Parkinson v O'Brien
[2021] NZCA 309
•12 July 2021 at 10.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA442/2020 [2021] NZCA 309 |
| BETWEEN | KEVIN PARKINSON |
| AND | LOUISA JANE O’BRIEN ON BEHALF OF GENERAL DYNAMICS CORPORATION LIMITED |
| Hearing: | 24 February 2021 |
Court: | Brown, Katz and Edwards JJ |
Counsel: | Z G Kennedy and S R Morris for Appellants |
Judgment: | 12 July 2021 at 10.00 am |
JUDGMENT OF THE COURT
AThe application to adduce further evidence on appeal is allowed in part and an order is made admitting Mr Parkinson’s affidavit of 18 February 2021 as evidence.
BThe appeal is dismissed.
CThe appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
Table of Contents
Para No
Introduction [1]
Relevant background [5]
GDC and subsequent entities [5]
The Wanaka property [9]
The relationship property proceeding [14]
The High Court judgment [16]
Issues for determination on appeal [21]
Is leave to appeal required? [24]
Principles applicable to s 165 applications [33]
Application to adduce further evidence [38]
First and second causes of action: prospects of success [53]
Third and fifth causes of action: prospects of success [68]
Weighing costs of proceedings against relief [79]
Other considerations [86]
Our assessment [89]
Result [92]
REASONS OF THE COURT
(Given by Brown J)
Introduction
The first appellant (Mr Parkinson) and the respondent (Ms O’Brien) are the directors of General Dynamics Corporation Ltd (GDC) and, together with their respective family trusts, own all the shares in that company.[1] They were in a relationship for 29 years, marrying in 1994. After their separation in 2013 Mr Parkinson commenced a de facto relationship with the first-named third appellant (Ms Kedrinskaia).
[1]Since 2003 the Kevin Parkinson Family Trust and the Louisa Parkinson Family Trust have each held 249 shares while Mr Parkinson and Ms O’Brien each held one share.
Pursuant to s 165 of the Companies Act 1993 Ms O’Brien applied for leave to bring a shareholder derivative action on behalf of GDC against Mr Parkinson, both in his personal and trustee capacities. The proposed claim also alleged that the third appellants, Ms Kedrinskaia and Liston Trustee Services Ltd, the trustees of the Anna Kedrinskaia Family Trust (the Trustees), had received property and profits of GDC and had participated dishonestly in Mr Parkinson’s breach of fiduciary duty.
That application was granted by Associate Judge Andrew on 14 July 2020.[2] The appellants now appeal.
[2]O’Brien v Parkinson [2020] NZHC 1681 [High Court judgment].
The respondents raise a jurisdictional issue, contending that the application under s 165 was an interlocutory application and hence the appellants are first required to obtain leave to appeal from the High Court under s 56(3) of the Senior Courts Act 2016. The respondents also apply to adduce further evidence on appeal. The appellants reject the jurisdictional contention and oppose the admission of further evidence.
Relevant background
GDC and subsequent entities
GDC was an electronic engineering company which employed only Mr Parkinson to carry out its services. It operated from a purpose‑built shed located at the family home of Mr Parkinson and Ms O’Brien. That property was held in the names of the trustees of their family trusts. According to Mr Parkinson the company’s role was predominantly to provide professional engineering consultancy and contract electronic services whereas Ms O’Brien maintained that GDC was involved in the design, development, manufacture and supply of electronic products.
Between 2004 and 2008 Mr Parkinson obtained a Master of Engineering from the University of New South Wales. Around 2004 he created a GPS receiver unit known as Namuru which he later updated in 2007. During this period GDC set up a website through which a number of Namuru GPS receivers were sold.
In a minute dated 31 May 2013 Mr Parkinson recorded that he would no longer be providing professional consulting engineering services to GDC as a shareholder employee but would remain a director of the company to continue maintaining administrative, financial and taxation functions as required. In July 2013 Mr Parkinson’s solicitors wrote to Ms O’Brien’s solicitors advising that GDC had ceased to trade and that Mr Parkinson was no longer in its employment.
Mr Parkinson and his son Richard incorporated General Dynamics Ltd (GDL) in June 2013. Ms O’Brien claims GDL took over the business and trading of GDC and Mr Parkinson’s actions in transferring the property, profits and opportunities of GDC to interests associated with him was a breach of fiduciary duty. Following his resignation from GDL, on 21 April 2017 Mr Parkinson incorporated General Dynamics Corp Ltd (GD Corp) as a vehicle through which he could continue to offer his professional engineering services. Ms O’Brien however claims this was just another transfer of the business formerly carried out by GDC.
The Wanaka property
On 28 November 2013 Mr Parkinson entered into an agreement for sale and purchase to buy land in Wanaka (the Wanaka property) for $525,000. A deposit of $30,000 was payable on signing with subsequent payments of $200,000 on 24 January 2014 and $295,000 on 30 April 2014.
The draft claim alleged that Mr Parkinson paid an initial deposit of $30,000 from the bank account of the Kevin Parkinson Family Trust which held property of GDC. It then alleged that Mr Parkinson paid a further deposit of $60,000 directly from the bank account of GDL from funds deposited by a customer of GDC. Further it was said that GDC property and profits held in the bank account of GDL were applied over the period July 2014 to December 2016 in the total sum of not less than $102,000 by way of repayment of an ASB Bank mortgage raised to complete the purchase of the Wanaka property.
Mr Parkinson advanced a different narrative. He deposed that he executed the agreement on behalf of Ms Kedrinskaia who had asked him to negotiate the purchase and arrange the legal aspects. He explained that on 29 April 2014 he and Ms Kedrinskaia signed a deed of nomination whereby he assigned to her the benefit and obligations of the agreement.
According to the appellants’ account the purchase price comprised:
(a)a loan advance of $90,000 from the Kevin Parkinson Family Trust to Ms Kedrinskaia on 25 November 2013 which was subsequently repaid;
(b)an advance of $140,000 from the Trustees; and
(c)a mortgage advance from the ASB Bank of $295,000 to Ms Kedrinskaia.
Mr Parkinson lodged a caveat on 6 December 2013 to protect his loan to Ms Kedrinskaia. He contended that the $90,000 loan advance from his trust comprised:
(a)$30,000 received by him as a distribution of relationship property in September 2013; and
(b)$60,000 taken in drawings from GDL, the GDL revenue having been generated by consultancy work which he undertook after he left GDC.
The relationship property proceeding
In late 2017 Mr Parkinson commenced proceedings in the Family Court seeking payment out of proceeds of the sale of his and Ms O’Brien’s former family home on the basis that the proceeds were relationship property.
That proceeding has been transferred to the High Court. Subject to the outcome of this appeal the relationship property proceeding and the derivative action are set down for hearing concurrently in February 2022.
The High Court judgment
The application for leave to bring a derivative action was made in the form of an interlocutory application accompanied by a statement of claim, which the Judge accepted could only be treated as a draft pleading.[3] However the Judge viewed the draft as providing a useful guide to the proposed claim in considering:[4]
… the critical issues of whether there is a reasonable likelihood of the proceedings succeeding; whether the costs of the proceedings will outweigh any relief realistically obtainable; and whether there are other considerations which tell against the grant of leave.
The ultimate question for determination was whether a prudent business person would bring the proceedings in the conduct of his or her own affairs.
[3]High Court judgment, above n 2, at [36].
[4]At [37]–[38].
On the first issue, the likelihood of the proceeding succeeding, the Judge found:
(a)There was a reasonable prospect of the first (breach of fiduciary duty) and second (breach of the duties in s 131 of the Companies Act) causes of action succeeding.[5]
(b)There was a reasonable prospect of the third cause of action (dishonest participation, receipt and assistance) succeeding.[6]
(c) The fourth cause of action (setting aside prejudicial dispositions under s 348 of the Property Law Act 2007) was likely misconceived.[7]
(d) There was an arguable case for the fifth cause of action (resulting trust).[8]
[5]At [42]–[64].
[6]At [65]–[78].
[7]At [79].
[8]At [81]–[83].
On the second issue the Judge recognised that the litigation would be hard‑fought, lengthy and complex[9] and acknowledged the difficulty in making any meaningful assessment of a realistic quantum of damages that the company might obtain in the event that leave was granted and the proceeding was successful.[10] He concluded:
[95] In assessing overall these various factors, I acknowledge that there may be some force in the collective impact of the various weaknesses Mr Kennedy has identified in the plaintiffs’ claim. In particular, the approach of the Court of Appeal in Nobilo v Nobilo suggests that the extent of damages recoverable may present challenges for the plaintiff. However, it is important to record this is not a mini-trial. In the circumstances here, where the experts’ costs appear to have largely been already incurred; where Ms O’Brien’s claims are supported by independent expert evidence; and where she is prepared and willing to fund the proceedings; I find that the costs of such proceedings would not outweigh any relief realistically obtainable. The hearing of a s 165 derivative proceeding with the related Family Court relationship property proceedings in this Court would also likely result in some cost efficiency. I also note that the cause of action against the third defendants includes by way of relief a claim against the Wanaka property (i.e. an asset of value).
(Footnote omitted.)
[9]At [90].
[10]At [92].
Turning to other considerations:[11]
(a)The Judge viewed the fact that GDC had ceased trading as a relevant but not decisive factor.
(b)He considered the length of time since GDC ceased to trade was a factor of some concern but attributed the delay to Ms O’Brien’s very poor health. In addition the fact that the Family Court proceeding remained unresolved suggested that there would not be any real prejudice resulting from such delay.
(c) He rejected the appellant’s submission that the dispute would be better resolved through the liquidation process or that the Family Court was the appropriate forum for Ms O’Brien’s complaints.
(d)Finally, he regarded potential limitation hurdles as a matter for trial.
[11]At [97]–[101].
In granting leave the Judge viewed the claim for breach of fiduciary duty in particular as appearing to have real merit in giving rise to important issues of accountability, stating that the expert evidence suggested the amount at issue was substantial.[12] However he declined to make an order under s 166 of the Companies Act that the costs of the derivative action be met by the company.[13]
Issues for determination on appeal
[12]At [103].
[13]At [106].
The notice of appeal is a detailed document which takes issue with almost every significant conclusion in the judgment. That intensity of challenge is reflected in the appellants’ similarly detailed revised list of issues which, in addition to alleging numerous errors in the Judge’s reasoning, questions whether the evidence supported six significant findings.
The respondents’ separate list of issues, which in substantial part mirrored the appellants’ list, particularised their preliminary jurisdictional challenge in this way:
2. Whether the appellants were required to obtain leave to appeal under s 56 of the Senior Courts Act 2016, specifically:
a.Whether the decision to grant leave to bring the derivative shareholder action is an order or decision of the High Court made on an interlocutory application as “interlocutory application” is defined by s 4 of the Senior Courts Act 2016 namely:
i.an order or a direction relating to a matter of procedure; or
ii.any application in any civil proceedings, or intended civil proceedings, for some relief ancillary to that claimed in a pleading?
As we explain below,[14] we do not consider that an appeal from a s 165 leave determination involves the granular analysis which the lists of issues invite. In our view the parties’ contentions on appeal are appropriately addressed as follows:
(a)whether leave to appeal is required;
(b)the principles applicable to s 165 applications;
(c)the application to adduce further evidence;
(d)the prospects of success;
(e)whether the costs of proceedings outweigh the relief obtainable; and
(f)any other considerations.
Is leave to appeal required?
[14]At [35]–[36]. See also [65] and [83].
Leave is required for an appeal to this Court from an order on an interlocutory application,[15] the definition of which in s 4(1) of the Senior Courts Act materially states:
interlocutory application—
(a)means any application to the High Court in any civil proceedings or criminal proceedings, or intended civil proceedings or intended criminal proceedings, for—
(i)an order or a direction relating to a matter of procedure; or
(ii)in the case of civil proceedings, for some relief ancillary to that claimed in a pleading;
…
[15]Senior Courts Act 2016, s 56(3) and (5).
The argument of Ms McCartney QC for the respondents that leave to appeal was required can be summarised as follows:
(a)There being no prescribed procedure for applications for leave under s 165, an application may be made either by a statement of claim in the intended proceeding together with an interlocutory application for leave or by an originating application for leave.
(b)The respondents chose the former route, adopting the procedure under pt 18 of the High Court Rules 2016.
(c)Hence the proposed appeal from the order granting leave is from an order made on an interlocutory application.
(d)Both limbs in para (a) of the definition of “interlocutory application” in the Senior Courts Act were satisfied, Ms McCartney citing Trotter v Telfer Electrical Nelson Ltd.[16] Section 56(3) therefore applied and leave from the High Court was required before coming to this Court.
[16]Trotter v Telfer Electrical Nelson Ltd [2018] NZCA 231, [2019] NZAR 476.
Ms McCartney further submitted that the criteria for granting leave under s 56 are not satisfied as there is no arguable error of law or fact of general or public importance warranting determination or the further cost and delay.
In response Mr Kennedy for the appellants submitted:
(a)the orthodox procedure for leave to bring a derivative action is by an originating application under pt 19 of the High Court Rules accompanied by affidavits and a draft statement of claim;
(b)an alternative procedure available under pt 18 of the Rules requires a statement of claim seeking leave under s 165, an application for directions under r 18.4(1), affidavits and a draft intended pleading in the proposed substantive proceeding;
(c)the procedure adopted by the respondents was an unauthorised hybrid: the Judge correctly accepted that the statement of claim could only be treated as a draft in the circumstances;
(d)in the High Court counsel for the respondents accepted that the shareholder derivative action comprised a separate proceeding that had concluded with the judgment. A fresh notice of proceeding and statement of claim was filed in the High Court in July 2020.
Regardless of the form of the application in the High Court, whether it constituted an interlocutory application depends on whether it meets the substantive two-limbed definition stated at [24] above. Addressing the first limb of the definition, this Court in Trotterv Telfer Electrical Nelson Ltd considered that a protest to jurisdiction, based upon the jurisdiction of the Employment Relations Authority, related to a matter of procedure as it concerned the proper mode of conducting a legal proceeding to determine the issues between the parties.[17]
[17]At [20].
An application under s 165 requests the Court’s permission to initiate a proceeding in the name and on behalf of the company. It is an application which is to be determined by reference to mandatory statutory criteria. It is not on a par with applications for directions or as to the manner in which a process should proceed. We do not consider that it is apt to describe it as a matter of procedure in the sense recognised in Trotter.
The second limb of the definition of an interlocutory application was also considered in Trotter:
[21] In respect of the second limb, we also consider that the relief sought in the protest was “ancillary” to the relief sought in the Statement of Claim. The definition of “ancillary” in the Shorter Oxford Dictionary is subservient or subordinate. In the rules context, the word “ancillary” is used to mean collateral to but flowing out of the relief claimed in the pleadings (for example, r 5.50 — appearance for ancillary matter), or necessary to support or respond to the relief claimed in the pleadings (for example, s 20 of the Senior Courts Act — ancillary powers of Associate Judge).
[22] The relief sought in the application can be seen as ancillary to that sought in the pleading. It responds to the relief sought but is collateral to it — the application for stay (or dismissal) does not engage directly with the relief sought, but rather responds that it is relief which should be pursued in another forum.
(Footnotes omitted.)
The relief sought on the leave application under s 165 is a prerequisite to bringing a proceeding. Hence it cannot fairly be described as either ancillary or collateral to the ultimate relief in the proceeding that the applicant is seeking permission to commence. It is not a station along the line but a destination in itself. That reality was recognised in Ms McCartney’s memorandum of 28 July 2020 in the High Court which referred to the s 165 application as having “concluded” and to the subsequently filed claim as “the separate substantive proceeding”.
Acceptance of the relief as ancillary could only be possible if, as initially occurred here, it were legitimate to launch the intended proceeding in anticipation of a s 165 order and to apply for leave in that same proceeding by an interlocutory process. We do not accept that that is an appropriate vehicle for seeking leave under s 165. We accept Mr Kennedy’s submission that in the normal course such an application should be made by originating application.[18]
Principles applicable to s 165 applications
[18]See for example Robcke v Metz [2015] NZHC 1724, [2015] NZCCLR 21 at [1]. Similarly in Ballantyne Trustees Ltdv Papprill Hadfield & Aldous Solicitors Nominee Company Ltd [2015] NZHC 2294 at [6] where we infer that the form of proceeding regularising the application was an originating application.
Section 165 of the Companies Act relevantly provides:
165 Derivative actions
(1) Subject to subsection (3), the court may, on the application of a shareholder or director of a company, grant leave to that shareholder or director to—
(a) bring proceedings in the name and on behalf of the company or any related company; or
(b) intervene in proceedings to which the company or any related company is a party for the purpose of continuing, defending, or discontinuing the proceedings on behalf of the company or related company, as the case may be.
(2) Without limiting subsection (1), in determining whether to grant leave under that subsection, the court shall have regard to—
(a) the likelihood of the proceedings succeeding:
(b) the costs of the proceedings in relation to the relief likely to be obtained:
(c) any action already taken by the company or related company to obtain relief:
(d) the interests of the company or related company in the proceedings being commenced, continued, defended, or discontinued, as the case may be.
(3) Leave to bring proceedings or intervene in proceedings may be granted under subsection (1), only if the court is satisfied that either—
(a) the company or related company does not intend to bring, diligently continue or defend, or discontinue the proceedings, as the case may be; or
(b) it is in the interests of the company or related company that the conduct of the proceedings should not be left to the directors or to the determination of the shareholders as a whole.
…
In discussing s 165 this Court in He v Chen observed:[19]
[30] [Section 165(2)] requires the court to assess each consideration separately. The relative weight each carries will depend on the facts of the case. In assessing each statutory criterion the court should adopt the standard “which would be exercised by a prudent business person in the conduct of his or her own affairs when deciding whether to bring a claim”. It is very well established by High Court authority, which we endorse, that the prudent business person standard applies to an assessment of s 165(2)(a). It has also consistently informed the Court’s assessment of the remaining three criteria. While we emphasise it is the express words of each statutory consideration which the Court must have regard to, we consider it helpful to assess whether each criterion applies to the prudent business person standard.
(Footnotes omitted.)
[19]He v Chen [2014] NZCA 153, [2015] NZAR 437.
This Court further noted that it is not the function of the Court on a s 165 application to make a determination of the ultimate merits of the claim.[20] Nor is its role to conduct an interim trial.[21]
[20]At [38].
[21]Vrij v Boyle [1995] 3 NZLR 763 (HC) at 765, affirmed recently in Needham v EBT Worldwide Ltd (2006) 3 NZCCLR 57 (HC) at [22].
The Judge below was mindful of this constraint, stating at the commencement of his consideration of the first issue:[22]
[39] In addressing the issues, it is important to recall that proceedings of this kind under s 165 should not become an interim trial on the merits.
[40] There is extensive evidence before me in the form of affidavits and exhibits (five bound volumes) which include transcribed evidence of various interlocutory applications in the related Family Court proceedings. There is clearly a good deal of mistrust between the parties and many of the fundamental factual matters in dispute give rise to issues of credibility. It is not my role to determine issues of credibility, although it is relevant to address whether the claims made are so implausible or unsupported by probative evidence that they are not reasonably likely to succeed.
[41] The defendants’ submissions present a careful and wide-ranging attack on the foundations of Ms O’Brien’s proposed claims. The challenges to Ms O’Brien’s evidence and those of the experts she relies upon may ultimately prove to have merit. However, for present purposes, I accept the submission of Ms McCartney that I should not focus on the minutia of the evidence, the claims, or the counterclaim. Rather, I must form an overall assessment (a screening process) in addressing the statutory and other relevant criteria. This includes focusing on the critical documentation. I also note that Ms O’Brien’s claims are supported by independent forensic accounting evidence, which is yet to be tested.
We endorse that approach.
[22]High Court judgment, above n 2.
It is fair to say that the mistrust between the parties to which the Judge referred was evident both in the arguments advanced before us and in the contested application to adduce further evidence on appeal.
Application to adduce further evidence
The proposed new evidence annexed to the affidavit of Ms O’Brien dated 2 February 2021 comprised eight tranches of documents. It is convenient to adopt the shorthand technique in both sides’ written submissions by referring to the documents by their exhibit numbers.
The first four tranches were said to be relevant to the issue of Mr Parkinson’s beneficial interest in the Wanaka property:
LOB 1: documentation relating to the mortgage advance in relation to the purchase of the Wanaka property.
LOB 2:resolution of the Trustees of the Anna Kedrinskaia Family Trust approving the entry into the loan documents in favour of ASB Bank.
LOB 3:ASB Bank notification of the loan advance of $295,000 showing the client’s name as Anna Kedrinskaia and Kevin Parkinson.
LOB 4:the private individual client authority by Mr Parkinson for the withdrawal of his caveat over the Wanaka property.
The documents are said to contradict the evidence for the appellants that Mr Parkinson did not have, and was never intended to have, a beneficial interest in the Wanaka property.
The remaining tranches of documents were said to be relevant to the application of diverted property and profits from the original business of GDC to the bank accounts of Ms Kedrinskaia and to repay the mortgage borrowings of $295,000 for the Wanaka property:
LOB 5:bank statements for account suffix-50 in the name of Anna Kedrinskaia for the period 2 April to 2 December 2017.
LOB 6:bank statements for account suffix-52 in the name of Anna Kedrinskaia for the period 18 May 2017 to 31 March 2020.
LOB 7:bank statements for account suffix-53 in the name of Anna Kedrinskaia for the period 3 April 2017 to 31 March 2020.
LOB 8:bank statements for account suffix-00 in the name of Anna Kedrinskaia for the period June 2014 to June 2017.
It is contended that the entries in the various bank accounts support the respondents’ position that property and profits sourced from the original business of GDC were applied to repayment of the borrowings for the purchase of the Wanaka property.
Admission of the proposed new evidence was opposed on the following bases:
(a)It is not fresh: LOB 1 and LOB 3.
(b)It presents an incomplete and misleading picture: LOB 2.
(c)It is not cogent: LOB 5, LOB 6, LOB 7 and LOB 8.
Mr Parkinson filed an affidavit in support of the appellants’ notice of opposition to the application. With reference to LOB 2 Mr Parkinson annexed a number of documents that he says make it clear he did not, and does not, have a beneficial interest in the Wanaka property:
(a)an unsigned deed of record between Mr Parkinson, Ms Kedrinskaia and the Trustees dated 2019;
(b)a signed deed of record dated 2020 between the same parties; and
(c)an affidavit of Mr D W Snedden, a director and shareholder of Liston Trustee Services Ltd, confirming that the bare trust arrangement contemplated did not go ahead.
A letter from ASB Bank to Ms Kedrinskaia dated 22 July 2020 is also annexed in support of the explanation why the allegations in respect of Ms Kedrinskaia’s personal accounts are incorrect.
The principles governing the admission of further evidence on appeal are well established. The evidence must clear a triple threshold of credibility, cogency (which in practical terms means it could affect the outcome of the proceeding) and freshness (which means it could not reasonably have been obtained for the first instance hearing).[23]
[23]LRR v COL [2020] NZCA 209, [2020] 2 NZLR 610 at [123].
Mr Kennedy submits that documents LOB 1 and LOB 3 have been in the respondents’ possession since at least February 2020 when they were provided by way of informal disclosure in an unsigned form in the relationship property proceeding. Subsequently they were provided in signed form in October 2020 in compliance with the High Court discovery order.
On the face of it they are not fresh. However Ms McCartney argues that their significance could not be understood without the benefit of document LOB 8. It was not until discovery of the bank account statements that evidence was available that confirmed that the facility account referred to in LOB 1 and LOB 3 was being funded out of profits of the business.
In Rae v International Insurance Brokers (Nelson Marlborough) Ltd this Court stated that, while the absence of freshness is not an absolute disqualification, the criteria for admission in such circumstances must be very strict.[24] The Court said that when the evidence is not fresh it should not be admitted unless the circumstances are exceptional and the grounds compelling. We do not consider that threshold is attained in relation to documents LOB 1 and LOB 3. The application in respect of those documents is declined.
[24]Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA) at 193.
Document LOB 4 did not receive specific attention in the submissions of either counsel. Mr Parkinson’s affidavit noted that the title for the Wanaka property, which was relied on by the respondents in the High Court, clearly shows that he lodged a caveat and that it was removed on 1 May 2014. Hence he commented that the significance of LOB 4 is unclear. It is not apparent to us that it is cogent with reference to the issues on the appeal. We decline to receive it in evidence.
Mr Parkinson’s complaint in relation to LOB 2 is that without reference to other documents it presents an incomplete and misleading picture. However that concern is mitigated by the fact that several documents are annexed to Mr Parkinson’s affidavit in opposition, their significance being explained in his affidavit.
Lack of cogency is the ground of opposition in respect of documents LOB 5 to LOB 8. Mr Kennedy argues that those documents comprising ASB Bank account statements do not answer any issues relevant to the judgment below, they do not establish the propositions which the respondents attempt to draw from them and they are misleading given that there are other relevant documents, which have been provided on discovery but are not before the Court, that would complete the picture.
However in the High Court the Judge noted that there appeared to be some critical discovery yet to be obtained by the respondents including bank statements for the accounts into which GD Corp’s profits appeared to have been paid.[25] In our view this evidence is therefore both fresh and cogent.
[25]High Court judgment, above n 2, at [75].
Accordingly the application to adduce further evidence is granted in respect of documents LOB 2 and LOB 5 to LOB 8. We also make an order admitting Mr Parkinson’s affidavit in reply as evidence. In respect of documents LOB 1, LOB 3 and LOB 4 the application is declined.
First and second causes of action: prospects of success
These causes of action, which are against Mr Parkinson, allege breach of a fiduciary duty and breach of s 131 of the Companies Act.[26] These were understandably addressed together, arising as they do from the same contention that, as a director of GDC, Mr Parkinson diverted property, profits and opportunities of GDC in favour of himself and his interests. As the Judge noted the proposed claim was reformulated by Ms McCartney in her submissions in reply as being that Mr Parkinson caused GDC to cease trading and took over the company’s property and business for his own personal benefit. In so doing he exploited for his own interests the business and business opportunity of GDC and the on-going manufacture and sale of product that belonged to it, including the Namuru GPS receivers as well as later versions of the same.[27]
[26]The draft statement of claim made allegations of breach of ss 135 and 301 of the Companies Act 1993 in the second cause of action, but these were not pursued in the High Court.
[27]High Court judgment, above n 2, at [42].
The thrust of the appellants’ attack on the Judge’s finding of a reasonable prospect of the claim succeeding is that the evidence does not support Ms O’Brien’s “central (and critical) allegation” that Mr Parkinson misappropriated property, profits and opportunities belonging to GDC.
Mr Kennedy submitted that while fiduciary obligations arise from an individual’s position as the director of a company, the same is not the case in relation to an employment relationship. They are separate relationships giving rise to separate obligations and neither is subject to a duty not to resign.[28] He placed reliance on Jas‑Net (NZ) Ltd v Seagar, in particular the following finding:[29]
There is no doubt that although a former employee and director, the defendant was entitled as from 31 May to canvass the customers of the plaintiff, and that knowledge of their identity acquired during employment is no bar to so doing … Similarly there is no doubt that the defendant is entitled to set up in business in opposition to the plaintiff, there being no covenant in restraint of trade applicable.
[28]Citing BDM Grange Ltd v Parker [2006] 1 NZLR 353 (HC) at [77] and [86]; and Internet Traders Ltd v Hutson [2016] NZHC 1269 at [12].
[29]Jas‑Net (NZ) Ltd v Seagar (1991) 5 NZCLC 67,327 (HC) at 5–6.
Mr Kennedy acknowledged that, while Mr Parkinson was entitled to resign as a director of GDC, as a matter of fact he did not. But he submitted the relevant question was whether Mr Parkinson’s decision to remain as a director of GDC necessarily meant that he acted in breach of fiduciary duties in offering his personal professional services through a different corporate vehicle. Mr Kennedy submitted the answer must be in the negative because GDC’s interests were severely constrained by the fact that it had become a deadlocked non‑trading entity following Mr Parkinson’s legitimate decision to resign as an employee.
In response Ms McCartney distinguished Jas-Net, emphasising that it is not the respondents’ case that Mr Parkinson was not able to resign as an employee and market his skills. Rather the respondents contend that, having announced the separation and without approval or consent of the company removed four truckloads of plant and equipment of GDC, Mr Parkinson thereby deprived GDC and Ms O’Brien of the ability to carry on the business and earn revenue, including with the independent contractors who in the past had provided services to GDC.
Ms McCartney described the appellants’ reliance on the Judge’s statement at [50], for the proposition that the evidence established that GDC’s business was largely dependent upon the skill and expertise of Mr Parkinson, as a misreading of the judgment. She submitted, in our view correctly, that at [50] the Judge was addressing the appellants’ submission that, because Mr Parkinson was engaged in the day-to-day work for GDC, only he could provide plausible evidence about the nature of the business.
However in the same paragraph the Judge accepted Ms O’Brien’s claim that she had a close understanding of the business and her evidence could not be dismissed as implausible or lacking in credibility. The Judge further noted that there was independent evidence supporting her contention that GDC carried on the business of manufacturing and selling electronic product and was not simply the consultancy vehicle as contended by Mr Parkinson.
Mr Kennedy submitted that the Judge’s view, that the fact that Mr Parkinson was free to hand in his notice at any time did not engage with Ms O’Brien’s claim of diversion of property, business and profits,[30] begged the question as to the nature of such property, business and profits. He emphasised Mr Parkinson’s evidence that GDC’s business model was the provision of professional engineering services and that GDC did not own the intellectual property associated with the products it designed and produced for its clients. In his submission the Judge’s finding that Ms O’Brien’s claims as to the nature of the business should be preferred over Mr Parkinson’s evidence rested on a flimsy evidential basis.
[30]High Court judgment, above n 2, at [63].
We do not consider that criticism of the judgment is valid. We note that the Judge’s reasons included:
[51] Ms O’Brien relies on, amongst other things, the evidence Mr Parkinson gave in the Family Court affidavit of 6 September 2018, in which he deposed that in the period 2004 – 2006, GDC sold 18 Namuru GPS receivers to the University of New South Wales and a further 60 to others. The financial accounts for GDC and GDL’s financial statements for the years ending 2015 and 2017 provide clear, independent evidence supporting Ms O’Brien’s position. So, too, does the opinion evidence of Ms O’Brien’s expert, Mr Paul Moriarty, who says a significant proportion of hardware sales by GDC is not commensurate with a consulting service. The archived versions of the GDC websites which Mr Moriarty annexes, and GDC’s invoices, further support Ms O’Brien’s position. Those websites refer to GDC as an electronic engineering company that designs, develops, manufactures and supplies electronic systems. Some of the GDC invoices record matters such as fitting, soldering, engineering and programme set-up, assembly of components, provision of electronic componentry, and the upgrading and testing of software.
[52] Mr Kennedy’s submission that there is no evidence that these web pages were live or that any sales were made from them misses the point. The issue is not whether the web pages were live but, rather, whether they evidence representations by the relevant companies that they were manufacturing and selling GPS receivers. In any event, this evidence all needs to be tested. And on its face, Ms O’Brien’s claims as to the nature of the business appear to have considerable merit.
We agree with Ms McCartney’s submissions that the Judge was entitled to regard the GDC and GDL financial accounts and the expert analysis by Mr Moriarty as more reliable than Mr Parkinson on this issue.
However Mr Kennedy then submitted that the inquiry about the nature of GDC’s business was largely a distraction from the real issue, namely that, to the extent the products designed and constructed by GDC reflected the application of Mr Parkinson’s personal skill and expertise, he was free to produce the same or similar products after he left GDC, subject only to any intellectual property constraints in favour of GDC.
Mr Kennedy proceeded to closely analyse the evidence on the question whether GDC owned protectable intellectual property in the products that it had produced, including the Namuru GPS receiver (versions 1 and 2), the Biarri GPS receiver and the Kea GPS receiver. This strand of argument involved several issues including the history of the development of the products, alleged obsolescence, the implications of alleged open source technology and the analysis of documentation, including a licence agreement with the Commonwealth of Australia.
In our view this degree of intensity of analysis travels well beyond the comparatively limited function of a Court in exercising the s 165 jurisdiction. These are issues which require close consideration and are more appropriately the role of a trial. That consideration is underscored by the point of contention about a recital in the Commonwealth of Australia licence agreement concerning ownership of intellectual property which was the subject of a handwritten amendment apparently made by Mr Parkinson.[31]
[31]High Court judgment, above n 2, at [62].
The Judge accepted Ms McCartney’s submission that it was arguable that GDL retained some original intellectual property.[32] Mr Kennedy’s analysis did not persuade us to the contrary. In any event the Judge made the point that Ms O’Brien’s claims do not depend solely on the issue of protectable intellectual property.
[32]At [61].
It is important to recall that, as the appellants recognised in their statement of issues, the inquiry at this juncture is merely whether the causes of action are arguable. We are satisfied that there is sufficient evidence to support a finding of an arguable case. We are not persuaded that the Judge erred in his assessment that the claim for breach of fiduciary duty in particular appears to have real merit and gives rise to important issues of accountability.[33]
Third and fifth causes of action: prospects of success
[33]At [103].
Like the appellant, we address together the third and fifth causes of action against the third defendants, namely dishonest assistance and resulting trust. They allege that Ms Kedrinskaia participated in Mr Parkinson’s alleged fiduciary duty breaches and that the Wanaka property was transferred to the Anna Kedrinskaia Family Trust to conceal Mr Parkinson’s interest in the property, the sources of the purchase funds and his breaches of fiduciary duty.
There was no material difference between the parties as to the components of the test for dishonest assistance, save that Ms McCartney observed that Mr Kennedy’s formulation was directed only towards a breach of trust and omitted reference to breach of a fiduciary duty. However, as the Judge noted,[34] all members of the Supreme Court in Sandman v McKay recognised that it is not settled on the authorities whether liability for dishonest assistance arises on the basis of a breach of fiduciary duties or is confined to claims by beneficiaries of trusts where the trust property has been disposed of in breach of trust.[35] Like the Supreme Court, the Judge proceeded on the assumption that participation in breach of fiduciary duty is a sufficient foundation for a claim of dishonest assistance. That was an appropriate course in the context of a s 165 application.
[34]At [69].
[35]Sandman v McKay [2019] NZSC 41, [2019] 1 NZLR 519 at [126], n 104.
In relation to the claim of dishonest receipt the Judge was confronted with critical issues of credibility.[36] In those circumstances he accepted Ms McCartney’s submission that he should focus on documentation and independent expert evidence. We did not understand Mr Kennedy to take issue with that approach.
[36]High Court judgment, above n 2, at [74].
The Judge said:
[74] … The solicitor’s trust ledger in the name of Mr Parkinson does provide support for Ms O’Brien’s claims that the trustees of the Anna Kedrinskaia Trust did not contribute materially to the purchase price of the Wanaka property. The plaintiff can also point to documentary evidence that profits from the business carried on by GDL and now GD Corp are being paid to Ms Kedrinskaia. I note also the independent expert evidence of Mr Moriarty that the source of the funds withdrawn ($60,000) was derived from GDC’s transferred business activity and is thus arguably, the property of GDC.
[75] There is a proper basis for being sceptical about some of the claims that Mr Parkinson makes, and I note as well there appears to be some critical discovery yet to be obtained by the plaintiff. This includes bank statements for the accounts into which GD Corp’s profits appear to be being paid into.
Mr Kennedy pointed to other documents which he claimed constituted evidence that Mr Parkinson did not materially contribute to the purchase price. These included the deed of nomination dated 29 April 2014, the Anna Kedrinskaia Family Trust’s bank statements and the loan advance of 25 November 2013. He further argued that the Judge did not understand the nature of the financial support that Ms Kedrinskaia provided to both GDL and GD Corp.
The Judge accepted that there was no clear and unequivocal evidence of objective dishonesty but considered that in cases of this kind, particularly in determining the matter on the papers alone, that was probably unlikely.[37] However the inference he drew from the evidence led him to conclude that there was a reasonable prospect of success on the proposed third cause of action.
[37]At [77].
We are not persuaded that that conclusion was erroneous. Indeed we consider that it gains some support from the additional documentation which the respondents have been granted leave to adduce. In that regard Ms McCartney submited that when all the bank statement entries are taken into account, there was no repayment of the claimed advance but instead an ongoing funnelling of the profits of GDL through to the joint current account of Mr Parkinson and Ms Kedrinskaia. She also submited on the basis of the additional bank statements adduced in evidence that there are numerous entries that show funds from the various business entities carrying on the diverted GDC business being paid to the Wanaka property mortgage account.
Ms McCartney also drew attention to the content of the further documents annexed to Mr Parkinson’s affidavit in opposition to the new evidence application which were not before the Judge below. We consider that it is pertinent to note the recitals to the signed Deed of Record:[38]
A. The Trust purchased the property at 21 Hauchan Lane, Wanaka, identified by RT OT6C/430 (“the Property”) for a purchase price of $525,000.00 with settlement taking place on 1 May 2014.
B. The Trust financed the purchase price as follows:
(i)$90,000.00 loan advance from Anna, on advanced from a loan advance from Kevin to Anna (“Kevin’s Loan”);
(ii)$295,000.00 joint loan advance from Anna and Kevin, on‑advanced from borrowings from ASB, secured by a guarantee from the Trust and a mortgage to ASB over the Property (“ASB Loan”);
(iii)$140,000.00 from an existing ASB overdraft facility held by the Trust.
C. Paragraph 2 of the trustee resolutions of the Trust dated 29 April 2014 which relate to the purchase of the Property state as follows:
“The purpose of the transaction is for the trust to purchase and hold the property as bare trustee for Anna Kedrinskaia and Kevin Parkinson.” (the “Bare Trust Arrangement”).
D. Notwithstanding the Bare Trust Arrangement noted in said trustee resolutions, the parties wish to record that at no stage did they proceed with or formalise the Bare Trust Arrangement post settlement of the Property as Kevin was not in a position to contribute equally to the purchase price and loan repayments. As such, the Trust is the legal and beneficial owner of the Property.
[38]At [42(b)] above.
The document acknowledges that the parties did not record in writing that this bare trust arrangement did not proceed. They then record examples of their conduct to evidence that it did not proceed.
On the face of it at least, the material which was before the High Court together with the additional material submitted on appeal provides support for the submission that overall the contemporaneous documents provide a significant challenge to the affidavit evidence of Mr Parkinson and Ms Kedrinskaia that Mr Parkinson did not contribute to the Wanaka property purchase price.
With reference to the fifth cause of action Mr Kennedy submitted that the evidence did not support the conclusion that material contributions to the purchase of the Wanaka property were made by any parties other than Ms Kedrinskaia and the Trustees. Nor, he said, was there evidence supporting the requisite common intention that Mr Parkinson had a beneficial interest in the Wanaka property, let alone GDC. The fate of this claim will likewise depend on the inferences to be drawn from all the documents and from findings on credibility. We cannot conclude at this stage that the claim is unarguable. It would not be appropriate in our view to preclude this claim being advanced if leave is granted for the other three causes of action.
Weighing costs of proceedings against relief
One of the mandatory factors the Court is required to have regard to when determining whether to grant leave to a shareholder to bring proceedings on behalf of a company is the costs of the proceedings in relation to the relief likely to be obtained.[39]
[39]Companies Act, s 165(2)(b).
Mr Kennedy submitted that a meaningful assessment of the likely costs to be incurred in the event leave is granted is appropriate and necessary in order to make a finding pursuant to the prudent business person test. He contended that the Judge failed to make a proper assessment of the likely costs involved in bringing the claim or to bring those to account in the assessment of the test.
The appellants’ submissions on this aspect of the appeal:
(a)conducted comparative assessments of loss advanced by the parties’ experts;
(b)attacked Mr Moriarty’s assessment of loss of $747,000 as untenable; and
(c)reprised the arguments below on the double-counting of enterprise value and post-separation profits.
Mr Kennedy also contended that the Judge erred in considering that equitable compensation provided a potential remedy, emphasising that the draft statement of claim did not plead such a remedy but rather focused on the remedy of account for profit.
We have sympathy with the Judge’s view that, in the absence of any testing of the disputed accountancy evidence and that of the remuneration experts, it is difficult to make a meaningful assessment of a realistic quantum of damages that the company might obtain in the event that it was successful with the proposed proceeding.[40] We consider that the task which the appellants submit the Judge should have undertaken, and likewise the breadth of the argument in this Court, proceeds substantially beyond the task anticipated in s 165(2)(b). In our view the analysis reflected in the Judge’s reasons at [95][41] admirably discharged the statutory obligation.
[40]At [92].
[41]At [18] above.
With reference to the attack on the Judge’s conclusion that on the basis of the evidence there was an arguable substantial claim for equitable compensation[42] we consider that the criticism of the pleading is somewhat formalistic. In both the first and second causes of action the first claim for relief is for judgment for a sum represented by the GDC property, value and profits diverted by Mr Parkinson. At least in the context of the first cause of action we consider that such relief could take the form of equitable compensation. While the second order sought is for an accounting, in both instances that is expressly framed as an alternative order to the primary relief sought.
[42]High Court judgment, above n 2, at [94].
Earlier we noted the Judge’s comments about the scale of the evidence and argument presented to him.[43] That sentiment was also apparent in the course of his consideration of the arguments on the costs/relief equation:
[91] Even if the costs will be significantly high, as Mr Kennedy submitted, it is a troubling and unattractive proposition that the Court should place weight on that factor when the party raising the issue appears to be conducting his defence (at least on the material made available to me) by taking issue with virtually every point and thereby adding significantly to those costs. That is not to say that Mr Parkinson’s defence lacks merit, but the history of the proceedings in the Family Court and the approach taken to the applications in the present case do provide some reason for concern. The allegation of “scorched earth” litigation cannot be said to be the sole responsibility of Ms O’Brien.
Those comments are similarly apt with reference to the presentation of the appeal.
Other considerations
[43]At [36] above, quoting [40] of the High Court judgment.
Two additional considerations were advanced by the appellants. First Mr Kennedy submitted that the Judge erred in distinguishing He v Chen[44] where this Court considered the fact that the company was no longer trading was a major factor. In the present case proceedings were not filed in the High Court until more than six years after GDC ceased trading and the judgment was issued more than seven years later.
[44]He v Chen, above n 19.
We accept that the cessation of trading is clearly a relevant factor. But, like the Judge, we consider it is not decisive as to whether leave should be granted. In the present case the derivative action is able to be heard concurrently with the relationship property proceedings which have been transferred to the High Court. Given the funds Ms O’Brien has already committed to this litigation, it is not the case, as suggested by the appellants, that a liquidation process would be a better forum for these issues. The Judge correctly viewed this as a different factual situation from He v Chen where the company was already the subject of an application for liquidation, which this Court concluded should be allowed to proceed.[45]
[45]At [63].
Secondly it was submitted for the appellants that, while Ms O’Brien deposed that she was ill during the separation, in fact she resumed work six months later. Ms McCartney responds that Ms O’Brien had been diagnosed with cancer just prior to the separation and regarded her condition as poor given that it was a second occurrence. The fact that she was able to resume work at the beginning of 2014 did not mean that she had the financial, physical and emotional resources to run the litigation which, Ms McCartney noted, had been aggressively defended. We do not consider that there was an error made by the Judge in attributing the delay in the commencement of proceedings to Ms O’Brien’s poor health.
Our assessment
While as this Court noted in He v Chen, s 165(1) confers a discretion with reference to the grant of leave,[46] we proceed on the assumption that so far as the mandatory statutory considerations are concerned the appeal is one to which Ausstin, Nichols & Co Inc v Stichting Lodestar applies.[47] We have undertaken our own analysis of the submissions and the evidence (albeit untested), together with the additional material which was not available to the Judge.
[46]At [59].
[47]Austin, Nichols& Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.
In our view the respondents have made out an arguable case in respect of the four surviving causes of action. While, as this Court likewise observed in He v Chen,[48] there is some difficulty in carrying out a costs-benefit analysis, we consider that the relief which is likely to be obtained if the claim is successful warrants the costs of the proceedings, particularly having regard to the efficiency which we anticipate should flow from the concurrent pursuit of the relationship property proceedings.
[48]He v Chen, above n 19, at [57].
There is nothing about the case which we consider would warrant the exercise of the discretion to decline leave notwithstanding our views on the statutory considerations.
Result
The application to adduce further evidence on appeal is allowed in part and an order is made admitting Mr Parkinson’s affidavit of 18 February 2021 as evidence.
The appeal is dismissed.
Ms McCartney submitted that, if the appeal was determined to be unmeritorious, an increased costs order was appropriate to reflect the significant unnecessary costs incurred by the respondents. Putting aside the over-detailed nature of the arguments in which both sides engaged, we do not consider that this appeal as of right warrants a departure from the standard award of costs.
The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Morris Legal, Auckland for Appellants
Mac and Co, Auckland for Respondents
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