Saunders, Magill, Feeney, Horrocks, Hunter, Thomas, Withers v Houghton and Anor

JurisdictionNew Zealand
JudgeBaragwanath J
Judgment Date18 December 2009
Neutral Citation[2009] NZCA 610
Docket NumberCA684/2008 CA693/2008 CA329/2009
CourtCourt of Appeal
Date18 December 2009
And Between
Timothy Ernest Corbett Saunders, Samuel John Magill, John Michael Feeney, Craig Edgeworth Horrocks, Peter David Hunter, Peter Thomas, Joan Withers
Appellants
and
Eric Meserve Houghton
First Respondent

and

Darryl Alexander Jones
Second Respondent
And Between
First New Zealand Capital
Appellant
and
Eric Meserve Houghton
First Respondent

and

Darryl Alexander Jones
Second Respondent
And Between
Credit Suisse Private Equity Incorporated
First Appellant

and

Credit Suisse First Boston Asian Merchant Partners LP
Second Appellant
and
Eric Meserve Houghton
First Respondent

and

Darryl Alexander Jones
Second Respondent
And Between
Forsyth Barr Ltd
Appellant
and
Eric Meserve Houghton
First Respondent

and

Darryl Alexander Jones
Second Respondent

[2009] NZCA 610

Court:

Glazebrook, O'Regan and Baragwanath JJ

CA684/2008

CA691/2008

CA693/2008

CA329/2009

IN THE COURT OF APPEAL OF NEW ZEALAND

Representative action against directors of companies where shareholder funds were lost — proceedings brought by represetatives. Principles governing appointment of representatives and consideration of appropriate safeguards. Consideration of fiduciary duties of promoters.

Counsel:

A R Galbraith QC and D J Cooper for Appellants

J R Eichelbaum for First Respondent

No appearance for Second Respondent

D H McLellan and R Butler for Appellant

J R Eichelbaum for First Respondent

No appearance for Second Respondent

A Olney and N Hegan for Appellants

J R Eichelbaum for First Respondent

No appearance for Second Respondent

A Challis for Appellant

J R Eichelbaum for First Respondent

No appearance for Second Respondent

A The appeal against the representation order is dismissed.

B The appeal against dismissal of the application for permanent stay is dismissed.

C The appeal against the refusal to strike out the cause of action alleging breach of fiduciary duty is allowed and that cause of action is struck out.

D The order of the High Court for interim stay of proceedings will continue until further order of that Court.

E There is no order as to costs.

JUDGMENT OF THE COURT

REASONS OF THE COURT

(Given by Baragwanath J)

Table of Contents

Para No

Introduction

[1]

Issue (1) What principles determine whether Mr Houghton is entitled to sue the respondents in a representative capacity?

[10]

Rule 4.24 and class actions

[10]

(a) What is the nature of the claim and the claimant group?

[18]

(b) What are the likely issues?

[20]

Issue (2) What principles govern consent to the use of a litigation funder?

[21]

Issue (3) What approach should be taken to the application for security for costs?

[35]

Issue (4) What other mechanisms can be devised to achieve the objectives of r 1.2?

[38]

Issue (5) What is the apparent strength of the claim?

[42]

Issue (6) How should the principles be applied?

[43]

(a) The nature of the claim and the claimant group

[43]

(b) The likely issues

[48]

The Fair Trading Act: pre-float period

[49]

The Fair Trading Act: post-float period

[52]

Securities Act 1978

[55]

Negligence

[58]

Breach of fiduciary duty

[60]

The need for close court control of representative proceedings

[63]

(c) The specific funding arrangements

[64]

(d) The strength of the claim

[67]

The argument for a maintenance/champerty bar

[67]

The issue of reliance

[83]

Issue (7) Should the claim for breach of fiduciary duty be struck out?

[95]

Decision

[109]

Introduction
1

Feltex Carpets Ltd (Feltex) was wholly owned by Credit Suisse First Boston Asian Merchant Partners LP (Credit Suisse MP) which decided to sell its shares by way of a public offering. In conjunction with the sale it undertook a public float of $50m of new shares.

2

The signatories of the prospectus and investment statement required by the Securities Act 1978 occupied four distinct roles: seven were directors of Feltex acting in that capacity; Credit Suisse First Boston Private Equity (now Credit Suisse Private Equity Inc) (Credit Suisse PE) was promoter; First New Zealand Capital and Forsyth Barr Ltd were organising participants and joint lead managers of the share issue; and Credit Suisse MP was vendor of the issued shares. They are the defendants and appellants in this case.

3

The float on 4 June 2004, at a price of $1.70 per share, is said to have raised more than $250m. The major part of the proceeds, some $180m, was received by Credit Suisse PE as vendor of the shares. By March 2006 the share value had declined to about 60c per share. The company was placed in liquidation on 13 December 2006 and the shareholders' funds were entirely lost, while creditors were owed some $30–40m.

4

Mr AJ Gavigan, who had not held shares in Feltex, incorporated a litigation funder Joint Action Funding Ltd (Joint Funding). At his instigation Eric Meserve Houghton, who had bought Feltex shares on the Initial Public Offer and Darryl Alexander Jones, who later bought shares on the market prior to the collapse of their price, issued proceedings supported by Joint Funding against the directors, Credit Suisse PE, First New Zealand Capital and Forsyth Barr. Messrs Houghton and Jones are the plaintiffs in this case and the first and second respondents to this appeal, in which Mr Jones did not participate. We declined to read a memorandum by the former solicitor for the respondents, said by him to be written without Mr Jones' authority and to the use of which Mr Eichelbaum objected.

5

The statement of claim alleged against all defendants breach of the Fair Trading Act 1986, negligence and breach of fiduciary duty. Breach of the Securities Act was also alleged against the directors and Credit Suisse PE. Messrs Houghton and Jones obtained from Associate Judge Christiansen an order appointing them as representatives of others who had bought on the Initial Public Offer and on the market respectively.

6

The High Court, in a judgment delivered by French J, struck out the claims by Mr Jones in negligence and for breach of fiduciary duty. The order appointing Mr Jones as representative of others who had bought shares on the market, rather than on the initial offering, was discharged. The defendants' appeal is against other aspects of that judgment:

  • (a) confirming that Mr Houghton is entitled to sue them in a representative capacity;

  • (b) dismissing their application for stay of the proceedings on the ground that the litigation funding and management agreement is an abuse of process; and

  • (c) declining to strike out the cause of action pleaded by Mr Houghton for breach of fiduciary duty.

7

In a subsequent judgment French J stayed the proceeding pending the appeal to this Court.

8

The appellants firmly deny any misconduct on their part. A Securities Commission investigation, while finding subsequent deficiencies in Feltex's performance of its disclosure obligation, found that the prospectus was not misleading in any material respect. Counsel for the first respondent, who was instructed very shortly before the hearing of the appeal, was unable to provide specific evidence of the major allegations contained in his clients' current and proposed amended pleadings. As will appear, we offer no opinion as to the merits of the respective parties' cases.

9

The principal issues are:

  • (a) What principles determine whether Mr Houghton is entitled to sue the respondents in a representative capacity?

    • (i) The nature of the claim and the claimant group.

    • (ii) The likely issues.

    • (iii) Absent detailed class action rules, the need for close court control on representative proceedings.

  • (b) What principles govern consent to the use of a litigation funder?

  • (c) What approach should be taken to the application for security for costs?

  • (d) What other mechanisms can be devised to achieve the object of r 1.2 of the High Court Rules (“just, speedy and inexpensive determination of the proceeding”)?

  • (e) What is the apparent strength of the claim?

  • (f) How should the principles be applied? This requires consideration of defences relating to maintenance and champerty and the issue of reliance.

  • (g) Should the breach of fiduciary duty claim be struck out?

Issue (1) What principles determine whether Mr Houghton is entitled to sue the respondents in a representative capacity?
Rule 4.24 and class actions
10

Rule 4.24 of the High Court Rules (formerly r 78) states:

Persons having same interest

One or more persons may sue or be sued on behalf of, or for the benefit of, all persons with the same interest in the subject matter of a proceeding—

(a) with the consent of the other persons who have the same interest; or

(b) as directed by the court on an application made by a party or intending party to the proceeding.

The rule permits the making of representation orders. They are a form of what elsewhere are called class action orders. Rule 4.24 substantially reproduces a 19th century English rule which is retained also in other common law states including Canada and Australia. There are different lines of authority, some such as Taff Vale Railway Co v Amalgamated Society of Railway Servants [1901] AC 426 (HL) adopting a generous approach to representation applications and others that do not.

11

Rule 4.24 speaks of “persons with the same interest”. That phrase, or its equivalent in other jurisdictions, has been read more and less widely. The Chief Justice of Canada in Western Canadian Shopping Centres v Dutton [2001] 2 SCR 534 recounted at [24]–[26] the flexible and generous approach to class actions which preceded and immediately followed the Supreme Court of Judicature Act 1873 and the adoption of the r 4.24 equivalent. This was followed by a subsequent more restrictive approach. Finally, the effects of mass production and consumption revived the problem of...

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