Ayylidiz v Casablanca Sylvia Park Limited
[2020] NZHC 1771
•22 July 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-2621
[2020] NZHC 1771
UNDER Part 18 of the High Court Rules IN THE MATTER
of an application for orders under s 174 of the Companies Act 1993
BETWEEN
TEYFIK AYYLIDIZ
First Plaintiff
BIRGDUL AYYLIDIZ
Second PlaintiffAND
CASABLANCA SYLVIA PARK LIMITED
First Defendant
KIWITURKS OREWA LIMITED
Second Defendant…/cont
Hearing: On the papers Appearances:
C T Patterson for the Plaintiffs DP Weaver for the Defendants
Judgment:
22 July 2020
JUDGMENT OF GORDON J
[As to costs]
This judgment was delivered by me on 22 July 2020 at 11 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors: Kplegal Limited, Auckland
Burley Attwood Law, Tauranga
Counsel:C T Patterson, Auckland D P Weaver, Tauranga
AYYLIDIZ v CASABLANCA SYLVIA PARK LTD [2020] NZHC 1771 [22 July 2020]
HUSEYIN ISIK
Third Defendant
NIGAR IVGEN
Fourth Defendant
MURAT AVCIOGLU
Fifth Defendant
Introduction
[1] This is an application by the first and second plaintiffs, Teyfik Ayyildiz and Birgul Ayyildiz (the plaintiffs), for costs, following orders made by consent settling the proceeding at the commencement of the intended hearing on 2 June 2020.
[2]The application for costs is opposed by the defendants.
Background
[3] The plaintiffs had sought relief under s 174 of the Companies Act 1993. They are minority shareholders in two companies, the first defendant, Casablanca Sylvia Park Ltd (Casablanca), and the second defendant, Kiwiturks Orewa Ltd (Kiwiturks). The companies operate licensed cafes and restaurants, one at the Sylvia Park shopping mall and the other at Orewa. The third, fourth and fifth defendants, along with two non-parties, are also shareholders in the two companies.
[4] The plaintiffs’ allegations were denied by the defendants. In the end it was not necessary for the Court to make any findings as the proceeding was settled at the commencement of the trial on agreed terms, which included the following:
(a)The value of the shares in Casablanca and Kiwiturks was agreed by consent, being the mid-point value as assessed by Grant Thornton (valuer instructed by the defendants) in its report of 28 June 2018; and
(b)The plaintiffs, as one party, were to sell their shares to, or buy the shares of, the third to fifth defendants and one named non-party in both companies by way of a sealed tender process.
[5] The steps in the tender process were specified in the consent order. The successful tender would be the one which produced the most favourable outcome to the vendor(s) at or above the mid-point value of the shares, taking into account both price and conditions.
[6] Although the parties were able to settle the proceeding, they could not agree on costs and separate memoranda have been filed.
Costs claimed and opposition
[7] The plaintiffs seek 2B costs with a 60 per cent uplift. The uplift is on the basis of an alleged unreasonable refusal to accept Calderbank offers. Scale costs are calculated at $49,234. With a 60 per cent uplift, the final claim for costs is $78,774.
[8] Mr Weaver for the defendants opposes costs. The defendants deny the plaintiffs were successful or that the defendants were unsuccessful. Mr Weaver submits that, while the defendants also wish to recover costs, they accept that, on a proper and principled assessment, costs must lie where they fall.
[9] Mr Weaver submits that in the event the Court finds the defendants were unsuccessful (denied), costs against the defendants should be refused under either or both r 14.7(f),1 and r 14.7(g)2 of the High Court Rules 2016.
[10] As to the uplift sought, Mr Weaver submits that, because no judgment was obtained in the proceeding, the uplift rule has no application.
Were the plaintiffs the successful party?
[11] I start by noting that Mr Patterson for the plaintiffs acknowledges the Court has made no findings of fact. He then sets out in his memorandum certain facts which he anticipates will not be disputed by the defendants and which he says are supported by the evidence of the plaintiffs.
[12] As the Court made no findings of fact and did not reach any conclusions in relation to the relevant law on any of the claims or the defendants’ defences, and as no judgment was given on any of the plaintiffs’ allegations of misconduct or claims for relief under s 174 of the Act, I do not intend to traverse the alleged facts.
1 Where the party claiming costs has contributed unnecessarily to the time or expense of the proceeding.
2 On the basis that the plaintiffs have caused wasted costs.
[13] Mr Patterson goes on to submit that the plaintiffs were the successful party because the resolution recorded in the consent orders was materially identical to the remedy they sought when they commenced the proceeding.
[14] Mr Weaver refers to the fact that the statement of claim contained various allegations of misconduct, which were denied by all the defendants. Then, on 7 June 2019, shortly before the first allocated trial date, the plaintiffs filed an application for leave to file an amended statement of claim. The amended statement of claim introduced further allegations of misconduct in relation to payroll issues, supplier rebates, loss of earnings and the shareholder current accounts. Mr Weaver draws attention to the fact that none of the misconduct allegations formed part of the settlement orders. He further submits the plaintiffs were not successful in terms of their claims of shareholder oppression or prejudicial conduct under s 174 of the Companies Act.
[15] Mr Weaver submits that in terms of the relief sought for a shareholder buy-out, the defendants also pleaded that relief. The issue between the parties was the misconduct allegations.
[16]I turn then to the relief claimed by the plaintiffs, which is as follows:
(a)That the shares in Casablanca and Kiwiturks be valued;
(b)That there be a shareholder buy-out of the shares in the two companies following their valuation, with shareholders interested in purchasing shares to tender for shares at valuation or above;
(c)(For Casablanca) any orders the Court thinks necessary to allow a proper accounting of Casablanca’s transactions in order to reach a robust valuation;
(d)(For Kiwiturks) in the alternative to a valuation and shareholder buy-out, that Kiwiturks be liquidated;
(e)Any other orders that the Court considers just and equitable to address the oppressive, unfairly discriminatory or unfairly prejudicial conduct of the two companies;
(f)(For Casablanca) orders for interest on any payments properly due to the plaintiffs in their capacity as shareholders of Casablanca, or the first plaintiff in his capacity as a former director of Casablanca, from the date those payments were due;
(g)(For Kiwiturks) orders for interest on any payments properly due to the first plaintiff in his capacity as a shareholder of Kiwiturks, or in his capacity as a former director of Kiwiturks, from the date those payments were due; and
(h)Costs.
[17] The statement of defence of 12 July 2019 denied the plaintiffs were entitled to the relief pleaded and said:
(a)The appropriate relief in relation to both companies was for the Court to order the sale of the plaintiffs’ shares to the defendants; and
(b)Such further or other relief as may be appropriate to achieve a clean break between the parties.
[18] As already noted, there was no adjudication on the claims of misconduct, either under s 174 of the Companies Act or otherwise. The orders made were limited to a shareholder buy-out. In other words, the relief sought by the plaintiffs under [16](e),
(f) and (g) above did not form part of the settlement. On the shareholder buy-out issue, the resolution aligned with the claim rather than the defence, in that the orders allowed for either side to buy out the other under the process agreed on. In contrast, the statement of defence pleaded that the sale should be by way of the plaintiffs’ shares to the defendants.
[19] In short, the plaintiffs were successful in achieving part of the relief sought; and, in terms of the orders made, the plaintiffs were marginally more successful than the defendants whose position was limited to the plaintiffs selling to the defendants. The plaintiffs achieved some success. And success on more limited terms is still success.3
[20] I will address whether there should be any reduction in the amount of costs claimed later in this judgment.
Increased costs
[21] Mr Patterson relies on two Calderbank letters and one open letter sent to the defendants’ solicitor prior to the commencement of the proceeding.
[22] On 28 March 2017, counsel for the plaintiffs wrote to the solicitors for the defendants on a without prejudice save as to costs basis. The letter stated that it was highly unlikely that the parties would ever be able to work together as shareholders in either of the companies. The letter continued:
6.We consider that an application to the Court for relief as prejudiced shareholders is likely to result in the Court making orders that include an independent valuation of the Companies and orders for a shareholder buy-out in each individual company at issue. This outcome is likely regardless of whether the application is by our clients (as foreshadowed in earlier correspondence), or by Other Shareholders.
7.Given that likely outcome, we consider it is in the interests of our clients and the Other Shareholders to put their money and efforts towards that result now, rather than expend additional irrecoverable costs and face the respective increase in costs risk that litigating this type of dispute will involve.
8.Note that we have set out the buy-out as being one where the Other Shareholders buy out the Ayyildiz Shareholders since that has already been proposed on an open basis in our letter of 21 November 2016, but we are instructed that our clients are willing to consider proposals that they buy out the Other Shareholders and any reasonable requests for variation of the commercial terms proposed that may be required to give effect to any resolution.
3 Weaver v Auckland Council [2017] NZCA 330, (2017) 24 PRNZ 379 at [26].
[23] The proposal was set out in a schedule to the letter and the letter recorded that it was available for acceptance until 4 April 2017. A reasonable request for an extension would be considered.
[24] On 18 May 2017, a further offer, on an open basis, was made by the plaintiffs. The letter proposed that a suitable valuer be appointed from Grant Thornton to value the shares in both companies; that the shareholders pay for the valuation in proportion to their shareholding; and that a buy-out proceed by way of a sealed tender process with any one or more shareholders of the two companies able to submit a buy-out offer. The offer was expressed to remain open until 23 May 2017 unless extended in writing.
[25] There was a third letter of 5 September 2017 on a without prejudice save as to costs basis. The offer of 18 May 2017 was repeated. It was to remain open until 8 September 2017.
[26] The Court was not provided with any responses on behalf of the defendants. But it is plain the offers were rejected as proceedings were commenced on 2 November 2017.
[27]Mr Weaver submits:
(a)None of the letters sets out an amount the plaintiffs would accept as payment for their shares. Nor did they address the shareholding interests of the non-party in Casablanca.
(b)The letters cannot be considered alongside any judgment obtained as there was none, therefore rr 14.10 and 14.11 do not apply;
(c)The letter of 28 March 2017 allowed for a response time of only four working days and the two later letters only three working days;
(d)The statement of claim did not mirror the letters but contained allegations of misconduct and sought compensation beyond what was contained in the letters; and
(e)The settlement orders made on 2 June 2020 did not provide the plaintiffs a better outcome.
[28] A Calderbank letter is one in which a party to Court proceedings makes an offer to settle on a without prejudice basis, but reserves the right to produce the letter when questions of costs are addressed. The procedure encourages a realistic appraisal of a party’s position in (pending) litigation.4
[29] The Calderbank rules are encapsulated in rr 14.10 and 14.11. Rule 14.10 is the empowering provision. Rule 14.11 sets out the effect an offer has on costs. Those two rules provide:
14.10Written offers without prejudice except as to costs
(1)A party to a proceeding may make a written offer to another party at any time that—
(a)is expressly stated to be without prejudice except as to costs; and
(b)relates to an issue in the proceeding.
(2)The fact that the offer has been made must not be communicated to the court until the question of costs is to be decided.
14.11Effect on costs
(1)The effect (if any) that the making of an offer under rule 14.10 has on the question of costs is at the discretion of the court.
(2)Subclauses (3) and (4)—
(a)are subject to subclause (1); and
(b)do not limit rule 14.6 or 14.7; and
(c)apply to an offer made under rule 14.10 by a party to a proceeding (party A) to another party to it (party B).
(3)Party A is entitled to costs on the steps taken in the proceeding after the offer is made, if party A—
(a)offers a sum of money to party B that exceeds the amount of a judgment obtained by party B against party A; or
(b)makes an offer that would have been more beneficial to party B than the judgment obtained by party B against party A.
4 Aldrie Holdings Ltd v Clover Bay Park Ltd [2016] NZHC 1482 at [14].
The offer may be taken into account, if party A makes an offer that—
(a)does not fall within paragraph (a) or (b) of subclause (3); and
(b)is close to the value or benefit of the judgment obtained by party B.
[30]The rules on increased costs refer to Calderbank letters:
14.6Increased costs and indemnity costs
…
(3) The court may order a party to pay increased costs if—
…
(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
…
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding;
[31]It is clear that under r 14.6, offers to settle are not limited to Calderbank offers.
[32] While Mr Weaver is correct that the letters do not set out an amount the plaintiffs would accept for the sale of their shares, neither did the consent orders (other than a reference to the amount of the Grant Thornton valuation). The letters set out a process by which a share sale would operate as did the consent orders: there was provision for a valuation; the valuation to be carried out by Grant Thornton; and then a sealed tender process. The offers in the three letters, were in combination, materially the same as the orders made in settlement of the proceeding. That the letters did not address the interest of the non-party is not material.
[33] The fact that there was no judgment, and that the proceeding settled, does not preclude the operation of the rules.5
5 Smith v Ball [2018] NZHC 1140 at [9].
[34] As to the time allowed for a response to the offers, the first two letters made it clear that it was open to the defendants to ask for further time.
[35] Although there were later allegations of misconduct pleaded in the statement of claim, the settlement orders reflected what was proposed in the three letters. And, finally, the orders made on settlement of the proceeding reflected the main outcome sought by the plaintiffs.
[36] Under r 14.6(3)(b)(v), the Court needs to make an assessment of the reasonableness of a party’s rejection of an offer. That assessment is at the date the offer was made and declined. Reasonableness will depend on the size and timing of the offer, the reasonable expectations of the party refusing the offer and on the party’s ability, at the time of the offer, to assess the merits of the case.
[37] Here, the size of the offer is not a relevant factor. What was proposed and later ordered by consent was a process for the sale of shares in the two companies. As to timing, by March 2017 it was abundantly clear that the parties had fallen out and could not work together, regardless of the truth or merits of any individual allegations. A share sale was the obvious solution.
[38] In my view the defendants were in a position, as at March 2017, to make an assessment of the offers made by the plaintiffs. Their rejection of the offers was unreasonable. A 50 per cent uplift is appropriate in all the circumstances.
Should costs be refused or reduced?
[39]Mr Weaver relies on r 14.7(f) and (g).
[40]Rule 14.7(f) provides:
14.7Refusal of, or reduction in, costs
Despite rules 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules if—
…
(f)the party claiming costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
…
[41] There is then a list of ‘misconduct’ options from (i) to (v). Mr Weaver does not specify which he relies on.
[42]However, there is also 14.7(g) which provides:
(g)some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.
[43] I consider Mr Weaver is on stronger ground with his submission on refusal of costs than on any of his other arguments, at least from a certain point onwards in the proceeding.
[44] At an early stage of the proceeding, the parties agreed to each instruct valuation experts so that a buy-out could be negotiated. That is recorded in a minute of the first case management conference dated 23 February 2018. At that stage the Court did not require the defendants to file a statement of defence. The defendants then immediately engaged Grant Thornton to provide an independent share valuation of the two defendant companies. That is recorded in a further case management conference minute dated 10 May 2018.
[45] On 31 July 2018, the Grant Thornton share valuation was provided to counsel for the plaintiffs. It was accompanied by an open offer in order to resolve the proceeding (while denying any oppressive conduct or liability). The defendants offered to buy the shares held by the plaintiffs in the two companies. On 3 August 2018, the offer was refused by the plaintiffs.
[46] I consider the conduct of the plaintiffs justifies the Court reducing costs incurred from that date.
[47] First, the interlocutory application for particular discovery was said by the plaintiffs to be necessary to verify source documentation so the plaintiffs’ valuation expert could prepare an independent share valuation. However, the independent
valuer instructed by the defendants was the very company proposed by the plaintiffs in their settlement offers prior to commencing the proceeding. Further, no share valuation was ever produced by the plaintiffs. The Grant Thornton valuation was adopted for the purpose of the consent orders.
[48] Second, there were repeated failures by the plaintiffs to comply with Court orders. On 28 February 2019, at a directions conference, a three-day fixture was set to commence on 24 June 2019. At that conference, the plaintiffs expressed an interest in buying the defendants’ shares in the two companies. An allowance was made for three weeks for settlement negotiations and trial directions were also made. One of those directions was that the plaintiffs were to produce their share valuation from their nominated independent expert. Again, at that stage, no statement of defence was required.
[49] The plaintiffs did not comply with any of the trial directions made. On 30 May 2019 it was necessary for fresh trial directions to be made. The Associate Judge also made a costs order against the plaintiffs. At that time the Associate Judge confirmed that the plaintiffs had advised the Court they did not contest the Grant Thornton valuation.
[50] Fourth, shortly before the 24 June 2019 fixture, the plaintiffs filed an affidavit from their accountant asserting that it was independent expert evidence. In that affidavit the accountant raised new issues regarding misconduct and monetary losses. He also contested the basis of the Grant Thornton valuation in spite of the fact that the Court had been told the Grant Thornton valuation evidence was accepted. In addition, the plaintiffs filed an application for leave to amend their statement of claim. By that stage the close of pleadings date had long passed. The defendants objected to the late application to amend the statement of claim and the admissibility of the evidence of the plaintiffs’ accountant.
[51] Fifth, on 13 June 2019, a Judge vacated the fixture. However, in fairness to the plaintiffs I note that there was also an issue with the availability of the defendants’ accountant. The fixture was adjourned to 2 June 2020.
[52] Sixth, the plaintiffs continued their claim advancing allegations of wrongful conduct on the part of the defendants until 29 May 2020, the last working day before the hearing. Following a telephone conference, which I had called with counsel, Mr Patterson filed a memorandum dated 29 May 2020 advising the Court that the plaintiffs’ “desire for a resolution of their interests in the companies now outweighs their need for vindication”. Annexed to the memorandum was a proposed draft order. I note that the draft order was not in fact in the form finally made but, rather, coincided with what was pleaded by the defendants, namely that the plaintiffs were to sell their shares in the two companies to the defendants.
[53] In summary, the plaintiffs filed a late and unsignalled affidavit, which in part challenged the Grant Thornton valuation in circumstances where the plaintiffs had said they agreed the valuation; they made a particular discovery application for the purpose of producing a share valuation which did not then eventuate; and they filed, but then did not pursue, an application for leave to amend their statement of claim. They also did not accept the proposed settlement offered by the defendants on 31 July 2018. That offer was on the basis of the Grant Thornton valuation and was for the plaintiffs to sell their shares to the defendants. That was in substance the form of the proposed draft order filed by Mr Patterson on behalf of the plaintiffs on the eve of the hearing on 29 May 2020.
[54] I do not overlook the contribution (in part) by the defendants (because of the unavailability of a defence witness) to the adjournment of the hearing set for 24 June 2019. Nevertheless, having regard to the conduct of the plaintiffs from the date of the settlement offer by the defendants on 31 July 2018, which the plaintiffs unreasonably rejected, I consider the plaintiffs’ costs should be calculated only from the commencement of the proceeding to the date they rejected that offer (3 August 2018).
Costs awarded
[55] The amount of scale costs is therefore $21,032. This includes commencement of the proceeding; preparation for the first case management conference; filing memoranda for and appearances at two case management conferences prior to 3 August 2018; and discovery. Although the interlocutory application for particular
discovery was filed prior to 3 August 2018, for the reasons referred to in [47] above I do not allow that claim. Appearances at the other case management conferences and other steps that occurred after 3 August 2018 are disallowed.
[56] The sum of $21,032 is increased by 50 per cent for the defendants’ unreasonable failure to accept settlement offers made prior to the commencement of the proceeding. The total sum awarded is therefore $31,548 in favour of the plaintiffs against the defendants.
Gordon J
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