Viranda Partners Limited v Guest
[2023] NZHC 1185
•17 May 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2376
[2023] NZHC 1185
BETWEEN VIRANDA PARTNERS LIMITED
Plaintiff
AND AND
AND
ANDREW JOHN DEXTER GUEST
First Defendant/Applicant
STEPHEN PATRICK DONOVAN
Second Defendant/RespondentVERITAS CAPITAL COMPANY LIMITED
Intervening Party/ Respondent
Hearing: 8 May 2023 Appearances:
J D Ryan for Plaintiff
A S Butler KC and C W Gambrill for First Defendant Appearance excused for Second Defendant (who abides) D H McLellan KC for Veritas Capital Company Limited
Judgment:
17 May 2023
JUDGMENT OF ASSOCIATE JUDGE LESTER
(Leave to appeal)
This Judgment was delivered by me on 17 May 2023 at 12pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date 17 May 2023
VIRANDA PARTNERS LIMITED v GUEST [2023] NZHC 1185 [17 May 2023]
[1] Andrew Guest (Mr Guest) seeks leave to appeal orders granting Veritas Capital Company Limited (Veritas), a 50 per cent shareholder in the plaintiff, leave to in substance take over the running and funding of the present proceeding.1
[2] Viranda Holdings Limited (VHL), is the other equal shareholder in Viranda Partners Limited (VPL).
[3] The first defendant, Mr Guest, is a director of VHL alongside a Mr Bridgman. The other defendant, Mr Donovan, is a former director of VHL.
[4] Veritas has two directors on the Board of VPL (Mr Tim Chen and Mr Patrick Pan), the remaining two of the four directors.
[5] In this proceeding, VPL claims that Mr Guest, aided by Mr Donovan, diverted a valuable business opportunity owned by VPL to another company which in turn gave Mr Guest an interest in that business opportunity. VPL commenced its claim against Messrs Guest and Donovan in December 2021, alleging breach of directors’ and fiduciary duties. A 10-day hearing is scheduled for August 2024. Mr Butler KC, counsel for Mr Guest accepts “there is undoubtedly dysfunction between VPL’s directors and VPL’s shareholders” albeit, he observes such has not prevented this proceeding progressing to the point of being set down.
[6] Veritas has been funding the litigation, albeit informally. Mr Bridgman joined with the Veritas appointees on VPL’s Board to approve this proceeding being filed. VPL is not trading and has no independent ability to fund this claim. Veritas’ funding of the litigation occurs by it paying VPL’s legal fees directly, which it does against Mr Guest’s protest; he maintaining Veritas doing so is contrary to the shareholders agreement between Veritas and VHL.
[7] In short, orders were made granting Veritas the ability to take over the running of the proceedings because:
1 Viranda Partners Ltd v Guest [2022] NZHC 2957.
(i)it was in the interests of VPL that its ability to pursue its proceeding be put on a firm and formal basis;
(ii)the continuation of this proceeding was dependent upon Mr Bridgman’s support for the litigation which may cease at a time when it is too late for the fixture to be maintained; and
(iii)the Court has committed two weeks of hearing time to this proceeding. I considered it a relevant factor that granting the application would make it less likely that the hearing would be subject to a late application for an adjournment.
[8] The orders were made subject to conditions that VPL could not amend its statement of claim to add causes of action unrelated to the subject matter of the proceeding as it stands.
Leave to appeal – the applicable law
[9] The principles relating to the threshold for granting leave to appeal are not in dispute. I adopt Mr Butler’s summary from his submissions in respect of the principles which are as follows:
14.As Fitzgerald J observed in Finewood Upholstery Ltd v Vaughan:2
The requirement for leave to appeal [under s. 56 Senior Courts Act 2016] should serve as a “filtering mechanism”, to ensure that unmeritorious appeals of interlocutory orders, or appeals of interlocutory orders of no great significance to either the parties or more generally, do not unnecessarily delay the proceedings in which the orders were made.
15.However, the Court of Appeal has also held that:
… the understandable objective of regulating the volume of non-substantive appeals does not preclude the grant of leave where it appears that the interests of justice warrant further consideration by this Court.3
2 Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [13].
3 Fairway Holdings Ltd v McCullagh [2018] NZCA 605 at [14].
16.The applicable considerations articulated in Finewood, as summarised by the learned authors of McGechan,4 and as cited with approval by the Court of Appeal in Greendrake v District Court of New Zealand, are as follows:5
16.1A high threshold exists;
16.2The applicant must identify an arguable error of law or fact;
16.3The alleged error should be of general or public importance warranting determination or otherwise of sufficient importance to the applicant to outweigh the lack of general or precedential value;
16.4the circumstances must warrant incurring further delay;
16.5The ultimate question is whether the interests of justice are served by granting leave.
These are considerations only, any one of which may or may not be relevant to any specific application for leave.
[10] Mr Butler emphasised it was only because Veritas’ application had been brought as an interlocutory application in extant proceedings that leave is required. He noted that had leave been sought by way of originating application, Mr Guest could have appealed as of right.
[11] Referring to Parkinson v O’Brien, Mr Butler notes that the decision was effectively a final determination on what he submitted was a matter of substance rather than procedure.6 Mr Butler submitted that reality should be reflected in whether the threshold for leave to appeal has been met.
The alleged errors in the judgment
[12]The application asserts the judgment contains the following errors:
3.1The learned Associate Judge was wrong to conclude that it would be “pointless” for Veritas to make a formal funding proposal (Judgment [16]);
3.2The learned Associate Judge was wrong to conclude, in the absence of Veritas making a formal funding proposal, that the first defendant would vote against any such proposal (Judgment [16] and elsewhere);
4 Robert Osborne (ed) McGechan on Procedure (online ed, Thomson Reuters) at [SC 56].
5 Greendrake v District Court of New Zealand [2020] NZCA 122 at [6].
6 Parkinson v O’Brien [2021] NZCA 309 at [32] with reference to Simons v ANZ Bank New Zealand Ltd [2022] NZHC 1836 and Mathias v Earthquake Commission [2022] NZHC 2941.
3.3The learned Associate Judge was wrong to conclude, in the absence of Veritas making a formal funding proposal, that Viranda Holdings Limited’s directors would vote against any such proposal (Judgment 18] and elsewhere);
3.4The learned Associate Judge was wrong to conclude that any rejection by the first defendant of a funding proposal would “beg the question of what a reasonable proposal is in the then prevailing circumstances” (Judgment [21]);
3.5The learned Associate Judge was wrong to conclude that it was not a “real concern” that Veritas would not conduct the proceedings in the interests of VPL (Judgment [50]);
3.6The learned Associate Judge was wrong to conclude that “the shareholders’ agreement should not be used to prevent VPL pursuing its claim with Veritas’ support” (Judgment, para [53]); and
3.7The learned Associate Judge was wrong to order that the first defendant be solely liable for Veritas’ costs (Judgment, para [59(c)]).
[13] Those points are repeated in the submissions being described as identifiable “errors of fact and law”.
[14] The submissions, however, do not develop why the conclusions in respect of these matters were arguably wrong.
Errors 1-4
[15]The first four asserted errors all relate to funding of the proceedings.
[16] It is common ground that Veritas has not presented to the Board of VPL a formal proposal in respect of its funding of the litigation. Mr Guest, as one of two directors of VHL, essentially has negative control over VHL’s actions. If he does not agree with VHL taking a step, then it will not take place. VHL, as party to the VPL shareholders’ agreement has to, on Mr Guest’s argument, consent to Veritas advancing funds to VPL to fund the litigation.
[17] Mr McLellan KC’s submission for Veritas is that given Mr Guest is one of the defendants in VPL’s claim, he is conflicted in respect of decisions relating to this proceeding. Further, and as I develop below, Mr McLellan submitted the funding point is not central as to why the orders were made. He submitted this application was determined on basic principles namely, the present proceeding raises a sound claim,
that is, it is of substance and for a value that warrants the costs of it being pursued and therefore, it is in the interests of VPL that the proceeding be pursued and its ability to do so confirmed.
[18] Mr Butler’s submissions were, in effect (and these are not his words) that recourse to the derivative action procedure should have been a last resort. The application was premature where a funding proposal had not been proposed. Hence, in identifying what were alleged to be errors in the judgment, Mr Butler submitted the Court should not have concluded it was pointless to require a funding proposal to be put as the Court could not be satisfied that Mr Guest, as director of VPL, would not put its best interests first.
[19] Mr Butler suggested that the passage of a letter from Mr Guest’s solicitors concerning funding, referred to in the judgment, had to be considered in context.7 I found the evidence strongly suggested the making of a formal funding proposal by Veritas to VPL would have been pointless and in doing so referred to a passage in a letter from Mr Guest’s solicitors. Mr Butler, in his submissions in support of the leave application, reproduced the passage from the letter together with the preceding sentence on which he placed emphasis.
[20] The letter from Mr Guest’s solicitors was in response to the assertion by Veritas’ solicitors that, “it appears that any vote against the proposed funding by Mr Guest will be self-motivated, not in the best interests of VPL and designed to subvert VPL’s ability to fund the claims against him and his brother-in-law”. Mr Guest’s lawyers replied:
You have no basis to assert that Mr Guest would not act in the best interests of VPL [Mr Butler’s emphasis]. Given VPL’s current financial position, it is entirely appropriate for Mr Guest to ensure that VPL does not incur liabilities which it cannot pay. Given the liabilities VPL appears to be incurring, Mr Guest has proper grounds to consider that VPL should not assume further liabilities, and to vote accordingly.
7 Viranda Partners Ltd v Guest, above n 1, at [16].
[21] Mr Butler submitted that this passage confirmed Mr Guest was aware of his obligations as director and was not a basis for concluding it would have been pointless for Veritas to table a funding proposal.
[22] I disagree. The last sentence speaks for itself; Mr Guest’s view being “VPL should not assume further liabilities” and would vote accordingly. A formal funding arrangement between Veritas and VPL would be in the nature of an advance, certainly not a gift. It is safe to assume Veritas would not want to continue to fund VPL’s legal expenses without knowing it would be repaid from any recovery in the litigation.
[23] As noted, my judgment referred to the evidence strongly suggesting the making of a funding proposal would be pointless. What then is the evidence in support of that view versus the evidence in support of the contrary position? Mr Guest considers Veritas’ unilateral funding of the litigation is in breach of the shareholders agreement. VPL has not agreed to Veritas funding the litigation – Veritas is simply meeting the invoices direct.8
[24] Mr Butler submitted at the November 2022 hearing that the orders were unnecessary when the informal funding had proved to be adequate when it had seen a fixture date set. Given that submission, I invited Mr Guest to confirm he would withdraw his claim that Veritas’ funding was in breach of the shareholders’ agreement. It seemed to me that Mr Guest could not rely on the fact that the informal funding had permitted this proceeding to advance as far as it has, to support the submission that the s 165 orders were unnecessary while maintaining that funding breached the shareholding agreement. In short, I did not consider Mr Guest could approbate and reprobate the informal payment of costs. Mr Guest declined to withdraw his claim that the informal funding breached the shareholders’ agreement.
[25] So, at the moment, the present informal funding arrangement Mr Guest submits means no order was necessary:
8 Veritas meeting the indebtedness of VPL to its lawyers does not of itself give Veritas rights against VPL unless VPL ratifies or adopts the payment see Dunstan v BNZ [2023] NZHC 200 at [12]-[14].
(i)gives Veritas no control over the proceedings other than the ability to stop its informal funding;
(ii)give Veritas no certainty of being able to recover its costs from VPL, even if the litigation is successful; and
(iii)may mean if Mr Guest is correct, Veritas is breaching the shareholders’ agreement.
[26] Mr Guest would not agree to remove item (iii) in the preceding paragraph. Again, Mr Guest’s view of VPL taking on further liabilities is recorded in his solicitor’s letter set out at [20] above.
[27] What then is the evidence that Mr Guest would be prepared to agree to a proposal that addresses not only item (iii) (which he has already rejected when put as a standalone issue) but also items (i) and (ii)?
[28] There is no such evidence. Mr Guest does not suggest the type of proposal he might accept, only that he wants to consider a reasonable proposal.
[29] I have not been persuaded there is an arguable appeal point based on my conclusion that the evidence strongly suggests the making of a funding proposal would have been pointless. There is no evidence the other way, only speculation that a proposal might have been accepted.
[30] The commercial reality is, Mr Guest must be taken to be against this litigation, whoever funds it. Mr Guest has not offered to abstain when VPL makes decisions in relation to the litigation against him. Mr Guest declined to sign the VPL Resolution agreeing to the proceeding being commenced against him. Mr Guest would not even concede that the informal payments of the legal fees by Veritas were not in breach of the shareholders’ agreement in order to bolster his counsel’s submission that the informal payments should be seen as an answer to the application that Veritas take over the litigation.
[31] As to the prospect Veritas would not conduct the proceedings in the interests of VPL, I concluded such was not a real concern. Mr Butler notes that Mr Chen and Mr Pan appear unwilling to take action against entities associated with Mr Chen’s father. Mr Butler suggests that is arguably a conflict of interest and would affect how Veritas would pursue the claim on behalf of VPL.
[32] As recorded in the judgment, Veritas only stands to recover anything if VPL’s claim against the defendants is successful. Veritas has no possible motive for the proceeding it has informally funded, to not be pursued appropriately.
[33] If Mr Guest considers that VPL should issue proceedings against entities associated with Mr Chen’s father, which he believes the Board of VPL will not authorise, then he is free to seek leave to bring a derivative action; a fact I recorded in the November 2022 judgment.
[34] Mr Butler submitted that the VPL Board should consider the range of potential claims VPL has which could be supported through shareholder funding. So much is a counsel of perfection which is hard to apply given the relationship between the directors. The short point is, if Mr Guest or VHL wanted to offer funding to VPL to issue proceedings against entities associated with Mr Chen’s father, then that is up to them.
[35] The orders made were narrow in the sense that Veritas only has the ability to control the present litigation. Veritas has absolutely no incentive to advance this proceeding in a manner that reduces the prospects of the litigation being successful.
[36] Mr Butler developed what was in substance a new submission based on the shareholders’ agreement containing a dispute resolution provision. Mr Butler submitted the argument was not wholly new, referring back to his written submissions from the original hearing where he submitted: “To the extent there is disagreement between shareholders, there is a dispute resolution mechanism in the VPL shareholders’ agreement”.
[37] Mr Butler submitted where there was a shareholders’ agreement in place the Court was considering a s 165 application, such should be considered in the context of the obligations in the shareholders’ agreement. In short, Mr Butler submitted that an application under s 165 should not be seen as means to ‘workaround’ the dispute resolution process in the shareholders’ agreement.
[38]The argument was as follows:
(1)The shareholders’ agreement requires the shareholders: “To ensure that the business (of VPL) is conducted in the best interests of the company and on sound commercial principles …”.
(2)The shareholders’ agreement provides:
“Notwithstanding anything else in this Agreement or the Constitution, the Board must pass a resolution where the required majority of Shareholders have passed that resolution”.
(3)Had a funding proposal been advanced, the shareholders were obliged to consider whether it was in the best interests of VPL. If VHL disagreed with the proposal, Veritas could invoke the dispute resolution process which provides that after mediation the issue can be resolved by arbitration.
[39] Mr McLellan submitted this issue was a red herring. It did not change the fundamental merit of the application which is summarised at [17] above.
[40] Mr Butler did not submit in the November 2022 hearing that the s 165 application should be stayed pending the agreement of the parties (VPL being a party to the shareholders’ agreement) or the funding issue going to arbitration. It is too late to raise that argument now.
[41] Equally, it was open to VHL to trigger the dispute resolution process. If VHL considers Veritas is in breach of the shareholders’ agreement in funding litigation direct then VHL could have required that issue to ultimately go to arbitration. It has
not done so. The funding issue has been around for an extended period. Neither party has availed themselves of the dispute resolution process. The standard against which an arbitrator would determine the dispute on Mr Butler’s argument is what is in the best interests of VPL. That is ultimately the same question under s 165 of the Act. To the extent the argument is advanced as being a ‘workaround’ of the shareholders’ agreement, that is a means of avoiding the dispute resolution process in the shareholders’ agreement, it is too late to make that submissions in the context of an application for leave to appeal. The dispute resolution provisions in the shareholders’ agreement were not advanced as being a jurisdictional bar to the s 165 application in the way an arbitration clause is raised in support of a stay of proceedings.
[42] If the significance of the absence of a funding proposal is put to one side, as I think it should be, then what is left? Mr McLellan focused on the threshold requirement under s 165(3)(b), that is, an order may only be made if the Court is satisfied it is in the interests of VPL that the conduct of the proceeding should not be left to the directors or to the determination of the shareholders as a whole. In respect of this issue, Mr Butler’s written submissions note that VPL had in fact been diligently continuing the proceeding on the strength of the informal funding.
[43]Mr Butler submitted:
25. Significantly, the jurisdiction to grant leave exists only if it is “in the interests of the company”; not necessarily the “best” interests of the company. The logical corollary is that the Court must determine that, for some reason, it is not in the interests for the company for the directors or the shareholders as a whole to continue to conduct the proceeding.
[44] At the end of the day, Mr Butler’s submissions do not address why there is an arguable error in respect of the basic foundations of the November 2022 judgment. These were that:
(a)the proceedings had merit;
(b)VPL had no other means of funding the litigation other than through support of Veritas;
(c)The order was consistent with VPL’s own view that it wanted certainty around the proceeding and for the proceeding to be effectively managed; and
(d)that certainty not only depended on funding but removing the future of the proceeding in effect, being subject to Mr Bridgman’s continuing support for the proceeding.
[45] Being satisfied on these points, I concluded that the threshold for the making of the derivative order was satisfied. I am not persuaded that there is a reasonably arguable basis for error in relation to my finding on the threshold point.
[46] As to whether it is in the interests of VPL that control of the litigation be removed from the directors/shareholders, one need only refer again to the fact it is common ground that the relationship between the directors and shareholders is dysfunctional. It cannot be in the interests of VPL that the pursuit of its sound cause of action be left with directors and/or shareholders when the relationship between them involves, what Mr Butler described as “bad blood” between them.9 Mr Butler does not identify an arguable error on this point.
[47] At [34]–[47] of my November 2022 judgment, I addressed the four mandatory considerations as to whether to grant leave, assuming the threshold for leave had been satisfied. Of those four considerations, only the fourth, the overall interests of the company, was really challenged in this application. As I noted in the November 2022 judgment at [46], whether this category in fact adds anything to the other issues is open to debate but I noted that any recovery will be the property of VPL and what will become of that recovery will be a matter for VPL.10 The ultimate point is, there is simply no downside to VPL in the orders being made. Veritas funds this litigation at its own risk.
[48] VPL stands to benefit from a recovery with its funder knowing if the proceeding fails the funding is lost.
9 Viranda Partners Ltd v Guest, above n 1 at [25].
10 At [47].
Conclusion
[49] I have not been persuaded that arguable errors have been identified in the decision. Mr Butler emphasised that he had not been able to find another case where a s 165 order had been made in an extant proceeding. That of itself is not a ground for leave if no arguable error is identified.
[50] As to the challenge to the costs award against Mr Guest, an appeal on that issue alone is not warranted by any of the Greendrake factors.
[51]The application for leave to appeal is declined.
Costs
[52] Mr Guest will pay Veritas’ costs on a 2B basis plus disbursements as fixed by the Registrar.
Associate Judge Lester
Solicitors:
Claymore, Auckland (for Plaintiff)
Martelli McKegg, Auckland (for First Defendant)
Steindle Williams Legal, Auckland (for Second Defendant) Maberly & Co, Auckland (for Veritas, non-party)
Copy to counsel:
A B KC, Barrister, Thorndon Chambers, Wellington (for First Defendant)
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