Mowlem v Keach

[2017] NZHC 267

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-2283 [2017] NZHC 267

UNDER

Section 174 of the Companies Act 1993

and Part 18 of the High Court Rules

BETWEEN

NIGEL JAMES MOWLEM Plaintiff

AND

BARRY JOHN KEACH First Defendant

NOC HOLDINGS LIMITED Second Defendant

METRO FLOORING LIMITED Third Defendant

THE FLOORING SHED LIMITED Fourth Defendant

Hearing:	16 February 2017
Appearances:	G Blanchard for the Plaintiff P Rice for the First, Second and Third Defendants No appearance for Fourth Defendant
Judgment:	24 February 2017

JUDGMENT OF MUIR J

This judgment was delivered by me on 24 February 2017 at 4.30 pm

Pursuant to Rule 11.5 of the High court Rules.

Registrar/Deputy Registrar

Date:…………………………

Counsel/Solicitors:

G Blanchard, Barrister, Auckland

P Rice, Barrister, Auckland

Mowlem v Keach [2017] NZHC 267 [24 February 2017]

Introduction

[1]      The plaintiff (Mr Mowlem) applies under s 165 of the Companies Act 1993 (the Act) for leave to bring a derivative action on behalf of the fourth defendant, The Flooring Shed Limited (TFSL).

[2]      His application in that respect was filed contemporaneously with proceedings under s 174 of the Act in which he seeks orders that:

(a)       the  first  and  second  defendants  take  steps  to  transfer  a  franchise agreement, relating to a business operated by TFSL, into its name;

(b)the first to third defendants pay compensation in an amount to be quantified; and

(c)       the first defendant sell his shares in TFSL to the plaintiff at fair value on such terms the Court thinks fit.

[3]      The present application proceeds on the basis foreshadowed in Vrij v Boyle1 and Greymouth Holdings Ltd v Jet Trustees Ltd2 and is designed to ensure that relief which may properly flow to TFSL, rather than the plaintiff personally, may do so.

[4]      I am satisfied that leave is appropriately granted.

Background

[5]      Mr Mowlem and the first defendant (Mr Keach) each hold 50 per cent of the shares in TFSL.  Both are directors of the company.

[6]      TFSL operates retail premises in Mt Wellington as part of the “Carpet Court”

franchise.   The second and third defendants (NOC Holdings Limited (NOC) and

Metro Flooring Limited (MFL)) are companies owned and controlled by Mr Keach.

1      Vrij v Boyle [1995] 3 NZLR 763 (HC).

2      Greymouth Holdings Ltd v Jet Trustees Ltd HC Auckland CIV-2011-404-5309, 19 December

2011.

[7]      TFSL was  incorporated  on  23  June  2005.    At  that  time  Carpet  Court’s business in New Zealand operated on a licence model.  MFL held licences for the “Western” and “Central” Auckland territories being respectively New Lynn to Helensville and Orakei to New Lynn.   It established retail stores in Henderson to service the Western territory and Newmarket to service the Central territory.  They appear to have acted as separate profit centres, albeit through the one company and under the same GST registration.

[8]      During the first half of 2005 Mr Mowlem and Mr Keach began to discuss the concept of setting up a new retail outlet in Mt Wellington which was considered well placed to serve Auckland’s affluent eastern suburbs.   Although Mr Mowlem had limited relevant experience, it was agreed that he could learn the trade in MFL’s Newmarket store while the new business was being established.

[9]      By June 2005 the parties had agreed to proceed and on 20 June Mr Keach sent a letter to the licensor Carpet Court New Zealand Ltd (CCNZ) requesting a licence for the “Central East” area.  The letter identified the “trading name” of the new business as “Carpet Court, Lunn Avenue, Ellerslie”, reflecting the fact that the parties had earlier identified suitable premises at that location.   Although, to Mr Mowlem’s knowledge, the application was made in Mr Keach’s personal name, he said  this  did  not  concern  him  because  no  company  had  at  that  stage  been incorporated and he understood Mr Keach to be making the application on behalf of such future entity.  Incorporation occurred three days later.  Mr Mowlem says that the fact each held 50 per cent of the shares in TFSL and were to be directors of the company reflected the parties’ agreement from the outset that the new business was to be a “50/50 venture”.

[10]     Contemporaneous  documentary  evidence  relating  to  the  detail  of  their business relationship and of the relationship of TFSL to Mr Keach’s existing company, MFL, is remarkably sparse.

[11]     Mr  Mowlem  says  it  was  his  understanding  the  new  business  would  be entitled to all of the usual income streams any other licensee might expect, including

manufacturer’s rebates.  He says that the only sums it was ever agreed MFL should

receive on account of TFSL’s trading operations were:

(a)      a sum of $2 per metre (later increased to $3 per metre), which he and Mr Keach subsequently agreed would be payable as a fee for MFL undertaking TFSL’s administration; and

(b)an additional sum of $10 per metre in relation to any stock TFSL purchased  from  MFL’s  warehouse  (by way of  a  return  on  MFL’s investment in relevant storage infrastructure).

[12]     Mr Keach has a very different take on what was agreed.  Indeed, he says that Mr Mowlem endeavours to “rewrite” how TFSL was set up and intended to operate. He says that from the outset it was “always intended” that either he or one of his companies would hold the Mt Wellington licence, that he formerly had a de facto licence in that area in which he had invested heavily and that there was no reason why he should part with that for no return.  He accepts, however, that he did promise Mr Mowlem that if ever the new business was sold he would “include the licence as part of the sale”.

[13]     He says further that the agreement between the parties was that TFSL would process all of its orders through MFL (which would provide all necessary administrative and  stock  management  support).    In  return  MFL got  to  keep  all rebates on product purchases.  He says this system operated for almost eight years without complaint by the plaintiff and it is only because product rebates have now spiked to abnormally high levels that Mr Mowlem endeavours to revisit longstanding commercial arrangements.

[14]     Although TFSL was incorporated in June 2005 it did not start trading in its Lunn Avenue premises until approximately February 2006.  There is some support for the proposition that, at least at the outset, it was intended that TFSL would have direct contractual relationships with the various carpet suppliers.  So, for example, the agenda for a directors’ meeting on 1 February 2006 records as a relevant item:

Set up accounts with all suppliers – Barry [Keach].

[15]     The minutes for the same meeting record:

Barry – to set up account with suppliers.

[16]     However, an email from Mr Mowlem to Mr Keach and another on 20 March

2006 notes:

We have sold some jobs that need processing today.  As agreed we will be a customer of Henderson until our accounts are set up with suppliers.

[17]    Whether intended initially to be a short term arrangement or otherwise, processing of orders through MFL became a long term feature of the company’s operations.    Only  in  2014  did  it  establish  direct  relationships  with  the  carpet suppliers.

[18]     As a result of these arrangements, when a retail customer placed an order with the Mt Wellington branch that branch in turn placed an order with MFL.   In some cases the order would be supplied from stock held in MFL’s warehouse (Mr Mowlem says approximately 15 per cent of purchases), but in the majority of cases orders were what is described in the trade as “cut length”, that is for a specific quantity of carpet, ordered off a sample, communicated to the manufacturer, and delivered  in  the appropriate length.    Cut  length  orders were likewise  processed through MFL with the result that MFL incurred the relevant contractual liability to suppliers and in turn billed TFSL which billed its retail client.  Mr Keach says that at times this involved MFL effectively bankrolling TFSL’s debtor’s ledger – a further service provided by MFL.

[19]     The rebates which feature prominently in this litigation were negotiated from time to time by CCNZ with various suppliers.  CCNZ operates a group purchasing scheme  under  which  its  former  licencees,  but  now  franchise  holders,  purchase product from approved suppliers and, in return, those suppliers pay rebates to CCNZ in respect of the product purchased.  The (now) franchisees in turn pay franchise fees (administration, marketing and royalty fees) to CCNZ on a quarterly basis.   Each quarter   CCNZ sends a reconciliation showing the franchise fees payable by the franchisee  and  the  rebates  received  by  CCNZ  and  in  turn  passed  on  to  the franchisees.  Predictably, if the rebates exceed the franchise fees the franchisor pays

the franchisee the net amount equal to the rebates less the franchise fees.   If the franchise fees exceed the rebates the franchisee pays the franchisor the net amount equal to the franchise fees less the rebates.

[20]     Mr Mowlem says that during the period in which MFL was responsible for TFSL’s  administration  he  understood  that  CCNZ’s  franchise  fees  exceeded  the rebates to which TFSL was entitled and that it was only the shortfall that was in turn on-charged  to  TFSL.    However,  at  a  very  much  later  date  (2012)  he  received informal advice from CCNZ that in fact the rebates on TFSL’s purchases were not being credited to TFSL.

[21]     At the same time he says he learned that the franchise for the Mt Wellington operation was not held by TFSL but by NOC.   He says that although the initial licence was applied for in Mr Keach’s personal name and that later (2006 or 2007) he agreed to a request by Mr Keach that it remain temporarily in Mr Keach’s name, (ostensibly to insulate Mr Mowlem from any downstream consequences of Mr Keach’s relationship property proceedings3), Mr Keach agreed that he would transfer the licence  into TFSL’s  name as  soon  as  such proceedings  were resolved.    Mr Mowlem  says  that  he  was  effectively  blindsided  by  the  2012  advice  that  such transfer had never occurred and that Mr Keach had in fact arranged for the licence

(later franchise) to be held, and subsequently renewed, in the name of NOC.  That remains  the  position  today  with  the  relief  sought  in  both  the  s 165  and  s 174 proceedings including orders that Mr Keach and/or NOC take all steps necessary to transfer the franchise agreement into TFSL’s name.

[22]     Although TFSL has now established direct relationships with suppliers, the rebates received by CCNZ continue to be paid to NOC as a result of it holding the relevant franchise agreement.  Discovery is yet to be given in the s 174 proceedings but Mr Mowlem estimates that, in total, approximately $257,000 of rebates properly payable to TFSL have been appropriated by that company.

[23]     In addition he says that, unknown to him, MFL processed, as if they were its own, orders originating with TFSL on which further rebates of at least $571,000

3      Albeit Mr Mowlem now acknowledges this makes little sense.

were payable.  In total therefore Mr Mowlem says TFSL has claims against the first to third defendants exceeding $800,000 plus interest.

[24]     Mr Keach, by contrast, says that such sums barely compensate MFL for the administrative, warehousing and numerous miscellaneous costs incurred by it.   In addition to bankrolling TFSL’s debtors, he claims that MFL is also entitled to credits for interest on average stock, reimbursement of credit card charges and a proportionate share of advertising costs and depreciation.   Mr Keach says that if leave is granted to commence derivative proceedings then any claim by TFSL for unpaid rebates will be met by an even greater counterclaim for these costs.

[25]     To that Mr Mowlem responds by saying that administration costs were the subject of contractual agreement and that no restitutionary claim can be advanced in that context.

TFSL’s intended cross-claim if leave granted

[26]     The draft cross-claim contains six causes of action, all of which rely on essentially the same facts.

[27]     The first cause of action alleges a breach of trust against Mr Keach.  It is said that at all times he held the relevant licence, and later the franchise agreement on express trust for TFSL and that such trust survived the later transfer to his wholly owned company NOC.  It is said that his duty as trustee included a requirement not to profit from the trusteeship without TFSL’s consent and this duty was breached by his actions in transferring the licence/franchise to NOC, retaining the benefit of rebates in NOC and appropriating, through MFL, rebates properly payable to TFSL.

[28]     The second cause of action alleges breach of fiduciary duties against Mr

Keach based on his obligations as a director of TFSL.

[29]     The third cause of action alleges a breach of constructive trust against NOC. Mr Mowlem pleads that NOC holds the franchise agreement as constructive trustee for TFSL based on the fact that it acquired the franchise agreement as a result of breaches of trust and fiduciary duty.

[30]     The fourth cause of action is in knowing receipt and is against NOC and MFL.  It is alleged that through Mr Keach, both companies had knowledge of Mr Keach’s breaches of trust and fiduciary duty and that as a result of those breaches they received rebates properly payable to TFSL.

[31]     In the fifth cause of action TFSL alleges that, in carrying out administration on TFSL’s behalf, MFL acted as TFSL’s agent and that it breached relevant duties by appropriating rebates properly payable to TFSL.

[32]     The sixth cause of action mirrors the fifth but is based on an alleged duty of care owed and breached by MFL.

Derivative applications

[33]     Section 165 of the Companies Act relevantly provides:

165     Derivative actions

(1)       Subject to subsection (3), 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),  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),  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.

[34]     The leading authority on application of the relevant tests is Vrij v Boyle, in which Fisher J said:4

Applying those criteria, the first requirement is that the Court have regard to “the likelihood of the proceeding succeeding”.   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.

[35]     In a subsequent case, Peters v Birnie, Asher J said:5

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 sub-section (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.

[36]     The matters appropriately considered under s 165(2) and (3) are mandatory but non-exclusive.

The likelihood of TFSL’s cross-claim succeeding

[37]     I approach this issue mindful of Fisher J’s caution that it is not appropriate to conduct  an  interim  trial  on  the merits  and  that the prudent  person  of  business, through whose lens the issue must be analysed, is not the holder of a crystal ball.

Routinely,  prudent  people  of  business  bring  proceedings  which  do  not,  for  one

4      Vrij v Boyle, above n 1, at 765.

5      Peters v Birnie HC Auckland CIV-2009-404-8119, 22 April 2010 at [29].

reason  or  another,  ultimately  succeed.    The  question  is  therefore  whether  the company has a sufficiently good and arguable case that having regard to the sums involved, the costs of prosecuting it, the likelihood of success of any counterclaim and the prospect of ultimately recovering a judgment, such a hypothetical prudent person of business would consider the claim properly brought.

[38]     I consider the intended claims satisfy that test.

[39]     At its heart this case is a contest of credibility. The unusually sparse nature of contemporaneous   documentation   at   the   time   of   formation   of   the   business relationship and during the early trading period places an even greater emphasis on this factor.

[40]     There  is  no  doubt  that  what  was  contemplated  was  a  joint  and  equal enterprise  reflected  in  the  exact  equality  of  shareholding  in  TFSL  and  the directorship arrangements.   The prospect that such an enterprise should be denied both the licence/franchise under which such a business would typically operate and one of the significant income streams to which such licencees/franchisees are typically entitled is unusual in that context.   Realistically, for Mr Keach and his companies to succeed in defence of the proposed claims they are likely to have to establish an agreement at the time of TFSL’s formation (or subsequently) that the Mt Wellington operation would effectively act as a sub-franchise, with no rebate entitlements.

[41]     That is not an untenable position but I agree with Mr Blanchard that there is sufficient evidence to the contrary that a prudent person of business would regard the claim as properly brought.  I summarise such evidence as follows:

(a)       At the outset (6 June 2005) Mr Keach described the proposed new

business as a “Stand alone Carpet Court”.

(b)He is said to have sighted and approved a proposal to ASB prepared by Mr Mowlem in which TFSL is described as a “partnership” of Messrs  Mowlem  and  Keach  and  “independent  of  Metro  Flooring

Ltd”.  I accept that such proposal also describes the business as “an extension of Barry Keach’s  flooring business” but in the context of the expressed “independence” a Court may conclude that such was simply  intended  to  provide  comfort  to  the  Bank  that  there  were systems and expertise available to the new business.

(c)      In 2007, after TFSL had been trading for approximately one year, it received a purchase offer from Lincoln Capital Partners (LCP) which was in the process of acquiring (ultimately successfully) sufficient Carpet Court businesses to convert it from a co-operative model into that of franchisor and franchisee.  The offer was $639,000.  Mr Keach made some calculations in order to assist Mr Mowlem in his assessment.  Such calculations had Mr Mowlem participating equally in the sale proceeds with no suggestion that any sum was payable by TFSL to  Mr  Keach  or  his  companies  for  transfer  of  the  relevant licence to LCP.  Because the implications in this respect are obvious Mr Keach says in his affidavit that while he insisted and it was agreed that NOC hold the franchise and that it receive the benefit of the rebates, nevertheless at the point a sale occurred the agreement was that the franchise would be transferred to the purchaser without cost. I agree with Mr Blanchard’s characterisation of such an arrangement as being on its face “contradictory”.

(d)On 8 October 2007 Mr Keach forwarded to Mr Mowlem an email that he had sent to the company’s accountant asking how TFSL compared with the “benchmarks” established by Carpet Court’s “top 10 stores”. It referred to a gross profit across such stores of 27 per cent and “rebates” of 2.2 per cent.   It then identified average overheads in various categories totalling 16.7 per cent (presumably of turnover). The email concluded “Comment please are we miles out???”. There was no suggestion in the email that an adjustment would be required in respect of rebates received by the benchmarking stores but unavailable to TFSL.

(e)      On  12  September  2008  CCNZ  emailed  Mr  Keach  a  draft  new franchise agreement.   It was immediately sent by Mr Keach to Mr Mowlem.  There was no suggestion on the part of Mr Keach that the proposed agreement was a matter which concerned him alone.

(f)      On 23 October Mr Mowlem emailed Mr Keach about the proposed new agreement.  One of the issues which he raised related to the level of rebates that TFSL would be entitled to under the agreement.   He also asked for confirmation that the TFSL “purchases rebate” had been “accumulating since February 2006” when the business started trading.  Although Mr Keach responded the same day to other issues in the email he did not comment either on historic or future rebates. Mr Blanchard submits that if the parties had indeed agreed that the franchise and rebates were to remain with Mr Keach or his companies then it is inevitable that Mr Mowlem’s email would have been met with a response reminding him of that arrangement. There is in my view some force in that submission.

(g)Having obtained information from the franchisor about the rebates payable to NOC/MFL, Mr Mowlem set out in writing his requirement that the franchise be transferred to TFSL and that it receive the benefit of all such rebates.   He did not receive any immediate “push back” from Mr Keach.  Indeed, for two quarters rebates were paid to TFSL although Mr Keach says such arrangements were premised on TFSL settling debts which it owed MFL and which it failed to do and thus

the arrangement was suspended.6    Predictably, Mr Mowlem suggests

that the debt was artificially inflated because of a failure by MFL to credit TFSL with rebates to which TFSL was entitled.

[42]     Mr Rice submits that in circumstances where it is undisputed that the product which TFSL purchased for its customers was (at least until 2014) in fact purchased

from  MFL  with  back  to  back  arrangements  between  MFL  and  the  carpet

6      The debt has since been repaid.  Mr Mowlem says this was the result of an unauthorised transfer undertaken by Mr Keach.

manufacturers, it is inevitable and predictable that the rebates should flow to MFL. However, there is no reason in principle why the agency arrangement pleaded in the draft statement of claim could not deliver rebates to TFSL despite the contractual arrangement which existed between MFL and suppliers.   Certainly such alleged inevitability and predictability could not in my view relieve Mr Keach from establishing the oral agreement on which he relies to say his interests were entitled to retention of the rebates.

[43]     Next Mr Rice says that the allegation of breach of trust against Mr Keach is misconceived because it is not possible to create a trust over property you hope to own in the future.  Further, at the point in June 2006 when the parties agreed to go into business, Mr Keach did not hold a licence for the Mt Wellington operation.

[44]    I agree with Mr Blanchard that there are two potential answers to this submission.  Mr Keach emphasises throughout his affidavit that, prior to the issue of the licence to NOC, he held a “de facto” licence in his own right for the same area. If that is the case it may constitute a sufficient property interest to be amendable to a declaration of trust.  More significantly, however, Mr Rice’s argument would not be an answer to a declaration of trust in 2006 or 2007 (as allegedly occurred when, with the consent of Mr Mowlem, Mr Keach said that his interests would hold the licence pending resolution of Mr Keach’s matrimonial affairs).  Mr Rice sensibly conceded that if such a declaration of trust was made at that time it is unlikely any court would be troubled in terms of remedy by the fact that the trust was declared by Mr Keach but related to property held by his company NOC.

[45]     Mr Rice further submits that the second cause of action (alleged breach of fiduciary duty by Mr Keach in his capacity as director of TFSL) cannot succeed because the corporate opportunity (to acquire the Carpet Court licence for Mt Wellington) never belonged to TFSL.  He says the opportunity arose solely through the efforts and investment of MFL long before TFSL existed and that TFSL paid nothing for it.  Indeed he says that if the licence had been transferred to TFSL Mr Keach would have been exposed to a valid claim by MFL that he had breached his fiduciary duties to that company.

[46]     There seem to me to be evidential problems with this argument.   In his affidavit Mr Keach says:

The licence  application  was  in  my name  because  I had  invested  in the Central East area over the past 15 years or so since MFL joined Carpet Court.  I held the de facto licence from Carpet Court to extend into the area.

[47]     Accordingly Mr Keach identifies the opportunity as one personal to him as opposed to one which reposed in MFL   That is confirmed by the fact that the application was made in his name and not MFL’s.  Moreover the subsequent transfer was not to MFL but NOC.

[48]     Nor am I persuaded by Mr Rice’s argument that directors ought not to be regarded as disloyal, even though they are pursuing interests other than their company’s, so long as they genuinely believe that the transaction is also in the company’s  best  interests.     This  submission  was  made  in  reliance  on  certain

observations in Professor Watts’ book Directors’ Powers and Duties.7   However, Mr

Blanchard points out that the observations occur in the context of a discussion about the position of group and related companies and submits care is necessary in terms of wider application.  In any event, Mr Keach may struggle to convince a Court that an arrangement whereby his own companies would retain the rebates was one he genuinely believed to be in TFSL’s best interests when there was never any contemporaneous analysis of what revenue stream might be foregone and how this compared with the reasonable costs of administration.

[49]     Next Mr Rice submits that no prudent business person would bring a claim in the name of TFSL when it will inevitably invite a counterclaim in respect of the many and varied services said to have been provided by MFL and uncompensated for  by the  $2  (subsequently $3)  and  $10  per  metre  fees  paid  by TFSL.    That counterclaim is currently calculated to be in the order of $800,000, coincidentally approximating what is said to be owed to TFSL by way of rebates retained by NOC

and MFL.

7      Peter Watts Directors’ Powers and Duties (LexisNexis, Wellington, 2009) at 6.4.2.

[50]     In response to this Mr Blanchard says that the parties agreed, and TFSL paid, a service fee on a per metre basis and that there is no room for a restitutionary remedy simply because it is now said such arrangements do not adequately compensate MFL for the services provided. As a statement of general principle such proposition is unarguable.  The ultimate outcome will, however, turn on the Court’s assessment of what was agreed at relevant times and, in particular, at the point in February/March 2006 when the direct arrangements with suppliers, which appear to have been previously contemplated, were substituted by an agreement that TFSL would be “a customer of Henderson” – this agreement having subsisted until 2014 despite having been expressed as applying only “until our accounts are set up with suppliers”.

[51]     Mr Blanchard also takes issue with the quantification of the counterclaim saying in many material respects it does not withstand basic scrutiny.  I agree with him that there are sufficient potential issues in this regard that it would not deter a prudent person of business from bringing a claim in TFSL’s name.  This is especially so given the conceptual difficulties which the counterclaim will face if a Court concludes that the only agreed remuneration MFL would receive for administrative services was the per metre charges.

Other mandatory considerations

[52]     In terms of the other mandatory considerations in s 165(2) and jurisdictional requirements in s 165(3) I make the following comments:

(a)      In respect of the costs of the proceedings in relation to the relief likely to be obtained (s 165(2)(b)) Mr Mowlem undertakes to the Court not only to meet TFSL’s actual solicitor client costs in the prosecution of the claim but any adverse costs award made against TFSL on final disposition  of  the  proceedings.    Such  undertaking  was  made  by counsel on behalf of his client and confirmed directly to me by Mr Mowlem.  I record it accordingly.  In the event TFSL is successful in any claim it retains its entitlement to seek costs.

(b)The  issues  raised  in  the  proposed  proceedings  are,  in  any  event, unlikely  to  be  materially  different  from  those  raised  in  the  s 174 proceedings to which TFSL is already a party.  In the context of the relief sought in those proceedings it is inevitable that they will need to address   the   same   questions   regarding   what   was   agreed   as compensation for the provision of services by MFL and the same arguments  that  underpin  the  proposed  counterclaim.     Mr  Rice accepted as much.   Discovery and witness briefs are likely to chart similarly parallel paths.   Whether therefore the focus is on TFSL’s costs  as  s 165(2)(b)  requires  or  the  proposed  defendants’  costs (something which although not mandatory may be taken into account by me) the commonality of issues favours a grant of leave.

(c)      No action has, or is likely to be taken by the company absent a grant of leave (s 165(2)(c)).  This is the inevitable consequence of the fact that both Mr Mowlem and Mr Keach are directors of TFSL and that both  hold  equivalent  shareholdings.    For  the  same  reason  I  am satisfied that the requirements of s 165(2)(d) are met.

(d)In respect of the interests of TFSL in commencing the proceedings (s 165(2)(d))  I consider  the case broadly equivalent  to  Greymouth Holdings Ltd in terms of the potential to reap significant benefits to TFSL with (by virtue of the undertakings recorded) no exposure to  it in costs.8

Other considerations

[53]     Mr Rice submits that because of Mr Keach’s commitment to transfer the licence to any purchaser of the business without consideration the Court should not lend its support to proceedings with no or limited ultimate benefit.  But there is no immediate timetable for disposition of the business and, in the interim, the franchisor considers itself obliged to make all rebate payments to NOC which has made it clear

that it intends to retain them for its own benefit.  TFSL should be entitled to make

8      Greymouth Holdings Ltd v Jet Trustees Ltd, above n 3.

out its claim to such payments and to seek recovery for the moneys which it alleges have been prior appropriated.

[54]     Finally, Mr Rice submits that derivative proceedings have the capacity to destabilise  the  franchise.    I  do  not  consider  this  a  sufficiently  material  risk  to influence my discretion.  The franchisor appears to be fully appraised of the parties’ dispute.   Indeed, it appears to have provided Mr Mowlem with the information which proved the catalyst for his claims.  Almost inevitably it will be aware of the existing s 174 proceedings.  In this case a grant of leave under s 165 does little more than ensure that the Court has at its disposal a complete range of options in terms of ultimate relief.   It is unlikely in my view to be seen by the franchisor as adding materially to the dispute of which it is already aware.

Result

[55]     I grant leave to Mr Mowlem to bring proceedings in the name of TFSL

against Mr Keach, NOC and MFL.

[56]     Such proceedings are to be in the form of the statement of claim annexed to the application (with rights reserved subsequently to amend as appropriate).

Costs

[57]     I allow costs to the plaintiff on a 2B basis against the first to third defendants (jointly and severally).  In the unlikely event these cannot be settled by agreement, memoranda may be filed (maximum three pages).   They are to be exchanged in

advance so as to limit areas of difference.

Muir J