IRVING BAKER LIMITED V MARYANNE CHERYL BAKER AND ORS HC AK CIV2003-488-042 [2006] NZHC 240 (16 March 2006)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
                                                               CIV2003-488-042



                BETWEEN                    IRVING BAKER LIMITED
                                           Plaintiff

       
        AND                        MARYANNE CHERYL BAKER
                                           First Defendant

           
    AND                        LANCE PATRICK BAKER
                                           Second Defendant

                AND
                       LEWIS WILLIAM WRIGHT AND
                                           JANICE MABEL WRIGHT
                 
                         First Third Parties

                AND                        JANICE MARIE BAKER AND RODNEY
         
                                 TANIA BAKER
                                           Second Third Parties


Hearing:        28
November 2005

Appearances: D James for Plaintiff
             M Lewis for First Defendant
             No appearance for Second
Defendant
             Appearances for First and Second Third Parties (excused)

Judgment:       16 March 2006 at 3.15 pm


    
         JUDGMENT OF ASSOCIATE JUDGE H SARGISSON




E- ma il:
D James - [e-mail]
M Lewis - [e-mail]
A Gilchrist - [e-mail]
R C Mark - [e-mail]

Solicitors:
Palmer McCauley, PO Box 576, Kerikeri
Madison Hardy,
PO Box 42224, Auckland


IRVING BAKER LIMITED V MARYANNE CHERYL BAKER AND ORS HC AK CIV2003-488-042 16
March 2006

[1]    This proceeding
is a derivative action brought on behalf of the plaintiff
company by two of its shareholders, Lewis and Janice Wright, against Maryanne
Baker and Lance Patrick Baker who are also shareholders in the company. Justice
Cooper gave the Wrights leave under s 165 of the
Companies Act 1993 to continue
the action in the name of and on behalf of the company on 24 July 2004.


[2]    On 14 December 2004,
Maryanne Baker took the necessary procedural steps
to join Lewis and Janice Wright and other remaining shareholders as third parties.


[3]    All of the shareholders are members of an extended family who became
involved in the company to promote the company's purchase
of a piece of their
ancestral land in Northland. The purchase proceeded, but sadly the company had to
resell the land and it suffered
a significant loss. After deducting the mortgage and
various expenses, the proceeds of sale reached only $45,182.14. The fund was
further reduced after deduction of GST and rates, and professional fees and is now
around $6,000.00. The company's loss has caused
dissension between the Wrights
and Maryanne Baker and this proceeding is the result.


[4]    The Wrights' claims, as set out in
the company's statement of claim, are in
essence that the company's records show that in addition to her 55,000 paid up
shares, Ms
Baker subscribed for 110,000 unpaid shares but did not pay the company
for them, and that the unpaid subscription is a loan at interest.
     They say the
company is entitled to call on her to make payment of the capital debt of
$110,000.00 plus interest on that sum
since 1995. In the substantive proceeding they
seek orders accordingly. They contend in the alternative that Ms Baker assigned the
shares to Lance Baker, her nephew, and that he failed to honour his promise to pay
for the shares. In addition, they contend that
Ms Baker is liable to repay money that
the company allegedly advanced for her personal use at a time when she was the
company's sole
director. The total claimed is well in excess of $200,000.00.


[5]    Ms Baker rejects these allegations. She acknowledges that
she subscribed for
the unpaid shares but she says it was on the basis that she would not be personally
liable to pay for them; that
a suitable shareholder was to be found to take over the
shares; and that she and would be reimbursed for interest she agreed to pay
on the

company's behalf. She says the interest was to be sufficient to cover the cost of the
company's borrowings to complete the purchase of the land, so as to benefit all of
the
shareholders.


[6]    In her counterclaim, Ms Baker seeks a contribution to or indemnity for the
cost of the shares and the interest
costs on related borrowings and payments. The
basis for the claim is that the other shareholders allegedly agreed that they would
share in any losses she might suffer if a suitable shareholder was not found. Ms
Baker contends that Mr Wright thwarted her attempts
to find a suitable purchaser for
the shares.


[7]    Ms Baker's third party notices raised the same allegations that the
shareholders
agreed to share in her loss if she could not find another shareholder.


[8]    The Wrights do not accept there was any such agreement
and they have filed
a statement of defence to the counterclaim on the company's behalf.


[9]    Janice and Rodney Baker have taken
no formal steps, but their counsel has
advised the other parties that they consider the proceeding is "counterproductive".
The reason
their counsel has given in correspondence is that if Ms Baker is found to
be liable "then all three relevant parties will have to
make a contribution which will,
in total, equal the amount of any liability which is imposed on Maryanne Baker, and
that any sums
that are to be contributed "will effectively come back to them as a
dividend".


[10]   If the Wrights' view of events is correct,
the reasons why they sought leave to
bring the company's action are not hard to see. If Maryanne Baker is made to pay
for the shares
and interest and reimburse the company for advances, then the
company will have surplus funds. Those funds will be available for
distribution to
the shareholders if the company is wound up. Winding up is likely because the
company is not trading now that the
whole purpose of its incorporation is gone. The
Wrights and other shareholders will benefit from the distribution that would follow.

[11]   In his decision to give leave, Cooper J noted that this is so even if, as a paid
up shareholder, Ms Baker would be entitled
to 60% of the amount available for
distribution. He considered that $100,000.00 to $150,000.00 would still be available
for distribution
to the other shareholders.


[12]   However, if Ms Baker is correct in her counterclaim and third party notices,
the proceeding would
do nothing to advance the interests of the company or the
shareholders. It would be Ms Baker who would be entitled to reimbursement.


[13]   Mr James made clear at the hearing that the company is not pursuing its
application for permission to use the company's
remaining monies to advance the
action, and that the Wrights do not seek to use the remaining company funds to
advance the company's
action. In accordance with Cooper J's direction, they will
bear those costs in the first instance.


Interlocutory Applications


[14]   As noted in my minute of 28 November 2005, a fixture was allocated on that
day for the hearing of several interlocutory applications.
Those applications raised a
number of issues all of which were resolved either by their being withdrawn or by
consent order, with
one exception.


[15]   That exception is the application made by Maryanne Baker, for orders under
section 167 of the Companies Act
1993:


       a)      Dismissing or staying the entire proceeding, and


       b)      Preventing Janice and Lewis Wright from
continuing the proceeding
               on behalf of the plaintiff company.


[16]   This is the application I am asked to determine.
The parties wished to rely on
evidence produced in support of the application dealt with by Cooper J and I gave
leave accordingly.

[17]   Ms Baker's position is that although Cooper J granted leave to Mr and Mrs
Wright to bring the derivative action in the name
of and on behalf of the plaintiff
company it is no longer appropriate for them to continue the action and that the
Court should make
an order to dismiss the proceeding or at least to stay the
proceeding until there is someone else who can be appointed to continue the action.


[18]   Ms
Baker relies on three grounds which can be summarised as follows:


       a)      That the proceeding is vexatious because, in monetary
terms, even if
               the plaintiff is successful, the outcome will be negligible and the
               plaintiff will not
benefit.


       b)      The joinder of Mr and Mrs Wright as third parties means they now
               have a serious conflict
of interest which prevents them from
               continuing to act as the alter ego of the plaintiff and they are unable to
 
             fulfil their duty to act in the best interests of the company under the
               Court appointment.       In these
circumstances, their continuing the
               proceeding is an abuse of process.


       c)      There are no other shareholders
available to conduct the litigation in
               place of Mr and Mrs Wright because they are all involved in the
          
    litigation themselves with a similar conflict of interest. In addition,
               none of them are willing to continue the
litigation on behalf of the
               plaintiff.


[19]   Ms Baker also raised, and abandoned, her argument that it is an abuse
of
process and vexatious for Janice and Lewis Wright to continue the proceedings in
the plaintiff's name when they have a vested
personal interest in the outcome of the
litigation. I pointed out that at the time Cooper J made his order, the Wrights had the
same
vested interest in the outcome of the litigation and that I did not propose to
revisit that issue in the context of the present application.


[20]   Mr and Mrs Wright were not represented as third parties at the hearing. Mr
Mark who is instructed by them in that capacity
sought leave to be excused and

indicated that he would abide the Court's decision. However, Mr James appeared on
behalf of the
company, which opposes the application. In effect, he also appeared
for the Wrights, because it is they who bring the action in the
name of the company.
There is in any event, no suggestion that Mr and Mrs Wright's non-opposition, as
third parties, should effect
the outcome of the application one way or the other.


[21]   I proceed on that basis.


[22]   The Court has a discretion under
s 167 to make any order it thinks fit in
respect of a derivative action, including but not limited to the kinds of order
specifically
described. Such orders include the giving of directions for the conduct
of the proceeding and there is no dispute that they would
also include orders staying
or dismissing the derivative action if there are sufficient grounds.


[23]   The discretion is clearly
a broad discretion but it is common ground that it
must be exercised having regard to the interests of the company and to whether
there
are new circumstances that warrant a fresh or different view of the factors to which
the Court had to have regard under s 165
in giving leave to bring the action.


Relevant Legal Provisions


[24]   The relevant parts of section 165 state:

       165. Derivative
actions - (1) subject to subsection (3) of this section, the
            Court may, on the application of a shareholder or director
of a
            company, grant leave to that shareholder or director to -

               (a) ...

               (b) Intervene
in proceedings to which the company ... is a party for
                   the purpose of continuing, defending, or discontinuing
the
                   proceeding on behalf of the company or related company, as the
                   case may be.

         
 (2) Without limiting subsection (1) of this section, in determining
               whether to grant leave under that subsection,
the Court shall have
               regard to -

               (a) The likelihood of the proceeding succeeding.

              
(b) The costs of the proceedings in relation to the relief likely to be
                   obtained.

               (c) Any action already taken by the company ... to obtain
relief.

               (d) The interests of the company ... in the proceedings being ...
                   contract, defended,
or discontinued, as the case may be.

           (3) Leave to) ... intervene in proceedings may be granted under
               subsection
(1) of this section, only if the Court is satisfied that either
               -

               (a) The company or related company
does not intend to ... diligently
                   continue or defend, or discontinue the proceedings, as the case
           
       may be; or

               (b) It is in the interests of the company ... that the conduct of the His
                   determination
of the shareholders as a whole.

Discussion and Conclusions


[25]   Cooper J said, when setting out his reasons for giving leave,
"it seems to me
that recovery of the apparent debt must be in the interests of the company, provided
that the costs of the litigation
do not make that course improvident". He found that
the likely costs did not indicate the litigation would be improvident. He considered
that $100,000.00 to $200,000.00 would still be available to distribute on the other
shareholders even allowing for the possibility
that Ms Baker is a 60% shareholder.
He did not accept Ms Baker's contention that the dispute as to her indebtedness to
the company
should be dealt with by a liquidator. He said that "the proposed
proceedings are as convenient a mechanism" for resolving the dispute
"as
proceedings in the context of a liquidation would be".


[26]   However, Ms Lewis contends that even if the company is successful
and is
entitled to recover the alleged debt in monetary terms the financial outcome will be
negligible. She argues that if Ms Baker
is liable to pay for the 110,000 shares, after
distribution of her 60% of the payment, the balance remaining for other shareholders
would be a mere 40% or $44,000.00. She also argues that there are other factors
which would could further reduce that amount. They
include that Ms Baker met the
interest charges on the mortgage (which was $120,000.00 initially and subsequently
increased to $150,000.00)
together with other costs. She says that Ms Baker paid
over $70,000.00 for interest and other costs to the company in excess of the
amounts
paid by other shareholders. She contends, by way of further example, that Ms Baker
is owed a separate and additional sum
of $20,000.00 by the company for monies

which the company should have credited to her, and that she paid to the company
monies
which she received from her nephew for which she has not received a credit.


[27]   Ms Lewis further contends that Ms Baker's counterclaim
and third party
notices are supported by sufficient evidence to show not only that the return to the
company would be negligible,
but that the company would owe Ms Baker a
significant sum.


[28]   I accept that there is substance in Ms Lewis' submission that
if Ms Baker
owes the company $110,000.00 for the shares, then 60% of that sum is likely to be
available for distribution to Ms Baker
as a 60% shareholder. However, the rest of
her argument revisits issues about interest and other charges that were before Cooper
J and they are not new. As His Honour noted in relation to the interest, "... if the
claim to capital succeeds, then there is a prospect
that interest will be payable as
well". Ms Lewis argued that this result is not right but it appears, on at least one
view of the
evidence that is presently before the Court, that monies the company
raised to refinance the mortgage were used to pay outstanding
mortgage interest
charges for which Ms Baker was allegedly responsible. They were also used to pay
her Westpac and Visa charges.
As against this, there is nothing to suggest other than
that also the company repaid the full amount of the mortgage on the sale
of the
property and possibly an additional sum by way of outstanding interest or other
charges.


[29]   Exactly what, if anything, Ms Baker owes the
company as a contribution to
these costs is not clear. There is simply insufficient evidence before the Court at this
stage to make
any definitive ruling on the point. Even taking into account the fact
that the company lost $50,000.00 as a direct result of the
depressed sale price, the
further losses the company sustained on the sale were substantial and such that the
proceeds of sale were
only marginally more than $45,000.00. A substantial portion
of what was lost has not been adequately explained. Specifically, there
is a sum of
approximately $200,000.00 from the sale proceeds which has been used to repay the
mortgage and presumably outstanding
interest and sale costs. Exactly what part of
the $200,000.00 (over and above the $110,000.00 that Ms Baker allegedly owes the

company) that she may be liable for is something that will have to be determined at
trial.


[30]     Furthermore, the submission
that Ms Baker is owed well in excess of what
she might owe pre-supposes that all of Ms Baker's arguments would be substantially
successful.
However, the factors she relies on were considered by Cooper J in
respect of the matters to be considered under section 165. The
principal point made
by Mrs Lewis before His Honour was that Ms Baker subscribed to the unpaid shares
without the necessary intention
of accepting personal liability, and that there was an
agreement to share the losses.


[31]     His Honour said:

         "...
on the face of it, there does appear to be a debt owing ... to the company.
         Whether or not the company would be able to
overcome the factual issues
         said ... to ground possible defences including any lack of intention to be
         bound contractually
to the company, an implied term that the first
         respondent's liability should have been for interest only so on, are matters
         which can only be determined on the facts following a fully contested
         hearing".

[32]     The net result is that
I am not satisfied that if the company's claim is
successful the monetary benefits to the other shareholders will be minimal. I do
not
therefore accept Ms Lewis' submission that this is a ground for staying or dismissing
the proceeding.


[33]     Ms Lewis made
a supplementary submission that Ms Baker is now in receipt
of a full grant of legal aid and that the Court should draw the inference
that any
judgment would be worthless exercise.              However, she acknowledged that no
comprehensive disclosure has been made
to the Court or parties in the affidavit
evidence of Ms Baker's financial position and I am not prepared to make the
inference in
the absence of such evidence. Furthermore, even if I were to accept that
Ms Baker is impecunious, a successful judgment, (assuming
that outcome) may be a
benefit to the company. It would leave open the possibility of recovery should Ms
Baker's circumstances change.

[34]      Coming to the matter of joinder Ms Lewis did not point to any specific
reason why Ms Baker's decision to join the Wrights
as third parties means that their
proceeding with the company's claim and defending Ms Baker's counterclaim will
not be in the best
interests of the company and I do not accept that it has that effect
automatically. The company's interest in the claim is in recovery
of the alleged
debts for its shareholders. Its interest in defending the counterclaim is primarily in
showing there was no agreement
between the shareholders to share in the cost of the
shares and the costs of servicing the mortgage. The fact that the Wrights are
both
`driving' the company's claim and defending the counterclaim does not conflict with
or undermine that interest and Cooper J
has effectively found as much.               The
introduction of the third party claim essentially raises the same issues and, if
anything, the Wrights' involvement as third parties is likely to advance the
company's interests because the matters raised by the Wrights on the company's
behalf are substantially
the same matters they raise by way of defence to the
counterclaim.


[35]      I come finally to the argument that there are no other
shareholders available
or willing to conduct the litigation. Given the above findings, it is not necessary to
deal with this ground.
I simply note that the letter from Mr Gilchrist does not
amount to an acknowledgement of a shareholders' agreement to share Ms Bakers'
losses.


[36]      In reaching my decision I have borne in mind another supplementary
submission made by Ms Lewis that Mr and Mrs
Wright have been unwilling to
attend a judicial settlement conference when this is a case that plainly should go to a
conference.
She points out that the fixture for Ms Baker's application was originally
allocated to a settlement conference which had to be abandoned.
As I understand her
submission, it is that this is a factor that indicates their unsuitability to stand in the
company's shoes as
plaintiff. The argument is one that has some merit, but on
balance I do not think it is sufficient to interfere with the leave given
to them to bring
the action on the company's behalf. It is may be a matter that the Trial Judge
considers relevant when dealing with
costs at trial, but that will be for the Judge to
decide.

Result


[37]     The application is declined.


[38]     The plaintiff
is entitled to costs as the successful party on a 2B basis with
disbursements to be fixed by the Registrar. Leave is reserved to
Ms Baker to file a
memorandum for the purpose of seeking orders as to payment by instalments,
provided the memorandum is filed and
served within fourteen days.




Dated at Auckland on _______________________ at ___________ am/pm.




                        
               ________________________________


                                           Associate Judge Sargisson