Murphy v Crisp
[2017] NZHC 615
•28 March 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2017-404-55 [2017] NZHC 615
UNDER the Companies Act 1993 BETWEEN
JOHN PATRICK MURPHY Applicant
AND
COLIN HAMILTON CRISP First Respondent
DAWNHAVEN LIMITED Second Respondent
Hearing: 28 March 2017 Appearances:
D B Beard for Applicant
L T Meys for RespondentsJudgment:
28 March 2017
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Legal Street Ltd (D B Beard), Auckland, for Applicant
Neilsons Lawyers (E Telle/L T Meys), Onehunga, Auckland, for Respondents
MURPHY v CRISP [2017] NZHC 615 [28 March 2017]
[1] Mr Murphy applies under s 165 of the Companies Act 1993 for leave to begin derivative proceedings in the name of Dawnhaven Ltd for two purposes:
[a] to apply for pre-commencement discovery in a proceeding in the
District Court under CIV-2016-004-1587; and
[b] to recover some of the money paid to Mr Crisp on a settlement in a
proceeding which I will refer to as the “Digitech” proceeding.
[2] Mr Murphy is a minority shareholder of Dawnhaven Ltd. Mr Crisp is the majority shareholder. There are 1,000 shares in the company. Mr Crisp holds 667 shares, Mr Murphy holds 333 shares. Both Mr Crisp and Mr Murphy are directors of the company. Because he has majority voting power, Mr Crisp could have Mr Murphy removed as director but Mr Crisp has so far not taken that step. Mr Murphy wishes to bring derivative proceedings in the name of Dawnhaven Ltd to obtain redress against Mr Crisp.
[3] Dawnhaven Ltd was incorporated as a vehicle through which Mr Murphy and Mr Crisp could invest in a scheme called Digitech. The scheme was very complicated. Kós J described it in his costs decision in N-Tech Ltd v A Booth Ltd.1
Dawnhaven Ltd was a loss attributed qualifying company - an LAQC. As Kós J noted in his decision,2 LAQCs had two advantages: their net tax position was transferrable to their shareholders, while their liability as an investor was non- transferrable.3 Mr Crisp and Mr Murphy had other LAQCs through which they made investments in Digitech. Mr Crisp’s was Crismac Ltd and Mr Murphy’s was Murmac Ltd.
[4] The Digitech scheme failed. The Serious Fraud Office prosecuted the promoters. The prosecutions failed. The promoters sued the investors for failure to
make all the payments required to complete purchases of shares in the scheme. The
1 N-Tech Ltd v A Booth Ltd [2012] NZHC 1167.
2 At [12].
3 Footnote 3 of the decision.
case went to hearing in 2011 but was discontinued on the eleventh day. In his costs decision, Kós J awarded the defendants $774,157.00 plus disbursements. He made it clear that the costs ordered were not to exceed actual costs.4 The costs decision was against the plaintiffs and in favour of one group of defendants. They were referred to in the decision as the Grove Darlow defendants. There were apparently about 60 of them altogether. Dawnhaven Ltd was one of the Grove Darlow defendants.
[5] Mr Crisp took an active part in the defence of the claim. The Grove Darlow defendants formed a committee to assist in the conduct of the defence. Mr Crisp was one of the members of the committee. By agreement of the other defendants he was paid $10,000 for his services - as was Mr Sullivan, the other member of the committee. Mr Murphy on the other hand did not take an active part in the defence of the claim.
[6] Following the costs decision of Kós J, a payment was made to the defendants. The amount allocated to Dawnhaven Ltd was $121,941.24. While Grove Darlow acted for the defendants, the money sum was paid into the trust account of another law firm, Foley & Hughes. A partner of that firm, Mr Foley, has sworn an affidavit exhibiting certain trust account records.
[7] The background to Foley & Hughes receiving the payment is apparently that by this stage Mr Murphy and Mr Crisp had fallen out. Grove Darlow was seen as partisan as being aligned to Mr Crisp’s interests. Foley & Hughes was independent. Mr Foley says that on the payment of $121,941.24 received after the Digitech proceedings, there were payments to Mr Crisp in repayment of his advances made for the Digitech proceeding. Mr Foley says that after Mr Crisp was repaid those sums, there was a balance of $27,115.21. The money was held on interest-earning deposit in Foley & Hughes’s trust account. The firm declined to pay that money out given that there was a disagreement between Mr Murphy and Mr Crisp as to how the funds should be applied. Eventually, Mr Crisp gave Foley & Hughes an indemnity, and Foley & Hughes paid out the entire sum to Mr Crisp. Foley & Hughes had
wanted to see whether Mr Murphy would make any claim to the funds. As no
4 Above n 1 at [166].
proceedings had been filed, they considered it safe to pay the money out against M Crisp’s indemnity. The payment appears to have been made in March 2014. After a deduction for Foley & Hughes’ fee, the balance paid out was $27,071.97.
[8] There is an issue as to the propriety of paying that entire sum to Mr Crisp. It seems arguable for Mr Murphy that this was a sum held by the company after Mr Crisp had been reimbursed for the expenditure he had incurred in funding the litigation. That $27,000 was arguably a return to the company which could be distributed to shareholders as dividend. If it could be distributed as dividend to shareholders, it had to be distributed pro rata according to shareholding, as required under s 53 of the Companies Act 1993. There is no suggestion that anything under the Companies Act or the constitution of the company would allow a departure from the normal requirement for a pro rata distribution. On that basis, it seems that Mr Murphy may have a case that $9,000 odd ought to be paid to him from Dawnhaven Ltd.
[9] Mr Murphy has a more extravagant view of his entitlements. He is suspicious that there are greater sums that might be available. Having regard to the evidence, I regard that aspect of his case as speculative only. I take into account that Mr Foley has attached to his affidavit copies of trust account records. Mr Foley was acting independently of both Mr Murphy and Mr Crisp. His firm was chosen as an independent stakeholder. I see no reason to be suspicious of the information provided in his affidavit. Mr Murphy may have at best an arguable case that he was short-changed when he did not receive any of the payment of the $27,000 held to the account of Dawnhaven Ltd by Foley & Hughes.
[10] Legally, there may be two ways by which Mr Murphy could pursue that matter. He may have a cause of action in his own name directly against Mr Crisp for receiving a payment which ought to have been paid to Mr Murphy. That would be a claim in quasi contract. To the extent that Mr Murphy has a direct cause of action against Mr Crisp, he does not need to bring a derivative proceeding under s 165 of the Companies Act.
[11] There is another way by which he may bring a claim. The claim would be that the payment by Foley & Hughes on behalf of Dawnhaven Ltd to Mr Crisp was an over-payment by the company to Mr Crisp and, to the extent that Mr Crisp has been overpaid, the company is entitled to recover the money back so that it can make a lawful distribution to Mr Murphy. Down that route, the proper plaintiff is the company, Dawnhaven Ltd. To be able to use the company route, Mr Murphy needs leave under s 165 of the Companies Act to bring a derivative proceeding.
[12] Mr Murphy has begun a proceeding in the District Court under CIV-2016-
004-1587. In it he has sought orders for pre-commencement discovery against a range of defendants, not only Mr Crisp but also the lawyers involved in the pleading: Mr Dale, barrister, who conducted the defence, Grove Darlow, and Foley & Hughes. In bringing that application, he sues not only in his own name but also uses the name of Dawnhaven Ltd as applicant. The application is made under r 8.20 of the District Court Rules 2014 which appears to correspond to r 8.20 of the High Court Rules. Apparently the point was taken in the District Court that Mr Murphy did not have the authority of Dawnhaven Ltd to bring the application in its name. Clearly, both directors would need to authorise the proceeding. Obviously Mr Crisp, as co- director, did not consent. That has resulted in the present application.
[13] Section 165 of the Companies Act 1993 says:
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.
(4) Notice of the application must be served on the company or related company.
(5) The company or related company—
(a) may appear and be heard; and
(b) must inform the court, whether or not it intends to bring, continue, defend, or discontinue the proceedings, as the case may be.
(6) Except as provided in this section, a shareholder is not entitled to bring or intervene in any proceedings in the name of, or on behalf of, a company or a related company.
[14] Mr Murphy may have a proper basis for suing for his share of the $27,000 paid out by Foley & Hughes. In saying that, I recognise that Mr Crisp may also have defences to that claim. Mr Meys suggested that the status of Dawnhaven Ltd as an LAQC may have some bearing on the matter. Mr Crisp may be able to show that he made further payments to the company for which he is entitled to be reimbursed, although he would obviously need to produce accounting records to justify that.
[15] At present I regard Mr Murphy and the company as having an arguable case for the $9,000 – a one-third share of $27,000. Clearly, Dawnhaven Ltd is unable to bring such a claim because of Mr Crisp’s control of the company through his directorship and through his majority shareholding. Mr Murphy does not have the
right as a director to bring a claim in the name of the company without the co- operation of Mr Crisp. That co-operation will obviously not be forthcoming.
[16] The leading decision under s 165 is Vrij v Boyle.5 There, Fisher J recognised that the court has a wide discretion. While regard is had to the matters in s 165(2), the discretion is not limited to them. Fisher J noted that the court does not conduct a “mini” trial. He considered that the appropriate test is whether a prudent business person in the conduct of his or her own affairs might decide to bring a claim. As to that, the amount at stake, the strength of the claim, the likely costs and the prospect of executing any judgment, are considered.
[17] I do not regard Dawnhaven as realistically having a claim which would exceed any amount within the jurisdiction of the Disputes Tribunal. The Tribunal has jurisdiction for claims up to $15,000 in contract and quasi contract.6 Any claim by Mr Murphy either in his own right or derivatively through Dawnhaven Ltd would be in quasi contract. Once it is appreciated that Mr Murphy’s claim can conveniently be brought in the Disputes Tribunal, any difficulties fall away. Costs do not become
an issue because the parties cannot appear in the Tribunal through lawyers but must represent themselves. There seems to be an arguable case. Dawnhaven Ltd has not taken any steps because it has been under the effective control of Mr Crisp throughout. On the exercise of the discretion under s 165 there is a proper basis for granting leave to Mr Murphy to bring a claim in the name of Dawnhaven Ltd in the Disputes Tribunal for a one-third share of the $27,000 paid to Mr Crisp in March
2014.
[18] I see no reason to grant leave for Mr Murphy to bring a claim in any other court for any greater sum than his share of the $27,000. The suggestion that there may be claims for greater sums is speculative. I see no sound basis for it. In other words, I do not grant leave for him to bring any proceeding in the District Court or this court in respect of the payments made from the trust account of Foley & Hughes
or to any other share of the settlement proceeds of the Digitech proceedings.
5 Vrij v Boyle [1995] 3 NZLR 763 (HC).
6 Disputes Tribunal Act 1988, s 10.
[19] Once the matter is confined to the Disputes Tribunal, the question of discovery falls away. Discovery is not ordered in the Disputes Tribunal. To a large extent the matter ought to regulate itself. If Mr Crisp is to show that he was entitled to be paid the $27,000 in full, he will need to provide the documents to show his entitlement. It does not appear that Mr Murphy needs pre-commencement discovery. Instead, the burden will be on Mr Crisp to make out any affirmative defence.
[20] There are some other aspects to this case.
[21] At the outset, Mr Beard appeared, but sought an adjournment. He indicated that further time was required to deal with this matter because he had only been instructed the day before. I was keen to proceed with the matter. The proceeding in the District Court has been held in abeyance, awaiting the decision of this court. If there were any adjournment, this court might not be able to deal with the matter for another two months. That delay would be unacceptable. This is a relatively confined matter which does need a prompt disposal. I therefore indicated I would go ahead with the hearing.
[22] The other aspect is that the opposition to Mr Murphy’s application devoted part of its efforts to showing that Mr Murphy is a trouble-maker. It also referred to abusive correspondence by Mr Murphy. Those aspects cannot prevail over Mr Murphy’s rights to have a genuine case heard in court or a tribunal. As there seems to be something in his case that he has not received his share of the company’s receipts from the litigation, he is entitled to have that matter tested in a tribunal with appropriate jurisdiction. While he has not helped his cause through his abusive correspondence, by making trouble and making vexatious complaints about the lawyers involved in this case, that does not mean that he should be denied the right to have his claim heard in the Disputes Tribunal.
[23] In summary, I grant leave to Mr Murphy to bring a claim in the Disputes Tribunal in the name of Dawnhaven Ltd against Mr Crisp for any overpayment to Mr Crisp of the proceeds of the settlement of the Digitech litigation. That claim is
not to exceed the jurisdiction of the Disputes Tribunal under s 10 of the Disputes
Tribunals Act 1988.
[24] I do not grant leave to Mr Murphy to bring any claim in the name of Dawnhaven Ltd in the District Court or in this court in respect of the Digitech proceedings.
[25] I dismiss the application for leave to apply for pre-commencement discovery in the name of Dawnhaven Ltd.
[26] These orders do not stand in the way of Mr Murphy bringing any claim in his own name without bringing any derivative proceeding in the name of Dawnhaven Ltd.
[27] I order that under s 166 of the Companies Act any costs incurred by Dawnhaven Ltd in bringing the proceeding authorised by this decision are to be borne by Mr Murphy alone.
[28] Mr Meys has advised that sometimes referees in the Disputes Tribunal transfer cases to the District Court, for example, because of complexity. Any such decision is for the Disputes Tribunal. It is not for me to indicate how the Disputes Tribunal referee should exercise his or her powers. Nothing I say in this decision is intended to limit the powers of a Disputes Tribunal referee to transfer this proceeding to the District Court if the referee so thinks fit.
[29] Mr Meys seeks costs for the respondents on the basis that Mr Murphy has not obtained leave under s 165 to bring a proceeding for pre-commencement discovery and has not obtained leave to bring a proceeding in the District Court for sums in the order of $150,000 which Mr Murphy intended.
[30] On the other hand, this has not been a whitewash for the respondents. Their opposition has not been effective in its tactics of attacking Mr Murphy’s character and claiming an absence of merit. Mr Murphy has not helped himself by not using a lawyer at an early stage of the proceeding. If Mr Murphy had engaged a lawyer
earlier he could have brought his proceedings more efficiently. Overall, I decline to make any order for costs. The parties have had divided success. Mr Murphy has got much less than he wanted but the respondents have not succeeded as fully as they would have wished. There is no order for costs in this proceeding.
……………………………….
Associate Judge R M Bell