff’s standing to bring the derivative action, not an application for leave. Therefore, Prudential Assurance does not provide support for the notion that leave is necessary before a common law derivative action may be commenced.13 In Oates v Consolidated Capital Services Ltd the Court summarised the position as follows: 14

[105] To summarise, a plaintiff who seeks to bring a derivative action under the general law must allege, in the initiating process, facts that show that he or she falls within a recognised exception to the prima facie rule that the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is the corporation itself. If the initiating process fails to make those allegations, it is liable to be struck out if the defendant chooses to apply to have it struck out. If the initiating process makes allegations, which, if true, would suffice to enable the plaintiff to enforce a right owed to the company in which the plaintiff was a shareholder, but the defendant asserts that the allegations are so insubstantial that the matter should not go to trial, the defendant can move to seek summary dismissal of the claim. If trial of the merits of the action would be long and complicated, a defendant might choose to have a question of the plaintiff’s standing to bring a derivative action decided as a preliminary question. But there is no requirement under the general law relating to derivative actions for leave to be obtained before a plaintiff commences such an action.

[30]   Subsequently, in Fruit Shippers Ltd v Petrie,15 Associate Judge Bell considered the issue of leave again in the context of determining standing to bring a common law derivative claim outside s 165 of the Companies Act 1993. Associate Judge Bell held:16

12     At 221–222.

13     Oates v Consolidated Capital Services Ltd [2009] NSWCA 183 at [92]–[98].

14 At [105]. See also APX Projects Pty Ltd v The Owners – Strata Plan No 64025 [2015] NSWSC 1250 at [46].

15     Fruit Shippers Ltd v Petrie [2020] NZHC 749.

16     At [48] (footnotes omitted).

[48]   There is a preliminary question.  Does Fruit Shippers Ltd need leave  to bring a derivative proceeding? The matter was not discussed in depth. Fruit Shippers Ltd did not make a formal application for leave, but Mr Friar said that if leave was required, it was sought. On the other hand, Mr Cooper did not submit that leave was required. The point arises because of the English Court of Appeal’s judgment in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 2): …

The English courts consistently followed that. Now the Civil Procedure Rules require a claimant to seek leave to bring a derivative proceeding. In Waddington Ltd the Hong Kong Court of Appeal held that that was a requirement of Hong Kong law as well. It appears however that there is room for procedural flexibility. The plaintiff is not necessarily required to make a formal application for leave. In Waddington Ltd Ribero PJ said that a challenge to the plaintiff’s standing generally takes the form of an application by the defendants to strike out the claim or to have the court determine as a preliminary issue that the plaintiff has no standing to sue on the company’s behalf, but it can arise in other procedural contexts. Accordingly, Mr Petrie’s strike out application provides an appropriate procedure to decide whether Fruit Shippers Ltd may make its derivative claim. …

In a similar way, Fruit Shippers Ltd has the onus of establishing that it can bring a derivative proceeding. Allowing the plaintiff’s case to be tested by a strike out application or by hearing the matter as a preliminary issue may be more efficient than requiring a plaintiff to obtain leave at the outset. The defendants decide whether to test the plaintiff’s case. They have the option of leaving the matter to be decided later at a final hearing and may do that for tactical reasons. A plaintiff beginning a derivative proceeding is not put to the expense of a leave application at the outset but will appreciate that they may be tested by a strike out application. The strike out application may filter out vexatious and unworthy claims. Defendants will appreciate that they should apply promptly.  Delay in applying for strike out may count against them.  Mr Petrie applied in good time in this case.

[31]   Based on the authorities discussed above, I consider that there is no requirement for a plaintiff to obtain the leave of the Court before commencing a common law derivative action, including any derivative action in the context of a body corporate. Rather, any challenge by the defendant to the plaintiff’s standing or the merits of the plaintiff’s claim should be by way of a strike-out application or by having the matter determined as a preliminary issue, for example by utilising rr 10.14 and 10.15 of the High Court Rules.

[32]   There is room for some procedural flexibility in this regard. For example, the issue of standing may also arise in other procedural contexts, such as an application to add a party or to amend a pleading so as to introduce a derivative action.17

17     Waddington Ltd v Chan Chun Hoo Thomas [2008] 11 HKCFAR 370 at [14].

[33]   Accordingly, in terms of the primary question raised in the plaintiffs’ application before me, I find that leave of the Court is not required to commence a common law derivative action, including any such  action  in  the  context  of  a  body corporate.

How should the issue of standing be dealt with?

[34]   As indicated in the Fruit Shippers case discussed above, there are several routes available to the defendants to challenge the standing of the plaintiffs to bring a claim on behalf of the Body Corporate. These are:

(a)an application for strike-out;

(b)applying for the issue to be determined as a separate or preliminary question under rr 10.14 and 10.15 of the High Court Rules;

(c)leaving the matter to be decided at the substantive hearing.

[35]   There are references to “procedural flexibility” in the Fruit Shippers case, including that the issue of standing may be determined as part of an application to add a party or to amend a pleading to introduce a derivative action. However, I am not prepared to deal with the issue of standing in the context of the present application for the following reasons.

[36]    First, the plaintiffs’ position has been that they do not require leave to commence their cause of action against the second and third defendants and that they should not be required to incur the expense of an interlocutory application, and that the appropriate course of action is for the defendants to apply for strike-out. The defendants have opposed that position and, as a result, the plaintiffs have been required to make the current interlocutory application. I have now found that leave is not required. In the circumstances, it does not seem to me to be appropriate that the defendants’ opposition to the application for leave should be treated as a de facto strike-out application.

[37]   Secondly, and most importantly, if the defendant’s opposition was to be treated as a strike-out application, an issue arises as what standard should be applied to the plaintiffs’ case. The issue of the standard to be applied on a strike-out application in this context was raised and discussed by Associate Judge Bell in the Fruit Shippers case:18

[49]      The next question is: to what standard should the plaintiff make out its case on a strike out application? In Prudential Assurance Co Ltd v Newman Industries Ltd the English Court of Appeal adopted the prima facie case standard as a half-way house between trying the entire case to see if leave should be given and assuming that the plaintiff will be able to prove what it has pleaded. The English courts have continued to apply that standard. In this context, a prima facie case is more than an arguable case. A plaintiff will be entitled to judgment if the defendant offers no defence. The court considers all the evidence on the application. On the other hand, in New Zealand there is a different standard for applications to begin a derivative proceeding under s 165 of the Companies Act. In Vrij v Boyle Fisher J adopted a prudent businessman test for the issue under s 165(2)(a) – the likelihood of the proceedings succeeding. Would such a person in the conduct of their affairs decide whether to sue? They would consider matters such as the amount at stake, the apparent strength of the claim, likely costs and the prospect of enforcing a judgment. …

[50]      The test in Vrij v Boyle has been applied in many cases. It makes sense to use the learning developed in those cases in the associated matter of a common law derivative claim for a company. It would be awkward to use one standard for cases under s 165 and another for common law cases. There are benefits in a [consistent] approach using the same test for both. Under a prima facie case approach, there is a greater risk of the application becoming a mini-trial. … Accordingly, I use the prudent businessman test for the strike out application. In this case the assessment is made on the evidence, not on the pleadings.

[38]   Although Fruit Shippers considered the issue of standing in the context of a common law derivative claim on behalf of a company outside s 165 of the Companies Act, the same issue as to the standard to be applied on a strike-out application arises in the context of bodies corporate. In particular, an issue arises as to whether the standard should be the standard under r 15.1 of the High Court Rules – no reasonably arguable cause of action – with the pleaded facts assumed to be true and limited consideration of the affidavit evidence; or whether the “prima facie” case approach should be adopted taking into account all the affidavit evidence with the risk of the matter becoming a mini-trial; or whether some intermediate approach should be adopted.

18     Fruit Shippers Ltd v Petrie, above n 15, at [49]-[50] (footnotes omitted).

[39]   I do not propose to resolve that issue in the context of the current application. The issue of the standard to be applied on a strike-out application was not directly addressed by the parties in their submissions. That is understandable because the plaintiffs’ application is focussed on the issue of leave. It seems to me that the issue of the standard to be applied could make a significant difference to the outcome of any strike-out application. That point requires full argument.

[40]   Thirdly, as discussed above, the defendants have several options to challenge the standing of the plaintiffs to bring and continue their cause of action on behalf of the Body Corporate. Without giving any indication as to the likely outcome on the issue of standing, I am concerned that if I was to determine the issue of standing against the defendants in the current procedural context, I would be precluding the defendants from taking into account the discussion in this judgment, and then being able to choose which option they wish to pursue.

Mr and Mrs Burney

[41]   The plaintiffs have provided with their interlocutory application a proposed third amended statement of claim in which the derivative action pleaded against the second and third defendants is also pleaded against Mr and Mrs Burney. The specific allegations made against Mr and Mrs Burney are set out above at [14]-[16].

[42]   I have found above that leave of the Court is not required to bring a common law derivative action. Therefore, the only issue requiring consideration is whether Mr and Mrs Burney should be added as fourth and fifth defendants in the proceedings pursuant to r 4.56(1)(b) of the High Court Rules.

[43]Rule 4.56 provides as follows:

4.56     Striking out and adding parties

(1)A Judge may, at any stage of a proceeding, order that —

(a)the name of a party be struck out as a plaintiff or defendant because the party was improperly or mistakenly joined; or

(b)the name of a person be added as a plaintiff or defendant because —

(i)the person ought to have been joined; or

(ii)the person’s presence before the court may be necessary to adjudicate on and settle all questions involved in the proceeding.

(2)An order does not require an application and may be made on terms the court considers just.

[44]   The defendants oppose the joinder of Mr and Mrs Burney primarily on the basis that the proposed case against Mr and Mrs Burney proceeds on substantially the same basis as the claim sought to be advanced against the second and third defendants, and that claim cannot succeed.

[45]   However, as found above, the plaintiffs do not require leave to commence a derivative action and, for the reasons set out above, I am not prepared to deal with the issue of standing in the current procedural context.

[46]   In the circumstances, it seems to me that Mr and Mrs Burney “ought to have been joined” in that the plaintiffs allege that the Body Corporate has a cause of action against Mr and Mrs Burney as members or former members of the Body Corporate committee on the same basis as alleged against the second and third defendants, and that the Body Corporate is entitled to monetary relief from Mr and Mrs Burney. In my view, Mr and Mrs Burney’s presence before the Court is necessary to enable the Court to adjudicate on and settle all questions involved in the proceedings.19

[47]   The defendants take  issue  with  the  plaintiffs’  contention  that  Mr  and  Mrs Burney should be joined because their presence will “improve the quality of the information before the Court given that they served on the Committee at the relevant times”. The defendants say if the plaintiffs want documents or evidence from Mr and Mrs Burney then they are free to seek non-party discovery from them or to subpoena them to give evidence at trial. However, the plaintiffs are not contending that Mr and Mrs Burney should be joined simply on the basis that their joinder will improve the quality of information before the Court. As discussed above, the plaintiffs are alleging a cause of action against Mr and Mrs Burney including a claim for monetary relief.

19Jessica Gorman and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR4.56.07] - [HR4.56.11].

[48]   It is not apparent that joinder of Mr and Mrs Burney will unreasonably delay the proceedings or materially add to the cost or complexity. As I understand the position, the Body Corporate and the defendants, including Mr and Mrs Burney, are jointly represented by Chapman Tripp.

[49]    I find that jurisdiction is established to add Mr and Mrs Burney as fourth and fifth defendants in the proceeding and I see no reason to exercise the Court’s discretion against joinder, particularly as this is a case of plaintiffs seeking joinder of additional defendants.20

[50]   I reiterate that joinder of Mr and Mrs Burney as fourth and fifth defendants under r 4.56(1)(b) of the High Court Rules does not preclude the defendants from applying for strike-out of the cause of action against Mr and Mrs Burney once the amended statement of claim is filed, or exercising any of the other options set out at

[34] above.

Result

[51]        Leave of the Court is not required for the plaintiffs to bring their cause of action by way of derivative action.

[52]      An order is made under r 4.56(1)(b) of the High Court Rules that Leigh Francis Burney and Diane Florence Burney be added as the fourth and fifth defendants in the proceeding on the basis of the proposed cause of action against the defendants in the draft third amended statement of claim dated 14 March 2023.

[53]      The matter is to be allocated a date for a further case management conference in the Associate Judge’s chambers list in late November 2023.

[54]      The parties shall endeavour to agree a joint memorandum addressing all relevant matters in sch 5 to the High Court Rules, to be filed three working days before the conference. Any differences between the parties should be set out in the

20 At [HR4.56.11].

joint memorandum.    If counsel cannot agree a joint memorandum, then separate memoranda may be filed.

[55]      As to costs, my preliminary view is that the plaintiffs are entitled to costs on a 2B basis. The parties should endeavour to agree on costs. However, if agreement cannot be reached then memoranda may be filed (not exceeding three pages – excluding costs schedules) and the issue of costs will be determined on the papers.

Associate Judge Skelton

Solicitors:

Lane Neave, Auckland for Plaintiffs

Chapman Tripp, Wellington for Defendants