Parkinson v O'Brien on Behalf of General Dynamics Corporation Ltd

• Jurisdiction: New Zealand
• Judge: Brown J
• Judgment Date: 12 July 2021
• Neutral Citation: [2021] NZCA 309
• Docket Number: CA442/2020
• Court: Court of Appeal

Between

Kevin Parkinson

First Appellant

Kevin Parkinson as Trustee of Kevin Parkinson Family Trust

Second Appellant

Anna Valeriena Kedrinskaia and Liston Trustee Services Limited as Trustees of Anna Kedrinskaia Family Trust

Third Appellants

and

Louisa Jane O'Brien on Behalf of General Dynamics Corporation Limited

First Respondent

Louisa Jane O'Brien as Trustee of Louisa O'Brien Family Trust

Second Respondent

[2021] NZCA 309

Court:

Brown, Katz and Edwards JJ

CA442/2020

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Companies — appeal against a High Court decision which granted the respondent leave to bring shareholder derivative action pursuant to s165 Companies Act 1993 — application to adduce further evidence — principles governing the admission of further evidence on appeal — principles applicable to s 165 applications — prospects of success — test for dishonest assistance — whether the costs of proceedings outweigh the relief obtainable

Counsel:

Z G Kennedy and S R Morris for Appellants

M J McCartney QC for Respondents

• A 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.

• B The appeal is dismissed.

• C The appellants must pay the respondents costs for a standard appeal on a band A basis and usual disbursements.

JUDGMENT OF THE COURT

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

1 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).

2 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.

3 That application was granted by Associate Judge Andrew on 14 July 2020. 2 The appellants now appeal.

4 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

5 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.

6 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.

7 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.

8 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

9 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.

10 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.

11 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.

12 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.

13 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

14 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.

15 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

16 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.

17 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

18 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...