Viranda Partners Limited v Guest
[2022] NZHC 2957
•14 November 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-2376
[2022] NZHC 2957
BETWEEN VIRANDA PARTNERS LIMITED
Plaintiff
AND
AND
ANDREW JOHN DEXTER GUEST
First Defendant
STEPHEN PATRICK DONOVAN
Second Defendant
Hearing: 1 November 2022 Appearances:
J Ryan for Plaintiff
A Butler KC and W Gambrill for First Defendant Appearance excused for Second Defendant (who abides)
D McLellan KC for Applicant (Veritas Capital Company Limited) B Prewett for Veranda Holdings Ltd (Non-party)
Judgment:
14 November 2022
JUDGMENT OF ASSOCIATE JUDGE LESTER
VIRANDA PARTNERS LIMITED v GUEST [2022] NZHC 2957 [14 November 2022]
[1] Veritas Capital Company Limited (Veritas) and Veranda Holdings Limited (VHL) are equal shareholders of Viranda Partners Limited (VPL). The defendants, Mr Guest and Mr Donovan, are the shareholders and directors of VHL along with Mr Bridgman. Mr Guest and Mr Bridgman are also directors of VPL (being two of the four directors). Mr Donovan was purportedly appointed a director of VPL but such is not reflected on the Companies Office Register, albeit Mr Donovan acted as a director.
[2] Veritas has two directors on the board of VPL (Mr Tim Chen and Mr Patrick Pan), the remaining two of the four directors. VPL claims Mr Guest, aided by Mr Donovan, diverted a valuable business opportunity VPL owned to another company which in turn gave Mr Guest an interest in that business opportunity. VPL brought this claim against Messrs Guest and Donovan in December 2021 alleging breaches of directors duties and breaches of fiduciary duties. A 10 day hearing is scheduled for August 2024. VPL is not trading. Mr Butler KC, counsel for Mr Guest, accepts: “There is undoubtedly dysfunction between VPL’s directors and VPL’s shareholders”.
Veritas seeks leave to pursue the present claim
[3]Veritas seeks the following orders:
(1)Granting Veritas leave to intervene for the purpose of continuing the proceedings on behalf of the plaintiff.
(2)Authorising Veritas to control the conduct of the proceeding on behalf of the plaintiff.
(3)Requiring the plaintiff to give Veritas any assistance it may reasonably require to continue the proceedings.
[4] The application is brought pursuant to s 165 of the Companies Act 1993 (the Act) which 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) …
(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.
[5]Section 167 of the Act provides:
167 Powers of court where leave granted
The court may, at any time, make any order it thinks fit in relation to proceedings brought by a shareholder or a director or in which a shareholder or director intervenes, as the case may be, with leave of the court under section 165, and without limiting the generality of this section may—
(a)make an order authorising the shareholder or any other person to control the conduct of the proceedings:
(b)give directions for the conduct of the proceedings:
(c)make an order requiring the company or the directors to provide information or assistance in relation to the proceedings:
(d)make an order directing that any amount ordered to be paid by a defendant in the proceedings must be paid, in whole or part, to former and present shareholders of the company or related company instead of to the company or the related company.
What Veritas must establish
Threshold
[6] Veritas must satisfy one of the two alternatives under s 165(3). The first would require Veritas to demonstrate VPL does not intend to continue these proceedings. Under the second, Veritas would have to demonstrate it is in the interests of VPL that the conduct of the proceeding should not be left to the directors of VPL or its shareholders as a whole.
[7] On behalf of Mr Guest, Mr Butler’s submissions emphasised that Veritas’ evidence does not demonstrate VPL does not intend to continue these proceeding. He submits that the capacity of VPL, that is, its ability to fund the litigation (which is discussed below), is not relevant to the Court’s assessment to VPL’s intention. Mr Butler is aided in that submission by counsel for VPL advising, pursuant to s 165(5), VPL remains committed to continuing with the proceeding.
[8] Further support for Mr Butler’s submission can be found in Company Law in New Zealand (2nd ed), where the authors note the courts have inferred an intention by the company not to litigate when it has ceased trading or the Board is deadlocked, or there is otherwise an impasse in management and control.1 The authors suggest that s 165(3)(b) is the more appropriate rubric under which to consider matters as deadlock, cessation of trading and wrongdoer control.2
[9] While here the alleged wrongdoers are not in control of VPL, it is common ground this is a dysfunctional situation and VPL is no longer trading.
[10] I approach the threshold issue on the basis s 165(3)(b) is the appropriate provision in this case.
The interests of VPL – funding the litigation
[11] Here, VPL decided to bring the present action. Mr Bridgman joined with the Veritas appointees on the VPL Board to approve the proceedings being issued. In support of Veritas’ application to take over this proceeding, Veritas relies on VPL having no independent ability to fund this claim. At the moment, Veritas is funding the litigation by paying VPL’s legal fees directly. That is against Mr Guest’s protests.
[12] Counsel for Veritas submits Mr Guest has refused to allow Veritas to support VPL or advance funds to it. It is also submitted Mr Guest has claimed that Veritas’ direct unilateral funding of the litigation is in breach of VPL’s shareholders’ agreement.
[13] Both Mr Prewett (counsel for VHL) and Mr Butler emphasised that Veritas has not made a formal proposal to VPL or to VHL regarding funding. As a consequence, the question of funding has not been formally put to the vote by VPL’s directors. Mr Butler makes the practical point that notwithstanding Mr Guest’s alleged position, Veritas has in fact funded the proceeding to date.
1 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2015) at 649.
2 At 650.
[14] Mr Butler goes on to submit VPL’s directors and shareholders may properly have different views about what costs VPL should incur, its spending priorities and how its funding should be provided. He submits that disagreements between the directors and shareholders regarding funding of the proceedings and spending priorities are not matters which should give grounds for the Court to conclude that it would be in VPL’s interests that VPL should not conduct this proceeding. Mr Butler submits if Veritas has a funding proposal, it should make the proposal to all VPL directors and to VHL.
[15] Under the shareholders’ agreement “funding and/or additional contributions to working capital required by the Company from time to time” is a matter for a unanimous resolution of the Board.
[16] The absence of a formal funding proposal by VPL needs to be seen in context. In short, the evidence strongly suggests the making of such a proposal would have been pointless. On 20 June 2022, Mr Guest’s lawyers wrote to VPL’s lawyers noting:
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.
[17] In the same letter, Mr Guest’s lawyers say funding is to be determined by unanimous resolution of the Board (pursuant to the shareholders agreement) and in the absence of unanimous resolutions, VPL should not have incurred any indebtedness to Veritas.
[18] Mr Bridgman’s position, as recorded in an email to Messrs Chen and Pan, is that he does:
… recognise that without Veritas’ funding the reality is that VPL would not be able to advance the case. The position is that VHL is not itself able to fund the VPL proceeding against Guest and Donovan, because Guest and Donovan are 2 of the 3 directors of VHL and would vote against VHL offering any such support. That should be obvious.
[19] Mr Guest’s position is Veritas paying VPL’s legal costs (and its taxation liabilities) is in breach of the shareholders’ agreement. However, Mr Butler submitted
in a practical sense the present funding arrangement was working as it had seen the proceedings issued and progressed in a proper way through to setting down. Given that apparent inconsistency, I invited Mr Butler to confirm that Mr Guest would withdraw his claim Veritas funding this proceeding was in breach of the shareholders agreement. Mr Guest cannot have it both ways. Mr Guest cannot submit the status quo in respect of funding does not need changing while keeping his powder dry on an argument that unilateral funding by Veritus represents a breach of the shareholders agreement by VPL. Mr Butler was not able to give the confirmation I sought.
[20] Mr Prewett, in his submissions, emphasised that the present application was premature, a theme echoed by Mr Butler. Mr Prewett submitted at best there was only uncertainty around further funding of this proceeding and if and when further funding was required, that issue should go to VPL’s Board. Again, I do not find that submission convincing given Mr Guest would, as a member of VPL’s Board, have to agree pursuant to the shareholders’ agreement to Veritas introducing funds to allow VPL to continue this claim against him.
[21] The idea mooted that the company could in effect ignore Mr Guest’s objections on the basis his rejection of a reasonable funding proposal was not in the interests of the company would beg the question of what was a reasonable proposal in the then prevailing circumstances and would be dependent on Mr Bridgman’s agreement.
[22] Mr Prewett suggested there may be other options open to VPL to fund the litigation and those alternative funding options should be considered by VPL’s Board. Again, this is unconvincing given what Mr Guest’s lawyers said about the financial position of the company and the passage quote above at [16]. Mr Prewett suggested VPL could seek to recover sums claimed to be owed to VPL by a company called Murphys Developments Ltd (Murphys), a company associated with the owners of Veritas. It is clear that Murphys does not accept it owes VPL any money, indeed, it is unclear whether the invoices relied on by VPL were even sent to Murphys. In any event, it is unrealistic for the funding of the present litigation to depend on a recovery of a claim for disputed invoices where proceedings to recover those invoices are a long way from being issued. VPL bringing a claim based on the Murphys’ invoices may involve another application for leave to bring a derivative action.
[23] What is clear, however, is there is no secure funding in place for this proceeding to be taken through to a 10 day hearing. The question I have to consider is whether it is in the interests of VPL that the conduct of the proceeding should not be left to its directors/shareholders in the absence of confirmed funding and where the present informal funding arrangement is subject to dispute.
[24] Mr Butler, in developing the argument that the present application was premature and anticipated obstacles that may not come to fruition, submitted, as the proceeding had progressed well to date, the Court should be slow to hand control to one shareholder. Mr Butler said he had been unable to find an authority involving a derivative application concerning the continuation of the proceedings as opposed to a party seeking to commence proceedings. That this application is to continue rather than commence proceedings does not, in my view, change the factors the Court must consider. However, it adds the additional factor that the applicant must show a reason why the continuation of the claim should be taken out of the control of the company.
[25] Mr Butler submitted that the dysfunction between the shareholders, which he went as far as describing as involving “bad blood” between Mr Guest and the Veritas interests, tainted Veritas’ ability to be trusted with the pursuit of VPL’s claim. He went so far as to say the proceeding had an element of utu about it.
[26] Mr Butler emphasised that the Court must not lose sight of the fact the cause of action here belongs to VPL and not to Veritas. Undoubtedly that is correct. However, the interests of Veritas and VPL are aligned. It is in Veritas’ interests to secure for VPL the best recovery possible for the company.
[27] The suggestion by Mr Prewett that Veritas might not be a suitable party to pursue the litigation on behalf of VPL ignores that Veritas can only receive a benefit from this litigation if VPL succeeds against the defendants. Veritas has no incentive to harm the interests of VPL.
[28] Mr Butler noted that Veritas’ sole director, Mr Tim Chen, is the son of Mr Brian Chen who is involved and, on the defendants’ case, consented to the transfer
of the business opportunity from VPL. I do not ignore the possibility of that conflict but there has been no suggestion Mr Brian Chen should be joined to the proceeding.
The interests of VPL – avoiding risk of proceedings being delayed
[29] It is plainly in the interests of VPL that its ability to pursue this proceeding be put on a firm and formal basis. While Mr Butler notes Veritas was only incorporated on 8 June 2021 and there is no evidence as to its assets, it has funded the proceeding to date. It is not in the interests of VPL that it be exposed to either the hearing having to be adjourned or come under challenge because it has not been able to comply with timetabling directions and/or otherwise properly prepare for the August 2024 hearing.
[30] Mr Ryan, counsel for VPL, submitted VPL wanted certainty around the proceeding and for it to be effectively managed.
[31] As to the submission the present application is premature and relies on anticipated rather than real difficulties, the reality is Mr Bridgman’s support for the litigation may cease at a time when it is too late for the fixture date to be maintained. As it stands, Veritas’ investment in the litigation, indeed the future of the litigation, is dependent upon Mr Bridgman’s continued support. Should Mr Bridgman change his allegiance then, absent a further urgent application for leave to pursue the claim under s 165, the proceeding would come to an end. If that occurred at an inopportune time, the two week hearing in 2023 would be at risk.
[32] It is in the interests of VPL that its status and ability (funding) to continue these proceedings be made certain. It is in the interests of VPL that it have certainty, both as to the authority for these proceedings and in respect of funding.
Decision on threshold
[33]I am satisfied the threshold for the making of a derivative order is satisfied.
Relevant factors in considering whether to grant leave
[34] Once s 165(3) is satisfied, the Court must still consider whether to grant the leave sought. There is no statutory limit on the factors the Court can consider in whether to grant leave, nor upon which factors should carry the most weight.
[35]Section 165(2) sets out four mandatory considerations. I now address each.
Consideration One: The likelihood of the proceedings succeeding
[36] This criteria does not require the Court “to conduct an interim trial on the merits”.3
[37] It has been said the appropriate test is that which should be exercised by a prudent person in the conduct of his or her own affairs when deciding whether to bring a claim. This includes considering such matters as the amount at stake, the apparent strength of the claim, the likely costs and the prospect of executing any judgment.4
[38] An unusual factor in this case is that the proceedings are already under way. VPL has already reached a view that it is appropriate and prudent for it to bring these proceedings.
[39] Mr Guest (in my view responsibly), for the purposes of this application, did not dispute that the proceeding meets the prudent business person test. Given the company already reached that conclusion in issuing this proceeding, I consider that the likelihood of the proceeding succeeding warrants leave being granted.
Consideration Two: Cost considerations
[40] In comparing the costs of the proceeding in relation to the relief likely to be obtained, similar considerations apply. The potential loss to VPL is put in the region of $25,000,000 and perhaps as much as $54,000,000. Mr Butler submitted quantum depended on feasibility studies which so far had not been produced so the claims
3 Vrij v Boyle [1995] 3 NZLR 763 at 765.
4 At 769.
needed to be treated with caution. This factor has been said to require asking whether the proceedings will have a “positive costs benefit for the company”.5 The applicant should provide evidence indicating the likely costs and level of recovery. While an indication of the level of recovery has been provided, the Court is left to make its own assessment of the likely costs. The practical point is that Veritas is underwriting those costs essentially at its own risk. While the profit VPL may have made from the business opportunity is disputed, the block of land to be subdivided pursuant to that opportunity is said to have sold in 2021 for $200,000,000 indicating the profits available from that opportunity were substantial. This is not a marginal case in terms of costs benefits.
[41]The authors of Company Law in New Zealand note:6
… where the company cannot afford to bring the proceedings, the applicant may improve his or her chances of obtaining leave if he or she undertakes to bear the costs of the derivative action.
[42] The authors note such an offer can in some cases be determinative of the leave application, although that will not necessarily be the case where the applicant has some ulterior motive for funding the litigation.
[43] No doubt Veritas has paid out not inconsiderable costs to get the case to the point that it has been set down. Significant ongoing costs lie ahead. The more Veritas spends on the basis of the present informal and opposed basis, the more it is exposed. Given Mr Guest’s objections to Veritas funding as noted at [16] above, if the possibility of an agreed funding basis existed, in my view, it was for Mr Guest to make that clear. Mr Guest cannot point to the non-absence of Veritas making a funding proposal when Veritas had no reason to believe such would be well received.
Third Consideration: Actions already taken
[44] The next consideration is whether the company has already taken any action to obtain relief. The authors of Company Law in New Zealand note this category will
5 Tweedie v Packsys Ltd (2005) 2 NZCCLR 584 (HC) at [51]; see also N M Tobin Orthodontics Ltd v Tobin [2013] NZHC 463 at [18].
6 Watts, above n 1, at 663.
only be relevant if the company has actually taken some additional steps to obtain relief. They note this consideration is not concerned with steps that might potentially be taken.7
[45] VPL proceedings are underway. I do not see that fact as bringing into play the above consideration.
Fourth Consideration: Overall interests of the company
[46] The final statutory consideration requires analysis of “the interests of the company … in the proceedings being … continued”. The authors of Company Law in New Zealand note the Courts have struggled to find any truly distinct role for this statutory consideration beyond factors that in reality relate to costs, the likely success of the claim, or the significance of the potential recoveries of bringing a derivative action.8
[47] I note here that if VPL’s claim succeeds, any recovery will be for VPL and have to be held to its credit. What will then happen to any recovery is another matter but it will not belong to Veritas. Absent funding from Veritas, VPL’s claim may flounder. Steps that make pursuit of the claim more certain must be in VPL’s interests. As VPL is not trading, granting this application does not cut across other activities of the company.
Other relevant considerations
[48] The Court has committed two weeks of hearing time to this proceeding. I consider it a relevant factor that granting this application will make it less likely the hearing will be subject to a late application for an adjournment. The allocation of lengthy hearing time represents a significant commitment of Court resources and means the allocated hearing time is not available to other litigants. A late adjournment application, perhaps because of funding uncertainties or a change in Mr Bridgman’s position, limits other potential users of that hearing time. Regularising the funding
7 Watts, above n 1, at 664.
8 Watts, above n 1, at 665.
and control of this proceeding makes an adjournment application less likely. Rather than the present application being premature and anticipating obstacles that may not arise being a weakness, in my view, it was appropriate for the present application to be brought now to head off the possibility of obstacles arising at a time when they may jeopardise the hearing.
[49] Mr Guest is concerned that if the application is granted, Veritas would be unlikely to conduct the proceedings in the interests of VPL rather, it would conduct the proceedings in its own interests. Just how that might be reflected in how the proceedings might be conducted in fact was not developed. Veritas has an interest in ensuring VPL’s case is advanced in the best possible manner. Anything Veritas might do that adversely impacts on VPL’s prospects of winning this case would benefit the defendants, not Veritas.
[50] I do not see this as a real concern. The only avenue for Veritas to recover is through VPL bringing its claim to a successful conclusion either through obtaining a judgment or settlement. If there is a settlement, such must be approved by this Court.9 The proceeding will remain subject to case management and control by the Court and will be in the hands of senior counsel. If the defendants have concerns as to how the proceeding is run they can raise them with the Court. If VPL obtains a judgment then any recovery will be paid to VPL.
[51] There is merit in the submission of Mr McLellan KC, counsel for Veritas, that the making of the orders sought would regularise what has been the reality of the situation to date, save that Mr Bridgman’s ability to have the casting vote over the future of the proceedings is removed. It is true, as Mr Butler submits, that the making of the order sought shifts the control of VPL’s proceedings from its directors to Veritas alone. But that is the consequence of any order under s 165, that is, the control of the proceedings moves from the company to the party seeking leave.
[52] I see no prejudice to Mr Guest or to VPL in the orders sought. Mr Butler submits the application is a significant intrusion on the rights of the shareholders who are effectively in a joint venture and who have a shareholders’ agreement.
9 Companies Act 1993, s 168.
[53] The reality is the shareholders’ agreement should not be used to prevent VPL pursuing its claim with Veritas’ support. The other reality is that the present dispute concerns Mr Guest and Mr Donovan allegedly gaining a benefit over the shareholders at the expense of VPL. Mr Butler’s submission loses its force in the face of the distrust between VPL’s shareholders.
[54] Mr Butler submits that giving control to Veritas may well mean that an element of objective assessment/control will be lost. In my view that overstates the risk when senior counsel who has had the conduct of this proceeding to date (not Mr McLellan) is to continue to be instructed. The substance of the allegations against the defendants is clear. Senior counsel will advise Veritas on the merits. The Court is able to revisit the leave under s 165 should it be established Veritas is not acting in VPL’s interests.
Limiting the scope of the present proceedings
[55] Mr Butler submits if the present application succeeds then the existing proceedings should not become a vehicle for Veritas to pursue separate and additional claims it considers VPL may have against Mr Guest. I agree that is appropriate. The present application should not be used as a backdoor for Veritas to have VPL bring, without leave, other claims against Mr Guest that VPL has not seen fit to pursue. Mr McLellan did not object to such a condition.
Standing to oppose the present application
[56] Mr McLellan submitted Mr Guest, as a director of VPL, did not have standing to be heard in opposition to the present application.
[57] While Mr McLellan did not press that submission, it is one I would not have accepted. Derivative applications often arise where either the alleged wrongdoer is in control of the company or there is deadlock preventing the company issuing the proceedings the applicant believes should be commenced. That very deadlock is likely to mean the company will not be able to give instructions to oppose the application. If the proposed defendant is not able to be heard it is likely that there will be no contradictor to the application. I agree with Mr Butler that it is appropriate that a defendant affected by the order has a chance to be heard.
[58] However, Mr Guest having actively unsuccessfully opposed the application, I am satisfied that it is appropriate Mr Guest should pay the costs of this application on a 2B basis, together with disbursements.
[59]Accordingly, I make the following orders:
(a)There are orders in terms of paragraphs 1(a), 1(b) and 1(c) of the application for leave to continue the proceedings as a derivative action dated 7 September 2022.
(b)There is an order that VPL may not amend its statement of claim to add causes of action unrelated to the present subject matter of the proceeding without leave and, for the avoidance of doubt, may not make allegations relating to Warkworth Holdings Limited, such would require leave.
(c)Mr Guest is to pay to Veritas’ costs on a 2B basis together with disbursements as fixed by the Registrar.
(d)Veritas is to provide regular reports to Mr Bridgman on the progress of the proceedings along with copies of all pleadings and Minutes.
(e)Veritas is to fund the present litigation with any claim it has to seek reimbursement of those costs to be dealt with pursuant to s 168 of the Companies Act 1993.
Associate Judge Lester
Solicitors:
Claymore, Auckland (for Plaintiff)
Martelli McKegg, Wellington (for First Defendant)
Steindle Williams Legal, Auckland (for Second Defendant) Maberly & Co, Auckland (for Veritas, non-party)