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Birnie Capital Property Partnership Limited v Birnie HC Auckland CIV 2010-404-3000 [2010] NZHC 2070 (29 October 2010)

Last Updated: 1 December 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-003000

AND BETWEEN BIRNIE CAPITAL PROPERTY PARTNERSHIP LIMITED Plaintiff

AND WILLIAM NORMAN BIRNIE First Defendant

AND STEPHEN ROBERT NORRIE Second Defendant

AND WILLIAM NORMAN BIRNIE, STEPHEN ROBERT NORRIE AND RICHARD JAMES O'BRYEN HOARE AS TRUSTEES OF THE PAONEONE SETTLEMENT TRUST NO.5

Third Defendants

AND PICASSO NOMINEES LIMITED Fourth Defendant

Hearing: 22 October 2010

Counsel: Z Kennedy and M Pascariu for Plaintiff

M D O'Brien and T M Horder for Defendants

Judgment: 29 October 2010

JUDGMENT OF ASHER J (Security for costs)

This judgment was delivered by me on Friday, 29 October 2010 at 4pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:

Minter Ellison Rudd Watts, PO Box 3798, Shortland Street, Auckland 1140, DX CP24061. Email: zane.kennedy@minterellison.co.nz and mihai.pascariu@minterellison.co.nz

Bell Gully, PO Box 1291, Wellington 6140. DX SX11164. Email: mark.obrien@bellgully.com

BIRNIE CAPITAL PROPERTY PARTNERSHIP LIMITED V WILLIAM NORMAN BIRNIE AND ORS HC AK CIV-2010-404-003000 29 October 2010

Introduction

[1] This is a security for costs application. The defendants seek an order in the form of undertakings to pay any costs awarded in favour of the defendants, with those undertakings to be from the persons who are financing the proceedings for the plaintiff. In the alternative orders are sought requiring the plaintiff to pay a sum into Court, or for such other security order as is appropriate. There is a substantive fixture set down for 14 March 2011.

[2] A feature of this application is that proceedings are brought by the plaintiff as a consequence of leave being granted to bring proceedings under s 165 of the Companies Act 1993 as a derivative action. It is necessary to briefly set out the background.

Background

[3] On 9 December 2009, Allen Patrick Peters and Bernard Paul Quinn brought an originating application for leave to bring a derivative action on the basis of a draft statement of claim in the name and on behalf of Birnie Capital Property Partnership Ltd (“BCPP”). BCPP had been incorporated on 20 November 2007 at the initiative of the first defendant in these proceedings, William Norman Birnie.

[4] Two years earlier, in 2007, Mr Birnie had owned or controlled a number of significant property projects. He decided to promote those projects to third parties who would invest in them through a new vehicle which ultimately was BCPP.

[5] 33,250,000 shares were issued in BCPP of which 16,000,000 were held by Paoneone Settlement Trust No.5(“Paoneone”), an entity controlled by interests associated with Mr Birnie, and are identified as the Group “A” shares. The other

17,250,000 shares were held by the investor shareholders who had decided to invest in Mr Birnie’s projects and are identified as the Group “B” shares. The Group A shareholders held 48.1 percent of the shares and the Group B shareholders 51.9 percent. The Group B shareholders included Mr Evans, and a Mr Gardiner for

whom the second applicant, Bernard Paul Quinn, was an alternate director. There was an independent chairman of the Board.

[6] There was a shareholders agreement signed on 21 November 2007. The Group A and B shareholders could each appoint a maximum of four directors to the Board. The constitution of the company provided that a valid resolution required the vote of the majority of directors, including at least one Group A director and one Group B director. The result was that no resolution of the plaintiff could be passed without the agreement of at least one director representing the Group A shareholders and one representing the Group B shareholders.

[7] An undated agreement called an agreement for sale and purchase of property projects was entered into in early 2008 (“the property agreement”). The parties to the property agreement were various interests associated with Mr Birnie on the one part and BCPP as the purchaser. Under the property agreement BCPP purchased from Mr Birnie and his interests, interests in various properties including property called in the agreement “the Lion Rock assets”. The Lion Rock assets were owned by Mr Birnie and his interests.

[8] Amongst the interests purchased by BCPP were two agreements for sale and purchase. These related to two blocks of land in the Purerua peninsula. The first agreement was to acquire the interest of Mr Birnie as purchaser in an agreement for sale and purchase of 94.10 hectares from John R Paterson & Co Ltd (“the Paterson agreement”). The second was an agreement to acquire a second property on the peninsula of 95 hectares, owned by Mr Birnie (“The Birnie agreement”). The two properties were to be developed into a golf course.

[9] The property agreement sets out the purchase prices for the various assets. In respect of the Lion Rock assets, the purchase price was $19 million. This was paid by the investors contributing $8 million in cash, and by the issue of 11 million shares in BCPP, which were put into the name of Paoneone.

[10] Paragraph 8.3 of the property agreement provided for the transfer back of the

Lion Rock assets from the vendors to BCPP if the conditions in the agreements were

not satisfied in accordance with the terms of the relevant agreement, and the purchaser was not able to acquire both the properties referred to in those agreements. To invoke this clause BCPP had to give the Lion Rock vendors ten working days’ notice of their wish for a transfer back. It read:

8.3 Transfer back of Lion Rock Assets: if the conditions in either:

(a) the agreement for sale and purchase of the Paterson’s property referred to in clause 4(a) of the Third Schedule; or

(b) if the agreement for sale and purchase for part of the Paoneone Farm referred to in clause 4(b) of the Third Schedule.

are not satisfied in accordance with the terms of the relevant agreement and the Purchaser is not able to acquire both the properties referred to in those agreements as a result of such failure, the Purchaser, at its discretion, may give written notice to the Lion Rock Vendors within 10 working days that it wishes to transfer back the Lion Rock Assets to the Lion Rock Vendors.

[11] The parties in these proceedings have both referred to the right to give notice of transfer back of the Lion Rock assets to the Lion Rock vendors as “the put option”. In the event of the put option being exercised, the Lion Rock vendors had to pay back the $19 million and receive back the Lion Rock assets.

[12] BCPP duly settled the property agreement in early 2008. The property market then deteriorated through 2008 and 2009. The applicants assert that various conditions in the Birnie agreement and the Paterson agreement were not satisfied by the requisite dates. Relying on clause 8.3 in the property agreement, from mid-2009 the Group B directors began pressing the Board to exercise the put option against the Lion Rock vendors, and unwind the purchase of the Lion Rock assets. The Group A directors, in particular Mr Norrie, rejected any suggestion that the put option should be exercised.

[13] On 31 July 2009, a formal resolution was put by some Group B directors to the Board that steps be taken to exercise the put option. The Board had a legal opinion to the effect that if either the Paterson or Birnie agreements were cancelled, the put option could be exercised. The majority of the Group B directors supported the resolution, but it was opposed by Messrs Birnie and Norrie and was not passed.

An alternative proposal of Mr Birnie requiring BCPP to forgo the put option, also was not passed. On 21 September 2009 the Board resolved to retain Seagar & Partners, valuers, to provide a valuation of the Paterson and Birnie land.

[14] On 30 September 2009, John R Paterson & Co. Limited, the vendor to Mr Birnie of the 94.10 hectares of Purerua peninsula cancelled the agreement between it and Mr Birnie. The reasons were non-satisfaction of a vendor loan condition, and a failure to obtain a new title within the time limits in the agreement. The $1 million deposit that had been paid by Mr Birnie was refunded and received by BCPP. There is no doubt that this was a valid cancellation.

[15] On 12 October 2009, Messrs Peters and Quinn as directors, without the approval or support of any Group A directors, gave notice to the Lion Rock vendors of the exercise of the put option on behalf of BCPP.

[16] Seagar & Partners provided a report on 16 October 2009 estimating the total current value of the Purerua peninsula land subject to the Paterson and Birnie agreements at between $10 and $13 million plus GST. $19 million had already been paid for the Lion Rock assets, and there were further moneys to be paid. Thus, the valuation given by Seager & Partners of $10 to $13 million meant that the land was now worth much less than BCPP would have to pay to acquire it. The correctness of the valuation of Seager & Partners is not accepted by the defendants.

[17] The Board met again on 19 October 2009. The Group B directors unanimously supported two alternative resolutions calling for the exercise of the put option. Those resolutions were not supported by Mr Norrie who was the only representative of the Group A directors at the meeting. Mr Birnie did not attend. A similar request asking Messrs Birnie and Norrie to reconsider their position as to the put option in the December 2009 Board meeting was also unsuccessful.

[18] In a judgment of 22 April 2010[1] I granted leave for Messrs Peters and Quinn to bring a derivative action on behalf of BCPP against the defendants. I found that there was sufficient likelihood of success on both the proposed causes of action to

grant leave. I concluded that a prudent business person would pursue the action in the conduct of his or her own affairs. I declined a mandatory interim injunction application on behalf of BCPP. I also declined a belated application under the Declaratory Judgments Act 1908.

[19] Messrs Peters and Quinn have since then, pursuant to the leave application, filed these proceedings with BCPP as the plaintiff. The statement of claim with some additions follows the form of the draft provided in the derivative action proceeding. The first cause of action alleges that Messrs Birnie and Norrie breached their fiduciary duties to the company by placing themselves in a conflict of interest and preferring Mr Birnie’s personal interests over those of the company in carrying out their duties as directors. They allege specifically that Messrs Birnie and Norrie breached their duties as directors in not voting in favour of two proposed resolutions. The first was a proposed resolution of 31 July 2009 to exercise the put option because of the non-satisfaction of certain conditions in the Birnie agreement and Paterson agreement. It is alleged that there had at that point been legal advice from the plaintiff’s solicitors that the agreements could be cancelled and that the put option could be exercised. The second proposed resolution was of 19 October 2009 to exercise the put option.

[20] The second cause of action is that the exercise of the put option on

12 October 2009 was valid and effective.

[21] Damages are sought from the Lion Rock vendors who are joined as the third and fourth defendants for the return of the $19 million that has been paid and, it is asserted, must be refunded. The proceedings are set down for hearing on 14 March

2011.

The parties’ respective positions

[22] Mr Kennedy for BCPP (and for Messrs Peters and Quinn) argued that his clients have a strong case and that it would be unfair to make an order for security for costs, which would effectively place the burden on Messrs Peters and Quinn or their interests to pay the security. He pointed out that as had been anticipated when

leave was sought, the limited funds of the company had been exhausted in pursuing the litigation and it was now being funded by Messrs Peters and Quinn on behalf of the company. Messrs Peters and Quinn have only 18 percent of the shares. He pointed out that Mr Birnie’s interests had approximately 48.1 percent of the shares. Mr Kennedy emphasised in relation to any order for security that there was a point at which the pursuit of the proceedings would become uneconomic for Messrs Peters and Quinn. He stated that they were pursuing the case as a point of principle and that their prospect of significant economic gain was limited by their 18 percent ultimate share.

[23] Mr O’Brien for the defendants strongly contested Mr Kennedy’s submission that the BCPP claim was strong. He submitted that the best way to approach the respective strengths and weaknesses of each of the parties’ positions was to regard them as roughly equal. The plaintiff should be treated as having an arguable case and the defendants should be treated as having an arguable defence. The consideration should go no further than that. He submitted that the defendants were entitled to security just like the defendants in any proceeding. He relied on the line of authorities which stand for the proposition that security will be ordered in relation to insolvent companies where there are shareholders or other interested persons who are funding the litigation and who can afford to meet a security order.

Approach to security for costs application

[24] The position is governed by r 5.45 of the High Court Rules which gives the Court a broad discretion to order security for costs. The purpose is well understood. It is to protect a party who may win the case against the risk of it being unable to enforce a costs order.

[25] The threshold under r 5.45(1)(b) is that “there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.” This is not in contention in relation to this application. There is reason to believe that BCPP will be unable to pay the costs if the claim fails. It was common ground at the hearing of the derivative action that its funds were limited and it is now common ground that those funds have been used

up and that the litigation is now being funded by Messrs Peters and Quinn. The shares are fully paid up. There is no doubt that an order for costs would not be met in the absence of an order for security.

[26] Once that threshold is crossed, the Court’s discretion is unfettered, and no formal checklist of principles is to be applied. As was stated in A S McLachlan Ltd v MEL Network Ltd:[2]

13. Rule 60(1)(b) High Court rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, "the Court may, if it thinks fit in all the circumstances, order the giving of security for costs". Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing "principles" from the facts of previous cases.

14. While collections of authorities such as that in the judgment of Master

Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ

430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going

through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given

disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[27] However, certain factors are undoubtedly relevant to the exercise of the discretion. The apparent strength or weakness of the case may be relevant.[3] It is not always possible for a Court to form any cogent assessment of the strength and weaknesses of a case. However, on other occasions a Court may be able to form a tentative view that a case is strong or weak. If the case appears to have a reasonable prospect of success and if there seems to be little prospect of any order for security of costs being met, the Court will be more reluctant to make an order or a significant order than, for instance, in the opposite position where the case appears weak and

there appear to be funds available to meet a security for costs order. These issues have to be weighed and a decision made.

[28] Also, it is relevant to discern whether when, if an order is made, there are parties or funds available to meet it. Will an order for security and an order for stay until the security is provided mean that the plaintiff cannot proceed and the case will fail? This will be the case if there are no funds of the plaintiff, and no access to funds of those who support the plaintiff. Or is there a third party who stands to benefit from the litigation and has funds which could be used to pay security? There is a well established line of authority where the Courts have ordered security be paid by impecunious companies knowing that those who have an interest in the company

will meet the order.[4] The Court is able to look behind the resources of the plaintiff

company itself, and consider who is behind the litigation and who is funding it, to gain an accurate commercial assessment of who might meet a security for costs order.

[29] The Court can take that commercial reality into account in exercising its discretion. Mr Kennedy argued that s 166 of the Companies Act 1993 established a statutory presumption that the costs of a derivative action are to be met by the company in question unless the Court considers this unjust or inequitable. I can see no basis for such a presumption. That section relates to payment of the company’s costs in a derivative action, not security for the defendant’s costs where the company’s costs will have to be borne by a third party.

[30] In Computer Training Services Ltd v Universal Data Systems Ltd[5] an order for security for costs was made in a derivative action. In that case the shareholders of the company had significant assets. The company was ordered to pay security for costs of $300,000 on the assumption that the funds would be provided by the shareholders. That case involved a litigation funder. Each case must be considered on its merits, but it is perfectly legitimate to make a security for costs order on the basis that if the case is to proceed persons other than the plaintiff company, but with an interest in the litigation, will have to meet the order for the case to proceed.

[31] It is also clear that it can be relevant to the exercise of the discretion that the plaintiff’s impecuniosity is caused by the defendant’s actions. It may be unjust for a defendant to receive security for costs if it is the defendant’s actions that are the subject of the litigation that have caused the plaintiff’s impecuniosity.[6] However, care must be taken to avoid the circular argument that because the defendant does not accede to the claim and pay damages, the impecunosity is therefore its fault.[7]

[32] It is now necessary to turn to the merits of the application. The starting point is the nature of the claim and its strengths and weaknesses insofar as any reliable assessment can be made at this point.

The claim and its strengths and weaknesses

First cause of action

[33] At the time the two resolutions of 31 July and 19 October 2009 were put to the vote of the Board with the intent that BCPP extract itself from its obligation to settle the Paterson and Birnie agreements, BCPP had already spent $19 million in respect of the properties and a further $8 million would have had to have been paid to settle the Birnie agreement. The total expenditure therefore would have been $27 million. However, the Seagar & Partners valuation indicated that the total value of the land was $10 to $13 million. As I observed in my derivative action judgment, there was good reason for the company to extract itself from such an agreement and

to not settle.[8] Not only would it avoid the burden of having to pay a further

$8 million for land that on the basis of a respectable valuation was worth so little that the money was being spent for nothing, but the exercise of the put option would also enable the company to pursue the recovery of $19 million from the Lion Rock vendors and thus greatly improve its financial position.

[34] The defendants have a number of responses to this proposition. They argue that the Paterson agreement could have been revived and that the development could

still proceed on a viable basis. They do not accept the Seagar valuation and say that the development could be profitable. They argue that there is no point in exercising the put option and then seeking the recovery of the $19 million from Mr Birnie and his associated interests, because Mr Birnie’s financial position is such that recovery was unlikely. I considered these arguments in the derivative action judgment. I was unable to accept the proposition that the development could proceed on a profitable

basis[9] and I was of the view that a prudent business person would assume a

reasonable chance of significant recovery from Mr Birnie and his interests if the claim was successful.[10]

[35] Mr O’Brien put forward a further basis for defence that had not previously been argued before me. He submitted in essence that BCPP was not able to validly exercise the put option because in doing so it was taking advantage of its own wrong. The wrong of BCPP was that it had not taken all steps it should have in keeping the Paterson and Birnie agreements alive. It had elected not to put up a bond of $160,000 in substitution for an unacceptable resource consent condition which required a temporary access road in respect of the Paterson land. If it had provided the bond the subdivision could have proceeded. The delay in the issue of the title and the consequent failure to complete the condition in time was the cause the cancellation of the Paterson agreement.

[36] Mr O’Brien relied on clause 8.7 of the Paterson agreement which required the purchaser (Mr Birnie) to do all things reasonably necessary to enable conditions to be fulfilled, and clause 8.1(b) of the property agreement which required BCPP to perform all the obligations of Mr Birnie and indemnify him against any damage or losses arising from a breach by BCPP of that clause. Mr O’Brien put this forward as a complete answer to both claims. He submitted that the put option quite simply could never have been properly exercised and Messrs Birnie and Norrie were quite right to vote against the two resolutions.

[37] While this will be a matter entirely for the trial Judge, I do not from the present perspective see these arguments as being the complete answer suggested by

Mr O’Brien. There is no doubt that Mr Birnie through his company, Birnie Capital Property Management Ltd, was entirely in charge of all steps that were being taken in relation to the Lion Rock assets. It was at his direction that no steps would be taken to pursue the resource consent condition, which meant that the Paterson agreement could be cancelled by the Paterson company. BCPP was entirely reliant on Mr Birnie and his company for the carriage of all aspects of the Lion Rock development. They were effectively investors in Mr Birnie’s project, which he was managing.

[38] It must be recalled that BCPP had no direct obligation to Mr Paterson under the Paterson agreement. That obligation was of Mr Birnie. Mr Birnie was still in charge and he had chosen to take none of the steps that Mr O’Brien is now criticising BCPP for not taking. Thus, BCPP may not be seen as seeking to take advantage of its own wrong. Rather, it has in good faith left the conduct of the transaction to Mr Birnie, and acted on the basis of his directions. And yet Mr Birnie now submits that the company was wrong to rely on his guidance.

[39] Another consequence of the fact that it was Mr Birnie who was in charge and dictated all steps, is that there must be an argument available to BCPP that Mr Birnie and those associated with him had waived any right to claim default under clause 8.2 of the property agreement by BCPP, or are stopped from such a claim.

[40] Further, it is far from clear that the unfulfilled conditions that were the basis of the proposed exercise of the put option and the Paterson agreement cancellation could be easily fixed by BCPP, or that it had any obligation to do so. The unsatisfactory conditions of the resource consent were of some moment, and it is not clear that there was any obligation on BCPP to accept different terms, which would involve it paying over further money, so that the agreement could stay on foot. Time had been of the essence, at least in respect of the Birnie agreement. The legal advice from BCPP solicitors was at the time that the agreements could be avoided.

[41] Moreover, the obligation in the Birnie and Paterson agreements to do all things reasonably necessary to satisfy conditions, was an obligation to do this by the

“date for fulfilment”. Any such obligation may well not have continued after the date for fulfillment, during the relevant time in 2009.

[42] I do not make any effort to do justice to the careful and extensive submissions I have received on this point. However, Mr O’Brien’s new arguments have not in any fundamental way shifted my perception of the merits. It is difficult to articulate any strong arguments why it was not in the company’s interest for all directors to support the exercise of the put option and the company’s consequent extraction from an agreement that had become entirely unattractive following the crash of property values.

[43] However, the issues are complex and I recognise that there are arguable defences to be put forward on behalf of the defendants. The defendants may succeed. So while I have this cautiously favourable view of the plaintiff’s case, I recognise the possibility that the defendants may win. I approach the exercise of my discretion on this basis.

Who would pay security for costs?

[44] I have already observed that it is common ground that Messrs Peters and Quinn or their interests are financially able to pay security for costs, or indeed to meet any undertaking that they might be required to meet any costs orders in this proceeding. They are presently funding the litigation for the plaintiff.

[45] It must also be recognised that they may be exposed to costs orders in any event, should the plaintiff lose. This would be on the basis that they are funding the litigation and, to the extent of their 18 percent shareholding, stand to benefit significantly from it.[11] I recognise that there are also arguments that they should not be liable as non-parties, particularly because of their limited shareholding and their limited interest in the result. I express no view on the merits of these arguments,

except to record the possibility of some exposure to costs on their part. However,

they do stand to benefit from this proceeding. It is, after all, about money. There is no public interest factor.

Exercise of the discretion

[46] Mr Kennedy sought to persuade me that the fact that Messrs Peters and Quinn because of their limited shareholding only had an 18 percent interest in the proceeds of a successful claim, was a particular reason not to discourage them by making an order. I do not accept this submission. This is commercial litigation. There is no public interest factor. It is a claim for money by parties with a financial interest. Messrs Peters and Quinn if they are successful will be entitled to the refund of all the costs they pay on behalf of the company to pursue the claim, together with interest. If they succeed and get 18 percent of the damages claimed of $19 million, this litigation will have been a successful financial enterprise. There may be doubts about Mr Birnie’s ability to meet a damages claim, but at the derivative action hearing Messrs Peters and Quinn indicated confidence in the prospect of some recovery from the Birnie interests of a damages award.

[47] Messrs Peters and Quinn will in the end make their own commercial assessment of whether they should proceed. But I see no reason to treat their position as different from that of any other party who chooses to pursue commercial litigation by financing a company in which they have an interest. I do not consider the fact that they will only recover for themselves part of the damages they seek as a reason in itself to discount or refuse a security order that might otherwise be made.

[48] If the plaintiff is successful, the defendants can be said to have caused the plaintiff’s present impecuniosity. If Messrs Birnie and Norrie had voted in favour of the exercise of the put option then the company would have extracted itself from the obligation to purchase the Lion Rock assets and have an entitlement to $19 million. If the defendants had assets, the company would have assets. It would not be in its present insolvent state.

[49] But only limited weight can be put on this factor in the present circumstances, as any assumption as to the cause of impecuniosity assumes that the

plaintiff will succeed. As observed,[12] there is also an element of circularity in this sort of impecuniosity argument. It will generally be the case that if the defendant has paid the sum of money claimed by the plaintiff in the proceedings, then the plaintiff would no longer be impecunious. This is a feature of most security for costs applications and is not in itself a reason to refuse an application.[13]

[50] But there is this difference in this case from the usual claim for a sum of damages arising from a wrongful act by a defendant. Here the alleged wrongful actions of Messrs Birnie and Norrie were acts by them in their capacity as directors of the plaintiff, and these actions, if the plaintiff is right, had direct adverse financial consequences to the company. Therefore, there is more here than just a refusal to pay the damages claimed that has contributed to the company’s losses. There will be a particular injustice if the defendants’ wrongful actions as pleaded, have in the end meant that the claim cannot proceed because they have made the company insolvent.

[51] In some cases it has been suggested that there should be a “reasonable probability” established by persuasive evidence that the plaintiff’s impecuniosity has arisen from the defendant’s actions complained of in the proceeding.[14] The difficulty, as always, is that such a threshold requires an assessment on the merits which, short of a full hearing, is a perilous exercise. Nevertheless, I have indicated a cautiously favourable view on the merits of the plaintiff’s case. I am in the end

prepared to place some weight against the grant of security on the fact that it is the defendants’ actions that are the subject of the litigation that have caused the present financial position for BCPP.

[52] Therefore, on the one hand I balance the plaintiff’s case, which is sufficiently strong to warrant the granting of leave to commence a derivative action, against the certainty that if the plaintiff fails and there is no security, the plaintiff company will not be good for a costs order. There is then a prospect of the defendants suffering the injustice, should no order be made of not recovering any costs. As against that I recognise that putting the costs bar too high may cause the case to become too

difficult for those behind the claim to finance, and I recognise that it may have been the actions of Messrs Birnie and Norrie in refusing to exercise the put option, which caused the company’s financial difficulties. I also balance the need for security against the fact that the defendants may be able to get costs from the non-parties, (although it is impossible to be certain that this would be so, or guess the quantum of any order, so this is a point of limited significance).

[53] I conclude that it is fair that some order for security for costs is made. I do not think it appropriate that the defendants be left totally exposed in relation to costs. If such an order deters Messrs Peters and Quinn from continuing with the proceeding, then that must be their commercial decision. They must decide what degree of exposure they are prepared to entertain to have the claim litigated.

The amount

[54] The amount of costs that should be ordered turns on the factors already referred to, and the plaintiff’s actual exposure to costs on the High Court scale. The plaintiff and defendants appear to agree that a combination of the 2B and 3B scales is appropriate. The plaintiff says the hearing will take one week. The defendants say it will take three weeks. The defendants argue for $60,000 for experts costs. The plaintiff in oral submissions did not accept that the figure should be that high

[55] I consider it fairest to assess security for costs as being on a 2B basis. The case does not demonstrate particular complexity or the documents any particular prolixity, but that issue will ultimately be for the trial Judge. I take the view at this stage that the proceeding will take two weeks to hear, but I recognise that it could go on a little longer. The estimate of $60,000 for expert costs appears to me to be high. It is my interim view that there will not be a need for much contested expert evidence. The valuation issues should be quite straightforward and I am not satisfied that there is any obvious need for an expert independent director, or an expert accountant. But I accept that some allowance must be made for experts.

[56] I would there therefore assess the likely costs on a 2B basis, save for discovery and inspection of documents which should be category 2C. I assume

experts’ fees of $30,000. I consider that the full potential exposure should be considered and not, as sought by Mr Kennedy, just costs since the filing of the security for costs application. The calculation is as follows:

Category 2 Daily rate $1,880

Band: Steps taken: Sch 3: Time: Cost:

C Commencement of defence 2 6.0 11,280

_{C List of documents on discovery 4.5 6.0 11,280}

2. Production of inspection documents

4.6 1.0 1,880

_{C Inspection of documents 4.7 6.0 11,280}

2. Filing memorandum for case conference (x 3)
   

B Appearance at case conference

_{(x 3)}

4.10 0.4 2,256

4.11 0.3 1,692

B Preparation for hearing 8 20 37,600

B Appearance at hearing 9.10 10 18,800

B Second counsel 9.2 5.0 9,400

_{Total time costs $105,468}

[57] Given my assessment of the background circumstances and the merits, I consider that a fair sum for security is approximately sixty percent of that amount, which, (rounded up), is the sum of $82,000. I accede to the plaintiff’s request that this be staged, and will make an order on the basis that half be paid now, and half later, but before the start of the trial.

Result

[58] I order that security for costs be paid by the company of $82,000 to the satisfaction of the Registrar. Alternatively on an agreed basis, this can be provided in the form of undertakings or in any other way acceptable to the defendants.

[59] The security is to be staged with $41,000 to be paid within 14 days and a further $41,000 by 1 February 2011.

[60] Should this security not be paid, or an alternative mode of payment or undertakings not be agreed between the parties, the proceeding is stayed.

[61] I reserve leave for the filing of further applications as to the mode of payment, the provision of undertakings, and the terms of the possible stay.

Costs

[62] Neither party has achieved the result sought, and I think it fair to reserve costs on this application.

...................................

Asher J

[1] Peters v Birnie [2010] NZAR 494.
[2] _{A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA).}
[3] See Attorney-General v Transport Control Systems [1982] 2 NZLR 19; and Ambrose v Pickard [2009] NZCA 502.
[4] National Bank of New Zealand Ltd v Donald Export Trading Ltd [1980] 1 NZLR 97; and _{Attorney-General v Transport Control Systems (NZ) Ltd [1982] 2 NZLR 19.}

[5] Computer Training Services Ltd v Universal Data Systems Ltd [2001] NZCA 305; (2001) 15 PRNZ 401.
[6] _{Bell Booth Group Ltd v Attorney-General (1986) 1 PRNZ 457 (CA).}
[7] See [48]– [50] below.

[8] At [40].
[9] At [34].
[10] At [39].

[11] See Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No2) [2005] 1 NZLR 145.
[12] _{At [31].}
[13] _{See Computer Training Services ltd v Universal Data Systems Ltd [2001] NZCA 305; (2001) 15 PRNZ 401.}
[14] See Davy v Howell (1993) 7 PRNZ 141; Weld Street Takeaways & Fisheries Ltd v Westpac Banking Corporation [1986] 1 NZLR 741.