Drummond v O'Rorke
[2020] NZHC 2123
•21 August 2020
IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA NGĀMOTU ROHE
CIV-2019-443-34
[2020] NZHC 2123
UNDER the Companies Act 1993 BETWEEN
CHRISTINE TERESA DRUMMOND
First Plaintiff
CHRISTINE TERESA DRUMMOND, LEE DRUMMOND, MARGARET MARY JOYCE, AS TRUSTEES OF THE LEA BROOK FAMILY TRUST
Second Plaintiffs
AND
JULIE KATHERINE O’RORKE
First Defendant
JULIE KATHERINE O’RORKE, PAUL GERARD O’RORKE, SOUTH TARANAKI TRUSTEES LIMITED AS TRUSTEES OF THE JKOK TRUST
Second DefendantsMOONCOIN FARM LIMITED
Third Defendant
Hearing: 3 March 2020 Appearances:
A R H Laurenson for Plaintiffs R T Wilson for Defendants
Judgment:
21 August 2020
JUDGMENT OF CLARK J
Introduction
[1] The first plaintiff (Ms Drummond) and first defendant (Ms O’Rorke) are sisters and shareholders in the third defendant company, Mooncoin Farm Ltd (Mooncoin).
DRUMMOND v O’RORKE [2020] NZHC 2123 [21 August 2020]
They have been in dispute since 2016. They ostensibly settled the differences between them at the court room door in March 2019. At their request, the Judge recorded the terms of their settlement. Although the settlement was to conclude all claims and counterclaims, Ms Drummond and Ms O’Rorke are again at an impasse.
[2] Ms O’Rorke refuses to allow distribution of funds in accordance with the settlement. She does not accept the calculations made by Mooncoin’s accountant, Tandem Group.
[3] Ms Drummond says that all matters in dispute were settled on 12 March 2019, when the parties agreed on all issues and adjustments as between the shareholders. She says those agreements fully and finally settled all of the parties’ claims, and issues now identified by Ms O’Rorke are afterthoughts.
[4] Ms Drummond says the situation is causing her and her husband financial hardship and she asks the Court to make an order approving the distribution of Mooncoin’s assets in accordance with Tandem Group’s calculations.
Background
[5] The parties have stood at the brink of settlement several times over the years. As will be seen, the context in which the most recent settlement discussions occurred is relevant to the determination of the issues. It is therefore desirable to set out the background in some detail.
[6] The following narrative is taken largely from the plaintiff’s uncontested chronology. I have also had regard to various Court minutes issued over time.
[7] Before 2002, Ms Drummond and Ms O’Rorke, in partnership with their three sisters, farmed a property in Opunake. In 2002 they established Mooncoin Farm Ltd. From 2007, Ms Drummond and Ms O’Rorke were its sole directors.
[8] But in August 2016, Ms Drummond sought to sell her shares in Mooncoin. The farm was valued.1 It was agreed the farm would be sold on the open market. Several months later, Ms O’Rorke offered to buy the farm from Mooncoin for
$6,624,000 plus GST and excluding shares. The offer was not accepted and in May 2017 the farm was re-marketed, although it seems the shareholders continued to negotiate.
[9] Dissatisfied with the impasse, in August 2017 Ms Drummond began proceedings under s 174 of the Companies Act. I refer to this proceeding, which was ultimately set down for hearing on 12 March 2019, as the March 2019 hearing. In September 2017, there was an agreement to settle. Counsel filed a joint memorandum on 30 October 2017, advising the dispute had settled but that there remained an issue as to the time required to complete settlement. It was anticipated that directions might be sought from the Court to help complete the various settlement steps.2
[10] A settlement conference was scheduled for 7 February 2018 for the purpose of finalising settlement details. At that settlement conference, counsel advised there were no outstanding matters between the parties. An agreement for sale and purchase had been drawn up and—although an issue had recently arisen as to 200 hay bales that Ms O’Rorke requested remain on the property—counsel confirmed that a Court Minute should record that all matters had been agreed. In case settlement did not proceed as anticipated, the matter was adjourned to June 2018 to monitor settlement completion.3
[11] In March 2018, Ms O’Rorke failed to pay the deposit under the agreement for sale and purchase. And on the settlement date, 1 June 2018, she failed to settle. Within a week of that date, counsel for Ms Drummond filed a memorandum seeking directions from the Court. Issues continued to arise between the parties that they were unable to resolve.
[12] At a conference before Churchman J in September 2018, the parties advised that there had been some progress towards settlement: the farm and stock had been
1 A registered valuer put the value at $8,900,000 plus GST and including company shares;
$8,258,000 plus GST and excluding company shares.
2 Drummond v O’Rorke HC New Plymouth CIV-2017-443-51, 23 November 2017 at [3].
3 Drummond v O’Rorke HC New Plymouth CIV-2017-443-51, 9 February 2018.
sold, and a substantial portion of the proceeds had been divided between the parties.4 Mr Laurenson indicated that the plaintiffs were willing to agree to the appointment of an independent arbitrator to resolve all outstanding issues but counsel at the time for the defendants said he had been unable to obtain instructions. Churchman J noted that the lack of instructions prevented the court from staying the proceedings under r 7.80 of the High Court Rules.
[13] In October 2018 the plaintiffs filed an amended statement of claim. The defendant then filed a statement of defence and counterclaim. It is said that Ms O’Rorke claimed for the first time that 32 heifers belonging to her were absorbed into Mooncoin’s herd in 2007. Pleadings were finalised, and the matter proceeded towards the hearing date of 12 March 2019.
The settlement reached on 12 March 2019
[14] On 12 March 2019, just before the hearing, the parties reached a ‘court door’ settlement. By consent, Ellis J issued the following orders:
[1] Mr Laurenson and Ms Hughes QC advised this morning that the parties have agreed to settle these proceedings. They ask me to record the settlement reached and to make orders accordingly. I do that below.
[2]By consent, I make orders that:
(a)Ms Drummond is to withdraw her claim for a management fee;
(b)Ms Drummond and Ms O’Rorke are to direct Mooncoin Farm Ltd’s accountant to pay all outstanding invoices addressed to Mooncoin Farm Ltd;
(c)Ms O’Rorke is to pay to the Lea Brook Family Trust the sum of $3,500 to settle the outstanding grazing account;
(d)the sums recorded at numbers as 1, 2 and 3 of Mr Lagan’s email at page 290 of the bundle of documents, namely:
(i)$3024.50 for the two cows that tested positive for Johnes;
(ii)$7314.00 for the six empty heifers;
(iii)$6106.50 for the 8 heifers
4 Drummond v O’Rorke HC Wellington CIV-2017-443-51, 26 September 2018.
are to be credited to Ms O’Rorke;
(e)eight per cent will be added to any difference in drawings received by the [sic] Ms Drummond;
(f)all other claims and counterclaims are withdrawn and the proceedings are to be discontinued; and
(g)costs lie where they fall.
This proceeding
[15] Despite that settlement, Ms Drummond and Ms O’Rorke are at yet another impasse. In July 2019 Ms Drummond, once again, initiated proceedings seeking orders under s 174 of the Companies Act.
[16] In her affidavit in support, filed on behalf of all plaintiffs,5 Ms Drummond states that under the 12 March 2019 agreement Mooncoin was to be liquidated and its assets distributed. An unresolved matter was a management fee of $208,523. Ms Drummond had claimed this fee against Ms O’Rorke’s claim for interest on any difference in drawings between the shareholders. There were other disputes, but the point of Ms Drummond’s evidence was to say that agreement on all matters was reached immediately before the hearing on 12 March 2019 and that:
… It was clearly understood that such agreements were in full and final settlement of any claim either party had. All other claims by the parties were withdrawn.
[17] In particular, the settlement included Ms Drummond’s agreement to withdraw her claim to a management fee.
[18] Referring to the calculations prepared by Mooncoin’s accountant after settlement, Ms Drummond says Ms O’Rorke refuses to allow the funds to be distributed in accordance with the accountant’s calculations. Attempts to resolve matters have been to no avail; once again the plaintiffs are in the unfortunate position of having little option but to apply to the court for assistance.
5 Lee Drummond is Ms Drummond’s husband. The Lea Brook Family Trust hold 499 shares in Mooncoin.
[19] Ms Drummond deposes that the situation is causing her and her husband financial hardship, as they need the settlement funds to retire an overdraft debt. As stated at the outset, Ms Drummond seeks orders approving the distribution of the assets of Mooncoin in accordance with Tandem Group’s calculations.
[20] Ms O’Rorke, and the defendants, oppose any such order. Ms O’Rorke does not accept the calculations. In her affidavit in opposition, Ms O’Rorke relevantly says:
(a)As far as she was concerned, it was intended that the interest to be paid under the settlement agreement was to be compounded.
(b)The management fee originally claimed by Ms Drummond was never repaid to Mooncoin and was in fact an unauthorised drawing, thus creating “a difference in drawing which continued from 8 June 2018 to [30 September 2019]”. Eight per cent interest on the drawing is to be applied but has not been.
The issues
[21] At a case management conference held on 28 November 2019 for this proceeding, Churchman J summarised the issues that appeared to require determination. But Mr Wilson for the first and second defendants confirmed in his submissions that some of those issues had been resolved before the hearing. So the relevant issues to be determined, as summarised by Churchman J, are:
(a)whether the interest charged on the current account of shareholders in MFL should be calculated on a simple interest or compounding interest basis;
(b)whether any interest should be charged on the sum of $208,523 paid to the first plaintiff on 8 June 2018 by way of management fee;
…
(e) whether the company should retain a contingency sum following payment to the shareholders, and if so, what that sum should be.
[22] Churchman J also commented in his Minute that it was unfortunate the parties had been unable to resolve what were relatively straightforward issues, particularly given the modest sums involved.6 He noted:
[15] Should the Court ultimately determine that one party has acted unreasonably in relation to any of the issues that the Court is required to determine, then that is a matter which can be visited by way of costs.
Is the interest payable under the settlement agreement compound or simple?
The parties’ positions
[23] For the plaintiffs, Mr Laurenson submitted that cl (e) of the settlement reflected the eight per cent interest that was calculated by Ms Davies and provided to the parties in February 2019, the month before the March 2019 hearing. Mr Laurenson referred also to Ms Davies’ brief of evidence prepared for that hearing, which Ms Davies has attached to her affidavit sworn for this proceeding.
[24] The plaintiffs’ key point is that significant compromises were made to reach the settlement recorded by Ellis J. Had the plaintiffs known that compound interest was to be claimed then, they say, they would not have made as many compromises. The plaintiffs say the defendants are trying to avoid settlement on the terms in the consent order. And they say that all of the issues now raised by the defendants should instead have been raised before those consent orders were made.
[25] For the defendants, Mr Wilson submitted that the orders must be interpreted and applied correctly by the Court. The order is simply silent as to whether the agreed interest was to be compounded. The defendants dispute the point because they do not accept Ms Davies’ evidence.
[26] Mr Wilson submitted that cl (e) of the settlement agreement is imperfectly drafted. The word “interest” is not even used in the clause and so needs to be implied. He submitted that to further imply the interest is to be compounded is simply to reflect conventional accounting practice. The defendants rely on expert evidence from an
6 Drummond v O’Rorke, above n 4, at [14].
experienced chartered accountant who offers the opinion that the eight per cent should be calculated annually and compounded.
What is the proper approach to interpreting the interest clause?
[27] The Court is being invited to state the effect of the following clause in the parties’ settlement agreement:7
(e)eight per cent will be added to any difference in drawings received by the [sic] Ms Drummond;
[28] I do not agree that the issue is to be determined by the principles governing res judicata or estoppel. Res judicata prevents a party from relitigating matters that were determined in a final judgment. Mr Laurenson submitted that although the issues in the proceeding that Ellis J was to hear were determined by consent orders, “their determination was within the purview of and subject to the approval of the court”. But the issues of interpretation that arise here were not judicially determined. The parties reached a settlement and asked Ellis J to record it. The agreement’s silence on the interest point is what gives rise to this proceeding: the issues are fresh.
[29]The two kinds of estoppel that may arise were explained in Sheils v Blakeley:8
In one branch of the law of res judicata the cause of action put in suit in the first proceeding passes into judgment so as no longer to have an independent existence. There is both a merger of the cause of action in the judgment and a cause of action estoppel. While in the case of what is commonly called issue estoppel a particular matter of fact or law in issue in the second proceeding is held to have been decided by the prior judgment but may or may not be determinative of the second proceeding
[30] Neither doctrine has any application to this case. The settlement agreement between the parties must be interpreted in accordance with the approach to the interpretation of a contract. The fact that the settlement agreement is reflected in consent orders does not alter the approach.
7 Set out above at [14].
8 Shiels v Blakeley [1986] 2 NZLR 262 (CA) at 266.
[31] The legal principles of contract interpretation were summarised by Tipping J in a much quoted passage from Vector Gas Ltd v Bay of Plenty Energy Ltd:9
[19] The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.
[20] Although subjective evidence would be relevant if a subjective approach were taken to interpretation issues, the common law has consistently eschewed that approach. The common law focuses strongly on the agreement in its final form as representing the ultimate consensus of the parties. Hence it is regarded as irrelevant how the parties reached that consensus. To inquire into that process would not be consistent with an objective inquiry into the meaning of a document which is generally designed to be the sole record of the final agreement. A party cannot be heard to say – never mind what I signed, this is what I really meant.
[32] A purposive or contextual interpretation is not dependent on finding an ambiguity in the contractual language.10 In Firm PI, the Supreme Court addressed the nature of the background knowledge that is relevant to, and able to be considered when adopting, an objective approach:11
[60] … the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the
9 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, 2 NZLR 444 (SC) at [19]–[37] (footnotes omitted).
10 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 9, at [4], [23], [64] and [151]. See also Firm PI 1 Ltd v Zurich Australian Insurance Ltd T/A Zurich New Zealand [2014] NZSC 147 at [61].
11 Firm PI, above n 10, at [60] (footnotes omitted).
fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
What evidence is available to help interpret the interest clause?
[33] Clause (e) of the order is imperfectly drafted. Not only does it contain a redundant “the”, it fails to qualify the reference to “eight per cent”. The parties accept that the clause means eight per cent interest. There is no difficulty then implying that word. The real difficulty is in ascertaining whether the interest was intended to be compounded. In taking an objective approach to interpreting the clause, the court must avoid ascribing “to the parties an intention that a properly informed and reasonable person would not ascribe to them when aware of all the circumstances in which the contract was made”.12 The circumstances and context of the settlement agreement, then, are relevant.
[34] Clause (e) is illuminated by the information that was known to the parties at the time and which also formed part of the negotiation context. Central to that context was Mooncoin’s accountant, Marilyn Davies. Ms Davies is a chartered accountant with over 22 years’ experience. She is the director of Tandem Group, an incorporation of chartered accountants, and has been the accountant for Mooncoin since 2007. She was aware of the history of the court proceedings between the shareholders and of the more recent dispute between Ms Drummond and Ms O’Rorke.
[35] Ms Davies’ evidence was that, throughout the dispute, she had been required to provide various calculations and shareholders settlement statements to assist the parties. Ms Davies provided the Court with documents containing summaries of the advice she had given the shareholders at material times. One of the documents is entitled: Mooncoin Farm Ltd – Summary of Shareholding Settlements. As this document was prepared in anticipation of the sale of the farm with its intended settlement date of 1 June 2018 it is not, on its own, particularly relevant to the
12 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 9, at [21].
settlement reached in March 2019. But when put together with later documents, it is illuminating.
[36] Next is the brief of evidence Ms Davies prepared for the March 2019 hearing. Ms Davies confirmed that the brief, attached to her affidavit filed in this proceeding, was the evidence she intended to give in the March 2019 hearing.
[37] Ms Davies’ brief referred to information in the following documents, which were attached to her brief and also appended to her affidavit sworn 23 January 2020:
(a)a letter from Ms Davies dated 15 February 2019 addressed “To Whom It May Concern”, written after her review of Ms O’Rorke’s statement of defence and counterclaim;
(b)an email sent on 15 February 2019 from Ms Davies to counsel for the parties, namely Mr Laurenson and Ms Hughes QC;
(c)Mooncoin Farm Ltd – Interest Calculations, a calculation of interest on the difference between Ms Drummond’s and Ms O’Rorke’s loan accounts;
(d)Summary of Shareholder Settlements, a document with Mooncoin settlement figures excluding the 32 cows mentioned in Ms O’Rorke’s counterclaim; and
(e)Summary of Shareholder Settlements – with Cows, a document with Mooncoin settlement figures including those 32 cows.
[38] Ms Davies letter dated 15 February 2019 (sent in Ms Davies’ capacity as Tandem Group director) points to the interim settlement figures document referred to above at [35]. Those figures had been calculated, at the request of Mooncoin’s directors, in anticipation of the 1 June 2018 settlement, on the basis of knowledge the accountants had as at 31 May 2018. The figures were sent to all parties for discussion, but there was little feedback. The full and final settlement was not to be completed
until shares were sold, at which point a final interest calculation and dividends would be completed.
[39] The letter advises that, in those settlement figures, “[i]nterest was calculated on the difference in the current accounts at 8% to reduce the tax impact and was included in the current account figures”. Then follows a review of the statement of defence and counterclaim by Ms O’Rorke for the March 2019 hearing. Under a heading “Paragraph 39” Ms Davies stated:
39. Such interest has been calculated by Mooncoin’s accountant Marilyn Davies of Tandem Group to be a sum of $339,581.
The interest figure referred to of $339,581 provided by Tandem Group is incorrectly calculated at 14%. This interest figure was provided by Tandem Group to [Ms O’Rorke] at [her] request. Tandem Group did not support that interest be charged at 14% and this was clearly expressed to [Ms O’Rorke] – the email to [Ms O’Rorke] is attached.
The interest rate used should be 8%. This is to the interest rate which is the universal standard for related party transactions and was previously agreed by [Ms O’Rorke] and [Ms Drummond] in 2009.
The final gross interest figure at 8% to 7 June 2018 should be $199,846,81, after deducting withholding tax at 17.5%. This leaves net interest of
$164,873.62, of which $162,911.25 was already included in the calculation in Paragraph 33 (the current account figure included in the interim settlement by Alex Laurensen).
[40] Another document, entitled Mooncoin Farm Ltd – interest calculation, calculates interest at eight per cent on the difference between loan accounts. The calculations are for the years 31 March 2007 to 7 June 2018. Under the calculations there is a note that states: “Interest is not compounded”.
[41] Thus, as at 15 February 2019, the parties were proceeding on the basis of Ms Davies’ calculations, which included the application of an eight per cent interest rate that was expressly not compounded.
[42] There is another relevant document. Ms Davies attached to her reply affidavit sworn October 2019 a letter from Mr Laurenson to Ms Hughes. While that letter postdates the parties’ settlement on 12 March 2019, the relevance of Mr Laurenson’s
letter is in its references to Tandem Group’s calculations. Those calculations,13 “as early as April or May 2018 in anticipation of the farm settlement in June 2018”, included interest at eight per cent on the difference in shareholders’ accounts. Ms Hughes’ attention was drawn to “the added interest adjustment on the loan difference at eight per cent of $162,911.00”, a calculation that appeared in the bundle of documents for the March 2019 hearing. Mr Laurenson’s letter of 10 May 2019 continued:
At no time did Julie O’Rorke ever question those workings and therefore the parties proceeded on the basis that that was the appropriate calculation for the difference albeit there was a dispute as to whether that amount was applicable or not.
The interest difference was then again calculated by Tandem Group on 15 February 2019 in anticipation of the hearing scheduled for 12 March 2019. The calculation is in the evidence … and that calculation is entirely consistent [with] Tandem Group’s calculation in 2018. At no time did Julie O’Rorke ever question the basis for the calculation nor was the lack of compounding or cumulative interest raised.
[43] Mr Wilson objected to the admissibility of the next paragraph in Mr Laurenson’s letter:
Importantly, on 19 February 2019 you wrote to us advising that as part of settlement your client was willing to concede an interest rate of 8% “… as calculated by Ms Davies …”. This clearly sets out the basis upon which interest was in dispute. There is no issue raised about compounding interest. We consider that if required we may adduce this aspect of your letter as evidence to establish the understandings upon which the overall fact of agreement was achieved.
[44] Mr Wilson submitted the paragraph was inadmissible because the letter from Ms Hughes was “without prejudice”. He also submitted that the letter dated 19 February 2019 referred to in the above paragraph did not lead to a concluded settlement.
[45] The communication from Ms Hughes to Mr Laurenson dated 19 February 2019 was intended to be confidential and was made in connection with an attempt to settle the dispute between Ms Drummond and Ms O’Rorke. Consequently the statutory privilege in s 57 of the Evidence Act 2006 is engaged.
13 Referred to at [35], above.
[46] I consider, however, that the statutory exception in s 57(3)(b) applies. That exception states that s 57 does not apply to “evidence necessary to prove the existence of … an agreement in a proceeding in which the conclusion of such an agreement is in issue”.14 The existence of the settlement agreement as a whole cannot be disputed
— it was recorded by Ellis J. But what is at issue here is, in effect, a subsidiary agreement as to interest. Admission of that key paragraph allows the interest clause of the agreement to be properly interpreted based on what the parties understood — and so agreed — at the time.
[47] Even if s 57(3)(b) does not apply, I consider that the need for the communication of 19 February 2019 to be admitted and considered in this proceeding outweighs the need for the privilege. To this extent, the exception in s 57(3)(d) operates: it is in the interests of justice that this document be admitted, to help resolve an otherwise unrelenting dispute.
[48] A further factor influences me in my approach to the privileged communication. The defendants filed expert evidence. I come to the affidavit evidence of Antony Burn in due course, but for present purposes the point is that Mr Burn deposed to having read the affidavits of the various deponents, including the affidavit of Ms Drummond sworn 7 October 2019 to which Mr Laurenson’s letter with its now contentious paragraph, is exhibited. Mr Burn deposed to having based his opinions on the facts and matters set out in the affidavits to which he refers and the financial statements for Mooncoin for the years ending 31 March 2017, 31 March 2018 and 31 March 2019. By making available to Mr Burn the extract from Ms Hughes’s letter, the defendant’s privilege in the 19 February 2019 communication was arguably waived.
What is the correct interpretation of the interest clause?
[49] What, then, is the effect of these various documents? The Tandem Group calculations prepared for the March 2019 hearing, and Ms Davies’ letter dated 15 February 2019 show that the original demand by Ms O’Rorke for interest to be
14 Evidence Act 2006, s 57(3)(b).
charged at 14 per cent was abandoned when Ms O’Rorke and Ms Drummond agreed in 2019 that the interest rate should be eight per cent.
[50] The documents further show that an eight per cent interest rate was applied and, critically, that interest was not compounded. At no time did Ms Davies’ calculations include compound interest. Ms O’Rorke’s affidavit evidence that she intended that the interest be compounded is subjective evidence of intention and therefore not helpful in ascertaining the objective meaning of the clause. The calculations and documents attached to Ms Davies’ brief of evidence, and her affidavit, are consistent with Ms O’Rorke’s stated willingness to concede an interest rate of eight per cent as reflected in Ms Davies’ calculations.
[51] As did Gault J in Vector Gas, I am able to determine this issue by ascertaining objectively what the parties are taken to have agreed based on the correspondence of their lawyers and the calculations of Mooncoin’s accountant.15
[52] Accordingly, on an objective approach, cl (e) is to be taken as reflecting the parties’ intention that eight per cent interest (not compounded) would be added to any difference in drawings received by Ms Drummond.
[53] I have reached this conclusion without reference to the expert evidence from Mr Burn. Mr Laurenson protested the admission of this affidavit because it was filed only three working days before the hearing. But that is not the reason I have not taken account of Mr Burn’s evidence. Rather, and without in any sense diminishing Mr Burn’s undoubted expertise,16 the orthodox approach I have taken to the interpretation of the settlement agreement meant that I focused on the context in which the settlement was made and on “all the facts and circumstances known to and likely to be operating on the parties’ minds”.17 Consequently, expert opinion as to standard practice has not assisted me in ascertaining, objectively, the agreement the parties actually reached at the time.
15 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 9, at [62].
16 Mr Burn is a past president and life member of Chartered Accountant Australia and New Zealand. His evidence was to the effect that where Marilyn Davies calculated interest each year and totalled the amounts, in his opinion it should have been calculated annually and compounded. Mr Burn said in his experience this is how interest on shareholder current accounts is treated.
17 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 9, at [19].
Should interest apply to the management fee?
[54] In her affidavit opposing the orders that Ms Drummond seeks, Ms O’Rorke stated that she had two concerns about Ms Davies’ calculations. One concerned interest: that issue has been determined. The second concerned the management fee.
[55] Ms O’Rorke says the management fee was never paid to Mooncoin even though Ms Drummond withdrew her claim to the fee at settlement. Ms O’Rorke says it was therefore an unauthorised drawing, which created a “difference in drawing which has continued from 8 June 2018 to the present”, and says, as far as she was aware, interest on this difference in drawing has not been applied.
[56] Ms Drummond says the settlement statement prepared by Ms Davies to effect the 12 March 2019 settlement shows her repayment of $208,523: the management fee.
[57] Mr Wilson says the settlement statement shows only that there is to be an adjustment for the management fee on final settlement. And because settlement has not yet occurred, the parties have not been able to agree on the relevant calculations giving effect to the consent orders. I agree with Mr Wilson that the summary of shareholder settlements shows there is to be an adjustment for the management fee on final settlement—not that it has been repaid.
[58] But, as Mr Laurenson pointed out, the sum ($208,523) would have been paid in March 2019 when the plaintiffs expected settlement to be effected. The delay in repayment is not due to any inaction on the part of the plaintiffs.
[59] The position is entirely unsatisfactory. The parties concluded a settlement on the basis of calculations completed by Ms Davies. Post-settlement, Ms O’Rorke has raised a new issue about interest on the management fee. Any such issue could and should have been raised before settlement. Ms O’Rorke points to no contemporaneous evidence in support of the proposition that the management fee was to be regarded as an unauthorised drawing and therefore was to attract interest, much less that it was to attract compound interest.
[60] Based on the defendants’ opening submissions for the March 2019 hearing, it is clear the primary issue for Ms O’Rorke at that time was how the “wash-up” should be conducted. Counsel’s formulation of the management fee issue focused on the fact that Ms Drummond had retrospectively sought to impose a fee on Mooncoin for services rendered since May 2002, despite no previous discussion about management fees.18 The simple order sought in relation to this issue was that “there was no justification for the imposition of a management fee”. Neither the submissions, nor the order sought, mentioned interest.
[61] Ms Drummond manifestly settled this point by withdrawing her claim for the management fee. That is recorded in the settlement agreement. And that is as far as this Court can take this issue. It follows that there will be no order, such as the defendant seeks, that interest be paid on the management fee.
Should Mooncoin retain a contingency sum?
[62] The final issue is whether Mooncoin should retain a contingency sum following payment to the shareholders and, if so, what that sum should be. The issue was not addressed by counsel for the plaintiffs.
[63] The defendants’ position is that the settlement statement prepared by Ms Davies shows that not all assets have been liquidated. It is said that the existence of shares in LIC and Ravensdown, GST and income tax receivable, and money held in the Govett Quilliam trust account mean it is not a simple matter of making a payment in full to shareholders: contingencies are needed in relation to these assets. In Mr Wilson’s submission, the appropriate process is for the Court to rule on calculations of interest. This would enable the directors to liquidate the remaining assets and make appropriate payments to shareholders as part of winding up the company.
[64] I note that the Summary of Shareholder Settlements prepared for the March 2019 hearing calculates a 50 per cent contingency figure “regarding future
18 The respective opening submissions of the plaintiffs and defendants for the March 2019 hearing were made available to me.
payables” in relation to both Ms O’Rorke and Ms Drummond. The effect of the calculation is to reduce the settlement payment to both Ms Drummond and Ms O’Rorke by $25,000. The notes at the bottom of that statement record: “Suggest
$50,000 held back for contingency for any further payables”. And the Summary of Shareholder Settlements – with Cows contains the same contingency calculations.
[65] That being the case, it is not clear to me that anything further is required. The defendants’ concern that contingencies are needed seems to be met.
Summary
[66] It is apparent from the history of the court proceedings that settlement between the parties is frequently understood to have been reached (at least by Ms Drummond), only for it to collapse and revive again at the court door. In the course of finalising this judgment I have had the opportunity to read the memorandum that Mr Laurenson filed in June 2018, updating the Court on progress with the settlement that the parties reached on 7 February 2018. The settlement was apparently reliant on Ms O’Rorke settling the purchase of the farm, land, and buildings from Mooncoin on 1 June 2018. As a result of Ms O’Rorke’s alleged failure to settle, the plaintiffs were said to face significant prejudice and hardship.
[67] Accordingly, on their behalf, Mr Laurenson sought urgent orders under s 174 of the Companies Act. For this reason he asked that the judicial conference scheduled for 11 June 2018 proceed so that directions or orders might be made. It seems that, once again, the parties agreed to an adjournment on the basis of a settlement. Cull J recorded on 11 June 2018 that, following settlement of the farm purchase, counsel agreed to an adjournment to 25 June to enable final resolution of all issues between shareholders.
[68] The Summary of Shareholder Settlements that Ms Davies sent to Ms O’Rorke and Mr Laurenson on 28 June 2019 contained the calculations that Tandem Group believed allowed an immediate settlement of funds to Ms Drummond and Ms O’Rorke. Ms Davies maintained the advice she had given to the shareholders as to the appropriate distributions of Mooncoin’s assets throughout, and, in particular, after the settlement agreement on 12 March 2019. The issues Ms O’Rorke raises after
the event (as to compound interest and interest on the management fee) have all the hallmarks of previous impediments to a concluded settlement. The parties record, even in a court context, that they have reached agreement, only to falter when Ms O’Rorke resists settlement until brought back to a courtroom. The situation is untenable.
[69] Neither party seeks the appointment of a liquidator. Mr Wilson submitted that if the Court determined the compound interest and management fee interest issues, then the parties could agree on what is payable.
[70] I have determined those issues. I have real reservations about leaving the position open-ended. I do, however, repeat the observation that Churchman J made. A costs award against any party who has acted unreasonably is likely to follow.
[71] The issues have been determined in the plaintiffs’ favour. As the successful party, the plaintiffs are entitled to costs. If costs cannot be agreed and it becomes necessary to seek a ruling, that exercise itself may become the subject of an additional costs award.
Karen Clark J
Solicitors
Govett Quilliam, New Plymouth for Plaintiffs
Young Carrington & Ussher, New Plymouth for First and Second Defendants
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