NZ Vee Eight Entrants Group Association Limited v Petch

[2012] NZHC 2350

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-000740 [2012] NZHC 2350

BETWEEN  NZ VEE EIGHT ENTRANTS GROUP ASSOCIATION LIMITED

Plaintiff

ANDMARK JAMES WAYNE PETCH First Defendant

ANDGARRY ALLAN PEDERSEN Second Defendant

ANDWAYNE ANDERSON Third Defendant

ANDCHRISTOPHER JOHN ABBOT Fourth Defendant

ANDJOHN DONALD MCINTYRE Fifth Defendant

Hearing:         3 September 2012

Counsel:         T Cooley and L Van for Plaintiff

J Miles QC and S Trafford for Defendants

Judgment:      13 September 2012

JUDGMENT OF WOOLFORD J

This judgment was delivered by me on Thursday, 13 September 2012 at 12:30 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Kensington Swan, Barristers and Solicitors, Auckland. J G Miles QC, Auckland.

S Trafford, Barrister, Auckland.

NZ VEE EIGHT ENTRANTS GROUP ASSOCIATION LIMITED V PETCH HC AK CIV-2012-404-000740 [13

September 2012]

Introduction

[1]      This proceeding is set down for a ten day hearing in the High Court at Auckland commencing on 1 July 2013.  There are three interlocutory applications currently before the Court for determination.

[2]      The plaintiff, NZ Vee Eight Entrants Group Association Limited (VEEGA), applies  for  an  order  joining  V8  Supertourers  Limited  (V8  Supertourers)  as  a defendant to the proceeding with related orders as to service of documents, the filing of a statement of defence and the completion of discovery.  The defendants apply for an order that the plaintiff pay the sum of $75,000.00 into Court as security for costs. The defendants also apply to stay the proceedings pending full and complete disclosure by the plaintiff to the Court and the defendants of all its litigation funding agreements, including the identity of parties to those agreements.

Background

[3]      VEEGA is  a  company  that  was  formed  to  coordinate  and  represent  the interests   of   the   entrants   in   the   Motorsport   New   Zealand   (MSNZ)   NZV8

Championship – the V8 touring car racing series organised and promoted by MSNZ and its 60% subsidiary, Motorsport Promotions Limited (formerly the Motorsport Company Limited (TMC)).  The first to fifth defendants were at all material times directors of VEEGA.   The first, second, third and fifth defendants are also share- holders of VEEGA in a personal capacity or through associated entities.

[4]      In 2008, VEEGA and TMC entered a joint venture agreement under which VEEGA’s wholly owned subsidiary, New Zealand V8’s Limited (NZV8’s), would retain and manage the commercial rights to NZV8’s touring cars and TMC would provide  NZV8’s  with  organisational  and  promotional  services  in  relation  to  the MSNZ championships.

[5]      Between 2008 and March 2010, a number of shareholders of VEEGA began to discuss the development of a new car to compete in the MSNZ NZV8 championships.  This was colloquially called “the car of tomorrow” (COT).  VEEGA

alleges that it was intended that the new car would be available to all shareholders of VEEGA and that it would modernise the racing fleet over a period of years in a manner that would be affordable to all participating teams.  VEEGA alleges that it was also anticipated that the new car would make the MSNZ championship more marketable and thereby provide benefits for the shareholders of VEEGA.

[6]      VEEGA delegated the task of developing the COT to a technical committee of  VEEGA comprising  the  first,  second  and  third  defendants.    The  COT  was discussed  at  a  meeting  of  VEEGA shareholders  on  19  March  2010.    Because VEEGA was not in a position to fund the construction of a prototype, it was agreed that a group of investors (comprising a number of VEEGA shareholders) would fund the COT’s prototype but that the process would be managed by the COT committee. It was agreed that the prototype itself would belong to the group of investors in proportion to their investments.  The plaintiffs allege, although it was agreed that the prototype itself would belong to the group of investors, the intellectual and commercial  rights  associated  with  the COT design  would  be  for the  benefit  of VEEGA.   This is disputed by the defendants who say that such an arrangement would  be  illogical.    They  allege  that  was  not  the  intention  of  the  investors  or VEEGA.  The shareholders of VEEGA agreed at the meeting on 19 March 2010, in principle, to endorse the COT project subject to costing.

[7]      Deeds  were  signed  between  individual  investors  and  VEEGA  in  which VEEGA agreed to be the investor’s agent on the basis that the developer of the prototype wanted to deal with one entity rather than a number of different investors. Shortly thereafter funds were deposited to VEEGA’s account by those shareholders who agreed to fund the COT project.  The COT committee attended to design and development of the COT from April 2010 onwards.

[8]      The joint venture agreement between VEEGA and TMC was terminated in mid-2010 by TMC as a result of a shareholder’s dispute.  Following termination of the joint venture agreement, VEEGA entered into a category agreement with TMC under which was agreed inter alia that TMC would pay to VEEGA a category payment of $100,000.00 plus GST per MSNZ championship season based on a minimum number of competitors per event and that VEEGA would have the rights to

sell sponsorship deals on the competing vehicles and to retain any income resulting from the sponsorship.

[9]      The first, second and third defendants incorporated V8 Supertourers on 16

September 2010 and were appointed directors and shareholders of the company.  The first, second and third defendants held dual directorships in VEEGA until, at least, February 2011.  The fourth and fifth defendants resigned from their positions with VEEGA in February and March 2011 and were subsequently appointed as directors of V8 Supertourers in May 2011.

[10]     On 30 October 2010, the directors of VEEGA (including the defendants) held a  meeting  where  it  was  resolved  that  “with  immediate  effect  V8  Supertourers Limited would take over everything to do with COT project, including the COT account”.  The effect of this was to transfer the COT project (including the design and  intellectual  property),  to  V8  Supertourers.    The  transfer  was  reported  to VEEGA’s shareholders in March 2011.  Subsequent to the transfer, V8 Supertourers set up a race series in competition with the MSNZ championship allegedly utilising the specifications and designs for the COT.

[11]     In summary, VEEGA’s position in the substantive proceeding is that:

(a)      The  COT  design  and  intellectual  property  was  developed  for  the benefit of VEEGA and its shareholders;

(b)The shareholders of VEEGA agreed to fund the development of the COT project for the benefit of VEEGA on the basis that while the prototype would belong to the group of investors, the design  and intellectual property would remain the property of VEEGA;

(c)       The directors have breached statutory and fiduciary duties owed to

VEEGA in that;

(i)They were in a position of conflict as a result of their dual directorships in VEEGA and V8 Supertourers (which were not disclosed);

(ii)They breached their statutory and fiduciary duties to VEEGA and as a result misappropriated the property of VEEGA by transferring the COT design to V8 Supertourers; and

(iii)V8 Supertourers received the COT design with actual or constructive knowledge that the defendants had breached their statutory and fiduciary duties to VEEGA.

Application for joinder

[12]     Although the defendants initially filed a notice of opposition to VEEGA’s application  for  joinder  of V8  Supertours  as  a  sixth  defendant,  they  have  since advised the Court that they do not oppose the joining of V8 Supertourers. Accordingly, there will be an order joining V8 Supertourers as the sixth defendant to the proceeding and that V8 Supertourers be served with the following documents within 5 working days of the date of this judgment:

(a)       Notice of proceeding;

(b)      Amended statement of claim;

(c)       Plaintiff’s and defendant’s affidavit of documents;

(d)      Statement of defence; and

(e)       Statement of reply. [13] I also direct that:

(a)      V8 Supertourers file and serve a statement of defence to the amended statement of claim within 10 working days of the service of the documents on them;

(b)The first to fifth defendants file an amended statement of defence to the amended statement of claim within 10 working days of the date of service of the documents on V8 Supertourers;

(c)      V8 Supertourers complete discovery and provide a sworn list of documents together with electronic copies of its discoverable documents within 30 working days of the service of the documents on it.

Security for costs

[14]     The defendants apply for security of costs.  The legal principles relating to an application for security of costs under r 5.45 of the High Court Rules are well settled. The initial key question is whether there is reason to believe that VEEGA will be unable to pay the costs of defendants if it is unsuccessful in the proceeding.  The answer to that question is provided by VEEGA itself.

[15]     In an affidavit sworn on 19 July 2012, Martin Fine, a director of the firm of accountants that acts for VEEGA, states:

11.       ...VEEGA accepts that  its current statement  of  financial  position might, on its face, suggest that it will be unable to meet an adverse costs award as its position as deteriorated (and in fact shows that it has derived no income at all).

[16]     Mr Fine makes two points however.  First, VEEGA’s subsidiary, NZV8’s, is in a positive equity situation which obviously has a bearing on VEEGA’s financial position.  Secondly, it is Mr Fine’s belief that the deterioration of VEEGA’s financial position (and that of NZV8’s) has been caused by the defendants’ actions in relation to the COT and its related intellectual property.

[17]     As to the financial position of NZV8’s, the draft financial statements for NZV8’s for the year ended 31 March 2012 shows equity of $223,749.00.  However, the statement of financial position notes advances to VEEGA of $128,222.00, which may well not be able to be recovered given the deterioration in VEEGA’s financial position. I also note that if a costs award was made in favour of the defendants against VEEGA, then NZV8’s would not be obliged to come to VEEGA’s assistance or pay the costs award itself as it is not a party to the proceeding.

[18]     As to Mr Fine’s view that the deterioration of VEEGA’s financial position (and that of NZV8’s) has been caused by the defendants’ actions in relation to the COT and its related intellectual property, it seems to me that the reason why VEEGA did not earn any income at all in the year ended 31 March 2012 was that it failed to field enough cars in terms of the category agreement with TMC.   The category agreement provided that if VEEGA procured 14 or more entries for a round, TMC would pay VEEGA $14,286.00 plus GST for that round.  If VEEGA procured 18 or more entries for every round, VEEGA was to receive $100,000.00 plus GST for the entire MSNZ championship.   VEEGA’s failure to field enough cars seems to be attributable to the setting up of the new racing series by V8 Supertourers, which, of itself, would not substantiate an actionable claim against the defendants.  However, VEEGA submits that the transfer of the COT intellectual property can be seen as a major contributing factor to the success of the V8 Supertourers series.  On the other hand, the first defendant, Mark Petch, deposes that the success of the new series was inevitable given the poor promotion and management of the old series.  He disputes that any of VEEGA’s woes are due to the transfer of the COT intellectual property to V8 Supertourers.

[19]     Having established the threshold for an order for security of costs, the next question is what factors should be taken into account in the circumstances of this case  by  the  Court  in  exercising  its  discretion  to  order  security  of  costs  under r 5.45(2).  This discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[20]     VEEGA opposes the application for security of costs on the grounds that:

(a)       VEEGA has a strong claim against the defendants for breach of duty;

(b)An order for security may prevent VEEGA from proceeding with its claim against the defendants; and

(c)       VEEGA’s  financial  position  has  deteriorated  as  a  result  of  the

defendants’ actions.

[21]     As to the strength of the claim, counsel for VEEGA took me through the amended statement of claim and the relevant documentation which supported VEEGA’s case that the COT intellectual property belongs to it.  Having reviewed the documentation,  I  have  formed  the  impression  that  VEEGA’s  case  cannot  be described as wholly without merit.   There appears to be an arguable basis for the claim.  However, the defence also appears to me to be legitimate and credible.  I am unable in the context of an interlocutory application to make a more detailed assessment of the merits of the claim.

[22]     As to the issue of whether or not an order for security of costs may prevent VEEGA proceeding with its claim against the defendants, I note that VEEGA has thus far received funding from some of its shareholders and from other parties to enable it to bring the claim.  In his affidavit sworn 19 July 2012, Mr Fine states:

23.There are a number of shareholders of VEEGA who want to ensure that the losses suffered by VEEGA are recovered.  In addition to the pecuniary losses, there are a number of supporters who feel strongly about the events that have occurred as they have directly impacted on the sport in New Zealand.

24.As  a  result  of  the  strong  sentiment  within  the  shareholders  at VEEGA, a number of them have agreed to provide funding to VEEGA (by way of shareholder advances) for the litigation.   In addition to shareholder support however, a number of other parties have also pledged financial support so that the proceeding can be brought.  This support has occurred by way of advances to VEEGA which the directors have agreed to receive as loans which they will repay over time.

25.The funding arrangements referred to above have only been recently implemented.  Accordingly, they are not reflected in the most recent draft accounts for VEEGA.

[23]     This is amplified in an affidavit sworn on 30 August 2012 by Mr Michael

Ross, a director of VEEGA.  He states:

5.        I confirm that funding has been provided to VEEGA by a group of

its shareholders and NZV8’s Limited (its subsidiary).

6.The  identity  of  those  shareholders  and  the  amount  they  have advanced are confidential to the plaintiff.  If required by the Court, VEEGA is in a position to provide this information to the Court on a confidential basis.

7.The funds have been advanced to VEEGA as interest free loans repayable on demand.  I confirm there are no arrangements in place for VEEGA shareholders and/or NZV8 to benefit from the litigation. The Board of VEEGA continues to control the litigation, and there has  been  no  assignment   of  the   plaintiff’s  claim  against  the defendants to the funders.

8.With regard to the defendants’ application for security for costs, if the Court is inclined to make an order for security then more likely than not VEEGA will not be able to satisfy that order by way of a payment of monies into Court.

9.In the circumstances, VEEGA’s preference would be for security to be provided in the form of a bond which it intends to procure from CBL Insurance  Limited,  a  company  which  is  a  well  established provider of credit surety in New Zealand.

[24]     Because VEEGA has received funding from third parties to pursue its claim, I do not give much weight to its submission that an order for security of costs may prevent  it  from  proceeding with  its  claim  against  the defendants.   VEEGA has refused to disclose the agreements with the litigation funders but neither Mr Fine nor Mr Ross depose that they cannot continue to fund the litigation.   In fact, Mr Fine refers  to  the  “strong  sentiment”  of  the  funders.    Where  litigation  funders  are involved,  I am  of  the  view  that  a  Court  should  also  have  consideration  to  the difficulty in pursuing a third party for costs in the event that VEEGA is unable to pay.

[25]     Finally, as to VEEGA’s submission that its financial position has deteriorated as a result of the defendants’ actions, I noted above the rival contentions regarding the lack of any income at all from appearance fees.  The defendants also submit that at a broad level, VEEGA was, and has never been, a commercial trading entity.  Its purpose was to represent entrants in discussions and negotiations with MSNZ and TMC regarding the MSNZ V8 championship.  It was never intended to retain a profit

margin  from  appearance fees  and  sponsorship  monies  beyond  prudent  levels  of reserves to meet its minor overheads.

[26]     Additionally, the defendants submit that appearance fees cannot be relied upon by the plaintiff as income otherwise available to it to meet a costs award were it not for the defendants’ conduct because they were never intended to be retained by VEEGA.   One of VEEGA’s objectives was to distribute the benefits, bonuses and other payments due and payable to team owners from participation in the series. Appearance fees were earned by (and paid out to) the entrants who appeared in the races.  The appearance payments due from TMC were earned by and intended for entrants; VEEGA was merely to the conduit to pay them.  Thus, if entrants do not enter races, VEEGA does not earn an appearance fee, but nor is it expected to pay that fee out to the entrant.

[27]     Finally, the defendants submit that the defections from VEEGA were as a result  of the poor management  by TMC  of the V8 championship  series,  which VEEGA depended  upon.    They submit  that  part  of  this  poor  management  was VEEGA’s decision to retain the existing car.

[28]     Although  counsel  for  VEEGA  submits  that  VEEGA  had  other  revenue streams, and was not just there to receive appearance fees, I am of the view that it cannot be considered a normal commercial entity.   It was formed to represent the owners of the V8 touring cars which competed in the MSNZ V8 national championship.   Four of the five defendants remain shareholders of VEEGA in a personal capacity or through associated entities.   In his affidavit of 19 July 2012, Mr Fine attaches a list of shareholders of VEEGA.  It lists 30 shareholders of which

18 are listed as either non-active or who, it is said, have “defected and signed up

with the defendants’ competing series”.

[29]     In all the circumstances, I am not satisfied that VEEGA’s impecuniosity is as a direct and inevitable result of any breaches of statutory or fiduciary duty duties on the part of the defendants.

[30]     Weighing all these factors in the balance, I am of the view that security of costs should be ordered on the basis that there is reason to believe that VEEGA will be unable to pay the costs of the defendants if it is unsuccessful in its claim.

[31]     As to the amount of costs, the defendants seek security for $75,000.00, which they estimate to be the costs associated with a 10 day trial next year, including 20 days preparation.  It is my view that an appropriate level of costs to be secured is, however, $50,000.00. This takes into account the real possibility that the trial will be somewhat shorter than 10 days, as well as my assessment of the merits of the claim and the defence of the claim as best as I am able to within the confines of an interlocutory application.

Application for stay of proceedings

[32]     The defendants also apply for a stay of proceedings on the basis that VEEGA has not obtained the Court’s approval of its funding arrangements and it has refused to provide full disclosure of those arrangements to the defendants.

[33]     As recently identified by the Court of Appeal in Saunders v Houghton,1  the torts of maintenance and champerty remain part of the law of New Zealand and there remains a need for proper controls appropriate to the nature of the case and for the Court to exercise some oversight in regard to the particular funder and funding terms proposed.

[34]     Maintenance involves the giving of assistance or encouragement to one of the parties to litigation by a person who has neither an interest in the litigation nor any other motive recognised by law as justifying that person’s interference.  Champerty involves the giving of assistance with litigation in which one has no personal interest in  return  for  profit.    The  Court  of Appeal  in  Saunders  provided  the  following guidance   on   when   a   funding   agreement,   otherwise   constituting   unlawful maintenance or champerty, will be permissible:

(a)       The court is satisfied there is an arguable case for rights that warrant vindicating;

(b)      There is no abuse of process; and

(c)       The proposal is approved by the court.

The principles in Saunders v Houghton were applied in Contractors Bonding Ltd v

Waterhouse.2

[35]     In his affidavit sworn 25 May 2012, the first defendant, Mr Petch, expresses concern that the funders of VEEGA’s claim are not independent commercial parties but  are  entities  that  are  interested  in  the  proceedings  for  reasons  other  than vindication of legitimate legal rights.  Mr Petch states:

13.Furthermore, based on my knowledge of the relationship between VEEGA, TMC and the shareholders, I believe it is probable that VEEGA’s   legal   costs   have   been   funded   from   TMC   or   its shareholders (which include MSNZ).

14.Since the defendants resigned from the Board of VEEGA, the new directors who have been appointed have been largely closely connected with TMC and MSNZ.  In particular,

(a)       Brian Budd, a director of VEEGA, is also General Manager of MSNZ;

(b)       TMC has announced that it intends to appoint Ian Tulloch as a director of TMC.   Mr Tulloch has a lengthy association with TMC and is currently a director of VEEGA and its subsidiary, NZV8s.

15.Finally, TMC is the entity which stands to suffer the most from the establishment of a competing V8 race series.

[36]     The defendants note that MSNZ is the sole regulatory body for motorsport in New Zealand. That role requires it to regulate and adjudicate on the series run by the defendants as well as that which VEEGA plays a part in.  The defendants note that MSNZ holds a 60% share in TMC which is the promoter of that championship series.  MSNZ therefore holds a commercial interest in the motorsport industry and has an interest in ensuring its series prevails over alternatives.   The defendants

submit that whether it is appropriate for MSNZ to have commercial interests of this nature  is  one  question.    Another  is  whether  if,  as  suspected,  it  is  funding  the litigation, competition law issues arise.  The defendants submit it would be deeply concerning if MSNZ or its subsidiary, TMC, was involved in any way with funding or encouraging VEEGA’s litigation.

[37]     The defendants refer to the UK Code of Conduct for the United Kingdom of the Third Party Litigation Funders Association, which sets out standards of good practice for third party litigation funders operating in the UK.   The code requires commitments from funders inter alia that “funders will not engage in anti- competitive conduct”.   The defendants submit that there appears to be risk that VEEGA’s litigation funding arrangements are tainted by anti-competitive conduct. However, given the complicated series of inter-relationships between the various parties, the defendants submit that they would be better placed to address the Court on this issue once disclosure of the agreements has been made.   The defendants submit that Saunders v Houghton and Contractors Bonding Ltd v Waterhouse are clear authority for the proposition that pending disclosure of the litigation funding agreements, the proceeding must be stayed.

[38]     As a preliminary issue, VEEGA notes that there is authority3 which states that the Court has no jurisdiction to require disclosure of third party funding in aid of a defendant’s application for security for costs.  Given that the Court has jurisdiction under r 5.45 to order a stay if security is not given or paid as directed, VEEGA submits it is difficult not to infer that the only reason the defendants have filed a separate application for stay is to circumvent the authority noted above.

[39]     VEEGA submits a stay ought to be refused.  It submits there is no risk of an abuse of process in the current case and that the doctrines of maintenance and champerty are not offended on the facts of this case.  VEEGA submits that funding has not been provided by third parties with no interest in the litigation.  The parties funding VEEGA are the shareholders of VEEGA and its subsidiary, NZV8’s, and both these parties have a legitimate interest in the proceeding.   The shareholders have a legitimate interest in protecting their investment and Mr Ross has deposed

that neither party stands to profit from the proceeding and that the control of the proceeding remains with the board of VEEGA.

[40]     Counsel for VEEGA was, however, unable to give the Court an assurance that MSNZ and/or TMC were not funding the shareholders and/or NZV8’s for the purpose of the litigation.  The defendants therefore retain legitimate concerns about the funding arrangements.

[41]     VEEGA has offered to disclose details of the funding arrangements to the Court in order to allay such concerns.  A Judge is however always reluctant to view documentation which has not been made available to one party to the litigation. Furthermore, I do not have any knowledge of the different roles that may be undertaken by shareholders of VEEGA who may be identified as funders of the claim.  Consequently, I would not be in a position to make any assessment of matters such as possible conflicts of interest.

[42]     In all the circumstances, I am of the view that VEEGA should disclose details of the funding arrangements to the defendants as well as the Court.  I will, however, not undertake any assessment of whether or not there is an abuse of process.  Instead, I shall leave it to the defendants to make any application they see fit following their review of the information to be provided by VEEGA.

Conclusion

[43]     I therefore make the following orders:

(a)      VEEGA is to provide security of costs in the sum of $50,000.00.  At the request of the parties, I leave it to them to determine whether security is to be provided by way of a cash sum deposited in the Court’s interest bearing account or in the form of a bond through CBL Insurance Limited, as requested by Mr Ross.

(b)There will be a stay of the proceedings until details of the funding arrangements have been disclosed to the defendants and the Court. The details should include:

(i)The identity of each funder of the litigation and the amount they have contributed;

(ii)The   contractual   arrangements   between   VEEGA  and   the funders, including any conditions relating to the litigation;

(iii)Details of any connections that the individual funders may have with MSNZ and/or TMC;

(iv)The  terms  on  which  funding  can  be  withdrawn  and  the consequences of withdrawal.

……………………………….

Woolford J