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McLean v Future Wealth Management Limited [2014] NZHC 528 (20 March 2014)

Last Updated: 4 April 2014


IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY



CIV 2013-404-002919 [2014] NZHC 528

BETWEEN JOHN GRAHAM MCLEAN Applicant

AND FUTURE WEALTH MANAGEMENT LIMITED

First Respondent

PETER REGINALD DAYMOND Second Respondent

Hearing: 10 February 2014

Appearances: A Hooker for applicant

D P H Jones QC for respondents

Judgment: 20 March 2014



RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 20 March 2014 at 3.30pm, pursuant to Rule 11.5 of the High Court Rules.


Registrar/Deputy Registrar

Date...............













Solicitors:

Andrew Hooker Lawyer, Auckland

Birdsey & Associates, Auckland

Counsel:

D P H Jones QC, Auckland



MCLEAN v FUTURE WEALTH MANAGEMENT LTD [2014] NZHC 528 [20 March 2014]

Contents

Background........................................................................................................................................ [5] The Draft Claim .............................................................................................................................. [10] Notice of opposition and evidence in opposition to the application ............................................ [20] The parties’ submissions ................................................................................................................. [29] The applicant .................................................................................................................................... [29] The respondents................................................................................................................................ [41] Supplementary evidence and submissions .................................................................................... [50] Discussion......................................................................................................................................... [56] Section 165(2)(a) – the likelihood of the proceedings succeeding ............................................... [57] Section 165(2)(b) – the likely costs of the proceedings ................................................................ [81]

Section 165(2)(b) and (3)(a) – any action already taken by the company to obtain relief, and whether the company intends to bring the proposed proceedings ................................................ [88]

Section 165(2)(d) – the interests of the company in the proposed proceedings ............................ [89]

Conclusion........................................................................................................................................ [97]



[1] The applicant (Mr McLean) applies under s 165 of the Companies Act 1993 (the Act) for leave to bring proceedings in the name and on behalf of the first respondent (Future Wealth) against the second respondent (Mr Daymond). Mr McLean also seeks an order under s 166 of the Act that Future Wealth bear the costs of the proposed proceedings.

[2] Those sections provide as follows:

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) 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) of this section, 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) of this section, 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) Notice of the application must be served on the company or related company.

(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.

166 Costs of derivative action to be met by company

The Court shall, on the application of the shareholder or director to whom leave was granted under section 165 of this Act to bring or intervene in the proceedings, order that the whole or part of the reasonable costs of bringing or intervening in the proceedings, including any costs relating to any settlement, compromise, or discontinuance approved under section 168 of this Act, must be met by the company unless the Court considers that it would be unjust or inequitable for the company to bear those costs.

[3] The application was supported by an affidavit sworn by Mr McLean attaching a draft statement of claim against Mr Daymond (the Draft Claim). Mr McLean stated in his affidavit that to the best of his knowledge and belief, the facts contained in the Draft Claim are true and correct.

[4] There was one affidavit filed in opposition, being that of the proposed defendant Mr Daymond.

Background

[5] Mr McLean and Mr Daymond are equal 50 per cent shareholders in Future

Wealth. Mr Daymond is the sole director of Future Wealth.

[6] Future Wealth was incorporated by Mr McLean and Mr Daymond in June

2009, for the purpose of acquiring the client base and funds under management of a company known as Wealthy and Wise Limited (Wealthy and Wise). That transaction proceeded, and on or about 12 August 2009, Future Wealth purchased the client base, funds under management, and certain liabilities of Wealthy and Wise, for the sum of

$440,000.

[7] When Future Wealth was incorporated, Mr McLean and Mr Daymond were both directors of the company. However, Mr McLean resigned as a director in late

2010 or early 2011. There is a dispute between the parties as to the date of Mr McLean’s resignation as a director. Mr McLean says that it was when he signed a resignation document on 1 December 2010. The respondents say that it was in March 2011, when his resignation was registered at the Companies Office.

[8] Mr McLean’s evidence was that the relationship between himself and Mr Daymond deteriorated significantly between 2009 and 2010, to the point where, by late 2010, Mr McLean felt no longer able to continue as a director of Future Wealth and resigned. Since then, Mr McLean has had no involvement in the business of Future Wealth, but has retained his 50 per cent shareholding.

[9] In August 2012, Future Wealth, Mr Daymond, and another company substantially owned and controlled by Mr Daymond (Future Plan NZ Ltd (Future Plan)) commenced proceedings against Mr McLean and McLean Financial Planning Limited, a company owned and controlled by Mr McLean. I will refer to this proceeding as the “Future Plan proceedings”. The plaintiffs in the Future Plan proceedings allege misconduct by Mr McLean and his company in various capacities, including as a director of Future Wealth. In part, the alleged misconduct is said to have involved Mr McLean engaging in “a covert and determined course of action from late 2010 into 2011 of the transfer of clients from the financial planning

division of [Future Plan] and Future Wealth to his company McLean Financial

Planning Ltd”.1


The Draft Claim

[10] Future Wealth is named as the plaintiff in the Draft Claim, and Mr Daymond is named as the sole defendant. According to the Draft Claim, Future Plan is the registered proprietor of the premises at William Pickering Drive, Albany, Auckland (the premises) from which Future Wealth carries on its business.

[11] In a section of the Draft Claim headed “Background”, there is provided a brief history of the business relationship between Mr McLean and Mr Daymond. While the draft pleading is deficient in certain respects (e.g. referring to Mr McLean and/or his company as “the plaintiff”), it is apparent that Mr McLean or his company entered into an agreement with Future Plan under which Mr McLean’s company would provide certain financial planning and investment advice to clients of Future Plan. The understanding was that Mr McLean’s company would operate from the premises.

[12] An agreement known as the “Adviser’s Agreement” was signed on 28 April

2004 recording the arrangements, and Mr McLean or his company began operating from the premises on 17 February 2004. The Draft Claim pleads that Mr McLean’s company was to be Future Plan’s exclusive agent, and that income and commission between the parties would be split on the basis that Mr McLean or his company would receive 70 per cent, and Future Plan 30 per cent.

[13] The Draft Claim contains a number of allegations against Mr Daymond:

(a) Causing Future Wealth to pay excessive rent for its occupation of the premises, and excessive overheads.

The Draft Claim pleads that while the market rent for the share of floor area occupied by Future Wealth at the premises is in the range of

$10,000 to $12,000 per annum excluding outgoings, Mr Daymond has

1 Para 7(c), affidavit of Mr Daymond sworn in opposition to the present application.

unilaterally caused Future Wealth to pay more than twice that sum in each of the past four years. The Draft Claim also alleges that Mr Daymond has caused Future Wealth to pay for all electricity used in the premises, notwithstanding that Future Wealth is only one of four tenants and occupies only approximately 18 per cent of the total floor area of the premises. Mr Daymond is also alleged to have caused Future Wealth to pay for a colour photocopier and all photocopying in the premises, despite Future Wealth being only one of five tenants. The cost of the colour photocopier is said to have been approximately $20,000. Future Wealth is said to have received no credit or recompense for its payments of excessive rent, electricity and/or photocopying and other overheads.

(b) Diverting brokerage/commission payments on “key person” insurance

policy.

The allegation is that Mr McLean and Mr Daymond agreed that, because Mr McLean was a central figure in Future Wealth’s business, Future Wealth should take out a key person insurance policy over his life. Mr Daymond arranged that cover on or about 15 June 2010, using an agency which Future Plan had with the insurer, rather than placing the cover through Future Wealth. Mr Daymond is said to have placed the ownership of the policy in his own name, rather than in the name of Future Wealth. While the policy is said to show Future Plan as paying the monthly premiums, the Draft Claim alleges that the premiums have in fact been paid by Future Wealth. An upfront brokerage payment of $3,500 to $4,000 to which Future Wealth should have been entitled, is said to have been received by Mr Daymond and/or Future Plan. Mr Daymond is then alleged to have unilaterally sold the renewal commission income stream from the policy to a company related to Future Plan, for a sum unknown to Mr McLean, without accounting to Future Wealth for the proceeds of sale.

(c) Sale of future commissions payable on the renewal of life insurance policies (to which Future Wealth was entitled), to Future Plan NZ (2010) Ltd (FPNZ), a company owned or controlled by Mr Daymond and/or Future Plan, for sums unknown to Mr McLean.

Mr Daymond and/or Future Plan is/are alleged to have received the proceeds of these sales, and failed to disclose them or account for them to Future Wealth.

(d) Sale by Future Plan of its insurance and investment client base to

FPNZ in or about September 2010.

The allegation is that, while FPNZ competes in the same industry and areas of business as Future Wealth, the sale required FPNZ to lease part of the premises and to share the facilities and equipment, including telephone lines, computer server and photocopier, with both Future Wealth and Future Plan. The specific complaints are that Mr Daymond unilaterally and without authorisation caused FPNZ to become a competitor of Future Wealth, within the same building, and that he failed and/or refused to ensure there were appropriate security measures and confidentiality agreements in place in relation to the client files and other commercially sensitive information of Future Wealth.

(e) Issues arising out of Future Wealth’s financial statements for the year ended 31 March 2010.

The Draft Claim says that Mr McLean identified some unaccounted expenditure, increasing overheads, arbitrary and excessive rates set and/or paid for overheads, and “a risk premium” of $1,420 being paid each month to Future Plan, an amount to which Mr McLean had not agreed. The Draft Claim also alleges unilateral decision making by the defendant, related transactions arranged by Mr Daymond

benefitting Future Plan, and the lack of any new revenue derived from insurance policies.

The Draft Claim pleads that Mr McLean raised these issues with Future Wealth’s chartered accountant in November 2010, and with Mr Daymond in February 2011. Mr McLean says that no satisfactory response was received on either occasion.

(f) Issues arising out of Future Wealth’s financial statements for the year ended 31 March 2011.

In or about January 2011, Mr McLean queried with Mr Daymond the expenditure and overheads being run through Future Wealth. Mr Daymond is alleged to have refused to disclose the extent of any contributions made by other tenants to the overheads, and to have insisted that Mr McLean should not discuss these issues with FPNZ.

(g) For the period 2010 to 2012, Future Wealth is said to have incurred overhead expenses, including rent, in a sum of approximately

$138,000, of which $106,500 was said to be excessive compared to comparable rented office premises elsewhere. The figure of $106,500 was expected to exceed $130,000 for the four years ending 31 March

2013. Thirty-four per cent of the operating costs of Future Wealth, on a “historical basis”, are said to represent costs properly attributable to Mr Daymond. Generally, expenses are said to have been excessive relative to the revenue base of Future Wealth’s business, and Future Wealth is said to be run inefficiently and inappropriately.

(h) “Inexplicable irregularities and/or anomalies” in Future Wealth’s accounts, including a number of unspecified expenses.2 There were increases in Future Wealth’s costs between 2010 and 2012 for

accounting, telephone and internet, utilities and insurance expenses,

2 “Brokerage” of $9,781 in the 2010 year, “subscriptions” of $1,977 in the 2011 year and $2,511 in the 2012 year, “leasing” of $4,733 in the 2011 year, and “legal costs” of $22,983 in the 2012 year.

and Future Wealth’s insurance revenue over each of the years is said to have not been fully and properly disclosed.

[14] The Draft Claim pleads a total of four causes of action against Mr Daymond:

(a) breach of director’s duties and failure to act in good faith and in the best interests of Future Wealth.3

(b) failure to exercise powers for a proper purpose.4

(c) failure to exercise due care, diligence and skill.5

(d) failure to disclose interests in transactions with Future Wealth.6

[15] The same factual allegations form the basis of each of causes of action (a) to

(c) above, and in each of these causes of action it is alleged that Mr Daymond:

(a) was conflicted in his position as both director of Future Wealth and the sole director of the registered proprietor of the premises occupied and leased by Future Wealth;

(b) appropriated or diverted assets of Future Wealth for his own personal benefit or that of Future Plan;

(c) acted so as to harm or prejudice the business and interests of Future

Wealth to the detriment of its shareholders; and

(d) has managed the company inefficiently or inappropriately, again to the detriment of its shareholders.

[16] Each of the first three pleaded causes of action also include the following additional particulars of the allegation that Mr Daymond acted so as to harm and/or

3 Companies Act 1993, s 131.

4 Section 133.

5 Section 137.

6 Section 140.

prejudice the business and interests of Future Wealth, to the detriment of its shareholders:

(a) failing and/or refusing to take steps to protect confidential client information of the company, in that Mr Daymond’s secretary was approached by Kevin Daily of FPNZ for a copy of a file.

(b) failing and/or refusing to take appropriate action when it was discovered that FPNZ had diverted telephone inquiries intended for Future Wealth, to the web address of FPNZ.

(c) failing and/or refusing to take appropriate action to prevent efforts by

FPNZ to recruit an employee of Future Wealth, Mr Glen Reid.


[17] The fourth cause of action alleges that, in breach of duty, Mr Daymond failed to disclose material interests in Future Wealth’s interests register and to the board. These alleged breaches include:

(a) causing Future Wealth to pay excessive overheads to the benefit of

Future Plan and/or Mr Daymond; and

(b) appropriating and diverting Future Wealth’s assets to the benefit of

Future Plan and/or Mr Daymond.

[18] The Draft Claim alleges that Mr Daymond’s failure to disclose these interests has caused prejudice and/or loss to Future Wealth in an amount to be quantified at or prior to trial.

[19] The relief sought in the Draft Claim on each of the four causes of action is as follows:

(a) declarations that the defendant is in breach of the pleaded duties; (b) an account of profits;

(c) alternatively, at the election of “McLean”, an inquiry into damages; (d) such other relief as the Court thinks fit;

(e) interest; and

(f) costs.


Notice of opposition and evidence in opposition to the application

[20] In their notice of opposition, the respondents say that the allegations against Mr Daymond have no substance or no sufficient substance, and do not warrant the granting of leave to commence a derivative action. The proposed derivative action is said to be an abuse of process. They also say that the claims in the Draft Claim, which are denied, can be brought in substance by Mr McLean in the Future Plan proceedings, and that the issue of separate derivative proceedings would illegitimately complicate the Future Plan proceedings, create unnecessary confusion, and incur unnecessary costs. They say that it is not in the interests of Future Wealth to bring the proposed derivative proceedings.

[21] In the event that leave is granted, the respondents say that the cost of any derivative action should be borne by Mr McLean. They say that it would be unjust and/or inequitable for Future Wealth to bear the cost of any derivative action.

[22] In his affidavit, Mr Daymond said that, in his view, the various claims in the Draft Claim have no basis whatsoever. However he did not address any of the claims specifically. Rather, the affidavit consisted substantially of an attack on Mr McLean’s actions and his motive for bringing the application.

[23] Mr Daymond stated in his affidavit that Mr McLean had failed to provide a personal guarantee of bank borrowings required for the acquisition of Wealthy and Wise, in circumstances where Mr Daymond anticipated that such a guarantee would be forthcoming. In the event, Mr Daymond and his wife had to take up the obligation to the bank. There was also reference to an income tax bill for Future Wealth of approximately $21,000 due in 2011. Mr McLean was apparently asked to

contribute to it, but refused. The issue was eventually resolved without any assistance or input from Mr McLean.

[24] The major area of concern expressed by Mr Daymond in his affidavit related to Mr McLean’s alleged actions, which are the subject of the claims made against Mr McLean in the Future Plan proceedings. Mr Daymond’s evidence was that the unauthorised removal of clients from Future Wealth resulted in a major decline in Future Wealth’s income from about March 2011. Mr Daymond stated that, when confronted, Mr McLean refused to stop transferring clients.

[25] Mr Daymond said that, since about late 2011, he has had to subsidise the income of Future Wealth by approximately $1,000 per month due to Future Wealth’s depleted client base. This was said to be despite clients of Future Plan, previously serviced by a company called Future Plan Investments Ltd, being transferred into Future Wealth from the end of 2011.

[26] Mr Daymond accused Mr McLean of backdating his resignation as a director of Future Wealth in an attempt to remove himself from the office of director earlier than was actually the case. As Mr Daymond put it, “Otherwise his own actions in taking Future Wealth clients for the benefit of himself and his (other) company would have breached his obligations as a director of Future Wealth”.

[27] Mr Daymond noted that Mr McLean is a party to the Future Plan proceedings, as is Future Wealth.7 Mr Daymond suggested that any claims Mr McLean might have can be brought by way of counterclaim in the Future Plan proceedings, in Mr McLean’s capacity as a shareholder of Future Wealth.

[28] Mr McLean did not file any evidence in reply.









7 Future Plan and Future Wealth are named as first and second plaintiffs in the Future Plan proceedings. Mr Daymond is the third plaintiff. Mr McLean’s company McLean Financial Planning Limited is the first defendant, and Mr McLean is the second defendant.

The parties’ submissions

The applicant

Section 165(2)(a) – the likelihood of the proceedings succeeding

[29] Mr Hooker cited the following passage from the judgment of Fisher J in Vrij v Boyle:8

It is not for me to conduct an interim trial on the merits. The appropriate test is that which would be exercised by a prudent business person in the conduct of his or her affairs when deciding whether to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, the likely costs and the prospect of executing any judgment.

[30] Mr Hooker also referred to the decision of Associate Judge Gendall in

Cameron v Coleman in support of the proposition that an applicant for leave under s

165 need only show that its proposed cause of action is “arguable”.9

[31] Mr Hooker went on to note that it can hardly be contested in this case that Mr Daymond owed conventional fiduciary duties as a director of Future Wealth. Mr Hooker then submitted that the matters set out in the Draft Claim, if proven, would amount to breaches by Mr Daymond of ss 131 and 133 of the Act. In his submission, the evidence before the Court is that there have been a number of instances in which Future Wealth has been charged rent and other expenses that, on the evidence, were out of proportion to those that would have been dictated by the market. He submitted that the expenses charged to Future Wealth have benefitted Future Plan, a company in which Mr Daymond is the sole director and the owner of

99 per cent of the share capital.

[32] In respect of the Mr McLean’s contentions that life insurance policies and/or commissions thereon which should have been owned by Future Wealth have been wrongly transferred to Future Plan and on-sold to FPNZ, Mr Hooker submitted that the transfer and subsequent sale of these assets has benefited Future Plan, a company

in which Mr Daymond is the 99 per cent shareholder and sole director.

8 Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765, line 42.

9 Cameron v Coleman HC Wellington CIV 2010-485-2151, 22 June 2011 at [40].

[33] Under this head, Mr Hooker submitted that the proposed derivative proceedings are concerned not only with excessive overheads incurred by Future Wealth in the past but there is also concern over ongoing and continuing costs (that is why a declaration is sought).

[34] Mr Hooker noted that the circumstances of the Future Plan proceedings and the proposed derivative proceedings are “entwined”, and that the witnesses would be the same in both proceedings. He submitted that if leave is granted to commence the derivative proceedings, it could be consolidated with the Future Plan proceedings and heard with it, with minimal extra resources being required.

Section 165(2)(c) – any action already taken by the company to obtain relief

[35] Mr Hooker pointed out that, as the sole director of Future Wealth rejects the allegations in the Draft Claim, no action has been taken by Future Wealth against Mr Daymond and none is likely to be taken.

Section 165(2)(d) – the interests of the company in the proceedings being commenced

[36] Mr Hooker submitted that the evidence shows that Future Wealth has been deprived of significant income, and will continue to pay costs far in excess of what it should be paying. Both of those circumstances directly and financially benefit Future Plan, which is under Mr Daymond’s sole control. Mr Hooker submitted that any prudent and responsible director of Future Wealth would take action to prevent assets and income of the property from being spent where that was unwarranted.

Section 165(3) – the Court must be satisfied that the company does not intend to bring, or diligently continue the proceedings

[37] There was no dispute under this heading. Mr Jones confirmed that Future Wealth does not intend to bring any proceedings in respect of the matters alleged in the Draft Claim.

[38] Addressing the respondents’ notice of opposition to the application, Mr Hooker submitted that Mr Daymond’s personal views that the application is merely a tactical manoeuvre is not admissible, relevant or correct. In respect of the counter-allegations in Mr Daymond’s affidavit, Mr Hooker submitted that even if they had substance, that would not affect the question of whether the allegations forming the basis of the proposed derivative proceedings had substance.

[39] Mr Hooker accepted that the parties to this application are all also parties in the Future Plan proceedings. However, he noted that Future Wealth is controlled solely by Mr Daymond, and that Mr Daymond has no intention of bringing proceedings of the kind contemplated by the application.

Section 166 – the costs of the proposed proceeding

[40] Mr Hooker submitted that if the present application is successful, the Court should order that the whole of the costs of bringing the derivative proceedings be met by Future Wealth.

The respondents

[41] Mr Jones noted that the discretion conferred under s 165(1) is both broad and undiminished by the specific criteria referred to in later subsections.10 In Mr Jones’ submission, it is this discretion which enables the Court to assess the motives of the applicant, which may be different from those of the company. The discretion also allows the Court to prevent proposed actions which would be trivial, unmeritorious or vexatious.

[42] Turning to the facts of this case, Mr Jones submitted that the claims in the Draft Claim lack substance, and that any amount involved would be modest. He also pointed to the unexplained delay between the time the Future Plan proceedings were commenced against Mr McLean in August 2012, the date of the Draft Claim in

May 2013, and to Mr McLean’s own role as a director of Future Wealth for a period

10 Citing Vrij v Boyle, above n 8, at 767, line 19.

at least up until 1 December 2010. Mr Jones submitted that, as a director, Mr McLean should have been involved in Future Wealth’s governance. Mr Jones also pointed to the lack of particularity in many of the paragraphs in the Draft Claim, and to the fact that Mr Daymond’s concurrent roles as a director of both Future Plan and Future Wealth were known to Mr McLean from the outset.

[43] Mr Jones submitted that it is not possible to assess the value of any cause of action in the Draft Claim, and therefore it is impossible to assess the efficacy of the claims.

[44] Referring to that part of the Draft Claim relating to the key person life policy, Mr Jones noted that Mr McLean is now no longer a part of the Future Wealth business, so that policy must now be redundant. As for the drawings of $1,420 per month which Mr Daymond has been taking from Future Wealth, Mr Jones noted that the figure is specifically pleaded in the Future Plan proceedings as an amount agreed between Mr McLean and Mr Daymond to take account of Mr Daymond taking on additional financial risk when Mr McLean would not provide a personal guarantee of the bank finance used in the acquisition of Wealthy and Wise.

[45] Looking at the Draft Claim as a whole, Mr Jones submitted that the potential amounts involved are not substantial, and cannot warrant High Court proceedings being issued. The relief sought, the account of profits or inquiry as to damages, is, in Mr Jones’ submission, vague and speculative.

[46] Addressing the s 165(2) factors, Mr Jones submitted:

(a) The likelihood of the proceedings succeeding – a prudent business person would not bring the proposed action. The prudent business person would consider the proceedings fraught with difficulty, and the various complaints made by Mr McLean could be raised in the Future Plan proceedings in any event. Given the nature of the claims made against Mr McLean and his company in the Future Plan proceedings, and the overall circumstances, it is unlikely that any prudent assessment would result in the issue of proceedings.

(b) The costs of the proceedings in relation to likely relief – on the evidence available, it is unlikely that Future Wealth would be granted relief. Even if it were, the relief is unquantified and would be small. Accordingly, any costs would be disproportionate. Consolidation of the proposed derivative proceedings with the Future Plan proceedings would only serve to significantly complicate the Future Plan proceedings, and result in unnecessarily additional cost. The practical difficulties would be considerable.

(c) Any action taken by Future Wealth to obtain relief – no action has been taken by Future Wealth, as the allegations are without merit.

(d) The interests of Future Wealth in the derivative proceedings being commenced – it would not be in the interests of Future Wealth to bring the proposed derivative proceedings. It would only be in Mr McLean’s interests in relation to the Future Plan proceedings which have been brought against him. Further, Future Wealth is already in financial difficulty due to the actions of Mr McLean, and any additional cost would be keenly felt. The real mischief done to Future Wealth is the conduct of Mr McLean, which is the subject of the Future Plan proceedings. It would not be in Future Wealth’s interests for the Court to grant leave to Mr McLean to commence the proposed derivative proceedings and thus distract attention from the Future Plan proceedings. The matters in dispute in the Future Plan proceedings form the real background against which this application has been made, and that background militates against the Court granting the application.

[47] Mr Jones noted that the bulk of the financial commitment to Future Wealth has come from Mr Daymond, not from Mr McLean. The respondents say that Mr McLean has deliberately undermined the Future Wealth business by conducting a systematic dismemberment of its client base for Mr McLean’s own advantage. Meanwhile Mr Daymond has had to subsidise from his own resources approximately

$1,000 per month since late 2011 for Future Wealth to make ends meet.

Mr Daymond has also transferred Future Plan clients into Future Wealth (from the end of 2011) to assist with income generation. Mr Jones submitted that it is against that background of ongoing contributions to Future Wealth by Mr Daymond and damaging activity by Mr McLean, that the efficacy of the proposed derivative proceedings should be assessed.

Section 166 – the costs of the proposed proceedings

[48] If leave were granted to commence a derivative action, Mr Jones noted the “starting position” under s 166 of the Act that any costs would have to be borne by Future Wealth in the first instance. He submitted that that would mean Mr Daymond would effectively have to pay, a result which Mr Jones described as farcical, particularly if there were a consolidation of the derivative proceedings with the Future Plan proceedings.

[49] In those circumstances, Mr Jones submitted that it would be both unjust and inequitable for Future Wealth to pay the costs of the proceedings. It would be Mr Daymond who would effectively have to pay, given that he is subsidising the company. There would be no financial burden for Mr McLean. Mr Jones referred to the decision of Heath J in Frykberg v Heaven, where the Court declined to make an order under s 166 in circumstances where, if an order was granted, the defendant would effectively be funding the litigation against himself and the company operated

by his son.11


Supplementary evidence and submissions

[50] By memorandum dated 19 February 2014, Mr Hooker sought leave to

produce a copy of Future Wealth’s financial statements for the year ended 31 March

2013. Mr Jones did not oppose the production of this additional evidence.

[51] With his memorandum, Mr Hooker attached a copy of those financial statements, and also copies of Future Wealth’s financial statements for each of the

years ended 31 March 2010 to 31 March 2012. In his memorandum, he drew


11 Frykberg v Heaven (2002) 9 NZCLC 262, 966 (HC) at [52].

attention to the fact that Future Wealth had spent $22,983 on legal fees in the March

2012 year, and $39,082 on legal fees in the March 2013 year. He submitted that Future Wealth has clearly been funding its claims against one of its shareholders (Mr McLean) in the Future Plan proceedings, and that it must therefore be quite able to fund the proposed derivative action against its other shareholder (Mr Daymond).

[52] In his reply memorandum, Mr Jones took issue with the contention that Future Wealth would be able to fund the proposed derivative action. In so doing, he referred to Future Wealth’s statements of financial performance for the March 2012 and March 2013 years, which showed operating losses of $26,021 and $31,915 respectively. Mr Jones also referred to a drop of over $100,000 between Future Wealth’s March 2011 revenue, and its revenue figures for each of the March 2012 and March 2013 financial years.

[53] The financial statements show that Future Wealth was operating at close to break even in each of the March 2012 and March 2013 years (without the legal expenses, there would have been an operating loss of approximately $3,000 in the March 2012 year, and an operating profit of roughly $7,000 in the March 2013 year).

[54] Future Wealth’s statement of financial position as at March 2013 showed almost nothing in the way of cash or other assets which would be available to meet any significant litigation costs.

[55] The financial statements as at 31 March 2013 show that Future Wealth’s current account liability to Mr Daymond then stood at $117,009, which figure included contributions of $48,607 made in the course of the year. Those figures seem consistent with Mr Daymond’s evidence that he has been personally funding Future Wealth so that it can meet its ongoing obligations, including its legal costs.

Discussion

[56] It is convenient to begin by considering each of the matters to which the

Court must have regard under s 165(2) of the Act.

Section 165(2)(a) – the likelihood of the proceedings succeeding

[57] I accept that it is not for me to conduct an interim trial on the merits, and that the appropriate test to apply is that which would be applied by a prudent business person in the conduct of his or her own affairs when deciding whether or not to bring a claim. Such a decision requires one to consider such matters as the amount at stake, the apparent strength of the claim, the likely costs, and the prospect of executing any

judgment.12

[58] The first (and apparently most substantial) matter of complaint in the Draft Claim is the allegation that Mr Daymond has caused Future Wealth to pay excessive rent to a company owned and controlled by him (Future Plan), and has caused Future Wealth to pay an excessive contribution to the total electricity bill for the premises, and to pay for the cost of a colour photocopier and all photocopying carried out in the premises (even though Future Wealth is only one of five tenants).

[59] As noted by Fisher J in Vrij v Boyle, it could hardly be contested that a director of a company owes conventional fiduciary duties to that company.13

Mr Daymond was at all material times a director of Future Wealth, and I think it is clear that, if and to the extent that Mr McLean can show that Mr Daymond caused Future Wealth to pay excessive rent and/or overheads to a company (Future Plan) in which Mr Daymond has a personal financial interest, Mr Daymond will be held to have breached his fiduciary duties to Future Wealth. The real issues in this case are:

(a) The quality of the evidence produced in support of the application, and whether Mr McLean has met the “arguable” case threshold referred to in Cameron v Coleman;14 and

(b) The likely quantum of any judgment which may be obtained in the derivative proceedings if leave is given.






12 Vrij v Boyle, above n 8, at 765, line 45.

13 Vrij v Boyle, above n 8, at 744, line 14.

14 Cameron v Coleman, above n 9.

[60] The only evidence in support of the allegations in the Draft Claim is Mr McLean’s affidavit confirming that the allegations in the draft claim are, to the best of his knowledge and belief, true and correct.

[61] The respondents have elected not to join issue on any of these specific allegations. There is just Mr Daymond’s broad statement that “the various claims” have no basis “in my view”.

[62] The Draft Claim asserts that the market rent payable by Future Wealth for the floor area occupied by it at the premises, would be in the range $10,000 to $12,000 per annum, excluding outgoings. That market rent is contrasted in the Draft Claim with the payments Future Wealth has actually been paying to Future Plan:

(a) $21,923 for a period of 231 days in the year ended March 2010. (b) $31,599 for the year to March 2011.

(c) $21,520 for the year ended March 2012. (d) $21,113 for the year ended March 2013.

[63] A number of points are immediately apparent. First, the figure of $10,000 to

$12,000 per annum in the Draft Claim is said to be a market rental figure excluding outgoings, whereas the figures set out above, which are derived from Future Plan’s financial statements and are said to be comparable, include outgoings. There is no evidence of what items have been included under the heading “Rents and Outgoings” in Future Wealth’s statements of financial performance, and no breakdown showing the individual costs allocated to each item. However, I think it reasonable to assume that the outgoings would have included a proportion of the rates charged for the premises by the Auckland City Council, if only because rates do not appear as a separate item listed under the heading “Expenses” in the financial

statements.15 And I think it not unreasonable to suppose that in premises with at




15 There is a separate item listed “Light, Power & Heating”.

least four separate tenants, the tenants would have some liability for other outgoings in addition to rates.16

[64] There must also be a serious question mark over Mr McLean’s market rent range of $10,000 to $12,000 per annum. As far as the evidence shows, Mr McLean is not a registered valuer or otherwise qualified to give expert evidence on market rentals, and all allegations have been denied by the respondents.

[65] Weighing those considerations as best I can, I am unable to conclude that Mr McLean has produced sufficient evidence to meet the “arguable case” threshold in respect of the claim that excessive rents were paid in either of the years ended March 2012 and March 2013 (in each of those years, the “Rents & Outgoings” figure was approximately $21,500).

[66] The position with the “Rents & Outgoings” figures for the March 2010 and March 2011 years may be somewhat different. The amounts included in the accounts for “Rents & Outgoings” for each of those years are either in excess of

$30,000 or, in the case of the shorter period covered by the accounts for the March

2010 year, equivalent to a figure in excess of $30,000 per annum. I think that difference called for some better explanation than the broad denial of all allegations which the respondents provided, and it may be that Future Wealth could claim that the rent paid in each of those two years was excessive.

[67] The Draft Claim also alleges that Mr Daymond has caused Future Wealth to pay for all electricity used in the premises, despite Future Wealth being one of four tenants and occupying approximately only 18 per cent of the total floor area of the premises.

[68] Whatever may be the merits of this allegation, it seems apparent that any claim would be small. Future Wealth’s financial statements show that in the years ended 31 March 2010 and 31 March 2011, the sums paid for “Light, Power &

Heating” were respectively $525 and $2,341. The corresponding figures for the


  1. For example, Body Corporate fees or other outgoings associated in the common areas of the premises used by all tenants.

years ended 31 March 2012 and 31 March 2013 were $5,029 and $4,189. There is no evidence of the total figures for electricity used in the premises.

[69] There is nothing in the evidence which describes the businesses operated by the other tenants in the premises, or explains why the electricity usage in the premises would necessarily be proportionate to floor area occupied. And even if the allegations in the Draft Claim were correct, at least some proportion of the amounts paid by Future Wealth for electricity would have been properly chargeable to it. If there is a claim at all in respect of electricity consumption, it is clear that it would be a small claim, unlikely to be in excess of $5,000 – $10,000 for the period to

31 March 2013.

[70] The next allegation is that Mr Daymond allegedly caused Future Wealth to pay for a colour photocopier and all photocopying in the premises, despite Future Wealth being only one of a number of tenants and occupying only approximately

18 per cent of the total floor area of the premises. The Draft Claim pleads that, to the best of Mr McLean’s knowledge, the cost of the colour photocopier was approximately $20,000. Mr McLean says that he does not know how much Future Wealth has spent on this photocopying.

[71] If Future Wealth expended a sum as large as $20,000 on a new photocopier, I would have expected the photocopier to be shown as an item of office equipment in the depreciation schedule forming part of Future Wealth’s financial statements. No such item appears in the depreciation schedules in any of the years ended 31 March

2010 through 31 March 2013. The explanation may be that the copier was not purchased but leased. There is an item “Leasing Expenses $4,399” in Future Wealth’s statement of financial performance for the year ended 31 March

2013, and it may or may not represent the costs of leasing the copier. But even if it does, there is nothing in the evidence that would suggest that Future Wealth has not received full value for the lease payments.

[72] Furthermore, there is no evidence of the extent of other tenants’ use of the colour photocopier, or evidence to support the contention that Future Wealth did not make appropriate recoveries from other tenants who may have used the copier.

Taking those matters into account, I am not satisfied that Mr McLean has produced sufficient to show that Future Wealth would have an arguable case on the proposed claims relating to the colour photocopier.

[73] The next area of complaint relates to the “key person” insurance policy. The allegation appears to be that Mr Daymond and/or Future Plan received an upfront brokerage payment of approximately $3,500 which should have been paid to Future Wealth. There are also allegations that Future Wealth has been paying monthly premiums on the key person policy, and that Mr Daymond unilaterally sold the renewal income stream from the policy to a related company of Future Plan, for a sum unknown to Mr McLean. The key person insurance policy is said to have been taken out in June 2010 with Sovereign Insurance.

[74] The nature of this claim is far from clear. On Mr McLean’s own account, he resigned as a director of Future Wealth in December 2010, and thereafter he was not involved in the running of Future Wealth’s business. From that point on, he was presumably no longer a “key person” as far as Future Wealth was concerned and, on the face of it, Future Plan would no longer have had any need for insurance on Mr McLean’s life. I note too that the financial statements for Future Wealth for the year ended 31 March 2013 show a sum of only $939 paid for “Insurance”. Allowing for the costs of other necessary insurances Future Wealth would have needed to maintain, it seems unlikely that any premiums for insurance on Mr McLean’s life were paid by Future Wealth after 1 April 2012.

[75] On the evidence which has been produced, it is very difficult to make any assessment of the likelihood of Future Wealth successfully making any claim against Mr Daymond in respect of the “key person” insurance. It does appear, however, that any claim would likely be small, probably limited to the upfront brokerage of approximately $3,500 which Mr McLean alleges was wrongfully diverted from Future Wealth to Mr Daymond or Future Plan.

[76] The next matter of complaint set out in the Draft Claim relates to the alleged sale to FPNZ of future commissions payable on the renewal of life insurance policies. Mr McLean says that Future Wealth was entitled to receive these

commissions but Mr Daymond failed to account to Future Wealth when they were sold to FPNZ.

[77] Again, it is very difficult to make any assessment of the merits of this claim on the very limited evidence which was produced. Furthermore, it is clear that the amounts involved with this complaint would be small. In oral submissions, Mr Jones described the amounts involved as “crumbs” and “rats and mice”. Mr Hooker did not disagree with that characterisation of the size of this claim.

[78] The other complaints set out in the Draft Claim seem to me to be no more substantial. The allegation that Mr Daymond unilaterally and without authorisation caused FPNZ to become a competitor of Future Wealth, within the same building, and without arranging for appropriate security measures and confidentiality

agreements, seems not to have caused Future Wealth any loss.17 And if FPNZ

and/or other entities associated with Mr Daymond are operating in the financial planning/investment advice market in competition with Future Wealth, so too is Mr McLean’s own company, McLean Financial Planning Ltd. In those circumstances, I do not think that the mere alleged sale of Future Plan’s insurance and/or investment client base to FPNZ without more, can provide any arguable basis for a claim that Mr Daymond breached his duties to Future Wealth. There may be an issue as to whether having a company with a very similar name operating in the same building as Future Wealth, in the same industry, could have been in Future Wealth’s interests. However, there is no evidence of the extent to which the physical location of businesses operating in this industry may be important (e.g. if most of the business is transacted by representatives visiting clients in their homes or places of business, or by telephone or internet, the physical location of a business might not be of great importance). In the end, the most that can be said is that there might be a claim, but again it would seem likely to be modest.

[79] In my view, the various general concerns pleaded in the Draft Claim relating to Future Wealth’s financial statements do not reach the threshold of showing any additional arguable case by Future Wealth against Mr Daymond. Mr McLean raised

a number of questions about the accounts, but they were generally over insignificant

17 At least none has been identified in the Draft Claim.

sums, and did not, in my view, reach the threshold of showing that Future Wealth has an arguable claim against Mr Daymond in respect of them.

[80] Summarising the position under the “Likelihood of the Proceedings Succeeding” heading, it seems to me that Future Wealth might have an arguable case against Mr Daymond in respect of rent and/or outgoings for the years ended

31 March 2010 and 31 March 2012, but on the evidence available the claim would be small – probably no more than $15,000 to $20,000. Any claim there might be in respect of overcharging for electricity usage would not exceed $10,000, and the various claims in respect of insurance premiums and/or commissions seems unlikely to be worth more than $15,000 to $20,000 at best if they can be established. Overall, the evidence of an “arguable case” is borderline, and on the very limited evidence produced the quantum of any claim would not appear to be more than about $40,000 to $50,000.

Section 165(2)(b) – the likely costs of the proceedings

[81] The parties did not direct their submissions to the likely duration of a trial if leave were granted on the application, or to the costs of such a trial. Mr Hooker simply submitted that the derivative proceedings would sensibly be consolidated with the Future Plan proceedings, and that there would be little additional cost if that were done. Mr Jones submitted that consolidation would lead to a farcical result, where Future Wealth would, in the same consolidated proceeding, be suing not only Mr McLean as a defendant in the Future Plan proceedings, but also one of its co-plaintiffs in the Future Plan proceedings, Mr Daymond. And subject to any contrary order which might be made under s 166, Mr Daymond would effectively be funding the derivative proceedings against himself.

[82] In my view, it would not be safe for the Court to assume that, if leave were granted, the two proceedings would necessarily be consolidated and heard together. First, the matters of complaint which are the subject of the proposed derivative proceedings are substantially distinct from the plaintiffs’ claims against Mr McLean and his company in the Future Plan proceedings. The only significant area of overlap seems to be in the fourth counterclaim filed by the defendants in the Future

Plan proceedings, where Mr McLean’s company alleges that, while a director of Future Wealth, Mr Daymond transferred business from Future Wealth to companies or entities under his control. The Future Plan proceedings are otherwise not concerned with Mr Daymond’s conduct as a director of Future Wealth.

[83] A second consideration is that if leave were granted to bring the proposed derivative proceedings, separate solicitors and counsel would have to be retained to represent Future Wealth. Clearly, Mr Daymond as the sole director could not be permitted to instruct solicitors and counsel in proceedings brought against himself.

[84] One answer might be that, if leave were granted, the derivative proceedings and the Future Plan proceedings could be heard consecutively before the same Judge. But in my view that would not result in any significant costs saving. It might result in greater costs for Future Wealth if the company’s new solicitors and counsel were obliged to spend time dealing with aspects of the consolidated proceedings which were not directly relevant to the derivative proceedings. In the end, it seems to me that it would be unsafe to conclude that any consolidation order would be made, or that if it were, it would result in any significant saving of costs.

[85] I have little doubt that there is a substantial risk that if leave were granted, the costs of the proposed derivative proceedings would exceed the quantum of any judgment which might be obtained in them. There are some very broad allegations in the Draft Claim, including an allegation that Mr Daymond “has managed [Future Wealth] inefficiently and inappropriately to the detriment of shareholders”. The evidence on that application would appear to require an examination of all overhead expenses incurred by Future Wealth in the years 2010 to 2012 (see for example the allegations at paragraph 73(b)(c) and (d) – allocated overhead costs claimed to represent approximately 34 per cent of the operating cost base of Future Wealth, “expenses that are excessive relative to the revenue base of the business”, and “Future Wealth has been and is being run inefficiently and inappropriately”).

[86] Given the very broad nature of those claims, and the likelihood that expert accounting and valuation evidence would be required to properly address the claims in the Draft Claim, it is not difficult to conclude that the costs to Future Wealth of

pursuing the proposed derivative proceedings would be likely to be considerably in excess of any judgment it might obtain. Even allowing for an award of costs against Mr Daymond if the claims were successful, it must be doubtful that the proposed derivative proceedings would result in any net recovery for Future Wealth.

[87] If the only issue was the likely total recovery versus the costs of running the derivative proceedings, I have no doubt that a prudent business person would conclude that Future Wealth should not pursue the proceedings.

Section 165(2)(b) and (3)(a) – any action already taken by the company to obtain relief, and whether the company intends to bring the proposed proceedings

[88] As noted earlier, it is common ground that Future Wealth has not already taken any action in respect of the matters pleaded in the Draft Claim, and that there is no likelihood of any such action being undertaken if leave is not granted.

Section 165(2)(d) – the interests of the company in the proposed proceedings

[89] There is no relevant “related company”. The interests to be considered under this heading are solely those of Future Wealth.

[90] As noted above, I have no doubt that if it were simply a matter of assessing the likely financial recovery if the proposed proceedings were pursued, this is not a case that a prudent business person, acting in the conduct of his or her own affairs, would be likely to take. Furthermore, this is not, in my view, a case like Needham v EBT Worldwide Ltd where a prudent business person might issue proceedings and take the proceedings to the stage where full discovery has been obtained, and then

decide whether the proceedings should be resolved or continued.18 In this case, it is

accepted that the claims relating to insurance commissions are small, and it is apparent from the financial statements of Future Wealth and from the Draft Claim itself that the other claims would not be large. In my view, the prudent business person would be unlikely to form any different view of the economics of the

proposed proceedings after discovery had been obtained.



18 Needham v EBT Worldwide Ltd HC Auckland CIV-2005-404-001919, 27 March 2006 at [73].

[91] Mr Hooker made the point that the proposed proceedings are not concerned simply with recovery of damages or an account in respect of past wrongs allegedly committed by Mr Daymond. The proceedings also seek a declaration as to Mr Daymond’s future conduct. However, that submission seems to me to have an air of unreality about it. The prospects of Mr Daymond and Mr McLean remaining as equal shareholders of Future Wealth for any significant period into the future must be extremely low. The situation appears to be one where there is little if any remaining trust between Mr McLean and Mr Daymond, and it is necessary to consider the most

appropriate procedure for redress given the actual circumstances of Future Wealth.19

That assessment needs to be based upon the prudent business person test discussed above.

[92] In my view, any prudent business person would conclude that the overriding need is to bring to a head what is essentially a dispute between the shareholders of Future Wealth. Either a shareholders proceeding brought by Mr McLean under s 174 of the Act or an application to liquidate Future Wealth on the “just and equitable” ground,20 would seem to me to be a more appropriate vehicle for the claims in the Draft Claim to be brought. Such proceedings would provide an appropriate forum

for hearing the various claims of breach of fiduciary duty and breach of the Act, which are advanced in the Draft Claim.

[93] I think it appropriate also to take into account Future Wealth’s financial position in assessing whether the prosecution of the proposed derivative proceedings would be in the company’s interests. In the absence of any proposal for the proceedings to be funded by Mr McLean, I accept Mr Jones’ submission that the reality is that the proceedings would have to be funded by Mr Daymond himself, at least in the absence of any contrary order made under s 166. Mr Hooker has not suggested that the Court could make any order compelling Mr Daymond to fund Future Wealth to bring a proceeding against himself, and in the absence of such funding it seems clear from Future Wealth’s financial statements that it would not

have the resources to fund the proposed proceedings.


19 See Techflow NZ Ltd v Techflow Pty Ltd & Ors (1996) NZCLC 261,138 (HC) at 6; Chen v He

[2013] NZHC 2033 at [31].

20 Section 241(4)(d).

[94] Mr Hooker made the superficially attractive submission that, if it is good enough for Future Wealth to fund proceedings against one of its shareholders, then it should be good enough for it to fund justified proceedings against the other shareholder. Put another way, the fact that Future Wealth has brought proceedings against one shareholder cannot preclude the possibility that the company should also be taking (justified) proceedings against the other shareholder. I accept that submission as far as it goes: Mr Daymond cannot oppose the present application on the basis that Mr McLean himself may have committed wrongs against the company.

[95] The principal difficulty with Mr Hooker’s submission is that it is neither appropriate nor possible in hearing this application for the Court to form any view of the merits of Future Plan’s claims in the Future Plan proceedings it has brought against Mr McLean. The proposed derivative proceedings must be assessed on their own merits.

[96] While it might be in Mr McLean’s interests for Future Wealth to issue the proposed proceedings against Mr Daymond, that is not the question. The question is whether it would be in Future Wealth’s interests to bring the proceedings. For the reasons set out above, I am not satisfied that it would.

Conclusion

[97] Taking into account all of the foregoing considerations, the application for leave to bring the proposed derivative proceedings in the name of Future Wealth is declined.

[98] The respondents are entitled to costs, which should be assessed on a category

2B basis. If counsel are unable to agree on costs, memoranda may be filed. In that event, the respondents’ memorandum is to be filed within 14 days after the date of this judgment, and the applicant may file any memorandum in reply within 14 days

after service of the respondents’ memorandum.






Associate Judge Smith


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