O'Brien v Parkinson

[2020] NZHC 3402

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002814

[2020] NZHC 3402

UNDER

The Companies Act 1993

BETWEEN

LOUISA JANE O’BRIEN, on behalf of GENERAL DYNAMICS CORPORATION LIMITED

First Plaintiff

GENERAL DYNAMICS CORPORATION LIMITED
Second Plaintiff

AND

KEVIN PARKINSON

First Defendant

KEVIN PARKINSON, as trustee of KEVIN PARKINSON FAMILY TRUST
Second Defendant

ANNA VALERIENA KEDRINSKAIA and LISTON TRUSTEE SERVICES LIMITED,

as trustees of ANNA KEDRINSKAIA TRUST

Third Defendants

Hearing:

12 November 2020

Appearances:

J McCartney QC for Plaintiffs

Z Kennedy and A Morris for Defendants

Judgment:

18 December 2020

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

O’BRIEN & OR v PARKINSON & ORS [2020] NZHC 3402 [18 December 2020]

Introduction

[1]    This is an application for security for costs in a shareholder derivative action pursuant to s 165 of the Companies Act 1993. In my judgment of 14 July 2020,1 I granted Ms Louisa O’Brien’s application to bring proceedings in the name of General Dynamics Corporation Ltd (GDC) against her former husband, the first defendant, Mr Kevin Parkinson, and entities associated with him. I directed that the proceedings were to be under the control of Ms O’Brien. She is funding them.

[2]    There are related, Family Court relationship property proceedings between Mr Parkinson and Ms O’Brien which have now been transferred to this Court. Both proceedings are to be heard together at a trial in February 2022.2

[3]    In the substantive derivative proceedings, it is alleged that Mr Parkinson’s actions in transferring the property of GDC and its profits to interests associated with him were a breach of fiduciary duty. Ms O’Brien also seeks, in the name of GDC, a resulting trust in relation to a property in Wanaka, owned by the third defendant trustees. It is claimed that the third defendant trustees have received property and profits of GDC and have participated dishonestly in a breach of fiduciary duty.

[4]    There is no dispute that GDC is impecunious and thus the threshold in r 5.45 has been made out. The critical issue I must determine is whether, as a matter of discretion, an order for security for costs should be made, and if so, on what terms.

Factual background

[5]    A comprehensive factual background is set out at paragraphs [7] – [28] of my earlier judgment dated 14 July 2020. The following summary is what is necessary for the purposes of this application.

[6]    Ms O’Brien and Mr Parkinson were in a relationship for 29 years. They married in 1994 and separated in 2013.

1      O’Brien v Parkinson & Ors [2020] NZHC 1681.

2      Parkinson v O’Brien DC North Shore FAM-2017-044-751, 3 November 2020.

[7]    Ms Anna Kedrinskaia, one of the third defendant trustees, and Mr Parkinson, are in a de facto relationship.

[8]    GDC was incorporated around 1981 by Mr Parkinson and his father. In 1997, the Kevin Parkinson Family Trust and the Louisa Parkinson Family Trust were established. In 2003, there was a change of shareholding in GDC. 249 of the shares held by Mr Parkinson were transferred to the Kevin Parkinson Family Trust and 249 of the shares held by Ms O’Brien were transferred to the Louisa Parkinson Family Trust.

[9]    The nature of the GDC business and what Ms O’Brien says are “successor companies”, are at issue between the parties. GDC was an electronic engineering company whose role, Mr Parkinson says, was predominantly to provide contractual professional engineering consultancy and electronic services. Mr Parkinson says that he solely provided those services. Ms O’Brien says that GDC was involved in the design, development, manufacture, and supply of electronic systems.

[10]   On 28 November 2013, Mr Parkinson entered into an agreement for sale and purchase to buy the land at 21 Heuchan Lane, Wanaka (the Wanaka property). The purchase price was $525,000.   Mr Parkinson says that on 29 April 2014, he and    Ms Kedrinskaia signed a deed of nomination whereby he assigned the benefit and obligations of the sale and purchase agreement to the trustees of the Anna Kedrinskaia Trust (the third defendants).

[11]   The settlement of the purchase of the Wanaka property took place in May 2014. The trustees of the Anna Kedrinskaia Trust are the current registered proprietors. The solicitor’s trust account ledger shows that the purchase and mortgage was in the name of Mr Parkinson.

[12]   The balance of the net sale proceeds of the former family home of Ms O’Brien and Mr Parkinson is currently  held  in  a  solicitor’s trust  account.  According to  Ms O’Brien’s affidavit dated 1 October 2020, of approximately $590,000 (the proceeds of sale) she received an interim distribution of $240,000. This leaves a balance of about $350,000 which continues to accrue interest. An application by

Mr Parkinson for an equivalent distribution to him was opposed by Ms O’Brien.    Ms O’Brien says that, putting aside Mr Parkinson receiving half of the $590,000, there remains a balance of about $55,000 plus interest which represents her share.

Relevant legal principles

[13]Rule 5.45 of the High Court Rules 2016 provides:

5.45 Order for security of costs

(1)Subclause (2) applies if a Judge is satisfied, on the application of a defendant, –

(a)that a plaintiff –

(i)is resident out of New Zealand; or

(ii)is a corporation incorporated outside New Zealand; or

(iii)is a subsidiary (within the meaning of section 5 of the Companies Act 1993) of a corporation incorporated outside New Zealand; or

(b)that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)An order under subclause (2) –

(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient –

(i)by paying that sum into court; or

(ii)by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)may stay the proceeding until the sum is paid or the security given.

…

[14]   Once the threshold in r 5.45(1) is met, whether to grant security and if so, the quantum, are discretionary matters. A broad overall assessment, having regard to the

situation of the parties and the nature of the proceeding, is required.3 The discretion is not to be fettered by “constructing principles” from the facts of previous cases.4

[15]   The general approach is to balance two competing interests – “the defendant’s interests in being protected from a barren costs order and the plaintiff’s right of access to the Court.”5

[16]   It is a factor in favour of ordering security where a prima facie case can be established that the plaintiff’s claim is unmeritorious. That is, a security is more likely to be ordered, the less apparently meritorious a case is.6

[17]   In Highgate on Broadway v Devine, Kós J held that “access to justice is an essential human right.” 7 His Honour noted:8

The cost of exercising that right is the payment of costs in the event of failure. The right of a successful defendant to costs in that event is arguably subordinate to the plaintiff’s right to be heard. Strong social policy considerations favour the use of Courts as an accessible forum for the resolution of disputes and grievances of almost all kinds.

Analysis and decision

[18]   Ms O’Brien contends that there should, as a matter of discretion, be no order as to security for costs. In the alternative, she contends:

(a)Any determination as to whether security should be ordered should be deferred pending full and proper discovery by the defendant parties; or

(b)The Court should direct that $50,000 of the funds currently held in the Barter & Co trust account be separately identified (whether held in a separate trust account or otherwise) and be made available for an adverse costs award (“the undertaking”).

3      Hamilton v Papakura District Council (1997) 11 PRNZ 333 (HC) at 335.

4      A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13] and [14].

5      Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837 at [4].

6      Highgate on Broadway Limited v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [22](c).

7      At [23](b).

8      At [23](b).

[19]   The issue of security for costs in the context of a s 165 Companies Act 1993 derivative action was considered by Asher J in Birnie Capital Property Partnership Ltd v Birnie.9 The defendants in that case sought undertakings from non-party directors of the company to pay any costs. The non-parties were financing the proceedings for the plaintiff. It was not in contention that the threshold under r 5.45 was met. His Honour held that each case must be considered on its merits:10

… but it is perfectly legitimate to make a security for costs order on the basis that if the case is to proceed, persons other than the plaintiff company, but with an interest in the litigation, will have to meet the order for the case to proceed.

[20]   His Honour rejected a submission that s 166 of the Companies Act 1993 established a statutory presumption that the costs of a derivative action are to be met by the company in question unless the Court considers this unjust or inequitable.11

[21]Asher J observed:12

Also, it is relevant to discern whether when, if an order is made, there are parties of funds available to meet it. Will an order for security and an order for stay until the security is provided mean that the plaintiff cannot proceed and the case will fail? This will be the case if there are no funds of the plaintiff and no access to funds of those who support the plaintiff. Or is there a third party who stands to benefit from the litigation and has funds which could be used to pay security? There is a well established line of authority where the courts have ordered security be paid by impecunious companies knowing that those who have an interest in the company will meet the order. The Court is able to look behind the resources of the plaintiff company itself and consider who was behind the litigation and who was funding it, to gain an accurate commercial assessment of who might meet a security for costs order.

(footnotes omitted)

[22]Later, the Judge continued:

[44]      I have already observed that it is common ground that [the non- parties] or their interests are financially able to pay security for costs, or indeed to meet any undertaking that they might be required to meet any costs orders in this proceeding. They are presently funding the litigation for the plaintiff.

[45]      It must also be recognised that they may be exposed to costs orders in any event, should the plaintiff lose. This would be on the basis that they are

9      Birnie Capital Property Partnership Ltd v Birnie, HC Auckland CIV-2010-404-3000, 29 October 2010.

10     Birnie Capital Property Partnership Ltd v Birnie, above n 9, at [30].

11     Birnie Capital Property Partnership Ltd v Birnie, above n 9, at [29].

12     Birnie Capital Property Partnership Ltd v Birnie, above n 9, at [28].

funding the litigation and, to the extent of their 18 per cent shareholding, stand to benefit significantly from it [citing Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145] …

[23]   It is clear that Ms O’Brien is funding these proceedings for her own benefit. She is not a party to the derivative action proceedings (albeit she is a party to the relationship property proceedings, now to be heard at the same time) and, absent a non-party costs award, she will have no personal liability for any adverse costs award.

[24]   In my view, security of some kind should be ordered, particularly at this stage of the proceedings, before further costs are incurred. I reject Ms McCartney’s submission that an order for security for costs should be deferred pending full and proper disclosure of documents by the defendant. The outstanding issues in relation to discovery have arisen in the main in the Family Court proceedings. I am in no position at this stage to make an assessment of whether, as alleged, there has been a failure by the defendants to comply with their discovery obligations. In any event, I note that there are live interlocutory applications for further and better discovery, which will now be heard and determined in this Court.

[25]   I find that the critical issue to address is whether the undertaking is an appropriate form and amount of security.

[26]   One of the factors relevant to the exercise of discretion under r 5.45 – and in this case, to the issue of whether the funds of $50,000 are an appropriate form and amount of security – is whether the plaintiffs’ substantive claims are prima facie unmeritorious.13 A prima facie lack of merit will be weighed in the balance; the less apparently meritorious, the more likely a security is appropriate.14

[27]   Both parties addressed the issue of the merits of the plaintiffs’ claims. The defendants filed and served evidence from Mr Snedden, solicitor, a director and shareholder of Liston Trustee Services Ltd, a professional services trustee company and one of the third defendants.

13     Highgate on Broadway Ltd v Devine, above n 6, at [22](c).

14     At [22](c).

[28]   I find, however, that there is no proper basis in this case for me to reconsider or depart from my earlier findings in my judgment of 14 July 2020, that there is a reasonable likelihood of these proceedings succeeding.15 In that judgment, I traversed at some length the relevant documents at issue. I note also that that judgment is under appeal to the Court of Appeal with a hearing scheduled for February 2021.

[29]   In addressing the critical issue of the form and quantum of security offered by Ms O’Brien, the approach is not a matter of going through a checklist of “so-called principles” but rather, is a careful assessment of the circumstances of this particular case.16

[30]In this case, I find that the following principles have particular application:

(a)As the Court of Appeal held in McLachlan v MEL Network Ltd,17 it would be “harsh” on a joint venture partner in proceedings alleging that conduct of the other joint party led to failure of the joint venture (such as in the present case), to make an order so onerous that it would prematurely bring the proceedings to an end;

(b)The amount of security is not necessarily to be fixed by reference to likely costs awards. Rather, it will be what the Court thinks fit in all the circumstances;18 and

(c)In cases where a plaintiff can provide compelling evidence that a personal undertaking will be of substance and result in prompt payment of any costs award, a court may find that such undertakings sufficiently protects the defendant’s position.19

15     O’Brien v Parkinson & Ors, above n 1, at [102] and [103].

16     A S McLachlan Ltd v MEL Network Ltd, above n 4, at [14].

17     A S McLachlan Ltd v MEL Network Ltd, above n 4, at [26].

18 At [13]. See also Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [20].

19  Camelot Hotel Ltd v Square Holdings Ltd [2016] NZHC 82, (2016) 23 PRNZ 121 at [55]. See also Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 2504, [2018] NZAR 1699 at [40]; Banks v Farmer [2019] NZHC 53 at [346].

[31]   As to the quantum of any security, the defendants have helpfully provided a calculation of costs on a 2B basis, together with disbursements that include experts’ costs of $60,110. Those calculations are the basis for the defendants’ contention that the plaintiffs should pay the sum of $150,000 by way of security.

[32]   I accept the submission of Mr Kennedy that in determining the quantum of any security for costs award, experts’ fees should be taken into account.20 Having said that, the calculations provided by the defendants, while a useful starting point, are not determinative. The overriding and most important consideration is “how should the respective interests of the parties best be balanced?”21

[33]   In balancing the respective interests of the parties in this case, it is important to bear in mind the reality of the proceedings, namely that they arise out of the dissolution of a marriage of significant duration. The primary allegation, directed at holding Mr Parkinson to account, is that he breached his fiduciary duties by diverting property of the company for his own benefit (and depriving his wife, his partner in a joint venture business, of her proper entitlement). The proceedings, at least in the Family Court, have now been underway for some considerable time and as a matter of access to justice, it would be wrong to impose any significant hurdle, in effect, preventing Ms O’Brien from advancing what I have already concluded are reasonably tenable claims.

[34]   In evaluating  all  these  factors,  I  find  that  the  undertaking  offered  by  Ms O’Brien that the sum of $50,000 in the Barter & Co trust account be identified and held as security for costs for these proceedings is both an appropriate form of security and an acceptable amount. This case can be distinguished from Oxygen Air Ltd v LG Electronics Australia Pty Ltd,22 where Davison J held that the first instance Judge erred when he required an undertaking from the non-parties against their wishes.  Here,  Ms O’Brien has offered to give such an undertaking.

20     Banks v Farmer, above n 19, at [316]; Camelot Hotel Ltd v Square Holdings Ltd, above n 19.

21     Highgate on Broadway v Devine, above n 6, at [24](c), per Kós J.

22     Oxygen Air Ltd v LG Electronics Australia Pty Ltd, above n 19.

[35]   The funds held in the Barter & Co trust account are subject to any further orders of the Court and are, in that sense, under the control of the Court.23 That will, of course, be this Court, now that the Family Court proceedings have been transferred here and both proceedings are to be heard together. The sum of $50,000 are funds to which Mr Parkinson makes no claim at all. The claims that are made in these derivative action proceedings are in substance similar to the claims that Ms O’Brien makes in the relationship property proceedings. Because both sets of proceedings are so interrelated, these derivative proceedings by themselves do not add materially to the duration of the trial. There is no suggestion that, if unsuccessful, Ms O’Brien is not in a position to pay costs in those relationship property proceedings. Furthermore, in the event that Ms O’Brien unsuccessfully prosecutes these derivative action proceedings, there would appear to be a good basis for making a non-party costs award against her. In my view, there is no substance to the contention that the defendants are somehow at real risk of a barren or grossly inadequate costs award in the event that I do not order the sum of $150,000 to be paid by way of security. I note also, that as part of an undertaking, Ms O’Brien agrees that the $50,000 is to be available as a priority in the event of a costs award.24

Result

[36]   The defendants’ application for security of costs in the sum of $150,000 is dismissed.

[37]   As a matter of discretion, I find that Ms O’Brien, as agreed, is to provide an undertaking to be filed and served by 29 January 2021, agreeing that the sum of

$50,000 held in the Barter & Co trust account be held as security available for an adverse costs award in these proceedings (and as a matter of priority).

[38]   As to costs, I am of the preliminary view that in substance the plaintiff,     Ms O’Brien, has succeeded in defending the applications. In my view, she should be entitled to costs on a 2B basis plus disbursements. If costs cannot be agreed, the parties

23     See Parkinson v O’Brien [2018] NZFC 7101, decision of Judge D M Partridge in the related Family Court proceedings of 28 September 2018.

24     I note also that Ms McCartney QC, counsel for Ms O’Brien, does not claim any priority in relation to her fees.

are to file submissions (no more than three pages) by 5 February 2021. The Court will then determine the issue on the papers.

Associate Judge P J Andrew