Scarborough v Forest Grove Farms Limited

[2022] NZHC 2877

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2021-404-2118

[2022] NZHC 2877

UNDER

the Companies Act 1993

BETWEEN

MARY ROSE SCARBOROUGH

Plaintiff

AND AND AND AND

AND

FOREST GROVE FARMS LIMITED

First Defendant

RICHARD TREVOR LLOYD
Second Defendant

MARY ELIZABETH LLOYD
Third Defendant

VANESSA ROSE LLOYD
Fourth Defendant

SUZANNE ELIZABETH FOY

Fifth Defendant

Hearing:

On the papers

Appearances:

SWM Piggin for the Plaintiff

BJ Norling and FC Minehan for the Defendants

Judgment:

3 November 2022

JUDGMENT OF FITZGERALD J

[As to costs]

This judgment was delivered by me on 3 November 2022 at 3.30pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar  Date……………

Solicitors:	McDonald Law Limited, Auckland	Norling Law Limited, Auckland
To:	P Dalkie, Auckland	D Watson, Auckland

SCARBOROUGH v FOREST GROVE FARMS LTD [2022] NZHC 2877 [3 November 2022]

Introduction

[1]    In October 2015, the plaintiff inherited a 15 percent shareholding in the first defendant company, Forest Grove, from her late brother Mr Selwyn Lloyd. The other shareholders in Forest Grove are the second to fifth defendants, who are the plaintiff’s brother, sister-in-law and nieces respectively. Sadly, the relationship between the parties has broken down and the plaintiff now wishes to exit her shareholding in Forest Grove. She has commenced proceedings pursuant to s 174 of the Companies Act 1993 and seeks an order that Forest Grove be put into liquidation.

[2]    Unfortunately for a matter of this nature, the parties were initially unable to agree on appropriate discovery categories. The plaintiff accordingly filed an application for tailored discovery, and following amendments to the pleadings, an amended application. I was scheduled to hear the plaintiff’s amended application, though in the event there was discussion at the hearing between counsel and then subsequently with the Court, and an agreed outcome was reached. The parties have, however, been unable to agree the costs of the amended application, which are accordingly determined in this judgment.

Background

[3]    Prior to Mr Lloyd’s death, he held 50 percent of the shares in Forest Grove, and the second  and  third  defendants  together  held  the  remaining  50 percent  (25 percent each). The predominant business of Forest Grove is running a farm.

[4]    Prior to these proceedings being commenced, and following Mr Lloyd’s death, the defendants filed a caveat to prevent  a grant  of  probate  in respect of   Mr Lloyd’s will, which ultimately led to an application by the executors of the will (one of whom is the plaintiff), for a grant of probate in solemn form. The defendants opposed that application saying that Mr Lloyd’s last will was invalid, on the grounds of lack of testamentary capacity, lack of knowledge and undue influence. That proceeding was eventually resolved by way of mediation, following which the shareholding in Forest Grove was as follows:

(a)second defendant – 35 percent;

(b)third defendant – 25 percent;

(c)fourth defendant – 12.5 percent;

(d)fifth defendant – 12.5 percent; and

(e)plaintiff – 15 percent.

[5]The second and third defendants are the directors of Forest Grove.

[6]    As will be appreciated, the plaintiff is in a minority shareholding position, and sits somewhat “outside” the collective family group of the defendants.

[7]    In her amended statement of claim, the plaintiff says that she has no interest nor desire or intention to invest in or carry on business as a farmer, nor in the business of Forest Grove, including by reason of being a shareholder in Forest Grove. She alleges that the business of Forest Grove is being run in a manner that is oppressive and prejudicial to her, and that none of the other defendants are willing or able to buy out her shareholding. Hence her application for Forest Grove to be put into liquidation.

[8]    I make a preliminary point at the outset. The Court regularly sees family type disputes of this nature. It is most unfortunate that they result in formal litigation, which in the end is a costly and emotionally draining process for all involved. I reiterate what I conveyed to counsel at the hearing of the amended discovery application – namely to urge the parties not to get bogged down in unnecessary interlocutory skirmishes. In disputes of this nature, the plainly preferable option for all involved is an amicable resolution. If that is not possible, I would urge the parties, and their respective lawyers, to progress this proceeding as promptly and collaboratively as possible to a hearing.

The pleadings and issues arising

[9]    Only relevant documents need to be discovered. Relevance is established by reference to the issues for determination at trial. The issues to be determined at trial in turn arise from the pleadings. The pleadings are accordingly the starting point for considering what documents ought to be discovered. Issues such as proportionality then follow.

[10]   The crux of the plaintiff’s claim is that she is a “locked-in captive shareholder” in Forest Grove, has received no income or benefit from her shareholding, has no prospect of obtaining or realising any reasonable rate of return or income from her shareholding, in circumstances where no other shareholder wishes or is apparently able to purchase her shares. She also points to her age, namely 75 years old, by virtue of which she has a limited period of time in which to derive any benefit or value from her inherited shareholding.

[11]   In the context of the above, the pleadings give rise to the following core allegations and responses:

(a)The OCM investment: The plaintiff pleads that Forest Grove holds a

$135,000 investment with OCM Medical & Mobility Ltd (the OCM investment). The plaintiff says this is not a type of investment typically expected to be made by a farming or land-owning company. The plaintiff alleges that the OCM investment is shown at cost in the Forest Grove accounts and has not produced any economic return. The plaintiff further says that the OCM investment purely benefits one of the Forest Grove shareholders, the fourth defendant (and her partner) and its continuance is dictated by the majority shareholder group (being the defendants collectively). The defendants do not dispute the existence of the OCM investment, though say it was a decision made by both Mr Lloyd and the second defendant, and that the plaintiff was aware of the investment before acquiring her shares in the first defendant. The thrust of the defence is that the shareholding in the OCM investment is “currently held as an investment of the first defendant and the benefit of which is for all

shareholders of the first defendant”. The defendants deny that the OCM investment is dictated by the majority shareholder family group.

(b)Jobs/income for second and third defendants: The plaintiff pleads that the affairs of Forest Grove are being conducted in a manner to provide the second and third defendants with jobs and income, being a key reason for them opposing the liquidation of Forest Grove. The defendants admit this fact, and say further that the second and third defendants work part-time for the first defendant and are paid accordingly.

(c)Rental of the homestead: The plaintiff pleads that the homestead on the Forest Grove property is let to the fourth defendant. This fact is admitted by the defendants. They further say that the fourth defendant undertook renovations at the homestead (which was unliveable) and the opportunity for the fourth defendant to move into the homestead enabled her to start learning to help run the farm as Mr Lloyd was unwell at the time. The defendants say that it is “practical and cost effective” for the fourth defendant, her partner and her family to live on the farm to assist in its day-to-day operations, and that Forest Grove provides the fourth defendant and her partner and her children with jobs, future income and their family home. I note that, at least on the face of the pleadings, it is not suggested that the fourth defendant pays a market rent for the homestead.

(d)The surplus cash: The plaintiff pleads that Forest Grove has surplus cash assets in the order of $500,000 held on deposit (the surplus cash). She says that the surplus cash has not been returned or distributed by Forest Grove to shareholders. The defendants accept that the first defendant currently has around $400,000 by way of surplus cash. They plead that the cash is used for the farm’s operations and provides a level of security for unforeseen circumstances such as the impacts of the COVID-19 pandemic and drought. The defendants further say that over the course of the plaintiff’s shareholding in Forest Grove, Forest Grove has only made a profit in the year ending June 2019. The

defendants further plead that the likelihood of a future payment of a capital dividend has since decreased due to Forest Grove losing qualified company status, which is said to be the result of the plaintiff refusing to sign the appropriate documentation in her capacity as shareholder.

(e)No economic return generally: The plaintiff pleads that the sole or principal asset of Forest Grove, being the farmland, is not producing any economic return as a farming business. The defendants deny this allegation, and say that a profit of $36,000 was made in the year ending 30 June 2019. They also say that the impact of the COVID-19 pandemic has created difficulties for Forest Grove, and significant expenses were also paid by Forest Grove for the settlement of the estate of Mr Lloyd, which further affected its profitability and performance.1

(f)The plaintiff alleges that the business of Forest Grove is not currently a viable farming business and is at best simply a hobby farm, which is denied by the defendants. They plead that it is too large to be defined as a hobby farm and that the second to fourth defendants all work for Forest Grove. They plead that it is a viable business having built up cash reserves and is using those reserves to improve the farm’s practices and assets, such as improvements to fencing quality and stock unit numbers.

(g)Engagement with the accountant: The plaintiff pleads that an accountant of Warkworth (Withers & Co) is the Forest Grove accountant, and is also the accountant for all of the defendants and has effectively been acting on behalf of the company in its dealings with the plaintiff. These allegations are denied by the defendants, including that they all share the same accountant.

1      It is not clear on what basis Forest Grove paid these expenses.

(h)Potential buy-out of the plaintiff’s shares: The plaintiff pleads that the sale of some of Forest Grove’s company land would enable or facilitate the buy-out of her shares. The defendants admit this, but say that the significant cost and tax involved with selling Forest Grove’s land means that Forest Grove would need to sell an excessive amount of land to provide the plaintiff with her requested value of her shareholding, and that “there are other avenues available to the plaintiff to enable the buy-out of her shareholding that she has not undertaken” (said later in the pleadings to be investigating an external third party to buy out her shares). The defendants state that there have been discussions amongst the parties regarding the purchase of the plaintiff’s shareholding, but the parties have been unable to reach an agreement.

(i)Information regarding company transactions: There is also a dispute on the pleadings as to whether the defendants have provided the plaintiff with details of any commercial or other business transactions affecting the company which are under negotiation or discussion or entered into currently.

Amended application for discovery

[12]   The plaintiff’s amended application sought discovery by the defendants of the following categories of documents, the date range for each said to be from and including June 2015 “down to the present” (the amended discovery application was dated 25 March 2022, and thus the categories cover an approximately seven-year period):

(a)Annual financial statements of the company for the financial years ended June 2015, June 2016, June 2017 and June 2020.

(b)Annual financial statements of the company for the financial years ended June 2021 whenever they become available, but if not available at present then in the interim copies of the company’s latest management accounts to the latest available date.

(c)In respect of all of the company’s financial statements from June 2015 down to the present, electronic copies of supporting ledgers (for example MYOB and Xero) for the same.

(d)All communications commencing June 2015 to date to and from all or any of the first to fifth defendants and the company’s accountants Withers & Co.

(e)All communications commencing June 2015 down to the present between all or any of the first to fifth defendants as to the management and conduct of affairs of the company and including but not limited to the matter of the plaintiff’s shareholding.

(f)All communications commencing June 2015 down to the present of all or any of the first to fifth defendants as to any business dealings or transactions touching or concerning the company’s landholdings, whether under discussion or negotiation or entered into.

(g)Agendas including reports to or by directors and/or shareholders of directors and/or shareholders meetings, minutes and resolutions.

(h)All business plans or projections or reports as to the conduct of the company’s affairs from 2015 down to the present to and from the company’s accountants or all or any of the first to fifth defendants.

[13]The defendants did not oppose giving discovery of categories (a), (b), (c) and

(g) above. However, they opposed categories (d), (e), (f) and (h), variously on the grounds that the documents sought were not relevant to any pleaded allegations, the scope of the documents sought was too broad, and/or the plaintiff was embarking “on a fishing expedition”. The defendants also said that the discovery of the disputed categories was not reasonable or proportionate, and that some of the documents sought were already in the plaintiff’s possession or did not exist.

[14]   The defendants also attached to their notice of opposition their proposed categories of documents for discovery, namely:

(a)Documents relating to the plaintiff acquiring her shares in Forest Grove dated between 1 October 2015 and 18 October 2017.

(b)Documents relating to the company’s dividend policy and the payment of dividends to its shareholders, and any documents relating to the surplus cash of Forest Grove dated between 1 October 2015 and the present.

(c)Documents relating to the OCM agreement dated between June 2010 and the present.

(d)Documents relating to the employment of the second to fourth defendants with the company dated between October 2012 and the present.

(e)Documents relating to the fourth defendant’s residence in the

homestead dated between October 2012 and the present.

(f)Correspondence between the plaintiff and the defendants and the company’s accountant in relation to purchasing the plaintiff’s shareholding in Forest Grove and the sale of the company’s land dated between 1 October 2015 and the present.

(g)Documents relating to the qualifying company status of the company dated between 1 October 2015 and the present.

(h)Correspondence between the plaintiff and the company’s accountant, Withers & Co, that has been conducted on behalf of the company dated between 1 October 2015 and the present.

(i)Documents relating to the value of the farm and land owned by the company, including the costs involved with selling land dated between 1 October 2015 and the present.

Resolution of the amended application

[15]   At the outset of the hearing of the discovery application, I observed that there was a degree of agreement on the categories of documents, and indicated that some of the disputed categories sought by the plaintiff were overly broad. I adjourned while the parties discussed the disputed categories. In the event, as a result of that discussion and with further involvement from the Court, agreement was reached on the categories of documents to be disclosed. Those categories were recorded in my minute dated 18 May 2022 which made the following orders for tailored discovery (by consent):

(a)the management accounts and ledgers for the company for the years ended 30 June 2016 to 2021 in electronic or PDF form;

(b)annual financial statements for the years 2020 and 2021 as soon as they are available;

(c)all communications from 1 October 2015 down to the present between all or any of the first to fifth defendants as to the plaintiff’s shareholding;2

(d)all documents from 1 October 2015 down to the present about the possible disposal of the company’s landholdings, whether under discussion or negotiation or entered into;

(e)agendas, reports to or by directors and/or shareholders of directors and/or shareholders meetings, and minutes and resolutions from those meetings from 1 October 2015 down to the present;

(f)all business plans, accounting advice, reports and recommendations as to the conduct of the company’s affairs from 1 October 2015 down to the present to and from the company’s accountants or all or any of the first to fifth defendants.

2      This was noted as being limited to communications directly related to the plaintiff’s shareholding, rather than relating to, for example, the running of the company or farm in a more general sense, and thus indirectly relating to the plaintiff’s shareholding.

(g)those discovery categories numbered 1 to 9 of schedule 1 to the defendants’ notice of opposition dated 28 April 2022, save that category 2 is to exclude any underlying bank statements, and category 3 is to include but is not limited to the OCM Agreement itself; and

(h)copies of invoices for professional expenses charged or recharged to the company relating to the settlement of the estate of Selwyn Lloyd.

The parties’ respective positions on costs

[16]   The plaintiff seeks costs of the amended discovery application. While the plaintiff acknowledges that not all of the categories as sought (in the form set out in the amended application) were ordered, many of them were and accordingly she says that in substance she is the successful party on the application. The plaintiff seeks 2B costs on that basis.

[17]   The defendants, on the other hand, say they were the successful party on the amended discovery application, which they submit was wholly unnecessary and could have been avoided altogether. They say that they had made it clear to the plaintiff that some of the categories were too broad, agreed to those that they considered acceptable (on a pragmatic basis), and proposed their own appropriate discovery categories, all of which were ordered. In those circumstances, the defendants seek 2B costs  uplifted  by  100  percent,  or  failing  that,  uplifted  by 50 percent.

Discussion

[18]   It was plain, in my view, that some of the categories sought on the plaintiff’s behalf were framed in overly broad terms. These included categories (d), (e) and (f) in particular. On a strict approach to those categories, potentially vast numbers of documents, extending over a seven-year period, would have needed to be discovered. For example, category (d) would have captured correspondence merely setting up or arranging meetings, or discussion with the company accountant in relation to matters that have nothing to do with the allegations pleaded in the statement of claim. Similarly, a short email communication between any of the defendants about ordinary

day-to-day management of the farm could be captured by category (e). Category (f) was similarly broad, the concept of “any business dealings or transactions touching or concerning the company’s landholdings” also potentially capturing relatively minor and  day-to-day  transactions  quite  irrelevant  to  the  pleadings.  As  noted, I communicated these views at the outset of the hearing to the plaintiff’s (then) counsel.

[19] I note that despite agreeing to categories (a), (b) and (c) set out at [12] above, the defendants had opposed discovery of those categories at an initial stage (as set out in a schedule annexed to the defendants’ solicitor’s letter dated 7 April 2022). Consistent with the position advanced at the hearing, however, that schedule did record that categories (d), (e) and (f) were overly broad and not relevant to the proceedings. There was broad agreement in the schedule in relation to category (g) (subject to a date range).

[20]   As can be seen from the summary of the competing categories of documents proposed by the parties, and those actually ordered at the conclusion of the hearing, all of the discovery categories proposed by the defendants were ordered; those proposed by the plaintiff and not opposed by the defendants were ordered; and none of the disputed categories proposed by the plaintiff were ordered. Rather, “slimmed down” versions of those categories were ordered. In my view, the defendants’ proposed categories were reasonable and proportionate, being relatively closely tied to the various allegations made in the statement of claim. Indeed, it strikes me that there is relatively little dispute as to the underlying facts in this case (rather than the allegations that flow from them and what the legal consequences should be). Discovery in accordance with the defendants’ proposed categories would accordingly have been (more than) sufficient in my view, though the defendants adopted a pragmatic approach at the hearing in agreeing to some of the plaintiff’s categories and slimmed down versions of others.

[21]   In these circumstances, I consider the defendants were in substance the successful party on the application and ought to be awarded costs.

[22]   There is therefore a costs award against the plaintiff and in favour of the defendants on a 2B basis, in accordance with the schedule of costs attached to the defendants’ costs memorandum dated 1 June 2022, save for the following:

(a)Given the extensive pre-hearing correspondence between the parties on discovery, I do not consider that the preparation of written submissions ought to be awarded on a 2B basis. The dispute was straightforward and given the extensive earlier correspondence, the defendants were not “starting from scratch” on their submissions. Their preparation is awarded on a 2A basis.

(b)The case management conference claimed is to be excluded, being a cost item which ought to be included in any claim for costs at the conclusion of the substantive proceeding.

(c)I do not certify for second counsel. This was a straightforward application and not one where it is appropriate for the plaintiff to meet the costs of second counsel at the discovery hearing.

(d)Given I have not accepted some key aspects of the defendants’ submissions on costs (see below), and the costs dispute should have been a reasonably straightforward exercise with limited submissions,3 I also award costs of this step on a 2A basis.

[23]This leads to a costs award of $4,780.

[24]   I do not  consider  a 100 percent  or a 50 percent  uplift to  be appropriate.  A 100 percent uplift would, in my view, be quite unusual and exceptional. Counsel for the defendants did not refer me to any authorities in which a 100 percent uplift has been awarded. It is not appropriate in my view to seek such an uplift without substantive submissions on why the Court should take, as far as I am aware, such an extraordinary and novel step. Further, as leading commentary notes, an uplift of more

3      Instead, generating detailed memoranda and a further affidavit filed on behalf of the defendants.

than 50 percent is unlikely, given that the daily recovery rate is two-thirds of the daily rate considered reasonable for the particular proceeding.4

[25]   Nevertheless, given it should have been apparent that the disputed categories in the plaintiff’s amended discovery application were framed in too broad terms, and what I accept to have been the defendants’ overall approach of trying to resolve the discovery application without the need for a hearing, I consider a 20 percent uplift is warranted.

Result

[26]This leads to a costs award to the defendants in an amount of $5,736.

Fitzgerald J

4      Robert Osborne (ed) McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.02(2)(a)].