Roe v Wellington Combined Taxis Limited - [2023] NZHC 2756

JUDGMENT FOR PUBLIC RELEASE: SEE ADDENDUM

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

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

CIV-2023-485-22

[2023] NZHC 2756

BETWEEN
RICHARD WILLIAM ROE, VANNA SENG, PAUL JOHAN

JOHANSSON, THEODOROS SERAFIM, SURESH LALLOO and KRISHNA SAMY GOUNDAR
Applicants

AND

WELLINGTON COMBINED TAXIS LIMITED

First Respondent

DAVID CLYMA
Second Respondent

DELFIN DE GUZMAN
Third Respondent

CHRISTOPHER DAVID FINLAYSON
Fourth Respondent

GARTH FRASER
Fifth Respondent

SAHA DEWAN MUDALIAR
Sixth Respondent

DEV KUMAR NARAYAN

Seventh Respondent

Hearing: 11 July 2023

Appearances:

A Olney and H Cameron for Applicants

P Chisnall and P McBride for First Respondent

M Cavanaugh and C Clayton for Second to Fifth and Seventh Respondents

No appearance by or for Sixth Respondent

Judgment:

2 October 2023

ROE v WELLINGTON COMBINED TAXIS LIMITED [2023] NZHC 2756 [2 October 2023]

JUDGMENT OF ASSOCIATE JUDGE SKELTON

TABLE OF CONTENTS

The structure of WCT [5]

Background [18]

Legal principles [40]

Threshold requirements [43]

Mandatory criteria [47]

The proposed claim [50]

Likelihood of success – s 165(2)(a) [52]

[50(a)] and [50(b)]: Compliance with s 117 of the Act and duty to ensure compliance [56] [50(c)]: Duty to act in good faith and in the best interests of the company [85] [50(d)]: Duty to exercise powers for a proper purpose [112]
[50(e)]: Duty to exercise reasonable care [119]

Costs of the proceedings in relation to the relief likely to be obtained – s 165(2)(b) [125]

Benefit [126]

Cost [131]

Discussion [135]

Any action already taken by WCT to obtain relief - s 165(2)(c) [138] Interests of WCT in the intended proceedings being commenced – s 165(2)(d) [139] The prudent business person [147]
Conditions on which leave should be granted [148]

Result [158]

Addendum – Confidentiality [161]

[1] The applicants are taxi drivers and shareholders of the first respondent, Wellington Combined Taxis Ltd (WCT). The second to seventh respondents are directors of WCT.

[2] The applicants seek leave under s 165 of the Companies Act 1993 (the Act) to bring a derivative action in the name and on behalf of WCT.1 The claims in the proposed statement of claim concern a decision in 2020 by WCT’s directors to implement a policy which I will refer to in this judgment as the “2020 Levy Policy”. The applicants allege that the directors who made that decision did so in breach of various fiduciary and statutory duties owed by them to WCT.

[3] The directors oppose leave being granted on the basis that no prudent business person would pursue the proposed claim, and that the claim is not arguable on available evidence, and any benefit is significantly outweighed by its cost.

[4] WCT will abide the decision of the Court on the applicants’ application for leave to bring the proposed proceedings. However, WCT opposes the order sought that it pay the costs of the application and the proposed proceedings, and the application for additional orders directing cooperation by WCT.

The structure of WCT

[5]For present purposes, there are three key documents:

(a)the WCT Constitution (the Constitution);2

(b)the Operator’s Contract; and

(c)the WCT Rules and Disciplinary Procedures (the Rules).

1 The applicants have been granted leave by consent for this application to proceed by way of originating application under pt 19 of the High Court Rules 2016 - Minute of Associate Judge Johnston, 7 March 2023 at [3].
2 Two versions of the WCT Constitution have been put before the Court in the affidavit evidence, one version is dated 23 August 2012 and the other version is dated September 2012. Counsel for the parties advised at the hearing that there is no material difference between these two versions of the Constitution.

[6] WCT is constituted with a single class of ordinary shares. Clause 3.1 of the Constitution provides that there are 497 ordinary shares on issue.

[7]Clause 5 of the Constitution provides that:

5.1Qualification: Subject to clause 5.3, every holder of a Share must at all times:

(a)Hold a current small passenger service licence issued under the Transport Services Licensing Act 1989; and

(b)Be a party to a current Operator’s Contract.

[8] The Operator’s Contract gives the shareholder a licence to operate a taxi cab vehicle under the WCT brand and have access to facilities and services provided by WCT, including communication facilities by way of telephone, radio telephone, Mobile Data Terminal and other facilities and services.

[9] Many shareholders use that licence to drive their own WCT taxi. Such shareholders can conveniently be referred to as “Driver Shareholders”.

[10] Other shareholders, “Investor Shareholders”, lease out their shares to a non-shareholder wanting to drive a taxi cab, provided that person meets the legal requirements to do so.

[11]Clause 15.1 of the Constitution, Management of Company, provides that:

15.1 Management of Company: The business of the Company shall be managed by the Directors who may exercise all such powers of the Company as are not by the Act or by this Constitution required to be exercised by the Company in general meeting or otherwise, subject to the following:

…

(b)The Directors may from time to time make rules, regulations, by-laws (“Rules”) or policies not being inconsistent with this constitution or the Act (and amend, modify or revoke such Rules or policies) in respect of the terms and conditions of operating or driving any taxi cab in the Company’s taxi cab fleet, including (without limitation) the use of the Company’s communication facilities, the imposition of levies, the employment of Drivers, training, vehicle requirements, uniforms, passenger’s property, acceptance of credit cards and taxi service order vouchers, Company contract work, disciplinary procedures, the impositions of fines or other penalties for breach of the Rules, nomination of persons to enter into an Operator’s Contract

(“leasing policy”) or the management of an Operator’s business during period of incorporating (“management policy”). The penalties which may be imposed by the Rules may include that where an Operator is a Shareholder the Directors may, in their absolute discretion, require that Shareholder to transfer all ordinary Shares held by such Shareholder to a person nominated by the Directors and the provisions of clause 7.1 shall apply to any such transfer, and such Rules and policies shall be binding on all Shareholders and the Directors may from time to time prescribe forms of “Operator’s Contracts” or “Drivers Agreements” which shall be required to be executed by all holders of ordinary Shares in the capital of the Company, all Operators who are not shareholders and all Drivers whereby such ordinary Shareholder, non-ordinary Shareholder Operator or Driver (as the case may be) acknowledges (amongst other things) that he or she is bound by the Rules and policies of the Company.

…

(f) The Directors may from time to time impose, vary or rescind levies or other charges or penalties upon Operators or Drivers in such sums or at such intervals as the Directors may in their discretion think fit, for communication facilities or other service from time to time provided by the Company, and for the proper maintenance, carrying out, and exercising of the powers of the Company.

[12]The Rules define “Levy” as:

“Levy” means the Company’s operating levy, as fixed from time to time by the Board.

[13]Clause 4.1 of the Rules provides:

4.1 Duty to pay levies on time: The Levy is due for payment in full by every Operator on the first (1st) day of each Month and shall before the seventh (7th) day of each Month have been paid to the Company, and the Operator will, when called upon, pay the amount of any additional levy set by the Board in accordance with the Constitution. …

[14]Further, clause 4.8 of the Rules provides that:

4.8 Levy in arears: The Directors may also in their absolute discretion require any Shareholder or Operator who is a Shareholder and whose Levy is three (3) months or more in arears to transfer their share or shares in the Company to a person nominated by the Directors, in accordance with Article 7 of the Constitution.

[15] The various sources of revenue for WCT are outlined in the affidavit of David Clyma, a director and chairman of WCT as follows:

The levies are to meet the cost of the Company’s services provided to drivers. This includes the call centre, communications services, and the booking platform. A shareholder typically meets the cost of the levy from their earnings as a driver if they exercise the right to drive themselves, or from earnings under the lease if they lease that right to someone else.

The levy is one of the Company’s sources of revenue. Other revenue sources include factoring, bureau income, and profit share. Factoring is … where the Company’s wholly owned subsidiary, Combined Finance Limited, buys the credit card debt owed to a shareholder for a fare. Combined Finance profits from the difference between the purchase price for that debt and the actual debt recovered.

Bureau income refers to income from operating a bureau or call centre for another taxi company. The Company’s call centre can provide jobs for another taxi company’s driver when a customer calls that company’s phone number. …

Profit share is from the Company’s interest in TaxiCharge. … this is a Limited Partnership of which the Company is a limited partner. TaxiCharge provides customers with booking, billing, and payment services with taxis. The Company earns between 25% and 32% of TaxiCharge’s surplus, depending on the volume of business (fares) the Company produces.

[16] Mr Clyma also sets out the revenue from these various sources of income over the last four financial years to 31 March 2022 based on information from WCT’s financial statements. The largest sources of income over this period are levies and profit share, with levies being the largest source of income in the financial years ending 31 March 2021 and 31 March 2022. WCT has run at a significant operating loss since the financial year ended 31 March 2020.

[17] Richard Roe, one of the applicant shareholders, states in his affidavit that the services provided by WCT are mostly fixed costs which are almost entirely independent of the number of shareholders using them.

Background

[18] Since the Global Financial Crisis, the taxi industry has faced various challenges, and, at times, some Investor Shareholders have found it difficult to find a lessee to lease and operate their shares.

[19] In July 2012, the board at that time responded to the situation by passing a resolution to allow shareholders who couldn’t find a lessee for two months or more to pay a half levy (2012 Differential Levy). The resolution was contentious, and the board obtained legal advice from Buddle Findlay provided in a letter dated 12 December 2012. The summary section of the letter of advice stated:

2.In our opinion, there is a real risk that the Proposal is one that the Companies Act 1993 (Act) requires to be put to shareholders for decision [by special resolution] and therefore is not a proposal the board can decide on.

3.Even if the Proposal is a matter the board can decide on:

(a)in our opinion there is a real risk that:

(i)based on the information we have been provided, the Proposal may not be able to be justified as in the best interests of the company;

(ii)adversely affected shareholders may have a claim against the company for unfair discrimination/prejudice.

(b)while the strict legal position is that directors with a conflict of interest can vote, best practice is directors should not vote where they stand to benefit financially from a decision.

[20] However, the performance of WCT began to improve and the filling of vacant leases by the end of 2012 negated the need for implementation of the 2012 Differential Levy.

[21] That remained the position until 2018 when the number of shares that were unoperated began to increase.

[22] In January 2019, the board wished to offer a reduced levy for shareholders who had not been driving or leasing their right to drive for three months. The board was concerned about the implementation of such a policy because of the earlier advice from Buddle Findlay on the 2012 Differential Levy. The board sought further legal advice from Gibson Sheat. As a result of this advice, the board finally rescinded the 2012 Differential Levy resolution.

[23] A summary of Gibson Sheat’s advice was published in a letter to shareholders dated 22 January 2019. The letter noted that:

9.The Board is concerned about the possibility of a challenge against the Board on the basis that the proposed resolution appears to treat one group of shareholders (investor shareholders) differently to other shareholders. Shareholder drivers would not be able to access this subsidy as, by definition, the shareholder drivers would never be ‘empty’.

[24] The letter then set out a general summary of the legal advice received from Gibson Sheat:

11.A provision for levy relief in the case of a medical mishap which prevents a shareholder driver or lessee driver from working for a lengthy period can be justified as it is generally applicable to all who suffer the mishap. The possibility of mishap applies to all and no prejudice arises.

12.While the current resolution is considered in good faith by the Board for the benefit of all shareholders, it is by its very nature limited to an ‘empty share’ situation and is therefore potentially not of direct benefit to all shareholders. It is consequently distinguishable from the medical mishap situation and at risk of being challenged.

13.The lawyers do not consider it would be appropriate for the Directors to implement this resolution without specific authorisation from shareholders. Instead their advice is that the Board could develop and then propose a comprehensive levy relief scheme to all shareholders. This scheme will be presented at the next Annual General Meeting for consideration and, if approved, inclusion in the Company’s Constitution. This will give all shareholders the opportunity to debate the resolution, and the chance to vote either for or against it.

…

[25] Subsequently, a proposal was submitted for vote at WCT’s 2019 Annual General Meeting (AGM). The proposal was for a reduced levy to be available to any shareholder if their share was inoperable for three months. The board sought further legal advice from Gibson Sheat at that time. Mr Clyma states in his affidavit evidence that:

Following that advice, I believed there would be no issue with the proposal or with voting rights, and that payment of the levy arises from the operator’s contract with the Company not the Company’s constitution.

[26]The proposal was presented but failed at the 2019 AGM.

[27] From January 2020, the board adopted a new policy, giving the board a discretion to allow the holder of a share that was unoperated for more than three months to suspend the Operator’s Contract in relation to that share, and while that suspension was in place, they would not have to pay the levy.

[28] Then, in March 2020, Covid-19 came to New Zealand and Level 4 restrictions were imposed.

[29] In his affidavit evidence, Mr Clyma refers to the impact that the Covid-19 restrictions had on WCT and the shareholders. He says that some shareholders cancelled their Operator’s Contract and sold their share(s) and that there was a reduction in the share price.

[30] Mr Clyma says that at the regular monthly board meetings and special board meetings between March and October 2020, the board considered measures for responding to the challenges presented by Covid-19. These measures included: directors reducing their honorarium; reducing services or associated costs of services while fewer drivers were operating; reducing other costs, for example, by making use of the Covid wage subsidies. The board also provided relief to shareholders by freezing shareholder levies, minimising any increase to shareholder levies, and subsidising the levies for all shareholders in April and May 2020 so shareholders were only required to pay half their levy. This subsidy was extended for those shareholders whose levies were up to date.

[31] Mr Clyma states that in response to the increased threats to terminate, and actual terminations of Operator’s Contracts, the board sought further legal advice from Gibson Sheat on the board’s powers under the Constitution, the Rules and the Operator’s Contracts. This advice was provided on 30 April 2020.

[32] Mr Clyma also says that, in April 2020, he became aware that one of WCT’s competitors, Green Cabs, was in financial difficulty. Green Cabs was put into liquidation on 14 July 2020.

[33] On 17 July 2020, a shareholder submitted a proposal for WCT’s 2020 AGM. That proposal stated:

Levies are an operational matter and since WCT Constitution empowers the Board to set Company policy, it is the Board’s responsibility to watch interest of all shareholders when formulating policy. WCT Operators can be divided in two equal categories. The ones who are still operating and the ones who are not and are leasing their shares, popularly known as lessor shareholders. All shareholders have equally supported the company whenever it was required. Not long ago when cameras became mandatory and the ageing dispatch system needed an upgrade, the Company had to float another 50 shares so that the cost could be met. At that time the Company chose to rely on all shareholders to invest in shares to raise the capital required to meet the costs.

In the current environment, while Covid-19 is making the existing model of WCT shareholding even more challenging, the Board is encouraged to look after the shareholders who have interest in the company and having bought shares at huge prices, in return all they are looking for is some passive income. Most of the concerned shareholders are ex WCT Operators who have now retired and with their faith in a progressive company, they have retained shares in the hope of small return by way of a lease fee.

Lately, it is taking increasingly longer to fill the vacant shares and asking the shareholder to pay levies while they have no income, can prove to be the last straw. This is visible in the share price dropping even in Pre Covid environment, and now that we must deal with Covid impact the situation is looking even more gloomy. … Keeping in mind, the current situation, it will only be reasonable for the Board to adopt a policy that protects the shareholders who in some cases had their life’s savings tied up in shares that they once bought at huge prices. The fact that owner Operators still have the option of making their investment viable by driving the share, whereas the ones who have retired may not even get their P endorsements renewed, needs to be kept in mind as well when making a pragmatic decision which ensures security for all shareholders.

It cannot be denied that the Company needs to collect levies from shareholders to run the show. It will only be fair to ask that the levies should reflect the service provided by the Company. A retired shareholder, whose share is waiting to be leased out is receiving a highly reduced level of service as compared with an Owner Operator. Looking at this years annual accounts I believe this proposal to be sustainable.

[34] The proposal was discussed at the AGM on 13 August 2020. The proposal was passed by an ordinary resolution receiving 65.5 per cent support from shareholders. A point of order was raised at the meeting with regard to the ability of some shareholders to vote because they had not paid levies or because their Operator’s Contracts were suspended. The point of order was not ruled on at the meeting and all shareholders in

these categories were able to vote. The board was to investigate the issue and obtain legal advice.

[35] On 2 September 2020, the board resolved to implement the policy, which I refer to hereafter as the “2020 Levy Policy”. The resolution stated:

…

Board’s view:

The Board acknowledges the challenges of the Covid-19 and is confident that the economy will improve in due course and till at least March 2021, there is need to take measures which instills the shareholder confidence and minimizes the financial stress for them.

Considering the ordinary resolution as the shareholders wish as it was voted by an overwhelming majority, the Board has decided to fix the monthly levies till March 2021 and has also considered to charge reduced levies for the shares which are not in operation as they are deemed to be dormant and not receiving the same level of service as the operating shares.

Board resolution:

Till March 2021, the monthly levies be fixed at $370 for shares in operation and reduced levies of $40 per month be charged on shares which are not in operation subject to the following conditions.

·The share must be non-operational to qualify for reduced levies.

·The reduced levies will apply on a calendar month basis and not for part month, and a share becoming non-operational during the month will be eligible for reduced levies from the beginning of following calendar month.

·There should be no outstanding levies on the share for it to qualify for reduced levies.

·The vehicle must be decommissioned for the share to qualify for reduced levies.

This policy comes into effect as at 1 September 2020.

The Board has rescinded the previous Board policy (from January 2020), which allowed for suspension of Operator’s Contract. Shares for which Operators Contracts were suspended earlier, will pay levies at reduced levels as per the Board resolution above from 1st September 2021.

[36] On 16 September 2020, the implementation of the 2020 Levy Policy was challenged by a number of shareholders in a letter sent to the directors. Essentially, the shareholders contended that the effect of the policy was to deprive WCT of much

needed revenue and had the effect of advantaging Investor Shareholders to the detriment of Driver Shareholders. The shareholders contended that the policy was not in the interests of WCT.

[37] The board sought further legal advice from Gibson Sheat. This advice was provided on 14 October 2020. Mr Clyma states in his affidavit evidence that:

Following that advice, and reflecting on my previous decision, I believed there was no issue with the reduced levy.

[38] The board sent a letter to shareholders on or about 14 October 2020 responding to the issues raised in the shareholders’ letter dated 16 September 2020. The board stated that the 2020 Levy Policy would be in place until March 2021 and would then be reviewed taking into account the business conditions including the continuing impact of Covid-19 on the economy.

[39] The 2020 Levy Policy currently remains in force. The current levy for an operated share is $490 per month and the levy payable on an unoperated share is
$52.85 per month.

Legal principles

[40] Under s 165 of the Act, the Court may grant leave to a shareholder or director of a company to bring proceedings in the name and on behalf of the company or any related company. Section 165 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.

(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.

[41] There is no issue with the applicants’ standing to bring the application for leave as they are shareholders of WCT.

[42] An applicant must satisfy either of the two threshold requirements in s 165(3), following which the Court may exercise its discretion by reference to the four mandatory criteria in s 165(2), with a residual discretion to take into account other considerations.

Threshold requirements

[43] Under s 165(3)(a), leave may be granted if the company which is the intended plaintiff does not intend to bring proceedings in respect of the claims that the applicants wish to pursue.

[44] In He v Chen, the Court of Appeal stated with regard to this threshold requirement:3

That subsection provides a threshold requirement which must be met before the court’s discretion to give leave to bring a derivative action may be exercised. Section 165(5)(b) aids the assessment by requiring a company to inform the court whether it intends to bring proceedings. Even without this information … a court might nonetheless be satisfied the company does not intend to bring proceedings. The court may be so satisfied by drawing inferences from the evidence available to it. We consider the direction that the court be “satisfied”, without more, permits the threshold to be met in this way, if the evidence justifies it.

[45] In this case, the intended plaintiff, WCT, is represented. Bahman Fakharzadeh, the general manager of WCT, has provided an affidavit. Mr Fakharzadeh has confirmed in his affidavit that WCT does not currently contemplate bringing proceedings against the directors with respect to the matters outlined in the proposed statement of claim.

[46]Accordingly, I find that the threshold requirement in s 165(3)(a) is met.

Mandatory criteria

[47] The Court must exercise its discretion whether to grant leave having regard to the four mandatory criteria set out in s 165(2). In assessing the criteria, the Court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim”.4

[48] The Court of Appeal in He v Chen confirmed that the prudent business person test should be adopted in assessing all criteria in s 165(2):5

3      He v Chen [2014] NZCA 153; [2015] NZAR 473 at [20] (footnotes omitted).
4      Vrij v Boyle [1995] 3 NZLR 763 (HC), at 765.
5      He v Chen, above n 4, at [30] (footnotes omitted).

This section requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim”. It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s 165(2)(a). It has also consistently informed the Court’s assessment of the remaining three criteria. While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.

[49] While consideration of the four criteria in s 165(2) is mandatory, ultimately the granting of leave is discretionary and not limited by those criteria and the Court may take into account other relevant criteria.

The proposed claim

[50] The applicants have provided a proposed statement of claim in support of their application for leave. The proposed claim alleges that the 2020 Levy Policy was implemented by the intended defendants in breach of:

(a)the requirements of s 117 of the Act that the policy be approved by a special resolution of each interest group affected;

(b)their duty in s 134 of the Act not to act, or agree to WCT acting, in a manner that contravenes the Act (see (a) above);

(c)their duty in s 131 of the Act to act in good faith and in what the directors believed to be in the best interests of WCT;

(d)their duty in s 133 of the Act to exercise powers for a proper purpose;

(e)their duty in s 137 of the Act to exercise the care, diligence and skill that a reasonable director would exercise in the same circumstances.

[51] The applicants seek a declaration invaliding the 2020 Levy Policy and damages from the intended defendants for the levy revenue foregone by reason of the policy.

Likelihood of success – s 165(2)(a)

[52] Section 165(2)(a) requires the Court to have regard to the likelihood of the contemplated derivative action succeeding.

[53] In Parkinson v O’Brien, the Court of Appeal confirmed that in assessing the likelihood of success, it is not the function of the Court to conduct an interim trial or make a determination of the ultimate merits of the claim.6 The Court of Appeal also confirmed that the inquiry at this juncture is merely whether the causes of action are arguable and whether there is sufficient evidence to support a finding of an arguable case.7

[54] The Court of Appeal also endorsed an approach whereby issues of credibility are not determined but “it is relevant to address whether the claims made are so implausible or unsupported by probative evidence that they are not reasonably likely to succeed” and the focus should not be on “the minutiae of the evidence, the claims, or the counterclaim” but to “form an overall assessment (a screening process) in addressing the statutory and other relevant criteria” which “includes focussing on the critical documents”.8

[55] I now turn to consider each of the claims the applicants propose to advance, as described at [50(a)]-[50(e)] above, in order to determine whether the causes of action are arguable and whether there is sufficient evidence to support a finding of an arguable case on each.

[50(a)] and [50(b)]: Compliance with s 117 of the Act and duty to ensure compliance

[56]Section 117 of the Act provides that:

117 Alteration of shareholder rights

(1)A company must not take action that affects the rights attached to shares unless that action has been approved by a special resolution of each interest group.

(2)For the purposes of subsection (1), the rights attached to a share include—

(a)the rights, privileges, limitations, and conditions attached to the share by this Act or the constitution, including voting rights and rights to distributions:

6      Parkinson v O’Brien on behalf of General Dynamics Corp Ltd [2021] NZCA 309 at [35]-[36]; and He v Chen, above n 4, at [38].
7      Parkinson v O’Brien, above n 6, at [67].
8      At [36]-[37], endorsing the approach taken by the High Court in that case.

(b)pre-emptive rights arising under section 45:

(c)the right to have the procedure set out in this section, and any further procedure required by the constitution for the amendment or alteration of rights, observed by the company:

(d)the right that a procedure required by the constitution for the amendment or alteration of rights not be amended or altered.

…

[57]Section 116 of the Act defines “interest group” as follows”:

(1)… Interest group, in relation to any action or proposal affecting rights attached to shares, means a group of shareholders—

(a)whose affected rights are identical; and

(b)whose rights are affected by the action or proposal in some way; and

(c)subject to subsection 2(c), who comprise the holders of 1 or more classes of shares in the company.

(2)For the purposes of this Act and the definition of the term interest group—

(a)1 or more interest groups may exist in relation to any action or proposal; and

(b)if—

(i)action is taken in relation to some holders of shares in a class and not others; or

(ii)a proposal expressly distinguishes between some holders of shares in a class and other holders of shares of that class,—

holders of shares in the same class may fall into 2 or more interest groups.

[58] The applicants note that, for the purposes of s 117, s 117(2)(a) provides that “rights attached to a share” include “the rights, privileges, limitations and conditions attached to the share by this Act or the constitution…”.

[59] The applicants submit that the obligation to pay the operating levy is a requirement of being a shareholder as a consequence of the provisions of the Constitution, the Operator’s Contract and the Rules. They submit that this is a limitation or a condition attached to the shares. The applicants note that cl 5.1 of the

Constitution provides that every shareholder must be a party to an Operator’s Contract. The Operator’s Contract requires an operator to comply with the Rules, and the Rules provide for the payment of the operating levy.

[60] In his affidavit, Richard Roe, one of the applicant shareholders, refers to having reviewed various documents including several prospectuses and investment statements produced in accordance with the Securities Act 1978 in relation to the issue of new WCT shares in around 2010 that refer to the “levies attached” to newly issued shares.

[61] The applicants submit that the Rules envisage that the board will, from time to time, fix the operating levy, but this does not expressly envisage the board setting a different operating levy for shareholders in differing circumstances. Clause 15.1(b) of the Constitution provides that the directors may make rules or policies, including the imposition of levies, but such rules or policies must not be inconsistent with the Constitution or the Act.

[62] The applicants say that 2020 Levy Policy treats Driver Shareholders and Investor Shareholders differently and therefore creates two interest groups.9 As a result, they submit that s 117 requires there to be special resolutions of each interest group to approve and implement the policy.

[63] If s 117 of the Act is engaged, the applicants submit that it follows that the directors breached s 134 of the Act requiring that a director must not act, or agree to the company acting, in a manner that contravenes the Act, or the constitution of the company. The applicants also submit that the 2020 Levy Policy would be invalid.

[64] The respondent directors make several points in response to this proposed claim.

[65] First, Mr Cavanaugh, for the second to fifth and seventh respondents, submits that the Constitution itself is silent on a shareholder’s obligation to pay a levy, as is the Operator’s Contract, and it is the Rules which impose the duty to pay the levy.

9 See s 116(2)(b) of the Companies Act.

Mr Cavanaugh submits that this “third-hand source” is too remote to engage s 117(2). Further, he notes that clause 15.1(b) of the Constitution provides for the directors to make rules and policies including the imposition of levies, and cl 15.1(f) also provides that the directors may from time to vary or rescind such levies. He submits that a remote connection with contemplated but variable rules cannot suffice as a condition which attaches to a share for the purposes of s 117.

[66] As noted above, the legal advice obtained by the board in 2012 from Buddle Findlay related to an earlier proposal under which the operating levy was to be reduced on shares where the shareholder couldn’t find a lessee for two months or more. The advice addressed the issue of alteration of shareholder rights under s 117 as follows:

6.Alteration of shareholder rights

6.1Under the Act, a company must not take action that affects the rights attached to shares unless that action has been approved by special resolution of each shareholder “interest group” (i.e. each group of shareholders whose rights are affected by the action in the same way). “Rights” includes “rights, privileges, limitations and conditions” attached to the share by the Act or the constitution. Waiver of levies clearly affects a condition attached to the shares by the constitution, namely the obligation to pay levies set by the board under the constitution.

6.2It could be argued that because the power to levy is in the constitution, this power can be exercised by the directors without shareholder approval. We think this is probably right for ordinary levy setting purposes. However we have reservations about whether this extends to a decision which results in levies being imposed unequally (which would be the result of waiving levies on unleased shares).

6.3Therefore, in our opinion there is a real risk that the Proposal would need to be referred to shareholders and cannot be decided by the board. If the Proposal were referred to shareholders, in order to comply with the Companies Act “interests group” provisions, there would probably need to be separate special resolutions by each of the two groups of shareholders, namely those who lease their shares and those who do not lease their share. This is because the proposal favours one group over the other.

[67] The advice assumes that the obligation on shareholders to pay levies set by the board under the Constitution is a condition attached to shares by the Constitution.

[68] Mr Clyma refers to advice received by the board from Gibson Sheat in August 2019 in relation to the 2019 proposal for a reduced levy for any shareholder if their share had been inoperable for three months. Mr Clyma states in his affidavit evidence that:

Following that advice, I believed there would be no issue with the proposal or with voting rights, and that payment of the levy arises from the operator’s contract with the Company, not the Company’s constitution.

[69] The board may, in 2012 and 2019, have received differing advice on the issue of whether the obligation on a shareholder to pay the operating levy arises from the Constitution and whether it is a condition attached to shares by the Constitution for the purposes of s 117. I agree with the submission of Mr Olney, for the applicants, that if the board did receive differing or conflicting advice then that supports rather than rebuts the proposition that it is arguable that the requirements of s 117 are engaged.

[70] Clause 5.1 of the Constitution requires every shareholder to be a party to an Operator’s Contract under which the shareholder becomes an operator and is required to comply with the Rules. Clause 15.1(b) of the Constitution provides that the directors may from time to time make Rules or policies (not inconsistent with the Constitution or the Act) including the imposition of levies, and also provides that Operator’s Contracts are to be executed by all holders of ordinary shares whereby the shareholder acknowledges that he or she is bound by the Rules and policies of WCT. Clause 15.1(f) provides that the directors may vary or rescind such levies. Even though it is the Rules that include the express provisions providing for payment of the operating levy (s 4), the binding nature of the Rules stems from the Constitution and the imposition of the levy on shareholders and the setting of the amount of the levy is a power exercised by the board under the Constitution. Therefore, in my view, it is arguable that the obligation on shareholders to pay the operating levy is a condition (and therefore a “right”) attached to shares by the Constitution for the purposes of s 117 of the Act. It seems to me that the power to vary or rescind levies under the Constitution simply means that that condition can be varied or rescinded from time to time.

[71] Secondly, Mr Cavanaugh refers to the applicants’ emphasis on there being a singular levy under the Rules and not different levies for differing circumstances. He submits that the Constitution and the Rules expressly contemplate a multiplicity of levies and their imposition or amendment as necessary.

[72] The Constitution and the Rules refer in various clauses to “levies” rather than just a singular levy. However, it seems to me that the point here is not whether there can be more than one levy imposed on all shareholders, or whether the operating levy imposed on all shareholders can be varied from time to time, but whether it is contemplated that different operating levies can be imposed or set for groups of shareholders depending on the differing circumstances of each group. As submitted by Mr Olney, this is not expressly envisaged or contemplated in the Constitution or the Rules. Therefore, if it is arguable that the obligation to pay the operating levy is a condition attached to each ordinary share, it is arguable that a proposal for different operating levies for groups of shareholders depending on the differing circumstances of each group would engage s 117.

[73] Thirdly, Mr Cavanaugh submits that the consequence of the applicants’ position is that any time the directors exercised a discretion in relation to a levy in any way, a special resolution would be required. He submits this is an absurd outcome which allows for unfettered interference in an otherwise express managerial discretion.

[74] However, in my view, it is arguable that because the power to impose and set levies is in the Constitution, the ordinary exercise of that power to impose and set levies, or to vary or rescind such levies, applying equally to all shareholders, could be exercised by the directors without engaging section s 117. That was the view expressed in the 2012 legal advice to the board (see [66] above). Section 117 and the requirement for a special resolution would arguably only be engaged where the proposal distinguishes between groups of shareholders creating two or more interest groups, and where the effect of the proposal favours one group of shareholders over another.

[75] In considering whether the 2020 Levy Policy distinguishes between groups of shareholders of the same class, and favours one group over another, relevant

contemporary documentary evidence includes the shareholder proposal which was the subject of the vote at the 13 August 2020 AGM.

[76]The first paragraph of the proposal states:

…WCT Operators can be divided in two equal categories. The ones who are still operating and the ones who are not and are leasing their shares, popularly known as lessor shareholders. …

[77]In the next paragraph, the proposal states:

In the current environment, while Covid-19 is making the existing model of WCT shareholding even more challenging, the Board is encouraged to look after the shareholders who have interest in the company and have bought shares at huge prices, in return all they are looking for is some passive income. Most of the concerned shareholders are ex WCT Operators who have now retired and with their faith in a progressive company, they have retained shares in the hope of small return by way of a lease fee.

(emphasis added)

[78]The next paragraph states:

Lately, it is taking increasingly longer to fill the vacant shares and asking the shareholder to pay levies while they have no income, can prove to be the last straw. This is visible in the share price dropping even in the Pre Covid environment… Keeping in mind, the current situation, it will only be reasonable for the Board to adopt a policy that protects the shareholders who in some cases have their life’s savings tied up in shares that they once bought at huge prices. The fact that owner Operators still have the option of making their investment viable by driving a share, whereas the ones who have retired may not even get their P endorsements renewed, needs to be kept in mind as well when making a pragmatic decision which ensures security for all shareholders.

(emphasis added)

[79]The next paragraph states:

It cannot be denied that the Company needs to collect levies from shareholders to run the show. It will only be fair to ask that the levies should reflect the service provided by the Company. A retired shareholder, whose share is waiting to be leased out is receiving a highly reduced level of service as compared with an Owner Operator. …

(emphasis added.)

[80] It is apparent that the proposal distinguishes between Investor Shareholders and Driver Shareholders. It is also arguable that the proposal favours Investor Shareholders over Driver Shareholders because the aim is to “look after” the investment of Investor Shareholders who are looking for some “passive income…by way of a lease fee”, and to adopt a policy that “protects” those shareholders. It is assumed that Driver Shareholders do not require looking after in terms of a reduced operating levy because they “have the option of making their investment viable by driving a share”. The rationale for the proposed policy is that Investor Shareholders who are unable to lease their shares are “receiving a highly reduced level of service” from WCT.

[81] When read in the context of the shareholder proposal voted on, the distinction between Investor Shareholders and Driver Shareholders is arguably also evident in the board’s 2 September 2020 letter to shareholders advising that the board had resolved to implement the 2020 Levy Policy. The letter refers to “a need to take measures which instills the shareholder confidence and minimizes the financial stress for them” and that the board has decided “to charge reduced levies for the shares which are not in operation as they are deemed to be dormant and not receiving the same level of service as operating shares”.

[82] It is contended on behalf of the directors that the 2020 Levy Policy was a policy available to all shareholders. However, it is arguable on the basis of the contemporary documents referred to above that the policy expressly distinguishes between Investor Shareholders and Driver Shareholders and is primarily intended to “look after” the investment of Investor Shareholders who are not able to lease and operate their shares, and minimise the financial stress on them. The shareholder proposal voted on expressly states that the need for the policy arises because it has become more difficult for Investor Shareholders to lease their shares. While the policy is theoretically available to Driver Shareholders, the proposal contemplates that most Driver Shareholders can and will continue to make their investment viable by driving. In order to qualify for the reduced levy, a Driver Shareholder would need to choose to stop driving and decommission their vehicle.

[83] In summary, I consider that it is arguable that the obligation on shareholders to pay the operating levy is a condition attached to shares by the Constitution, and that s 117 of the Act was engaged by the proposal for the 2020 Levy Policy, and the requirements of s 117 were breached because the policy was not approved by special resolutions of the relevant interest groups.

[84] It is, therefore, also arguable that the directors breached their duty in s 134 of the Act.

[50(c)]: Duty to act in good faith and in the best interests of the company

[85]Section 131 of the Act provides that:

131Duty of directors to act in good faith and in the best interests of the company

(1) Subject to this section, a director of a company, when exercising powers or performing duties, must act in good faith and in what the director believes to be the best interests of the company.

[86] The standard under s 131 is a combination of subjective and objective standards. As Fogarty J put it in Sojourner v Robb:10

[102] In this context, the standard in s 131 is an amalgam of objective standards as to how people of business might be expected to act, coupled with a subjective criterion as to whether the directors have done what they honestly believe to be right. The standard does not allow a director to discharge the duty by acting with a belief that what he is doing is in the best interest of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company. If a director believes that the duty to act in the best interests of the company is a duty always to act in the best interests of the shareholders, and never in the interests of the creditors, in a situation of doubt as to the solvency of the company, the director cannot be said to be acting in good faith. Creditors are persons to whom the company has ongoing obligations. The best interests of the company include the obligation to discharge those obligations before rewarding shareholders.

[87] The subjective aspect of the duty reflects the reluctance of the courts to “second-guess” directors’ commercial decisions.11

10 Sojourner v Robb [2006] 3 NZLR 808 (HC) at [102], upheld on appeal without discussion on this point – Sojourner v Robb [2008] 1 NZLR 751 (CA).
11 Vercauteren v B-Guided Media Ltd [2011] NZCCLR 9 (HC) at [51].

[88] The applicants contend that the 2020 Levy Policy has had a significant adverse impact on a revenue stream of high importance to WCT. Mr Roe states in his affidavit that levies raised on shareholders have been WCT’s largest and most reliable revenue stream. Vanna Seng is a shareholder and former director of WCT, and worked as a chartered accountant for six years prior to becoming a taxi driver. He has provided an affidavit in which he estimates that foregone revenue to the end of 31 March 2022 because of the policy was in the order of $520,000 (excluding GST). Mr Seng also estimates that foregone levy revenue on an ongoing annual basis while the 2020 Levy Policy remains in force would be in the order of $447,000–$560,000 (excluding GST).

[89]Mr Olney submits that:

(a)prima facie, the proposition that implementation of a policy that will result in significant loss in respect of WCT’s most predictable annual revenue stream, while running at an operating loss (as WCT has done since 2020) is not obviously in the best interests of the company;

(b)the board previously received legal advice (the Buddle Findlay advice) cautioning them of the difficulties in demonstrating that a policy that has the effect of significantly reducing revenues is in the best interests of WCT, and that advice also cautioned the board of the need to draw a clear distinction between the interests of shareholders (or a group of shareholders) and the interests of WCT;

(c)therefore, it is difficult to see how the directors could have reached such a belief in good faith without actively considering analysis about the implications of the policy and considering those implications relative to available alternatives.

[90] In this regard, there is reference in the minutes of the board meeting held on 27 May 2020 to analysis being sought in relation to potential levy policies:

Resolution no. 307

Board resolved that a levy structure process that encompasses for no levies for non-operating shares and variable levies for the shares in use, be completed

by the Management and a report with analysis be tabled by early next week for Board decision.

[91]The minutes also state in the general business section:

Item 3. Driver Retention –

The Board acknowledged driver retention as the biggest challenge to deal with in the current environment with unprecedented challenges presented by Covid 19.

The Board agreed to look at variable levy structure as one of the key tools to deal with this challenged [sic] and emphasised the Management to table a report with relevant analysis in support of their recommendations.

[92] However, there is no evidence before the Court that such analysis was prepared and provided to the board for consideration prior to the implementation of the 2020 Levy Policy.

[93] Mr Cavanaugh submits that the directors have provided evidence of their honest belief underlying, and reasons for, their decision to impose the reduced levy. These include:

(a)the backdrop of Covid-19 and its restrictions from March 2020;

(b)the context of threats from shareholders to terminate operating contracts which would have seen fewer shareholders to levy for WCT’s provision of services;

(c)the insolvency of WCT’s competitor, Green Cabs;

(d)the 17 July 2020 shareholder resolution, seconded on 20 July 2020 and passed at the 13 August 2020 AGM by a 65.5 per cent majority;

(e)review by the board from March 2020 to August 2020 of WCT’s costs and non-essential functions which might be removed to relieve financial pressure;

(f)consideration by the board of WCT’s financial position and risk of insolvency in the absence of a reduced levy;

(g)the fact of repeated legal advice from Gibson Sheat and the board’s reliance on it;

(h)the importance of the board retaining drivers for the long term financial health of WCT.

[94]I consider these beliefs and reasons below.

[95] While the evidence indicates that Covid-19 and its restrictions were a factor in the introduction of the 2020 Levy Policy, it is clear that the possibility of a levy policy providing relief for shareholders who could not lease their right to operate had been considered by the board well before Covid-19; the evidence indicates it was looked at in 2012 and again in early 2019. Further, the 2020 Levy Policy remains in place in 2023. So, while Covid-19 was undoubtedly a factor in the implementation of the 2020 Levy Policy, it seems that this type of policy is more generally linked to any circumstances which affect the ability of shareholders, in particular Investor Shareholders, to operate their shares.

[96] There is evidence from Mr Clyma of threats from shareholders to terminate their Operator’s Contracts and sell their shares and that some shareholders took this option. However, this would not necessarily lead to their being fewer shareholders to levy for WCT’s provision of services as contended on behalf of the directors. If shares were being sold, then necessarily there will be a replacement shareholder. And, if shares that were sold were not being operated because the share could not be leased, it is possible that the replacement shareholder may also be a driver who would operate the share.

[97] Further, cl 7.1(b)(iv) of the Constitution provides that the directors may, by notice in writing to any shareholder who has ceased to be a party to a current Operator’s Contract, call on the shareholder to transfer all ordinary shares held by the shareholder to a person nominated by the directors at the “fair value” thereof as fixed

in accordance with cl 7.3. Clause 7.4 provides that if a shareholder fails to transfer his or her share within 28 days then any two directors may execute a transfer of the shares and receive the purchase money for such shares from the purchaser and hold the purchase money in trust for the former shareholder (subject to any lien over the proceeds of sale of such shares for any debts or liabilities to WCT). Therefore, the board has the power under the Constitution to replace a shareholder who has terminated their Operator’s Contract.

[98] Further, there is contemporary documentary evidence that a significant concern with the termination of Operator’s Contracts and the sale of shares in 2020 may have been the impact on the share price, which is arguably concerned with the interests of shareholders rather than the best interests of WCT. The minutes of the board meeting dated 26 June 2020 record that:

The Board discussed further and discussed the case of a lessee persuading the lessor to sell her share to him at a cheap price after suggesting that he will otherwise give the termination notice.

Dave [Clyma] agreed that our long-term goal is stability of share price and we need to aim to minimise the cost for lessees and considering levy subsidies is one of the options.

[99] The 17 July 2020 shareholder proposal and the fact that it was passed at the 13 August 2020 AGM by a 65.5 majority is relied on by the directors as evidence that they were acting in good faith and in what they believed to be the best interests of the company. However, as discussed above, the 17 July 2020 proposal clearly distinguishes between Investor Shareholders and Driver Shareholders and is arguably directed primarily towards protecting the interests of Investor Shareholders. With regard to the vote at the 2020 AGM, although the proposal received majority support, of the 270 votes cast in favour, 251 were votes exercised by board members and management (including 195 proxy votes from drivers who could not attend the meeting). As noted above, a point of order as to entitlement to vote at the AGM of those who had suspended their Operator’s Contract was raised but not resolved at the meeting.

[100] The directors also say that in the period from January 2020 to August 2020, the board reviewed WCT’s costs and non-essential functions to identify costs and

non-essential functions that might be removed to relieve financial pressure on WCT. These measures are covered in the affidavit evidence of Mr Clyma. However, notwithstanding these measures, the focus of this application for leave is the decision by the directors to implement the 2020 Levy Policy and whether that was done in good faith and in what the directors believed to be in the best interests of WCT.

[101] Mr Clyma states in his affidavit evidence that the 2020 Levy Policy was to some extent driven by the risk of balance sheet insolvency. Mr Clyma’s evidence focusses on the potential bad debts arising out of shareholders not driving, or without anyone driving under a lease, not being able to pay the full levy. However, as submitted by Mr Olney, an overdue levy is not automatically a bad debt and may be recorded as an asset, not a liability. The minutes of the special board meeting held on 4 May 2020 record a discussion on the possibility of unpaid levies which suggests that at that stage unpaid levies were generally treated as overdue rather than as bad debts:

Dave [Clyma] mentioned that there could be many drivers who may not pay on time but eventually the levies are payable. At best they can be deferred.

…

Resolutions no. 301

Board decided that full levies for June are to be charged with the facility of deferring half levies for Operators who are having any hardship to pay on time. This applies to the shuttle fleet as well.

[102] Further, s 4 of the Rules provides various mechanisms for recovering overdue levies, minimising the possibility of bad debts. Under cl 4.8, the directors may require any shareholder, or operator who is a shareholder, and whose levies are three months or more in arrears to transfer their share or shares to a person nominated by the directors in accordance with art 7 of the Constitution as discussed above. In circumstances where the directors execute the transfer of shares, this process ultimately provides for the purchase monies to be held on trust for the former shareholder, subject to any lien over the proceeds of sale of such shares for any debts or liabilities to WCT, which would include unpaid levies.

[103] The directors also contend that the failure of Green Cabs Ltd was relevant to the risk of WCT insolvency. However, as Mr Olney submits, there would need to be

evidence as to whether the structure of Green Cabs was comparable to WCT before any conclusions could be drawn from the Green Cabs failure as to the risk of insolvency of WCT. Further, there is some contemporary evidence (for example, the minutes of the board meeting on 27 May 2020) that the liquidation of Green Cabs provided an opportunity for WCT, with drivers from Green Cabs transferring to WCT as lessees of shares.

[104] Mr Cavanaugh also refers to the directors’ reliance on advice from Gibson Sheat in 2019 and 2020. The difficulty here is that, apart from the advice provided in January 2019, there is no evidence as to the substance of the advice from Gibson Sheat, particularly the advice on the 2020 Levy Policy. Mr Cavanaugh submits that the directors are unable to produce the Gibson Sheat legal advice as it is subject to solicitor-client privilege and WCT has the claim to privilege and the right to waive it. WCT is represented on this application, but it is not apparent that any steps have been taken to request WCT to waive privilege in the advice.

[105] The 2012 Buddle Findlay advice to the board considered the issue of director’s duties in relation to the 2012 Differential Levy:

7.Directors’ duties

7.1Even if the Proposal is a matter the board can decide on, we think there is a real risk that the Proposal may not be able to be justified as in the best interests of the company.

7.2Directors’ duties under the Companies Act include obligations to act in what the director believes to be in best interests of the company and for a proper purpose.

7.3On the basis of the information we have seen, we think it would be difficult to show that the Proposal is in the best interests of the company. The proposal will reduce the company’s revenue at a time when it is just beginning to recover from substantial and sustained losses. The CEO’s December 2012 paper you forwarded to us by email on 10 December outlines the benefits as (1) providing investors a set limitation on their levy liability, and possibly (2) stablishing the share price, (3) preventing a fire sale of shares and (4) improving relationships between key investors and the company. The first three of these appear to be benefits to shareholders rather than the company. The fourth may benefit the company but a judgment [sic] would need to be made as to whether the amount of this intangible benefit would exceed the cost to the company of the lost revenue.

7.4Regarding the duty to act for a proper purpose, the interests of shareholders cannot be taken into account except to the extent that it is relevant to the best interests of the company.

[106] Mr Cavanaugh submits that the questions asked of and the advice from Gibson Sheat in 2019 and 2020 differed from the questions asked of and the advice received from Buddle Findlay in 2012. However, while the Buddle Findlay advice was in respect of the 2012 Differential Levy, not the 2020 Levy Policy, the advice indicates that any proposal that reduces the revenue of WCT at a significant time (for example, when the company is suffering an operating loss) and which focuses on the interests of shareholders such as stabilising the share price and preventing a fire sale of shares, is arguably not in the best interests of the company.

[107] While s 138(1) of the Act allows for a director to rely on legal advice, s 138(2) states that subs (1) only applies if the director acts in good faith, makes proper inquiry where the need for inquiry is indicated by the circumstances, and has no knowledge that such reliance is unwarranted. With regard to the directors’ reliance on the Gibson Sheat advice, in addition to there being no evidence as to the substance of the 2020 advice, there is no evidence as to the specific issues or questions in respect of which advice was sought, the information that was provided to Gibson Sheat, whether the 2012 Buddle Findlay advice was provided to Gibson Sheat, and whether the advice was tested by the directors or peer reviewed. On the basis of the evidence currently before the Court, it is not possible to properly assess whether the requirements in s 138(2) have been satisfied.

[108] In the circumstances, I do not consider that the fact of obtaining the advice from Gibson Sheat is sufficient to rebut the plaintiffs’ contention that there is an arguable case for breach of directors’ duties.

[109] Finally, the directors say that they believed the 2020 Levy Policy was in the best interests of WCT because it assists in retaining drivers who are fundamental to WCT’s revenue beyond the operating levy (in particular factoring and profit share). However, arguably that is not so. The 2020 Levy Policy only applies to shares that are not being operated on the basis that those shares are not using the same level of services as shares that are being operated. With regard to Investor Shareholders who

are unable to lease and operate their share, there is no driver to retain, and it is difficult to see how the 2020 Levy Policy incentivises the Investor Shareholder to find a driver. With regard to Driver Shareholders, the policy will only apply to them if they choose not to drive and decommission their vehicle, therefore reducing the number of drivers earning fares rather than retaining drivers. Therefore, it is difficult to see how the 2020 Levy Policy is a policy for retaining drivers. Arguably, it is a policy for retaining shareholders, which results in reduced levy revenue for WCT and potentially fewer drivers earning fares.

[110] As stated in Sojourner,12 the standard under s 131 does not allow a director to discharge the duty by acting with a belief that what she or he is doing is in the best interests of the company, if that belief rests on a wholly inappropriate appreciation as to the interests of the company.

[111] The directors contend that they believed the 2020 Levy Policy was in the best interests of WCT. However, for the reasons set out above, and based on contemporary documents such as the 17 July 2020 shareholder proposal and the 2 September 2020 letter to shareholders, I consider that it is arguable that, in implementing a policy focussed on “looking after” the interests of shareholders or a group of shareholders and instilling “shareholder confidence” and minimising “financial stress” on shareholders or a group of shareholders, the directors’ contended belief that they were acting in the best interests of WCT was based on an inappropriate appreciation as to the interests of WCT. Therefore, I consider it is arguable that the directors breached their duty in s 131 of the Act.

[50(d)]: Duty to exercise powers for a proper purpose

[112]Section 133 of the Act provides that:

133 Powers to be exercised for proper purpose

A director must exercise a power for a proper purpose.

[113] Mr Olney submits that the “proper purpose” must be connected to the interests of the company. He submits that the evidence does not disclose that directors

12 Sojourner v Robb (the HC judgment), above n 10, at [102].

exercised their power to implement the 2020 Levy Policy for a purpose that is connected to the interests of WCT, as distinct from the interests of shareholders or a particular group of its shareholders.

[114] Mr Cavanaugh submits that the section is aimed at prohibiting a director’s abuse of power by acting for an improper reason, even if the director was acting within the scope of their powers. He submits that whether the directors were acting for an improper purpose is a subjective test.13

[115] Mr Clyma summarises his, and the board’s, purpose in implementing the 2020 Levy Policy as follows:

My purpose, and that of the board, was to best ensure the financial stability of the Company in very difficult and unprecedented times. The reduced levy enabled that, as it stood the best chance of retaining shareholders; as the shareholders or their lessee’s ability to drive are fundamental to the Company’s various revenue streams. In this respect, the structure of the Company is unusual as its ownership by shareholders is inextricably merged with the revenue generating operations of the Company which is also done through the shareholders.

[116] The focus is on retaining shareholders, as a shareholder’s or their lessee’s ability to drive is fundamental to WCT’s revenue streams. However, as discussed above, arguably, this was not in the best interests of WCT. It could be said that the policy operates as a disincentive on an Investor Shareholder to lease the share to a driver or to find a buyer for that share who may wish to operate it, and therefore the effect is to deprive WCT of levy revenue, while not increasing other forms of revenue derived from earning fares. The policy may also result in Driver Shareholders deciding to cease to operate their shares in order to claim the benefit of the reduced levy. This has the effect of further reducing levy revenue for WCT and also reducing revenue derived from earning fares.

[117] As submitted by Mr Olney, the issue of proper purpose is also bound up with the conflict of interest issue that arises due to the fact that it is alleged that five of the six directors on the board that resolved to implement the 2020 Levy Policy were Investor Shareholders; moreover, having implemented the policy, three of those

13 Eclairs Group Ltd v JKX Oil & Gas plc [2015] UKSC 71 at [15].

directors then purchased additional shares. As noted above, of the 270 votes cast in favour of the policy at the August 2020 AGM, 251 were votes exercised by directors and management staff.

[118] Overall, for the reasons set out above, it seems to me that it is arguable that the directors breached their duty in s 133 of the Act.

[50(e)]: Duty to exercise reasonable care

[119]Section 137 of the Act provides that:

137 Director’s duty of care

A director of a company, when exercising powers or performing duties as a director, must exercise the care, diligence, and skill that a reasonable director would exercise in the same circumstances taking into account, but without limitation, -

(a)the nature of the company; and

(b)the nature of the decision; and;

(c)the position of the director and the nature of the responsibilities undertaken by him or her.

[120] Mr Cavanaugh submits that directors are required to act with the skill and care expected from a reasonable director in the same circumstances; only being liable for gross negligence, not for failures to take all possible care.14 He also submits that in exercising their skill and care, directors are entitled to rely on professional legal advice.15

[121] The applicants say that the directors failed to exercise reasonable care, diligence and skill in making the decision to implement the 2020 Levy Policy. They say that, in circumstances where issues with regard to differential levies had been contentious among WCT shareholders, a reasonable director would be additionally careful and diligent to satisfy himself or herself by reference to robust information and analysis.

14 Kuwait Asia Bank EC v National Mutual Life Nominees Ltd [1990] 3 NZLR 513 (PC) at 532–533.
15 Section 138(1), Companies Act.

[122] It seems to me that, before implementing the 2020 Levy Policy, a director exercising the care, diligence and skill expected of a reasonable director in the same circumstances, particularly with the company suffering an operating loss, would want to see analysis as to the effect of the proposed policy on WCT’s revenue compared with alternative scenarios. As discussed above at [90]-[92], although the need for analysis seems to have been identified at board meetings, there is no evidence that any analysis with regard to potential levy policies was actually prepared and provided to the board before the decision was made to implement the 2020 Levy Policy.

[123] With regard to reliance on professional legal advice, as discussed above at [104]-[108], on the basis of the evidence currently before the Court, it is not possible to properly assess whether the requirements in subs 138(2) of the Act have been satisfied. In the circumstances, I do not consider that the fact of obtaining the advice is sufficient to rebut the plaintiffs’ contention that there is an arguable case for breach of directors’ duties.

[124] I consider that it is arguable that the directors breached their duty in s 137 of the Act.

Costs of the proceedings in relation to the relief likely to be obtained – s 165(2)(b)

[125] Section 165(2)(b) requires the Court to have regard to “the costs of the proceedings in relation to the relief likely to be obtained”. The Court of Appeal has approached this factor on the basis that it requires the court to undertake a cost/benefit analysis of the intended proceedings.16

Benefit

[126] With regard to benefit, as discussed above, Mr Seng has estimated that as a result of the 2020 Levy Policy, the foregone levy revenue to 31 March 2022 was in the order of $520,000 (excluding GST). He also estimates that the foregone levy review on an ongoing annual basis as long as the 2020 Policy remains in force will be in the order of $447,000–560,000 (excluding GST). This must also be considered in

16 He v Chen, above n 3, at [54]–[58].

the context of the fact that WCT has run at a significant operating loss in the last three financial years.

[127] The applicants’ evidence also identifies other alleged adverse impacts on WCT of the 2020 Levy Policy which may be alleviated by ending the policy including mitigating ongoing under investment in core systems and arresting a decline in service standards.

[128] The directors question the assumptions made by Mr Seng in his analysis and rely on the affidavit evidence from Mr Fakharzadeh, the general manager of WCT. The applicants say that Mr Seng’s analysis does not take into account:

(a)the impact of shareholders unable to pay the levy cancelling their Operator’s Contract, which could drive a spiral of further cancellations and proportionate increases in the levy on remaining shareholders, as well as a loss of operating vehicles;

(b)unpaid levies constituting bad debts for WCT, with an insolvency risk.

[129] Mr Cavanaugh submits that the question of loss requires a proper causal assessment, including of the counter factual situation if the levy had been fully imposed on all shareholders during the relevant period. He submits that the counterfactual must consider: the likelihood of all shareholders paying their full levy in the relevant period; the likelihood of shareholders cancelling their Operator’s Contract and the financial consequences, including of any spiral effect; the likelihood of recovering any unpaid levies if demanded in full; the likelihood of solvency concerns arising from unpaid levies; and the consequences of those solvency concerns.

[130] No such counter factual analysis has been put before the Court at this stage. However, with regard to cancellation of Operator’s Contracts, as discussed above at [96]-[97], where a shareholder cancels his or her Operator’s Contract, this may well result in either voluntary sale or forced transfer of shares, so that there would be a replacement shareholder who may then operate the share as an owner/driver or by leasing the share. This would likely minimise any adverse financial impact of

shareholders cancelling their Operator’s Contracts. With regard to unpaid levies, as discussed at [102] above, s 4 of the Rules provides various mechanisms for recovering overdue levies, including, where levies are in arears for three months or more, forced transfer of shares and recovery of debts due to WCT, minimising the possibility of bad debts.

Cost

[131] With regard to the costs of the intended proceeding, Mr Olney submits that, assuming WCT’s management provides reasonable cooperation for the efficient prosecution of the claims, and that extensive evidence is not required, the trial is unlikely to take more than a week, and the cost is likely to be less than $100,000 (excluding GST).

[132] The directors take issue with this estimate and say that the estimate of one week ignores the reality of claims of this nature including:

(a)the cost (and hearing time) of evidence on WCT’s financial position and the counterfactual referred to above;

(b)the need for evidence from the directors and for cross examination of the directors; and

(c)the need for WCT to call expert evidence to speak to a reasonable director’s conduct in the circumstances.

[133]The directors also say that it may be necessary to join a third party.

[134] Mr Cavanaugh submits that a hearing time of at least three weeks (and consequent cost) seems more likely.

Discussion

[135] While Mr Fakharzedeh has questioned whether the assumptions underlying Mr Seng’s estimate of lost revenue are sound, Mr Seng’s estimate is the only estimate currently before the Court. Based on Mr Seng’s estimate, the foregone revenue to

31 March 2023 is in the order of $1 million, with approximately a further $500,000 of foregone revenue annually. The relief likely to be obtained includes avoiding ongoing foregone revenue if the 2020 Levy Policy otherwise remains in place. There is no evidence from the directors that the policy is under review or about to be rescinded.

[136] As noted above, the applicants’ evidence also identifies other alleged adverse impacts on WCT of the 2020 Levy Policy which may be alleviated by ending the policy, including mitigating ongoing under investment in core systems and arresting a decline in service standards.

[137] On this basis, even if the cost of the intended litigation is double or triple the estimate put forward by the applicants (say $200,000 – $300,000), it seems to me that the cost/benefit equation falls in favour of a prudent business person pursuing the proceeding. In addition to the damages that would be claimed (currently $1 million) and other potential non-monetary benefits, avoiding just one further year of foregone levy revenue would potentially result in WCT receiving an additional $500,000 in revenue.

Any action already taken by WCT to obtain relief - s 165(2)(c)

[138] This is not a relevant consideration as no action has been taken by or on behalf of WCT in respect of the 2020 Levy Policy.

Interests of WCT in the intended proceedings being commenced – s 165(2)(d)

[139] The authors of Company Law in New Zealand suggest that this final statutory consideration requires the Court to take into account any particular benefits that the derivative action might have for the company as a distinct legal entity and any particular harm that may result to the company from the proceedings.17 They observe:18

The courts have, however, struggled to find any truly distinct role for this statutory consideration beyond factors that in reality relate to the cost, the

17 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 665.
18 At 665.

likely success or the significance of the potential recoveries of bringing a derivative proceeding.

[140] In He v Chen, the Court of Appeal accepted that “…in principle, if the company has an otherwise justified claim, it will be in the interests of the company to pursue it
…”.19

[141] The respondents raise two matters in contending that the proposed proceedings are not in the interests of WCT.

[142] First, as stated in the affidavit evidence of Mr Fakharzadeh, WCT currently has depleted reserves and it is submitted that WCT would be required to explore undesirable avenues to fund the proposed claim, including imposing additional levies on shareholders, selling its assets, creating and selling new shares, or taking on further debt.

[143] However, the funds required to meet litigation costs will be required over a period rather than upfront. Further, it is not clear that the imposition of an additional levy would necessarily be undesirable or onerous for shareholders. For example, a modest additional levy of $40 per month on all shares for one year would raise funds in the region of $240,000 towards funding of the intended proceedings.

[144] Secondly, Mr Cavanaugh submits that the applicants have an alternative remedy under s 174 of the Act (prejudiced shareholders). He submits that the remedies available under s 174(2) cover the same remedies as sought by the applicants in the proposed statement of claim and that a claim under s 174 would be more appropriate in the circumstances.

[145] However, even if the applicants in this case could bring a claim under s 174 of the Act, I do not consider that requires leave to be declined to commence the intended derivative action. The two types of claims are directed at different wrongs, would involve different respondents, and the remedies sought would not be the same. The proposed derivative action seeks to enforce the rights of WCT and to hold the directors accountable for breaches of their duties to WCT, including a claim for damages for

19 He v Chen, above n 3, at [31].

loss to WCT. Any claim under s 174 would focus on the manner in which the affairs of WCT have been conducted and seek relief for oppression or unfair prejudice to the applicant shareholders personally.

[146] In Beverley v Drylandcarbon GP One Ltd,20 an application for leave to bring a derivative action was made in the circumstances where proceedings were already being pursued under s 174 of the Act. The Court held that the fact that there was already a claim under s 174 of the Act did not prevent leave being granted to bring the derivative action:21
[99] A derivative action and unfair prejudice claim arising from a common factual background can co-exist particularly in a case where the two proceedings are directed at different wrongs, involve different respondents and seek different remedies.

The prudent business person

[147] Standing back and looking at all the matters raised in the round, I am satisfied that a prudent business person conducting their own affairs would commence the intended proceeding. The proposed claims against the directors are at least arguable. The potential value of the claims in terms of monetary and non-monetary benefits is significant for WCT which is currently running at a significant operating loss. The cost of pursuing the claims is not insignificant, but the cost/benefit analysis falls in favour of pursuing the claims. The bringing of the claims is in the interests of WCT including determining whether the directors have breached duties owed to WCT and in holding the directors to account for any such breaches.22

Conditions on which leave should be granted

[148]Section 166 of the Act provides that:

166 Costs of derivative action to be met by company

The court shall, on the application of the shareholder or director to whom leave was granted under section 165 to bring or intervene in the proceedings, order that the whole or part of the reasonable costs of bringing or intervening in the proceedings, including any costs

20     Beverley v Drylandcarbon GP One Ltd [2022] NZHC 3606.
21     At [99] (footnote omitted).
22     Thorrington v McCann (1998) 8 NZCLC 261,564 (HC) at 261,571.

relating to any settlement, compromise, or discontinuance approved under section 168, must be met by the company unless the court considers that it would be unjust or inequitable for the company to bear those costs.

[149]In Presley v CallPlus Ltd, the Court held that:23

[62] … Leave having been granted, the Court must order that the company meets the costs unless it considers it unjust or inequitable for the company to do so. The section creates a clear onus on the respondent to satisfy the court that it would be unjust or inequitable for the company to bear the costs. …

…

[67] … There are good policy reasons why the Act provides that once leave has been granted the onus is on the respondent to satisfy the court that it would be unjust or inequitable for the company to bear those costs. …

[150] The respondent directors and WCT submit that there is a good basis as to why it would be unjust to have WCT meet the costs of the proposed proceeding. With reference to the affidavit evidence of Mr Fakharzadeh, they refer to the financial position of WCT being relatively poor and having significantly worsened in recent history with drains on its reserves through significant operating losses, and the need to make necessary investments into the business and technology that should take priority over the pursuit of litigation. Mr Fakharzadeh also states that much of the cash or cash equivalents held by WCT is held by WCT for taxi drivers’ payments, rather than it being WCT’s money.

[151] The respondent directors and WCT submit that the issue of which party bears the costs of the intended proceeding should be deferred until a later stage (after determination of the proposed claim), and in the meantime the applicants should meet the costs of the proceeding, or that there should be an order capping the level of costs to be paid by WCT, with costs in excess of that cap to be met by the applicants personally. However, while there is no evidence before the Court as to the financial position of the applicants, Mr Olney submits that such orders would close the door to the Court, and that the applicants can’t carry the cost burden on behalf of WCT and all shareholders. In my view, the orders sought by the respondents raise a risk that the

23 Presley v CallPlus Ltd [2008] NZCCLR 37 (HC) at [62] and [67].

claims could not be pursued, or that the proceeding would have to be abandoned prior to trial.

[152] As discussed above, the costs of the proceeding will have to be met over time rather than upfront. It seems to me that even if the cost of the litigation cannot be met from cash funds, it could reasonably be met by WCT way of an additional levy on all shares. As discussed above, an additional levy to assist in funding the litigation would be modest and temporary. It may be contended that an additional levy is undesirable because the respondent directors, as shareholders, would to some extent be funding proceedings against themselves. However, as stated in Presley,24 “… the proposed defendant cannot call in aid his own shareholding as a means of placing further obstacles in the way of an applicant in the way of costs”.

[153] Overall, I am not satisfied that it would be unjust or inequitable for WCT to bear the costs of the intended proceeding to be brought for its benefit.

[154]The applicants have also sought an additional order as follows:25

WCT and its directors provide all reasonable assistance in relation to the proceedings, including giving the lawyers engaged by the applicants to act for WCT in the proceeding access to potentially discoverable documents within the control of WCT.

[155] The basis for this order appears to be that the affidavit of Mr Fakharzadeh discloses a degree of animus towards the applicants and that this raises concerns that WCT and respondent directors are not willing to provide reasonable assistance.

[156] Mr Chisnall submits that the order sought is very wide and premature. He submits that, if leave is granted, WCT is aware of the expectation that it should provide reasonable assistance to allow proceedings to be pursued and should not frustrate the proceedings.

[157] I am not satisfied that WCT and the respondent directors will not provide reasonable assistance in relation to the proposed proceedings. I am not prepared to

24 Above n 23, at [67].
25 See s 167 of the Act.

make the additional order sought by the applicants at this stage. I do, however, propose to reserve leave for the applicants to apply for ancillary orders as necessary under s 167 of the Act to give effect to the order for leave.

Result

[158]The application for leave is successful and I make orders as follows:

(a)an order under s 165 of the Companies Act 1993 granting leave to the applicants to bring proceedings in the name and on behalf of Wellington Combined Taxis Ltd against the second to seventh respondents in terms of the draft statement of claim attached to the originating application dated 19 December 2022;

(b)an order under s 167 of the Companies Act authorising the applicants to control the conduct of the intended proceedings;

(c)an order under s 166 of the Companies Act that the reasonable costs of the intended proceedings be met by Wellington Combined Taxis Ltd.

[159] I reserve leave to the applicants to apply for such ancillary directions or orders as may be required to give effect to these orders including under s 167 of the Companies Act.

[160] With regard to the costs of this application for leave, my preliminary view is that, given that WCT has abided the decision of the Court on leave, the costs of the application should be met by the second to seventh respondents on a 2B basis. The parties should endeavour to agree costs. However, if agreement cannot be reached, then memoranda may be filed (not exceeding five pages) and costs will be determined on the papers.

Addendum – Confidentiality

[161] In my minute dated 12 July 2023, an interim order was made that there is to be no public disclosure or reporting, by the media or otherwise, of certain information set

out in [8] of the minute because of the commercially sensitive and confidential nature of the information.26

[162] Subsequently, in the minute of Cooke J dated 22 August 2022, an order was made under r 5 of the Senior Courts (Access to Documents) Rules 2017 that neither the Court file nor any document relating to this application may be searched, inspected, or copied by anyone without the permission of a Judge, and only after the parties have been given the opportunity to be heard on any request to so search the Court file.27

[163] Given these orders, this judgment was released only to counsel for the parties on 2 October 2023 to enable them to advise by 16 October 2023 whether there are any parts of the judgment which they seek to have redacted from the public version of the judgment on the grounds of commercial sensitivity and confidentiality. Counsel for the parties have advised that no redactions need to be made.

[164]Accordingly, the judgment is now released and published.

Associate Judge Skelton

Solicitors:
Cameron Lawyers, Wellington for Applicants
McBride Davenport James, Wellington for First Respondent
Wotton Kearney, Auckland for Second to Fifth & Seventh Respondents

26 Minute of Associate Judge Skelton, 12 July 2023.
27 Minute of Cooke J, 22 August 2023.