X & J Trading NZ Limited v Wayne and Nancy Limited
[2020] NZHC 251
•24 February 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2019-404-002461
[2020] NZHC 251
BETWEEN X & J TRADING NZ LIMITED
First Plaintiff
PAIRUA VILLAGE HOLDING LIMITED
Second Plaintiff
AND
WAYNE AND NANCY LIMITED
First Defendant
WEIBIN JIANG
Second Defendant
LING XIE
Third Defendant
BEREBORN TRADING LIMITED
Fourth Defendant
continued overleaf…
Hearing: 24 February 2020 Appearances:
H McDermott for the Plaintiff
K L Chiu for the Fifth Defendant
Judgment:
24 February 2020
JUDGMENT OF VAN BOHEMEN J
This judgment was delivered by me on 24 February 2020 at 3.00pm Pursuant to Rule 11.5 of the High Court Rules
…………………………
Registrar/Deputy Registrar
X & J TRADING NZ LIMITED v WAYNE AND NANCY LIMITED [2020] NZHC 251 [24 February 2020]
…continued from previous page
DAHUA GROUP LIMITED
Fifth Defendant
TRIPLE 6 TRADING LIMITED
Sixth Defendant
VICTORXIE TRADING LIMITED
Seventh Defendant
Solicitors/Counsel:
Righteous Law, Auckland Forest Harrison, Auckland
Introduction
[1] Ms Li, who is not a party to the proceeding, wishes to bring proceedings in the name of X & J Trading NZ Ltd (X & J Trading) and Pairua Village Holding Ltd (Pairua Village) of which she is a shareholder and director, against the defendants in relation to the purchase and operation of a butcher’s shop.
[2] On 5 November 2019, Ms Li applied in the names of X & J Trading and Pairua Village for:
(a)Leave to bring a derivative action on behalf of X & J Trading and Pairua Village under s 165 of the Companies Act 1993;
(b)Directions as to service on X & J Trading and Pairua Village and the defendants;
(c)Freezing orders in respect of the funds in the bank accounts of the second, third, fourth and seventh defendants.
[3] By judgment dated 19 November 2019, Palmer J granted directions as to service with respect to the derivative action and declined the application for freezing orders on the basis he was not sufficiently persuaded of the merits of the application to grant them on a without notice basis. Palmer J said he was not persuaded there was sufficient evidence of a real risk of dissipation of the assets to justify the orders. Palmer J directed that the matter be called in the duty list once evidence of service had been filed.
[4] Following Palmer J’s judgment, the proceeding was served on the defendants and Ms Li sought the freezing order originally applied for on an “on notice” basis.
[5] In a minute dated 29 December 2019, Katz J noted the procedural muddle caused by the solicitors for Ms Li not following the required procedures under the High Court Rules 2016 for seeking leave to bring a derivative action pursuant to s 165 of the Companies Act 1993. Katz J then provided guidance on those procedures, observed that an application for leave should have been brought in the name of Ms Li,
and reminded the solicitors for Ms Li that the substantive proceeding on the part of X & J Trading and Pairua Village can be brought only once leave had been obtained.
[6] Katz J said it necessarily followed that the application for freezing orders must be declined until leave to bring the proceeding in the names of X & J Trading and Pairua Village had been obtained. Katz J also recorded that even if she had had jurisdiction to grant the freezing orders she would have declined them because no further evidence had been filed to address the evidential issues identified by Palmer J.
[7] Katz J said that before the proceedings could progress further, they needed to be put on a proper procedural footing. She said that in her view the best course would be for the current proceeding to be struck out or discontinued, and for a fresh proceeding to be filed under Part 18 of the High Court Rules 2016 or Ms Li may wish to bring proceedings in her own name. Katz J said she would not strike out the proceeding at that time in order to give Ms Li’s solicitors time to consider and reflect on the issues she had raised. In the meantime, Katz J directed that the defendants were not required to take any further steps until further order of the Court and directed the proceeding be placed in the duty list for further review on 3 February 2020.
[8] By minute dated 3 February 2020, Fitzgerald J noted that no further steps had been taken to address the procedural issues raised by Katz J but noted that Ms Li was presently in China and that the travel restrictions in place to deal with the coronavirus outbreak were likely to hamper Ms Li’s return to New Zealand in the short term. Fitzgerald J recorded that given the procedural defects in the way the proceeding had been commenced and given that no steps had been taken to regularise them, the Court might feel the need to take steps at its own initiative, for example, by striking them out. However, in order to give Ms Li’s solicitors further time to consider matters, Fitzgerald J put the proceeding in the duty list for 24 February 2020.
[9] By memoranda dated 31 January and 20 February 2020, Ms McDermott, solicitor for Ms Li, recorded the steps taken to date, recited relevant parts of the High Court Rules and s 165 of the Companies Act, took issue with Katz J’s advice regarding the correct course to be taken to regularise the proceeding, in particular the need for leave to be obtained before the substantive claim was filed, and said that the
proceeding could be concluded on a more timely basis if it were allowed to proceed rather than being struck out.
[10] Ms McDermott proposed that the application for freezing orders and the substantive claim be put on hold until the application for leave to bring a derivative action had been dealt with by the Court. She also proposed that Ms Li be given until 31 March 2020 to file and serve her affidavit in support of the application for leave because of the difficulties of getting documents sworn in China at present.
Discussion
[11] While, as Ms McDermott notes, s 165 of the Companies Act does not stipulate that the application for leave must be filed prior to the substantive claim, that does not alter the fact that, as a matter of law, a shareholder cannot bring an action in the name of the company unless and until leave has been obtained.
[12] When a company acts, it acts through its board of directors, as provided for in s 138(1) of the Companies Act:
The business and affairs of a company must be managed by, or under the direction or supervision of, the board of the company
[13] Ordinarily, therefore, any proceeding in the name of a company requires the approval of its board. Section 165 provides an exception to that requirement. However, until the exception is granted by way of leave, a proceeding cannot be filed in the name of the company. It follows that no substantive claim can be filed by a shareholder in the name of a company unless leave has been obtained.
[14] It will not help matters to continue down the course Ms McDermott has proposed because, at present, the plaintiffs in the proceeding are named as X & J Trading and Pairua Village even though Ms Li has not obtained leave to bring the proceeding in the names of those companies. That is procedurally and legally incorrect.
[15] Accordingly, as foreshadowed in the minutes of Katz and Fitzgerald JJ, I strike out this proceeding on the basis that it has been brought by a shareholder in the names
of the two plaintiff companies without leave having been obtained under s 165 of the Companies Act 1993.
[16]If Ms Li wishes to pursue her claim she may either:
(a)File an application in her own name for leave under s 165 of the Companies Act to bring proceedings in the name of X & J Trading and Pairua Village; or
(b)File substantive proceedings in her own name.
Costs
[17] In her minute dated 3 February 2020, Fitzgerald J held that the fifth defendant, the only defendant to appear at the call on 3 February 2020, was entitled to costs of that appearance and directed that the fifth defendant file a memorandum as to the costs sought.
[18] Ms Chiu, counsel for the fifth defendant, has filed a schedule of costs and disbursements seeking costs of $4,304, calculated on a 2B basis, for preparation and appearances at three calls on 19 December 2019, 3 February 2020 and 24 February 2020.
[19] I agree that 2 B costs are appropriate and that the fifth defendant is entitled to costs for preparation for the call on 19 December 2019 and for her appearances on 19 December 2019, 3 February 2020 and 24 February 2020. However, given Katz J’s direction on 19 December 2019 that the defendants were not required to take any further steps until further order of the Court and the fact no response has been required of the defendants to the memoranda filed by Ms McDermott on 31 January and 20 February 2020, I see no basis for awarding costs for the preparation for the calls on 3 and 24 February 2020.
[20]Accordingly, I certify costs of $2,390 for the fifth defendant.
G J van Bohemen J
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