PETERS & ORS V BIRNIE & ORS HC AK CIV-2009-404-8119

PETERS & ORS V BIRNIE & ORS HC AK CIV-2009-404-8119 22 April 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2009-404-8119IN THE MATTER OF Section 165 of the Companies Act 1993 BETWEEN ALLEN PATRICK PETERS First Applicant AND BERNARD PAUL QUINN Second Applicant AND BIRNIE CAPITAL PROPERTY PARTNERSHIP LIMITED Third Applicant AND WILLIAM NORMAN BIRNIE First Respondent AND STEPHEN ROBERT NORRIE Second Respondent AND WILLIAM NORMAN BIRNIE, STEPHEN ROBERT NORRIE AND RICHARD JAMES O'BRYEN HOARE AS TRUSTEES OF THE PAONEONE SETTLEMENT TRUST NO. 5 Third Respondents AND PICASSO NOMINEES LIMITED Fourth Respondent Hearing: 17, 18 and 19 March 2010 Appearances: Z Kennedy and M Pascariu for First and Second Applicants MP Reed and P Morten for Respondents Judgment: 22 April 2010 at 3:30 pmJUDGMENT OF ASHER JThis judgment was delivered by me on 22 April 2010 at 3:30 pm pursuant to Rule 11.5 of the High Court Rules .. Registrar/Deputy Registrar .. Date[1] Allen Patrick Peters, the first applicant, and Bernard Paul Quinn, the second applicant, seek leave to bring a derivative action on behalf of Birnie Capital Property Partnership Limited ("BCPP") against the respondents. On the basis that leave is granted, they have also filed an application by BCPP for a mandatory interim injunction, or, in the alternative, a declaration under the Declaratory Judgments Act 1908, and seek immediate determination of those applications.Background[2] This is another case where the rapid fall in property values since 2008 has led a business relationship born of goodwill and the expectation of profit to turn sour. The parties have had to face loss minimisation rather than profit realisation. It began in 2007 when William Norman Birnie, who owned or controlled a number of significant property projects, decided to promote those projects to third persons who would invest in the projects. This would enable development of the projects to proceed, and for debt on the properties to be reduced. [3] In November 2007, a number of investors accepted the offer from Mr Birnie to invest in several of his projects. These projects consisted largely of rights to acquire certain properties. Those rights were held either by Mr Birnie personally, or by trusts or companies associated with him, the Paoneone Settlement Trust No. 5 ("Paoneone"), the third respondents, and Picasso Nominees Limited ("Picasso"), the fourth respondent. [4] For the purpose of this decision it is not necessary to set out the names of the shareholders and directors and their percentage shareholdings in detail. However, it is necessary to set out the essential structure. [5] The company that was set up as the vehicle through which participation in the investment would proceed was BCPP. A total of 33,250,000 shares were issued, of which 16 million were held by Paoneone (identified as the Group "A" shares), and ultimately 17,250,000 shares were held by the investor shareholders (identified as the Group "B" shares). They were $1 shares. The Group A shareholders, therefore,held 48.1 percent of the shares in BCPP, and the Group B shareholders held 51.9 percent. [6] BCPP was incorporated on 20 November 2007. There was a Shareholders' Agreement signed on 21 November 2007. The A and B shareholders could each appoint a maximum of four directors to the Board. The Constitution of the Board 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. [7] By mid-2009 the Group A directors appointed to the Board by Paoneone were Mr Birnie and a long-term business associate of his, Stephen Robert Norrie. The Group B shareholder directors included Mr Evans, and a Mr Gardiner for whom the second applicant, Bernard Paul Quinn, was an alternate director. David Aspinall McCulloch was appointed as the independent Chairman of the Board. It can be seen from this structure that no resolution could be passed for BCPP without the assent of at least one of the directors representing the Group A shareholders, and one of the directors representing the Group B shareholders. [8] A undated document called an Agreement for Sale and Purchase of Property Projects was entered into in early 2008 ("the property agreement"). The parties were various interests associated with Mr Birnie on the one part, and BCPP as the purchaser. The interests associated with Mr Birnie were Paoneone, Picasso, Mr Birnie himself and a company, Kawau Properties Limited. A Management Agreement had been previously entered into between BCPP and a company of Mr Birnie's, Birnie Capital Property Management Limited. [9] Pursuant to the property agreement, BCPP purchased from Mr Birnie and his interests an interest in some properties on Kawau Island and an interest in an agreement to purchase a building development at 1 Featherstone Street, Wellington. The third interest purchased, and the one which has significance in these proceedings, was a 100 percent interest in what are called in the agreement the "Lion Rock assets". The Lion Rock assets were owned by Mr Birnie, Paoneone and Picasso. They were defined in the Third Schedule of the property agreement as including shares in Lion Rock Golf Course Limited, and Lion Rock DevelopmentLimited, two Internet names, and all intellectual property plans, agreements and other assets and rights of the Lion Rock vendors relating to the Lion Rock Golf Course Development. [10] However, of most significance to this application were two agreements for sale and purchase, listed at clauses 4(a) and 4(b) of the third schedule. The first was an agreement to acquire the interest of Mr Birnie as purchaser in an agreement for sale and purchase of 94.10 hectares on the Purerua Peninsula, from John R Paterson & Co. Limited ("the Paterson agreement"). It was stated that Mr Birnie would "assign" by nomination or otherwise to the purchaser on the applicable completion date. The second was an agreement to acquire a second property of 95 hectares, also on the Pererua Peninsula, which was owned by Mr Birnie, ("the Birnie agreement"). The two properties were to be developed into a golf course. [11] 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. It will be necessary to return to specific provisions of the property agreement later in this judgment. [12] Paragraph 8.3 of the property agreement provided for the transfer back of 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.[13] 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 transfer back the Lion Rock assets, and pay back the $19 million. [14] 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 send the put option to 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. [15] 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. [16] 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.[17] On 12 October 2009, Mr Peters and Mr 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. [18] 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] The total price to be paid by BCPP for the land to be acquired through the Paterson and Birnie agreements was to be $16 million plus GST. This money was going to have to be found by BCPP and paid before the agreements could settle. Given the $19 million already paid for the Lion Rock assets, the total amount to be paid if the transactions had gone ahead would have been $35 million. 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 respondents. [20] 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.The issues[21] Messrs Peters and Quinn in their capacity as Group B directors seek leave to commence proceedings for and on behalf of BCPP, against Messrs Birnie and Norrie, the Group A directors, and against Paoneone and Picasso. The first cause of action is against Messrs Birnie and Norrie. The allegation is that in their capacity as directors they breached their fiduciary duties to the company at common law, and their statutory duties under the Companies Act 1993 ("the Act"). The second cause of action is against the Lion Rock vendors, Mr Birnie and Paoneone and Picasso. It pleads the exercise of a put option against the Lion Rock vendors, and asserts that inbreach of the property agreement they have failed to pay back all or part of the $19 million. A declaration is sought that the put option has been validly exercised by the plaintiff, and damages in the amount of $19 million are claimed. [22] The applicants assert that these causes of action are sound and indeed strong. It is said that Mr Birnie in resisting the issue of the put option is in a conflict of interest position, as he is the affected vendor who will have to find the $19 million, and he will not receive the balance of the purchase price, should the Lion Rock aspect of the transaction be unwound. Mr Norrie, as his close associate, is also alleged to be acting in breach of duty. The put option, although it has issued without the formal authorisation of the Board in terms of the Constitution, is, it is submitted by the plaintiffs, a valid notice issued by BCPP. The applicants rely on s 17 of the Act which provides that no act of a company is invalid merely because the company did not have the capacity, the right, or the power to do the act. It is submitted that in any event the exercise of the put option can be ratified either at common law or under s 177 of the Act. [23] The respondents submit that Mr Birnie's refusal to cooperate with the exercise of the put option, and Mr Norrie's vote against it, are actions that make sound business sense and are in the interests of the company. Indeed, they went so far as to submit that the development of the Lion Rock assets can still proceed if the put option was not exercised. In particular, it is asserted for the respondents that any such action that will require Mr Birnie and his interests to come up with $19 million is futile, as he will be unable to meet such a judgment. It is further submitted that exercise of the put option would be likely to prompt the Bank of New Zealand as mortgagee of the default mortgage of the Kawau property, which is owed $6.5 million, to proceed to actively exercise its rights as mortgagee to the detriment of the company. [24] In relation to the claim against the Lion Rock vendors based on the put option, Mr Reed QC described it as a "fake put". He submitted that it was a dishonest way of proceeding for two Group B directors to issue a put option notice knowing that the Board itself had not agreed to the exercise of the put option. He submitted that the provisions of the Companies Act could not be availed of by theapplicants, as they were not third parties and in fact privy to the exercise of the fake put option. He submitted that in the circumstances the doctrine of ratification could not be applied.Approach to the application[25] The court has a broad discretion under s 165(1) of the Act to grant leave to a shareholder or director to bring proceedings in the name of or on behalf of a company, or any related company. Various considerations to which the court must have regard are set out in s 165(2), but they do not limit the scope of the discretion under sub-section (1). Section 165(2) provides:165 Derivative actions(1) (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.[26] Section 165(3) provides that leave will only be granted if the court is satisfied that either the company does not intend to bring the proceedings, or it is in the interests of the company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole. There is no doubt that, given the deadlock, BCPP will not bring proceedings against the intended defendants. The requisite Group A directors will not authorise such proceedings. The key issue is, therefore, whether this is a proper case for leave to be granted under s 165(1) having regard to the considerations set out in s 165(2).[27] In Vrij v Boyle, 1 a case which related to the similarly worded s 209X of the Companies Act 1955, Fisher J stated in relation to sub-section (2) at 765:Applying those criteria, the first requirement is that the Court have regard to "the likelihood of the proceedings succeeding". I adopt in that regard the useful test suggested in a slightly different context in Smith v Croft [1986] 1 WLR 580. 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 own 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, likely costs and the prospect of executing any judgment.[28] Although in this statement Fisher J was referring only to the single consideration of the likelihood of the proceedings succeeding, the prudent business person approach has been widely adopted in New Zealand, and applied on overview to the exercise of the s 165(2) discretion: Presley v CallPlus Limited, 2 and Catley v Waipa Corporation Limited. 3[29] It has been suggested that where a breach of fiduciary duty is alleged against a director that rather on focusing on the prudent business person test, it may be preferable to focus on whether a person acting as a fiduciary in respect of the funds of others ought to consider whether a prudent trustee would use the other person's funds for that purpose: Frykberg v Heaven.4 I respectfully agree with Winkelmann J's observation in Presley v CallPlus Limited that the test articulated inVrij v Boyle is to be preferred. There is no need for a test which varies depending on the nature of the cause of action. In all cases the court needs to address the specific factors set out in sub-section (2). The court then needs to stand back and decide whether on an overview, taking into account those factors and any other relevant matter, a prudent business person using his or her own funds would choose to proceed.1 Vrij v Boyle [1995] 3 NZLR 763.2 Presley v CallPlus Limited [2008] NZCCLR 37.3 Catley v Waipa Corporation Limited HC Auckland CIV-2008-404-007975 22 February 2010.4 Frykberg v Heaven (2002) NZCLC 262,966 at p 262,973.The likelihood of success – the first cause of action[30] It was emphasised by Mr Reed for the respondents that Mr Birnie did not actually vote for or against the resolution to exercise the put option. He did not attend the relevant meeting. That is not a persuasive argument. If the exercise of the put option was in the interests of the company, then Mr Birnie as a director had a duty to take those steps to support it. It may be that in making this submission the respondents were focusing on Mr Birnie's conflict of interest and the fact that he should abstain from voting. However, given the structure of the company's Constitution required a vote of the Group A directors before a resolution could be passed, that is not a persuasive argument. Putting to one side for a moment Mr Norrie's role, Mr Birnie had an overriding duty to the company under s 131(1) to act in good faith and in what a director believed to be the best interests of the company. That duty cannot be avoided by a director sitting on his or her hands. [31] Mr Norrie was not a Lion Rock vendor and he has deposed that he has no financial connection with the Lion Rock vendors. However, he is a close associate of Mr Birnie's, and it is necessary to examine the strength of his assertion that he has a legitimate view that the exercise of the put option is not in the company's interests. [32] If the put option is not exercised then the Lion Rock transactions insofar as they are still extant must proceed. Putting to one side the cancelled Paterson agreement for one moment, the company must, if it does not exercise the put option, pay Mr Birnie a further $8 million on the Birnie agreement. This means that in addition to the $19 million already spent, a further $8 million would have to be spent. This would only secure part of the Purerua Peninsula properties. As already observed, the Seager & Partners valuation indicates that the total value of the land, assuming a purchase of the Paterson land as well, is $10 to $13 million. [33] It is asserted by the respondents that the Paterson land could still be secured, and that the Paterson interests are still prepared to sell. A letter was produced in this regard from John R Paterson & Co. Limited indicating a willingness to do so. However, the letter makes no reference to the vendor funding, which was a key part of the original agreement.[34] It was argued for the respondents that if the Purerua Peninsula land was all acquired, and the development proceeded, that there might still be a profit for BCPP. However, total costs to develop the land are estimated by Seager & Partners to exceed $61 million over a five year development period. The interest costs of funding such a development (in addition to the $16 million still to be paid to acquire all the land), will take the costs to well over $100,000,000. That is more than the estimated completed value of the project. It is not possible to see how any prudent director would regard this as a viable investment. Rather, on the material before the court at the moment, such an investment would be doomed to failure and would be grossly imprudent. I am unable to accept the submission that a decision by the Board to proceed was a justifiable option for Mr Norrie to pursue at the Board. [35] Unless BCPP can extract itself from the extant agreement in relation to the Purerua Peninsula and the need to pay Mr Birnie the $8 million, it will remain locked into a transaction that seems certain to lose money. Purerua would, in any event, appear to be doomed as a development because the agreement relating to half the development land, the Paterson agreement, has been cancelled. [36] The option of exercising the put option in extracting BCPP from the transactions must be considered. This option would legally terminate BCPP's obligation to find a further $8 million and pay it to Mr Birnie. It would also give it the opportunity to recover the $19 million already spent on the Lion rock assets. It must be emphasised that if the development of the Purerua Peninsula project does not proceed, those moneys are lost and, from the company's point of view, utterly wasted. The proposed action gives a chance of recovery. [37] The cause of action to recover the $19 million would be against the three recipient respondents, Mr Birnie, Paoneone and Picasso. The $19 million will only be able to be recovered through assets owned or controlled by Mr Birnie. Mr Birnie's exact financial position is not known. He did not provide a statement of assets and liabilities in the affidavits filed. When I pressed the respondents on this omission in the course of submissions Mr Reed sought leave to file, following the conclusion of the hearing, an affidavit setting out those assets and liabilities. I declined the application on the basis that Mr Birnie had had an opportunity to set outhis position, and that it is only in exceptional circumstances that leave is given for the filing of further affidavit evidence after the hearing of a proceeding, when that evidence was available at the time of the proceeding. [38] I also have now before me an application on behalf of the applicants to file further affidavit evidence about Mr Birnie's financial position. That is evidence that has come to light since the hearing, but I decline that application also. Effectively the parties are inviting the court to reopen the whole issue of Mr Birnie's assets, and the likelihood is that this would necessitate a further hearing. This would be an undesirable development, particularly given the need for a relatively swift resolution of the issues between the parties. In an originating application hearing of this nature, where there is generally no cross-examination of deponents, I am doubtful whether further evidence can cast definitive light on a most difficult topic. A real determination of Mr Birnie's asset position would probably involve detailed and possibly controversial valuation evidence of real estate assets, a difficult task in the present economic climate. It is likely also to involve a consideration of the position of his family trusts, which could be complex. Further evidence will not resolve these issues at this stage. [39] I must determine whether an action to recover the $19 million from the Lion Rock vendors will be fruitless. Mr Birnie is not insolvent. He is not bankrupt and there are no bankruptcy proceedings against him. There are no outstanding judgments against him that have been drawn to my attention. Clearly he or his family entities have significant property interests. In my view a prudent business person would consider it worth spending some money, even some hundreds of thousands of dollars, in an effort to recover the $19 million from him. While no precise analysis can be made of what could be recovered from Mr Birnie, there is, in my view, a respectable chance of significant recovery. [40] Thus, on the material before me, there are two very good reasons why it is in the interests of the company for the directors to vote in favour of exercising the put option. The first reason is that the company avoids an obligation to pay $8 million to settle the second agreement for the Purerua Peninsula project with Mr Birnie. It also avoids any risk that it might have to respond positively to further proposals inrelation to acquiring the land from John R Paterson & Co. Limited. The second reason is that it enables the company to pursue the recovery of the $19 million from the Lion Rock vendors, and the real chance of recovering some, if not all, of that money. [41] Given this conclusion, it is hard to understand Mr Norrie's refusal to support the exercise of the put option. Mr Norrie has close links to Mr Birnie which must put in question his ability to act objectively and in BCPP's interests in relation to decisions that will work against Mr Birnie. He is a director of Mr Birnie's company, Birnie Capital Property Partnership Limited. He has been a trustee of the third respondent, the Paoneone Trust. He is the Chief Financial Officer of Orthopaedics Synergy Inc., a Delaware incorporated company in which Mr Birnie, and Birnie Capital Property Partnership Limited hold a collective direct or indirect 9.4 per cent interest. It appears that his position has been or may be about to be made redundant. It is certainly possible, following discovery and possibly cross-examination, that a lack of good faith on Mr Norrie's part, arising from his loyalty to Mr Birnie, could be shown. [42] I make no attempt to express a view on the ultimate merits of this claim for breach of fiduciary duty and breach of s 131(1). It would be wrong for me to do so given the limited nature of a s 165(2) hearing, which proceeds on affidavit evidence only, and without the benefit of full discovery and other trial procedures. However, there is sufficient likelihood of success to grant leave insofar as s 165(2) is concerned. [43] Should the second cause of action fail, and the court determined that there was no valid exercise of the put option, then, if the first cause of action has succeeded against the Lion Rock vendors, the directors would be liable for a very significant sum. It is likely to include the $8 million liability in relation to the Birnie agreement, and the $19 million that could not be recovered from the Lion Rock vendors. The amount recoverable against the directors as damages in the first cause of action may be limited to the potential recovery that would have been achieved against the Lion Rock vendors if the option had been exercised. I have dealt with this at paras [36] - [40]. I have concluded that there is a real potential to recoversignificant sums from Mr Birnie, either in his personal capacity or in his capacity through his interests as a Lion Rock vendor. [44] If the cause of action for breach of fiduciary duty was established against Mr Norrie, there is no reason to believe that a significant sum of damages could not be recovered from him.The likelihood of success – the second cause of action[45] It can be observed that to some extent the second cause of action is an alternative to the first cause of action. If the second cause of action succeeds, even if there had been breaches of fiduciary duty by Messrs Birnie and Norrie in refusing to vote for the exercise of the put option, that refusal will not have led to any loss as the put option would have been validly exercised in any event. However, there could still be some claim for the extra costs to the company arising from their refusal to vote for the put option. And there may be causes of action added, seeking ratification. [46] The second cause of action turns on the validity of the notice exercising the put option issued by the applicants Messrs Peters and Quinn, on 12 October 2009. As already observed, this was not issued as a consequence of a Board resolution, and not approved of by a Group A director. [47] I did not receive detailed submissions on the application of ss 17 and 177 of the Act. Nor did I receive detailed submissions on how the common law doctrine of ratification might apply. I, therefore, do not propose conducting any close analysis of this aspect of the second cause of action. There are complexities in applying either ss 17 (ultra vires acts) or 177 (ratification of actions of directors) to a situation where all parties involved have an understanding of the exact provisions of the Constitution of the company, and an involvement within the company in the relevant events. [48] Two observations can, however, be made about the Lion Rock vendors denying the validity of the put option or any subsequent ratification of it by thecompany. The first is that Mr Birnie in his personal capacity (if the first cause of action was established), could be seen as taking advantage of his own wrong. He would be seeking to rely on his own breach of fiduciary duty in refusing to vote for the exercise of the put option as a defence to a claim based on a notice issued by the Group B directors. [49] The second is that it is reasonably arguable that the put option can be ratified. The difficulty in the way of such a ratification argument is the line of authority to the effect that if a time is fixed for doing an act, whether by statute or by agreement, the doctrine of ratification cannot be allowed to apply if it would have the effect of extending the time: Bird v Brown, 5 Presentaciones Musicales SA v Secunda and Anor,6 Imperial Financial Corp Limited v Crown Financial Corp Limited. 7 These cases were subject to careful analysis by Associate Judge Faire in Body Corporate No. 192964 v Auckland City Council.8[50] It is arguable that the retroactivity that is a usual consequence of ratification cannot apply in this case, as the effect would be to extend the ten working day time limit for the exercise of the put option, expiring as it did long before any ratification could occur. [51] It must be observed that the boundaries of the exception to ratification are far from clear. In Presentaciones Musicales SA v Secunda and Anor, a writ was issued within time but ratified out of time. It was held that the writ issued without authority is not a nullity, and that the plaintiff was entitled to adopt an authorised action of the issue of the original writ. One of the Judges in the English Court of Appeal inPresentaciones Musicales SA v Secunda and Anor, Rochell J, held at pgs 285-286 that the property exception was not established as the expiry of the limitation period did not create a right for the defendants.5Bird v Brown (1854) Exch 786, 154 ER 1433.6 Presentaciones Musicales Sa v Secunda and Anor [1994] 2 All ER 737.7 Imperial Financial Corp Limited v Crown Financial Corp Limited [1994] NCLR 408 at 426.8 Body Corporate No. 192964 v Auckland City Council HC Auckland CIV-2004-404-7207 23 May 2005.[52] In Smith v Henniker-Major & Co. (a firm), 9 Walker LJ of the English Court of Appeal observed:[71] I am inclined to think that this debate (as to whether the exception is limited to ratification affecting property rights) may not be particularly profitable. Even though the operation of the Limitation Act 1980 is normally to bar the remedy rather than to extinguish the right, an accrued defence under the Act has often been spoken of in terms approximating to a property right of which a party ought not to be deprived. In my view the right approach would be to regard the deprivation of an accrued right as an important example of the general rationale identified in Bowstead v Reynolds's article 19, that is, unfair prejudice. [72] In my view the Presentaciones Musicales case binds this court as to the proposition that ratification of proceedings is not automatically barred after the expiry of the limitation period. For reasons to be set out on the amendment issue I consider that the fact that the ratification is at one removed (that is, not of the proceedings themselves, but of an assignment of a cause of action) should not be a decisive distinction. But thePresentaciones Musicales case did not touch on other aspects of unfair prejudice arising from delay.[53] This case concerned the issue of proceedings and limitation periods. However, as was noted by Associate Judge Faire, the theme of Robert Walker LJ's obiter dicta appears to that the overriding question becomes whether there is unfair prejudice. [54] Undoubtedly, if Mr Birnie was found to have been in breach of fiduciary duty in not supporting the issue of the put option, it is unlikely he could be said to have suffered from any unfair prejudice resulting from ratification. [55] The existing pleadings do not specifically deal with the issue of ratification, and it may be that they will be amended to seek a specific order directing the Group A directors to ratify the exercise of the put option. I am satisfied that a sufficient likelihood of success has been made out in relation to the second cause of action, to warrant the grant of leave so far as the ingredient referred to in s 165(2)(a) is concerned.9 Smith v Henniker-Major & Co. (a firm)[2002] 3 WLR 1848; [2003] Ch 182 at [71].[56] It is to be noted that in s 165(2)(a), "the likelihood of the proceedings succeeding" no threshold or benchmark of success such as "serious question to be tried" or "strong arguable case" is included. This was undoubtedly deliberate and it would be wrong to try and further refine the test. It can be observed, however, that the more likely the proceedings are to succeed, the stronger the case for leave, although this will only be a factor. Even if the proceeding is very likely to succeed, there may be considerations which would dissuade a prudent business person from proceeding.The costs of the proceedings in relation to the relief likely to be obtained[57] No precise attempt was made by either party to estimate the costs of the proceedings, although both accepted that they would amount to some hundreds of thousands of dollars. This is undoubtedly correct. At best the relief that will be obtained if the proceedings succeed will be considerable indeed; relief from an obligation to pay $8 million, and $19 million in recovered expenditure, a total of $27 million. In addition too there is the prospect of BCPP avoiding attempts by Mr Birnie to require the Board to accept the John R Paterson & Co. Limited offer, and be exposed to pay yet a further $8 million. [58] The parties made no effort to estimate the time the proceedings would take. In my estimate the issues in the proceedings will be moderately confined. The really contested factual issues are likely to be Mr Birnie's financial position, and the relationship between Mr Norrie and Mr Birnie. Legal issues will include analysis of concepts such as ultra vires and ratification. The proceedings should have, in the end, a relatively narrow compass and may not take more than a week to hear. The costs of the proceedings appear to be manageable, and are unlikely to exceed the potential recoverable damages even if only a proportion of the amount claimed is recovered.Other factors[59] No action has already been taken by the company or a related company to obtain relief and, therefore, s 165(2)(c) does not apply.Is it in the interests of the company that proceedings be commenced?[60] It is this circumstance, set out in s 165(2)(d), which gives rise most directly to the consideration of what a prudent business person would do. In this case the following matters would appear to indicate that it is in the interests of the company to grant leave: a) The first and second causes of action look to be seriously arguable on the evidence currently before the court. b) The successful conclusion of the proceedings will relieve the company, at the very least, of an obligation to pay $8 million for land worth less than that. This is the minimum practical advantage to the company from the successful conclusion of the proceedings. If it turns out that the Lion Rock vendors and Mr Birnie have assets and can meet all or at least part of the claims, the benefits will be much greater. At best they could extend to the recovery of $19 million. c) The costs of pursuing the action appear to be comparatively modest against the importance and value of the claim. [61] The plaintiffs have frankly expressed the hope of an acceptable settlement offer from the Birnie interests, if proceedings are commenced. Mr Reed was critical of this but there can be no objection to a plaintiff commencing proceedings in the hope of a settlement. The courts encourage parties to settle civil disputes. A prudent business person could anticipate the possibility of a realistic settlement offer if leave was given and the action pursued. [62] The other practical objection put forward as to why Mr Norrie does not support the issue of the put option, is his assertion that this will lead to the Bank of New Zealand taking steps to enforce its mortgage of $6.5 million over the Kawau property against BCPP. It is submitted that on past performance the Bank of New Zealand is likely to take such action. The Bank has already given a notice of default on the mortgage, and written asserting its right to have the remaining funds held byBCPP following the refund of the Paterson deposit, paid to it. Those funds, which may now be in the vicinity of $200,000 have been specifically demanded by the Bank. [63] Mr Morton, junior counsel for the respondents, emphasised the fact that Mr Birnie has provided a guarantee to the Bank of $2.5 million on the Kawau mortgage. He submits that the qualitative worsening of Mr Birnie's financial position might leave the Bank to take firmer action in relation to the Kawau mortgage. [64] However, the Bank of New Zealand is undoubtedly fully aware of this proceeding and the various allegations and counter allegations. It can be confidently assumed that it has a good understanding of Mr Birnie's financial position. It is aware, therefore, of the potential claim for $19 million against him, and will have made its own assessment of its options. It does not follow as a matter of logic, that the issue of these proceedings should prompt a tougher line by the Bank. Insofar as moneys recovered will be assets of BCPP, the Bank may well consider the issue of proceedings as a positive development. At least the position could be regarded as neutral in terms of the security position, because what may be subtracted from Mr Birnie's assets as guarantor, will be added to BCPP's assets as principal debtor. [65] The possibility that the issue of proceedings might prompt the Bank to act cannot be discounted and must be taken into the mix. Given the considerable advantages of BCPP issuing proceedings already referred to, I do not consider that this intangible risk would dissuade a prudent business person from proceeding. [66] Taking a step back I conclude that a prudent business person would pursue the action in the conduct of his or her own affairs. That person would conclude that such an action was in the interests of the company. Therefore, leave should be granted. I emphasise that the observations I have made on the merits are made without the benefit of all the evidence or cross-examination, and without there having been discovery or the opportunity for the parties to present detailed submissions on all relevant points.Conditions on which leave should be granted[67] I consider that the conditions sought by the applicants are appropriate. Messrs Peters and Quinn appear to represent the interests of approximately a third of the minority shareholders, or, as Mr Kennedy has submitted, 20 percent of the total shareholding. The other Group B shareholders have taken no active steps in the proceedings, although the company Minutes and their non-appearance indicate that they acquiesce to the issue of the put option. [68] I am prepared, in the circumstances, to grant leave to the first and second applicants, Messrs Peters and Quinn, to bring proceedings, and for the reasonable costs of bringing the proceedings to be met by BCPP. [69] I grant leave to the parties to bring further applications in relation to costs. It seems likely that the funds of BCPP will be insufficient for the conduct of the litigation, and that the litigation if it is to continue will have to be funded, at least to some extent, by the Group B shareholders.The application for mandatory interim injunction[70] Subject to leave being granted, Messrs Peters and Quinn apply on behalf of BCPP for the immediate grant of interim orders directing Messrs Birnie and Norrie to vote in favour of the resolution to ratify the put option notice or, alternatively, to vote in favour of the resolution to exercise the put option right and any subsequent resolutions relating to the exercise of that right. [71] For the reasons already given, I find that there is a serious question to be tried that Messrs Birnie and Norrie are in breach of their statutory and fiduciary duties in not supporting the exercise of the put option. However, effectively the applicants seek under this heading a final judgment in respect of at least an aspect of the claim. This involves an acceptance of the assertion that Messrs Birnie and Norrie are in breach of fiduciary duty, and effectively an order that they rectify that breach. Such an order is mandatory in its nature.[72] Mandatory interim injunctions, especially those which have the effect of determining a cause of action in favour of one party against another, are sparingly granted. The position was summarised by Eichelbaum CJ in Soft-Tech International Pty Limited v Ball,10 where it was stated:Mandatory injunctions are relatively uncommon, interim mandatory injunctions are rare indeed, and interim mandatory injunctions having the effect of a final order and involving the payment of a sum of money which normally would be described as a debt, in my experience are completely novel.This statement was quoted in Telecom New Zealand Ltd v Clear Communications Limited, 11 where a mandatory interim injunction was sought requiring a defendant to make payments in terms of an agreement. It was noted, referring to a statement of Hammond J in Faumui v AFS (NZ) Limited, 12 that an interlocutory injunction is normally brought to preserve a status quo pending a final decision; a mandatory interlocutory injunction is likely to be more intrusive and to disturb the status quo. An injunction was refused. [73] It can also be observed that a mandatory interim injunction which has the effect of determining a cause of action in favour of a party, deprives the unsuccessful part of all the normal safeguards that will ensure a fair hearing, including discovery, adequate time to prepare and present evidence, an opportunity to cross-examine and to make full submissions. Because the mandatory interim injunction will have final effect, there is a far greater likelihood of an injustice if a mandatory interim injunction rather than a restraining injunction is granted. [74] To turn to orthodox interim injunction issues, in terms of the standard test set out in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd, 13 a serious question to be tried has been established. However, the balance of convenience and, indeed, the overall justice of the situation do not require a mandatory injunction. There is no acute urgency. Rather, there is a need for a speedy hearing and the parties should consider seeking a priority fixture or some sort of fast track designation. In general10 Soft-Tech International Pty Limited v Ball (1990) 3 PRNZ 683.11 Telecom New Zealand Ltd v Clear Communications Limited (1997) 6 NZBLC 102,325.12 Faumui v AFS (NZ) Limited Unreported Auckland CP 500/93 20 August 1993 at pg 7.13 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 143 (CA).terms the company is likely to survive a delay of some further months. The extraordinary urgency, or element of flagrancy that might prompt a court to make a mandatory order to prevent a gross injustice, are lacking. [75] The overall justice of the situation does not require the court to ride roughshod over the usual procedural safeguards available to defendants, and to determine a fiduciary duty claim. The fact that the case might appear on the material before the court at present to be relatively strong, it is far from decisive. There is no reason to take the drastic and unusual step of making a mandatory interim injunction. This application is refused.Proceeding under the Declaratory Judgments Act 1908[76] The applicants, again on the assumption that leave has been granted and the usual interlocutory processes truncated so that the application for declaratory judgment is heard immediately, seek a declaration that the notice given by Messrs Peters and Quinn on 12 October 2009 was valid and effective notice for the purposes of clause 8.3 of the property agreement. [77] The respondents strongly resist this application being heard. It is a claim for final relief which will determine at least an aspect of the proceedings. [78] The amended application claiming the new relief of an order under the Declaratory Judgments Act, was filed on Thursday, 11 March 2010, and came to the attention of the respondents on Friday morning, 12 March 2010, some three working days before the fixture for the application of Wednesday, 17 March 2010. In a telephone conference on Monday, 15 March 2010, Mr Reed for the respondents indicated his objection. The issue could not be properly considered in the course of that conference, so Mr Reed's objection was noted, to be determined in the course of this decision. [79] I uphold Mr Reed's objection. What the applicants effectively seek is for this court to now treat the draft amended statement of claim as having been filed, and the substantive new proceeding brought to trial. In fact no new proceeding has as yetbeen commenced following the grant of leave, so there is at present no properly filed application under the Declaratory Judgments Act 1908 before the court. Putting to one side that significant procedural bar, I accept that it would be unfair for the respondents to have to endeavour to deal with the substantive Declaratory Judgments Act application on such short notice. Although by definition Declaratory Judgments Act proceedings do not involve the giving of extensive evidence, at the very least counsel for the plaintiff would have wished to have had a proper opportunity to prepare submissions. They have not had that opportunity and I do not consider that it would be fair to force them to accept the grossly truncated timetable on such short notice. I am not so satisfied that there is such urgency about the issues that would warrant the court taking such a drastic step. [80] I must also observe that the Declaratory Judgments Act cause of action appears to be based on a misunderstanding of the nature of the Declaratory Judgments Act procedure. Under s 3 of the Declaratory Judgments Act, a speedy and inexpensive procedure is provided for the determination of a question as to the "construction or validity of any statute or any deed, will or document of title, or any agreement made or evidenced by writing". [81] In the proposed proceeding there is an issue as to whether the validity of an act (the giving of the 12 October 2009 notice) was valid. However, that issue does not depend solely on the issue of the construction or validity of any statute or agreement. There is no real argument about the meaning of clause 8.3 of the property agreement. The issue as argued before me has been rather whether a notice signed only by two Group B directors is valid or can be ratified. The resolution of this involves a number of issues of fact and law. There is no single issue of construction which will determine it. It is my preliminary view, therefore, that this cause of action will not succeed. [82] I, therefore, decline to determine the application for relief under the Declaratory Judgments Act 1908. I make it clear that this is an issue that the applicants may, if they choose to do so, still pursue in the substantive proceedings that they are authorised to bring, and that my view on the merits is not a determination.Result[83] Leave is granted to the applicants, Messrs Peters and Quinn, to bring a derivative action on behalf of BCPP. This is to be founded on the causes of action set out in the draft statement of claim attached to the amended notice of originating application of 11 March 2010. Further causes of action relating to the same subject matter may be added. [84] The first and second applicants, Allen Patrick Peters and Bernard Paul Quinn, as directors of Birnie Capital Property Partnership Limited are authorised to control the conduct of the proceedings. [85] The first and second applicants' reasonable costs of bringing the proceedings will be met by funds held by the third applicant, insofar as they are available. [86] Leave is reserved for the parties to seek further orders in relation to costs. [87] The application for an interim order directing the first and second respondents to vote in favour of the resolution put to the Board on 19 October 2009 is declined. [88] The application for a declaration that valid and effective notices for the purposes of s 8.3 of the property agreement have issued is declined for the purposes of this proceeding. This is not a final determination of any such application, which is not yet properly before the court and may be pursued in any substantive proceedings that follow this granting of leave.Costs[89] If the parties cannot resolve costs I will receive submissions, the applicants to file those submissions within 14 days of today's date, and the respondents to file their submissions within a further 14 days... Asher J