Singh v Auckland Taxi Service Limited
[2021] NZHC 2157
•17 August 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000626
[2021] NZHC 2157
UNDER The Companies Act 1993 IN THE MATTER OF
An application to bring a derivative action on behalf of AUCKLAND TAXI SERVICE LIMITED and AUCKLAND GOLD LINE TAXI LIMITED
BETWEEN
JOGINDER SINGH
First Applicant
SUKHDEV SINGH HUNDAL
Second ApplicantSATNAM SINGH
Third Applicant
AND
AUCKLAND TAXI SERVICE LIMITED
First Respondent
AUCKLAND GOLD LINE TAXI LIMITED
Second RespondentAUCKLAND GOLD LINE CO- OPERATIVE TAXI SOCIETY LIMITED
Third Respondent
MANMOHAN SINGH DUA
Fourth Respondent
Hearing: 12 July 2021 Appearances:
L T Meys for Applicants
S S Khan and M Orange for Defendant
Judgment:
17 August 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
SINGH & ORS v AUCKLAND TAXI SERVICE LTD & ORS [2021] NZHC 2157 [17 August 2021]
This judgment was delivered by Associate Judge Andrew on 17 August 2021 at 4.30 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar
Date ………………………….
Introduction
[1] This is further litigation relating to the governance and control of the Auckland Gold Line Co-operative Taxi Society1 and its two subsidiaries, Auckland Taxi Service Ltd2 and Auckland Gold Line Taxi Ltd.3
[2] In earlier and related judicial review proceedings, Lang J ordered the Society to hold an AGM no later than 31 March 2019, and to make the share register available for inspection by all members.4
[3] These proceedings, commenced in May 2019, began with an application for urgent interim relief. Peters J ordered Mr Manmohan Dua, the chairman of the board of the Society and the board of the two subsidiaries, to take such steps as were required to reinstate Mr Joginder Singh’s access to the Auckland Airport taxi rank, but declined to grant relief in respect of the other four orders sought.5
[4] In the present application, Mr Joginder Singh, Mr Sukhdev Hundal and Mr Satnam Singh,6 apply for leave under s 165 of the Companies Act 1993 to bring a derivative action on behalf of ATS and Gold Line against Mr Dua. They claim to be members of the Society and directors of its board and its subsidiaries. They allege that Mr Dua is corrupt, that he breached director and fiduciary duties and misappropriated
1 The Society.
2 ATS.
3 Gold Line.
4 Deep v Auckland Gold Line Co-operative Taxi Society Ltd [2019] NZHC 217.
5 Auckland Taxi Service Ltd v Singh [2019] NZHC 971.
6 The applicants.
company funds. The application is interlocutory in the context of judicial review and contempt of court proceedings.
[5]The critical issues I must determine are:
(a)Do the applicants have standing, either as directors or members of the Society and/or its subsidiaries, to apply to bring a derivative action under s 165 of the Companies Act, or at common law?
(b)If so, are the claimed procedural defects so substantial and prejudicial that the application should be dismissed on the grounds it is an abuse of process?
(c)Have the applicants established that there is a reasonable likelihood of a claim of breach of directors’ duties (including fiduciary duties) against Mr Dua succeeding?
Background facts
[6] The Society is a registered Society under the Industrial and Provident Societies Act 1908.
[7] One of the objectives of the Society under its 2012 Rules is to operate an approved taxi organisation under the Land Transfer Act 1998 for the benefit of its members.
[8] In March 2013, the Society entered into a contract with Auckland International Airport Ltd for its subsidiary, Gold Line, to be an exclusive taxi transport operator at the airport. Since 2016, the airport contract has been held by ATS.
[9] The applicants are taxi drivers. Their status, and whether they remain as members of the Society and directors of its board and those of the subsidiaries, is at issue. It is not in dispute that the third applicant, Mr Satnam Singh, is a current member of the Society.
[10] Mr Joginder Singh, Mr Sukhdev Hundal, Mr Satnam Singh and Mr Dua were appointed directors of Gold Line, ATS and the Society in late 2015 or early 2016.
[11] In March 2016, Mr Jasvinder Gill, a member associated with the applicants, obtained an interim injunction against the Society restraining it from blocking shareholders from driving at the airport.7
[12] On 5 May 2018, the Society passed a resolution as sole shareholder of ATS and Gold Line removing Mr Sukhdev Hundal as a director of those companies. The applicants challenge the validity of that resolution.
[13] In 2017, Mr Ramal Deep, Mr Satnam Singh and Mr Surinder Kumar filed and served judicial review proceedings against the Society. It is not in dispute that Mr Satnam Singh in those proceedings is not the same as Mr Satnam Singh in the current proceedings. The judicial review proceedings contained eight causes of action and included, amongst other things, challenges to the process by which the board appointed new directors, including Mr Dua, in 2016 and decisions relating to the tender submitted to the Auckland Airport by ATS.
[14] There was a three-day trial of the judicial review proceedings before Lang J in February 2019. In his judgment of 22 February 2019, Lang J granted relief in respect of two causes of action only.8 In ordering that the Society was to hold an AGM no later than 31 March 2019, he directed it to give notice of a meeting to all members, including those not in good standing by virtue of non-payment of levies and those who were then subject to disciplinary proceedings that had not yet been concluded. He also ordered the Society to make the share register available for inspection by all members.
[15] The events of 31 March 2019 are at issue. Mr Dua and the respondents say that an AGM was held in accordance with the orders of Lang J. The applicants dispute that contention and say Mr Dua and the respondents are in contempt of court for failing to carry out Lang J’s orders.
7 The District Court proceedings.
8 Deep v Auckland Gold Line Co-operative Taxi Society Ltd, above n 4.
[16] In a minute of 29 March 2019 in the Deep v Auckland Gold Line Co-Coperative Taxi Society proceeding,9 i.e. before the AGM, Woolford J refused to make any ancillary orders in relation to the viewing of the share register or the standing of any particular member of the Society to attend, speak and vote at the then upcoming AGM.
[17] In the statement of claim of 9 April 2019 in the present substantive proceedings, Mr Joginder Singh, Mr Sukhdev Hundal and ATS were named as plaintiffs and Mr Dua as defendant. The plaintiffs alleged that the Society had made unauthorised salary payments to Mr Dua, that he had charged unauthorised personal expenses to ATS, and had made unauthorised decisions for and on behalf of ATS. The plaintiffs sought relief under the Declaratory Judgments Act 1908 and an inquiry pursuant to Part 16 of the High Court Rules 2016 into sums Mr Dua allegedly and unlawfully took from ATS. The pleadings also contained causes of action for breach of directors’ duties by Mr Dua, monies had and received by him and conversion.
[18] Mr Joginder Singh and Mr Sukhdev Hundal also sought leave under s 165 of the Companies Act 1993 to bring a derivative action on behalf of ATS against Mr Dua for alleged breach of directors’ duties and misappropriation of company funds (the first derivative application).
[19] As noted above at [3], on 6 May 2019 Peters J issued judgment in respect of the plaintiffs’ application for urgent interim relief, also noting there was an internal dispute within the Society and ATS as to control of the business.10
[20]On 22 May 2019, the Society’s auditors accepted their appointment.
[21] In September 2019, a panel of independent adjudicators determined that Mr Joginder Singh and Mr Sukhdev Hundal should not remain members of the Society. In October 2019, the board of the Society resolved to that decision of the independent panel, and subsequently removed Mr Joginder Singh and Mr Sukhdev Hundal as members. The applicants challenge that resolution.
9 Above n 4.
10 Above n 5, at [6].
[22] On 26 October 2019, the Society passed two further resolutions (one as shareholder of ATS and one as shareholder of Gold Line) and resolved to remove Mr Joginder Singh as a director of the two companies.
[23] The first derivative application was set down for a hearing in March 2020. However, on 9 March 2020, the parties filed a joint memorandum agreeing to vacate the hearing. The applicants say they had understood that there was an agreement with the respondents that the accounts of the Society were being audited. However, it is not disputed that there was no binding settlement agreement to that effect.
[24] On 10 March 2020, Moore J ordered that the first derivative application be withdrawn.
[25] On 28 April 2020, Bell AJ directed the plaintiffs, namely Mr Joginder Singh and Mr Sukhdev Hundal, to file an amended statement of claim by 26 May 2020. That amended statement of claim was finally filed some 11 months later, on 2 February 2021.
[26] In July 2020, the District Court proceedings were settled and the injunction discharged.
[27] In the amended statement of claim of 2 February 2021, there are two named defendants: ATS as the first defendant, and Mr Dua as the second defendant. The plaintiffs did not seek leave to add ATS as a party under r 4.56 of the High Court Rules.
[28] On 17 March 2021, the board of directors of the Society held a meeting for the purpose of considering whether Mr Satnam Singh should be removed as a director of ATS and Gold Line. The resolution was carried. The applicants challenge the removal of Mr Satnam Singh as director.
[29] The present (and second) application for leave under s 165 of the Companies Act was filed on 22 April 2021, together with a second amended statement of claim. ATS is now named as a respondent to the application, together with Gold Line, the Society and Mr Dua.
[30] The second amended statement of claim includes a contempt of court cause of action for alleged breach of Lang J’s February 2019 judgment and includes judicial review causes of action. The plaintiffs also seek an order that the Society be placed in liquidation under s 241 of the Companies Act.
[31] On 22 June 2021, the Registrar of Industrial and Provident Societies wrote to the Society giving notice that he intends to cancel the registration of the Society in “no less than two months from the date of the notice”.11
Relevant legal principles
[32]Section 165 of the Companies Act relevantly provides:
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 –
11 Industrial and Provident Societies Act 1908, ss 6(a)(i)-(iii).
(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.
[33]Under the definition in s 2(3)(a), a “related company” includes a subsidiary.
[34]In He v Chen, the Court of Appeal observed:12
[30] [Section 165(2)] 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.
(footnotes omitted)
[35] It is not the function of the Court on an application under s 165 of the Companies Act to determine the ultimate merits of the claim, nor to conduct an interim trial.13
[36]In Fruit Shippers Ltd v Petrie, Bell AJ held:
The bar under s 165(6) is limited to proceedings by shareholders and does not extend more widely to common law derivative proceedings by non- shareholders with the requisite interest.14
12 He v Chen [2014] NZCA 153, [2015] NZAR 437; see also Parkinson v O’Brien [2021] NZCA 309 at [34].
13 He v Chen, above n 12, at [38]; Parkinson v O’Brien, above n 12, at [35].
14 Fruit Shippers Ltd v Petrie [2020] NZHC 749 at [42].
Analysis and decision
Issue (a) – Do the applicants have standing, either under s 165 of the Companies Act or at common law?
[37] Only shareholders and directors have standing to make an application under s 165 for leave to bring proceedings on behalf of the company.15
[38] The Society is not a company for the purposes of the Companies Act 1993. As noted, it is a society registered under the Industrial and Provident Societies Act 1908.
[39] The respondents contend that the applicants, Mr Joginder Singh and Mr Sukhdev Hundal, are not directors of either subsidiary or the Society and are not shareholders for the purposes of the Companies Act 1993.16 They are also no longer members of the Society. They therefore have no standing to bring the application.
[40] The respondents further say that the Society has passed resolutions removing Mr Joginder Singh and Mr Sukhdev directors of the two subsidiaries, and that the board of the Society, acting in accordance with r 7 of its Rules, has removed both men as members of the Society. They note that neither Mr Joginder Singh or Mr Sukhdev Hundal have taken steps to challenge their removal as directors and/or members.
[41] In relation to the “purported” third applicant, namely Mr Satnam Singh, the respondents contend that he is not a party to these proceedings and accordingly has no standing to bring the interlocutory application for leave under s 165 or at common law.
[42] The applicants say that their removal as directors and members was invalid and that they have standing as directors under the Companies Act to bring the derivative proceedings. They also say that it is reasonably arguable that they continue to remain as directors and that that is the threshold that they need to establish for the purposes of standing.
15 Companies Act, ss 165(1) and (3), See also Latumbo v Pacific Auto Carrier (NZ) Ltd [2018] NZHC 2773 at [65] onwards.
16 Under the definition in s 2(3)(a) of the Companies Act1 4, a “related company” includes a subsidiary. The fact that it is the Society that is the shareholder in the two subsidiaries is thus not a bar to obtaining leave, but that definition does not overcome the fact that members of the Society are not shareholders.
[43] I reject the applicants’ submissions. As van Bohemen J held in Latumbo v Pacific Auto Carrier (NZ) Ltd, the question of whether an applicant is a director or shareholder is not a matter to be left for subsequent determination at trial on the basis that it is arguable that he or she is a director or shareholder.17 Van Bohemen J noted the requirements of s 165 are clear: when granting leave to bring the derivative action, the Court must be satisfied that the person seeking to bring the derivative action is, in fact, a director or shareholder.18
[44] I find the applicants do not have standing to bring a derivative action under s 165 of the Companies Act. They are not directors of any of the entities and neither are they shareholders. My finding that they are not shareholders does not depend on any assessment of whether they remain as members of the Society. As noted, the Society is not a company under the Companies Act and even though members of the Society do hold shares in it, they do not fall within the statutory criterion under s 165.
[45] That leaves, then, the issue of whether Mr Satnam Singh, who is still a member of the Society, has standing to bring a common law derivative claim in the name of ATS and Gold Line.
[46] Derivative actions give individual shareholders standing to pursue litigation on behalf of a company against alleged wrongdoing by its directors. Such actions are a “pragmatic but principled”19 exception to the ordinary position that the company is “the proper plaintiff”:20 A company regulates wrongs it has suffered and irregularities in its affairs, therefore decisions to litigate rest with the company’s board of directors and minority shareholders have no standing.21 This has long been referred to as “the exception to the rule in Foss v Harbottle”, a touchstone authority in common law derivative actions.
17 Latumbo v Pacific Auto Carrier (NZ) Ltd, above n 5, at [68].
18 Latumbo v Pacific Auto Carrier (NZ) Ltd, above n 5, at [68].
19 Universal Project Management Services Ltd v Fort Gilkicker Ltd [2013] EWHC 348 (Ch) at [16].
20 Hilson v International Drug Detection Agency Ltd [2015] NZHC 1331 at [17]-[20]; Burland v Earle [1902] AC 83 (PC) at 93.
21 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 20.4.2.
[47] Since the enactment of the Companies Act 1993 in New Zealand, Foss v Harbottle no longer applies to derivative claims by company shareholders in New Zealand. However, as Bell AJ noted in Fruit Shippers Ltd v Petrie, s 165 does not displace the application of the common law rule to other corporate entities not covered by the Companies Act, for example, body corporates, limited partnerships and incorporated societies.22
[48] At common law, there are two conditions an aggrieved shareholder must meet to bring a derivative action. First, that there has been a “fraud on the minority”; second, that the wrongdoing directors had “control” of the general meeting.23 The English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2),24 held that a plaintiff must meet the following threshold to bring a claim:
In our view, whatever may be the properly defined boundaries of the exception to the rule, the plaintiff would at least be required before proceeding with his action to establish a prima facie case (i) that the company is entitled to the relief claimed and (ii) that the action falls within the proper boundaries of the exception to the rule in Foss v Harbottle.
(emphasis added)
[49] The scope of qualifying wrongs by directors includes equitable wrongs in a variety of forms, such as fraudulent or dishonest conduct and certain breaches of fiduciary duty; but mere negligence is not sufficient.25 In Matthias v Pearce, this Court noted that fraud on the minority would include attempts to dissipate corporate assets or illegal activity.26 In English cases, derivative proceedings have been allowed where directors have exercised their powers in the manner which conferred personal benefits at the expense of the company and other shareholders, although not meeting the
22 Fruit Shippers Ltd v Petrie, above n 9; see also Singh v Boutique Body Corporates Ltd [2019] NZHC 1707 at [26], Small v Body Corporate 324525 [2018] NZHC 19 at [28].
23 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 at 211A-B and 221 H–222B.
24 Prudential Assurance Co Ltd v Newman Industries Ltd (No 2), above n 23, at 211A-B and 221H– 222B
25 Universal Project Management Services Ltd v Fort Gilkicker Ltd, above n 19, at [18].
26 Mathias v Pearce (1992) 6 NZCLC 68, [1992] MCLR 437 (HC) at
threshold of fraud.27 “Wrongdoer control” will also arise where the aggrieved members and the wrongdoers are in “50/50 control”.28
[50] In assessing the application of the common law derivative action to corporate entities other than companies, it is instructive to focus on the fundamental rationale for derivative actions at common law and “double derivative” actions. Lord Denning MR explained derivative proceedings in the following way in Wallersteiner v Moir:29
But suppose it is defrauded by insiders who control its affairs – by directors who hold a majority of the shares – who then can sue for damage? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise proceedings to be taken against themselves. If a general meeting is called, they will vote down any suggestion that the company should sue them themselves. Yet the company is the one person who is damnified. It is the one person who could sue. In one way or another some means must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.
(emphasis added)
[51] In so-called “multiple” or “double” derivative proceedings, standing is extended to minority shareholders of a wronged company to bring a derivative action against members of its holding company where the holding company itself was subject to the same wrongdoer control as the company.30
[52] In Universal Project Management Services Ltd v Fort Gilkicker Ltd, Lord Briggs considered whether “multiple” or “double” derivative proceedings are recognised at common law. In holding that they are recognised, he adopted the approach of Lord Millett in Waddington Ltd v Chan Chun Hoo Thomas.31 In that case,
Lord Briggs held:32
[26] In my judgment, the common law procedural device called the derivative action was, at least until 2006, clearly sufficiently flexible to accommodate as the legal champion or representative of a company in wrongdoer control a would-be claimant who was either (and usually) a member of that company or (exceptionally) a member of a parent company
27 See, for example, Alexander v Automatic Telephone Co [1900] 2 Ch 56; Cooks v Deeks [1916] 1 AC 554 (HL); Daniels v Daniels [1978] 1 WLR 406; Abouraya v Sigmund [2014] EWHC 277 (Ch).
28 Universal Project Management Services Ltd v Fort Gilkicker Ltd, above n 21, at [18].
29 Wallersteiner v Moir (No 2) [1975] QB 373 (CA) at 390.
30 Universal Project Management Services Ltd v Fort Gilkicker Ltd, above n 21, at [21].
31 Waddington Ltd v Chan Chun Hoo Thomas, [2008] HKCU 1381.
32 Waddington Ltd v Chan Chun Hoo Thomas, above n 31, at [26].
where that parent company was in the same wrongdoer control. I would not describe that flexibility in terms of separate forms of derivative action, whether headed “ordinary” “multiple” or “double”. Rather it was a single piece of procedural ingenuity designed to serve the interests of justice in appropriate cases calling for the identification of an exception to the rule in Foss v Harbottle.
[53] The facts of Universal Project Management Services Ltd v Fort Gilkicker Ltd are analogous to this case. In that case, the applicant was not a shareholder in the company in which the cause of action was alleged to be vested. Rather, it was a member of a limited liability partnership which owned all the shares in that company.
[54] In his survey of Waddington Ltd v Chan Chun Hoo Thomas and other English cases in Fruit Shippers Ltd v Petrie, Bell AJ noted that the flexible approach ensures proceedings against wrongdoers in control of a company may be heard.33 He noted that Popeley v Popeley, is an example of beneficiaries of a trust holding shares having standing to sue an alleged wrongdoer on behalf of the company.34 He referred also to Zabusky v Virgtel Ltd, where the Queensland Court of Appeal held that there was no rule that a plaintiff in a derivative proceeding had to be registered as a shareholder.35 Bell AJ concluded that the common thread of the authorities is a willingness to allow standing to someone with sufficient interest if it is required to see that justice can be done.36
[55] Applying these principles, I find that Mr Satnam Singh has standing as a member of the Society to bring a common law derivative action in the name of ATS and Gold Line (being subsidiaries of the Society) against their chairman and director, Mr Dua. As noted above, the facts are somewhat analogous to those of Universal Project Management Services Ltd. The corporate structure here is akin to a holding company with two subsidiary companies and those companies remain in the control of the alleged wrongdoer, Mr Dua. Mr Dua is said to be conducting himself against the interests of the members of the Society (including Mr Satnam Singh), being the shareholder of ATS and Gold Line. Granting the applicants standing may be the only way to ensure Mr Dua is held to account and the grievances of members of the Society
33 Fruit Shippers Ltd v Petrie, above n 14.
34 Popeley v Popeley [2018] EWHC 276 (Ch).
35 Zabusky v Virgtel Ltd [2012] QCA 107, [2012] 1 Qd R 285.
36 Fruit Shippers Ltd v Petrie, above n 14, at [46].
“reach the court [where they] would not otherwise reach it because ... [of] the essential element of the wrongdoer’s control.”37
[56] As to whether leave should be granted in this case and the correct procedure to adopt, those are issues I address below. That includes the related standing and procedural issue of whether Mr Satnam Singh cannot, as alleged by the respondents, bring an application for leave to commence a derivative proceeding because he is not a party to the substantive proceedings.
Issue (b) – Are the procedural defects so substantial and prejudicial that the application should be dismissed on the grounds of an abuse of process?
[57] The procedural irregularities with these proceedings are extensive and troubling; the frustrations of the respondents are entirely understandable.
[58]Those irregularities can be summarised as follows:
(a)Mr Joginder Singh and Mr Sukhdev Hundal filed these proceedings in April 2019 against Mr Dua, together with an interlocutory application for leave to bring a derivative action by ATS against Mr Dua (the first derivative application). In advance of leave being granted, ATS was named in the statement of claim as the third plaintiff. Mr Joginder Singh and Mr Sukhdev Hundal were the first and second plaintiffs.
(b)In the amended statement of claim of 2 February 2021, ATS was no longer a plaintiff but named as the first defendant. No leave was sought by the applicants under r 4.56 of the High Court Rules to add ATS as a defendant.
(c)In the second amended statement of claim of 22 April 2021, ATS is the first plaintiff, Gold Line the second plaintiff, and Mr Joginder Singh and Mr Sukhdev Hundal the third and fourth plaintiffs.
(d)The second amended statement of claim was accompanied by this present, second application for leave to bring a derivative action (22
37 Jafari-Fini v Skilglass Ltd [2004] EWHC 3353 (Ch) at [42]-[43].
April 2021). Mr Satnam Singh is named as the third applicant, having not previously been named in any of the documents before the Court. ATS, Gold Line, the Society and Mr Dua are named as the four respondents.
(e)As part of their current application, the applicants, Mr Joginder Singh and Mr Hukhdev Hundal, seek a declaration under the Declaratory Judgments Act 1908 that they are valid directors of ATS and Gold Line. However, a declaration under the Declaratory Judgments Act cannot be made by way of interlocutory application. Part 18 of the High Court Rules applies to proceedings in which the relief claimed is under the Declaratory Judgments Act 1908.38 Such proceedings must be commenced by way of statement of claim and be accompanied by an application for directions as to service.
(f)On the day of the hearing, the applicants filed an application under r 7.52 of the High Court Rules for leave to file a second interlocutory application for leave to issue derivative proceedings. It was not served on the respondents prior to the hearing.
[59] I agree with the submissions of Mr Khan, for the respondents, that the application for leave to commence a derivative action, whether under s 165 or at common law, should have been brought as an originating application under Part 19 of the High Court Rules (and accompanied by affidavits and a draft statement of claim). As an alternative, it could have been brought under Part 18 (with a statement of claim seeking leave under s 165 of the Companies Act or at common law, together with application for directions under r 118.4(1) of the High Court Rules) affidavits and a draft intended pleading in the proposed substantive pleading). The Court of Appeal has recently confirmed that derivative actions in the normal course should be made by originating application.39
38 As provided in r 18.1.
39 Parkinson v O’Brien, above n 12, at [32]. In the English courts the civil procedure rules require a claimant to seek leave to bring a derivative proceeding (CPR19.9). In Waddington Ltd v Chan Chun Hoo Thomas, the Hong Kong Final Court of Appeal held that that was a requirement of Hong Kong law as well.
[60] The application pursuant to r 7.52 for leave to file a second interlocutory application was no doubt brought against the background of the first derivative application having been withdrawn. In my view, however, both applications should have been brought as an originating application and in the manner I have outlined above. In this case, the current three applicants would be the correct applicant parties for the purposes of an originating application. The respondents to such application should be Mr Dua, ATS, Gold Line and the Society.
[61] The extensive procedural irregularities are not to be dismissed lightly. However, the respondents have not in substance been prejudiced by the manner in which the applicants have sought leave to bring a derivative proceeding. They have been squarely put on notice as to the basis of the application and had a full and fair opportunity to respond by way of evidence and submissions. The addition of the critical applicant party, namely Mr Satnam Singh, at a relatively late stage in the process, is certainly unorthodox. But again, the respondents have had a full and fair opportunity to respond and address the issue of Mr Satnam Singh’s standing.
[62] The procedural deficiencies do not, in my view, constitute an abuse of process. In accordance with r 1.5 of the High Court Rules, I find that the failure to comply with the various procedural requirements, while irregularities, do not nullify the proceedings. The application for leave, brought on an interlocutory basis, can in substance be dealt with as an originating application for leave with Mr Satnam Singh as one of the applicants. It makes no sense to now require the applicants to start again and file a fresh application.
Issue (c) – Claims of breach of director’s duties and fiduciary duties
[63] I agree with the approach of Bell AJ in Fruit Shippers Ltd v Petrie that in determining whether leave should be granted for a common law derivative action, the Court should adopt the same test in relation to granting leave under s 165. As Bell AJ noted, there are benefits in a consistent approach using the same test for both.40
[64] I have referred at [31] and [33] above to the statutory criteria under s 165(2), including the likelihood of the proceeding succeeding. In addressing that factor and
40 Fruit Shippers Ltd v Petrie, above 14, at [50].
the other statutory criterion in s 165(2), the Court needs to adopt the standard exercised by a prudent businessperson in the conduct of his or her own affairs.41
[65] The first cause of action in the second amended statement claim of 22 April 2021 alleges breaches of the Companies Act and the company’s constitution by Mr Dua. In substance, it is contended that Mr Dua profited personally from his position as director, with the company paying for unauthorised personal expenses and Mr Dua exploiting or taking personal advantage of the company’s business opportunities. The applicants seek to hold Mr Dua accountable for what they say is serious mismanagement of the company’s affairs.
[66] In assessing the evidence to support these allegations I recall the caution that it is not the function of the Court on either a s 165 application or a common law derivative leave application to determine the ultimate merits of the claim.42 Nor is its role to conduct an interim trial.43
[67] In addressing the issue of the likelihood of these allegations succeeding, the following, undisputed facts provide important context. First, there have been no elections for the directors of the Society’s board since 2015 or 2016 and contrary to the Society’s Rules.44 Second, there have been no audited accounts since 2015. The applicants have been trying for some considerable time to obtain copies of the most recent financial statements for the Society but without success. Their understanding that they were to be provided with the financial statements was the basis for their withdrawing the first derivative application.
[68] I acknowledge Mr Dua challenges much of the applicants’ evidence in support of their application. However, I am in no position to assess the credibility of the witnesses, and the allegations that the applicants make are supported by documentation, including Visa card statements. There is also conflicting evidence before the Court from Mr Dua as to the status of the outstanding audit of the financial
41 See He v Chen, above n 12; Parkinson v O’Brien, above n 12.
42 He v Chen, above n 12, at [38].
43 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765, affirmed recently in Parkinson v O’Brien, above n 12, at [35].
44 Rule 15.1 provides that directors shall be elected for terms of three years each.
accounts. Auditors were appointed more than two years ago, but there are still no audited accounts available.
[69] I accept the applicants’ allegations against Mr Dua are serious, but they are supported by some probative evidence. This includes the table attached to the affidavit of Mr Joginder Singh, sworn April 2019, which asserts Mr Dua paid himself unauthorised fees and expenses of approximately $155,000. Mr Joginder Singh also contends that Mr Dua has run his personal businesses from the offices of ATS and for which ATS pays rent of $805.00 per week. That claim is supported by Companies Office documentation.
[70] I find that there is a reasonable likelihood of the claim of breach of director’s duties, including fiduciary duties, against Mr Dua succeeding. This would include breaches of ss 131 and 133 of the Companies Act and conceivably a claim that Mr Dua made personal use of the companies’ business opportunities and therefore breached fiduciary duties under the doctrine of corporate opportunity.45 There are serious accountability issues on the evidence before me. I acknowledge that Mr Satnam Singh has provided conflicting evidence as to his support for the claims against Mr Dua, but Mr Satnam Singh’s credibility will be a matter for trial. In any event, there appears to be a reasonable level of support for the derivative action and, as I have noted, the allegations are supported by documentary evidence and that of other witnesses.
Conclusion
[71] It is clear that the company itself will not bring proceedings against Mr Dua (he is in control). I also note that the applicants are to fund the proposed litigation.
[72] I find therefore that the applicants have established a proper basis for the Court to grant leave to bring a common law derivative action against Mr Dua.
[73] However, I find leave should be confined to the first cause of action in the amended statement of claim, namely a breach of director’s duties under the Companies Act 1993 and/or fiduciary duties. I decline to grant leave in relation to any of the other
45 See Vrij v Boyle, above n 43.
causes of action in the statement of claim, including liquidation orders under s 241 of the Companies Act.46
[74] The second amended statement of claim includes an application for judicial review. Leave is of course not required to bring that claim. It may be that such claims raises issues similar to those covered by the first cause of action, although any relief granted is likely to be of a different kind. The applicants’ ability to obtain relief by way of judicial review, while relevant, is not a basis for refusing leave to bring a derivative action.
[75] The procedural defects, while significant, do not justify dismissing the application. The applicants have established a reasonable likelihood of a claim of breach of director’s duties and/or breach of fiduciary duties against Mr Dua succeeding. The other criteria for the grant of leave have also been established.
Result
[76] I grant Mr Satnam Singh’s application to bring a common law derivative action in the name of Auckland Taxi Service Ltd and Auckland Gold Line Taxi Service Ltd against Mr Manmohan Dua, alleging breach of director’s duties under the Companies Act 1993 and/or breach of fiduciary duties. Leave is confined to those causes of action (in substance the issues raised by the first cause of action in the amended statement of claim dated 22 April 2021).
[77] Leave is granted on the condition that the applicants fund the proceedings. That will not, of course, preclude Mr Satnam Singh from seeking costs if the substantive proceedings are successful.
[78] The applicant, Mr Satnam Singh, is to file and serve an amended statement of claim that complies with the orders in this judgment by 17 September 2021. The applicants will need to consider whether the other causes of action in the second amended statement of claim exist independently of any derivative action.
46 As to the contempt of court cause of action, the parties to that cause of action should be the original parties to the proceedings before Lang J.
[79] I direct Mr Dua to provide on a counsel-only basis (namely, to Mr Meys) copies of the most recent financial statements for the Society and/or for Auckland Taxi Service Ltd and Auckland Gold Line Taxi Service Ltd by 3 September 2021. He must also disclose by the same date to Mr Meys the financial statements for all years since 2016 that are available.47
[80] I grant the parties leave to seek further orders including in relation to the disclosure of the financial statements.
[81] As to costs, I am of the preliminary view that, having succeeded, the applicant, Mr Satnam Singh, is entitled to costs on a 2B basis but with a 25 per cent discount to take into account the procedural irregularities which appear to have added to the cost of the proceedings.
[82] If the parties cannot agree on costs, then memoranda are to be filed and served within 14 days (no more than three pages’ length each).
[83] The applicants, who include Mr Sukhdev Hundal (a named party to the second amended statement of claim) should give consideration to whether the funds that Mr Hundal obtained from the Society (Mr Dua contends without authority) of between
$12,000 and $13,000 should be placed in a solicitor’s trust account pending resolution of the outstanding disputes between the parties.
Associate Judge P J Andrew
47 In his judgment of 22 February 2019, above n 4, Lang J noted that the financial statements for the Society for the 2016, 2017 and 2018 years should have been prepared some time ago. He also noted that it should not have been difficult for the board to have arranged for updated financial information to be prepared quickly in relation to the period commencing on 1 April 2018 (at [139]).
0
10
0