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Tyrion Holdings Limited v Infrastructure NZ Limited [2019] NZHC 2864 (5 November 2019)

Last Updated: 22 November 2019

JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by me on 5 November 2019 at 12:30 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors / Counsel:

Daniel Overton & Goulding, Auckland Keegan Alexander, Auckland

Blackwells, Auckland

M Taylor, Barrister, Auckland

TYRION HOLDINGS LTD v INFRASTRUCTURE NZ LTD [2019] NZHC 2864 [5 November 2019]

[1] In 2013, the plaintiff (Tyrion) commenced this proceeding. Its claims were dismissed by Courtney J in a judgment given on 30 July 2018.¹ In a costs judgment delivered on 6 November 2018, her Honour awarded costs to the defendants on a 2B basis up to 7 February 2018, with indemnity costs after that date.² The date 7 February 2018 was the date of a Calderbank offer made by the defendants which Tyrion did not accept.

[2] On 12 July 2019, the Court of Appeal dismissed an appeal by Tyrion against the judgment given by Courtney J on the plaintiff’s substantive claims. It allowed Tyrion’s appeal against the costs judgment in part, by reducing the award of indemnity costs to scale costs plus 50 per cent. As a result of the Court of Appeal judgment, the defendants became entitled to costs and disbursements in this Court totalling
$65,344.63. Those costs have not been paid, and the second and third defendants say that the plaintiff is impecunious and cannot pay.

[3] Because of that impecuniosity and non-payment, the second and third defendants now apply to recover the same costs from two non-parties, Paul O’Connor and Bruce Johnson (collectively, the non-parties), on the basis that the non-parties funded the conduct of the proceeding by Tyrion, with knowledge that Tyrion was insolvent, and in exchange for a one-third share of any damages that might be recovered. They say that the non-parties, having acted in their own personal interests in pursuing the proceeding, should not be permitted to escape personal liability for costs on the failure of the claims.

[4] The non-parties deny any liability for costs. In brief summary, they say that in 2013, they each acquired one-third of the shares in Tyrion, and their stake in the success of the litigation simply reflected that shareholding. They say that Tyrion was not insolvent when they took their respective shareholdings, as it owned (either directly or through related entities) 50 per cent of the shares in the first defendant (INZ), and that shareholding in INZ was worth considerably in excess of the costs which have since been awarded against Tyrion.

¹ Tyrion Holdings Ltd v Infrastructure NZ Ltd [2018] NZHC 1899.

² Tyrion Holdings Ltd v Infrastructure NZ Ltd [2018] NZHC 2856.

[5] If (contrary to their submission) the Court comes to the view that the second and third defendants have satisfied the criteria for the making of a non-party costs order, the non-parties submit in the alternative that the application for costs against them should be stayed, to allow Tyrion the opportunity to realise its stake in INZ and pay the outstanding costs. Tyrion has no liquid assets to pay the costs it owes; the INZ shares are its only significant asset. It was unable to comply with a statutory demand served on it on 26 September 2019 claiming the outstanding costs.

[6] The immediate problem is that INZ, which has been controlled by the second defendant (Mr Claydon), has been removed from the Companies Register for failure to file annual returns. It will need to be restored to the register so that it can be put into liquidation and (what the non-parties anticipate will or may be) its net surplus assets can be returned to its shareholders. Tyrion has recently applied to the Register of Companies for an order restoring INZ to the register, but no order on that application has yet been made.

Background

The establishment of INZ

[7] In 2005, Mr Matthew Blomfield approached Mr Claydon with a view to setting up a civil construction business together. Mr Claydon had many years’ experience as a civil engineer, and a principal focus of the new business would be carrying out infrastructure projects for territorial authorities. Together, Mr Blomfield and Mr Claydon incorporated INZ to undertake the civil construction and engineering work that would be involved.

[8] Initially, the shareholders in INZ were Mr Claydon (50 per cent), Blomfield Investments Ltd (BIL) (20 per cent), and Projects NZ Ltd (30 per cent). However, by mid-2007, INZ was controlled only by Mr Claydon and Mr Blomfield. Mr Claydon still held 50 per cent of the INZ shares and BIL 20 per cent. The other 30 per cent was held by a company associated with Mr Blomfield called Black Trading Ltd (BTL).

[9] The relationship between Mr Blomfield and Mr Claydon soured, and it was apparent by mid-2008 that INZ would not be able to continue. The directors were in
conflict, and substantially on that account the bank froze activity on INZ’s account. INZ stopped trading in 2008.

[10] Friction had arisen between Mr Blomfield and Mr Claydon by late 2007. In December 2007, Mr Blomfield drew down $70,000 from an INZ account without obtaining prior approval from Mr Claydon, and there were two other instances when Mr Blomfield used INZ money for what Mr Claydon viewed as Mr Blomfield’s personal purposes.

[11] On 6 June 2008, Mr Blomfield sent an email to Mr Claydon in which he expressed concern about INZ losing money, creating “a pretty serious insolvency issue that we need to deal with”. Mr Blomfield proposed that there should be no further shareholders’ advances or shareholders’ salaries paid by INZ until the situation could be sorted out.

[12] Without reference to Mr Blomfield, Mr Claydon began taking steps to disengage himself from Mr Blomfield and INZ. He established the third defendant (ICL) and on 11 June 2008 executed two agreements on behalf of INZ with ICL. The first agreement was for the supply of various services from ICL to INZ, including the provision of premises and management services. The second agreement was an equipment lease agreement, under which INZ leased its vehicles and equipment to ICL. Mr Claydon set about getting new contracts for ICL, although he also arranged for ICL to complete two outstanding contracts that INZ had on hand. ICL also attended to payment of outstanding INZ trade creditors, none of whom went unpaid.

[13] By November 2008, Mr Blomfield and Mr Claydon had not resolved their differences, and BIL and BTL were facing financial difficulties. The BIL and BTL shares in INZ were transferred to Black Rural Developments Ltd (BRD) on 21 November 2008. BRD changed its name to Tyrion in 2012.

The proceeding in this Court

[14] The present proceeding was commenced in 2013. Tyrion pleaded two causes of action: alleged breach by Mr Claydon of his statutory duties under certain sections of the Companies Act 1993 (the Act), and (under s 174 of the Act) alleged oppressive,
unfairly discriminatory, or unfairly prejudicial conduct by misappropriating INZ’s business.

[15] The only relief sought by Tyrion under s 174 was an order for compensation, representing the value of its 50 per cent shareholding in INZ as at July 2008.

[16] The case came on for trial before Courtney J in February 2018. Her Honour quickly dismissed the causes of action alleging breach by Mr Claydon of his statutory duties under the Act. Those duties were owed to the company itself, not to shareholders such as Tyrion.

[17] The Judge accepted that there had been conduct on the part of Mr Claydon that would have unfairly prejudiced the INZ shareholders associated with Mr Blomfield (at the relevant time, BIL and BTL). Her Honour said:³

[54] In summary, at the beginning of June 2008 INZ had an experienced and well-regarded managing director, premises, equipment, relationships with contractors, and work to meet its outgoings (including under its finance agreements). After June 2008, ICL had taken over its equipment and premises and Mr Claydon was directing his energy into finding work for ICL. The effect would be that, within a few months, INZ would have lost its equipment permanently and would have no further work coming in. It must be said that, in substance, INZ’s undertaking had been transferred to ICL. It must also be said that INZ’s shareholders associated with Mr Blomfield (at that stage BIL and BTL) were unfairly prejudiced by these events. Whether Tyrion, which acquired its shares later in 2008, was also prejudiced is a matter I consider later.

[18] Notwithstanding the finding of unfair prejudice to BIL and BTL, her Honour dismissed the claims under s 174 of the Act. First, her Honour considered that INZ’s demise (and any loss to its shareholders) was not entirely due to Mr Claydon’s actions. INZ already faced serious financial problems, and the dynamics between Mr Claydon and Mr Blomfield had deteriorated to the point where the bank had frozen INZ’s bank accounts and INZ was losing the confidence of councils. The ill-feeling between Mr Blomfield and Mr Claydon had already created a serious risk of Mr Claydon resigning as a director and starting a new business, and INZ was dependent on his experience in the industry.

³ Tyrion Holdings Ltd v Infrastructure NZ Ltd, above n 1.

[19] The second reason for the failure of Tyrion’s s 174 claim was that the Judge concluded that the value of Tyrion’s shareholding as at July 2008 was far lower than Tyrion had claimed. Tyrion had contended that its shareholding in INZ at July 2008 was worth $232,000. That figure was supported by expert valuation evidence given by a valuer, Mr Beylefeld, but his evidence was substantially rejected by the Judge. Courtney J preferred the evidence of the defendant’s valuer, Mr Martin, who put a value of $44,425 on the 50 per cent shareholding at July 2008. INZ’s external accountant, Mr Campbell, produced a valuation figure similar to that adopted by Mr Martin. The result of the Judge’s conclusion on the valuation issue was that Tyrion’s s 174 claim was effectively limited to an amount of approximately $44,000.

[20] The third reason for the failure of the claim was that the Judge considered it would not be just and equitable to grant the remedy sought by Tyrion, primarily because of disentitling conduct on the part of Mr Blomfield. Her Honour considered that, while Mr Claydon had been almost entirely responsible for such success as INZ had enjoyed, Mr Blomfield’s contribution appeared to have been minimal, and his personal financial difficulties had adversely affected INZ. Two companies controlled by Mr Blomfield had received loans totalling $85,000 from INZ, and those were irrecoverable. Mr Blomfield had also taken funds totalling approximately $200,000 from INZ, at the same time he was expressing concerns over INZ’s insolvency.

[21] A fourth factor weighing against the grant of the relief sought by Tyrion was that it did not become a shareholder in INZ until November 2008. Tyrion had no interest of any kind in INZ at the time (mid-2008) Mr Claydon’s actions actually affected INZ’s value. Courtney J was also satisfied that INZ’s financial position (and therefore the value of its shares) had deteriorated significantly between then and November 2008. By November 2008, INZ had no current work or prospect of future work, and its bank account had been frozen for several months. Her Honour took the view that, when it acquired the shares in November 2008, Tyrion knew exactly what financial state INZ was in.

[22] Her Honour recorded that INZ had not traded for years, and that Tyrion had no interest in seeing it resume trading. Tyrion’s only interest in the proceeding was
obtaining financial compensation for the value of the 50 per cent shareholding as at July 2008.

Tyrion’s appeal to the Court of Appeal

[23] Tyrion appealed to the Court of Appeal. Prior to the hearing, it sought to adduce further evidence in the form of an affidavit of Mr Blomfield made on 30 November 2018. In this affidavit, Mr Blomfield said that Tyrion had been owned by the Blomfield Trust, the trustees of which were Mr Blomfield and a solicitor who acted for Mr Blomfield and/or his interests, the non-party Mr Bruce Johnson. On 21 November 2008, the Blomfield Trust’s shares were transferred into the name of Mr Blomfield’s partner, Ms Rebecca Anderson.

[24] On 3 September 2013, Ms Anderson transferred her shareholding to the non-party Mr O’Connor. Mr O’Connor remains the sole registered shareholder and director of Tyrion.

[25] Mr Blomfield said that Ms Anderson made this transfer as “she did not have the funding available to pursue [Mr Claydon].” Mr Blomfield went on to say:

11. The arrangement was that Paul O’Connor would fund the litigation against Paul Claydon and [ICL] by way of loans to Tyrion and it was agreed that Paul would get a thirty three and one third percent share of the final return (being the amount of the judgment less legal costs) for so funding.

12. It was agreed that Bruce Johnson who was the instructing solicitor and also contributed to the funding would also get a thirty three and one third percent share for his part in the litigation.

13. The Blomfield Trust would get the remaining thirty three and one third percent share of the final return.

[26] Mr Blomfield said that this arrangement came about because he could not afford to pursue Mr Claydon and/or ICL for “having stolen the undertaking of [INZ]”. Mr Blomfield said that Mr O’Connor and Mr Johnson were friends of his, and they believed that he had been wronged, and that something should be done about it. Given Mr Blomfield’s personal impecuniosity, it was thought best to have the shares in Tyrion registered in Mr O’Connor’s name.
[27] Tyrion submitted on appeal that the alleged misconduct by Mr Blomfield and Tyrion’s knowledge of the precarious state of INZ’s financial position when it acquired its shareholding were not matters that the Judge was entitled to take into account as they had not been specifically pleaded by the defendants. The Court of Appeal rejected that submission, noting that Tyrion could not have been surprised when Courtney J used those factors against Tyrion in exercising her discretion to dismiss the claim.

[28] On the issue of Tyrion not becoming a shareholder until November 2008, the Court noted that Tyrion’s acquisition of its shares in INZ at that stage was “simply a mechanism to ensure Mr Blomfield and his interests have a means of trying to obtain a remedy for the alleged misappropriation of INZ’s business by Mr Claydon and ICW.” The Court considered that Tyrion must have known that the issue of INZ’s financial position when Tyrion acquired its INZ shares would be a major hurdle for it in its claim for relief. Leading authorities had made it clear that a s 174 claimant’s prior knowledge of the matters complained of would almost always be a relevant consideration in deciding cases under the section.⁴ The judicial cautions expressed in those cases “should have been fully understood by Tyrion before the hearing”.

[29] The appeal was dismissed, save for the adjustment to the costs award referred to at [2] of this judgment.

Evidence for the non-parties

[30] Mr O’Connor provided two affidavits in opposition to the non-party costs application. In his first affidavit, he explained that Mr Johnson was attending to an urgent personal matter and could not provide his own affidavit. He confirmed that he is the sole director of Tyrion and the legal owner of all of its shares.

[31] Mr O’Connor said he purchased the shares in Tyrion in September 2013 on the understanding that the value of Tyrion depended mostly on the outcome of this court proceeding. He agreed to hold all of the shares, on the basis that 33 per cent of the

4. Bermunda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198 (PC) at 212; and Gavigan v Eichelbaum [2017] NZCA 412, [2018] 2 NZLR 530.

shares would be held on trust for each of Mr Johnson and the previous owners of the company, and he would have beneficial ownership of the remaining 33 per cent.

[32] Mr O’Connor confirmed that the previous owners of Tyrion had told him that they could not afford to conduct the litigation. He said that they sold their Tyrion shares to him and Mr Johnson “so that we could inject the funds necessary for [Tyrion] to seek to recover the value believed to belong to [Tyrion]”.

[33] Mr O’Connor said that he and Mr Johnson injected funds into Tyrion in their capacities as shareholders. The litigation was conducted by Tyrion, with legal fees billed to and paid by Tyrion.

[34] Mr O’Connor acknowledged that, as one-third owners of Tyrion, Mr Johnson and he stood to gain indirectly from the litigation to the extent that Tyrion might succeed. Mr O’Connor said that he had no right to gain from the litigation otherwise than through his rights as a shareholder, and he had never done anything that he was aware of to take on a personal, direct responsibility for the litigation.

[35] Mr O’Connor said that, other than the costs of the litigation, Tyrion had no significant outgoings and was not otherwise insolvent. The shareholding in INZ was Tyrion’s main asset.

[36] Mr O’Connor accepted that the Courts have disagreed with him on the merits of Tyrion’s claims, but said that he had viewed the claim as a good one, properly pursued in the interests of Tyrion.

[37] In his second affidavit, Mr O’Connor addressed the value of Tyrion. Although he purchased his shareholding in Tyrion in the belief that Tyrion could not pursue the litigation without investment from him and Mr Johnson, he believed that Tyrion did then have sufficient assets to meet any adverse costs award if it were unsuccessful with the claim. In support of that belief, he produced a copy of what appears to be a draft balance sheet for INZ, dated January 2009,⁵ showing total shareholders’ funds of

5. The balance sheet appeared to have been produced using computer accounting software (MYOB or similar).

$757,652.61. That figure appeared in the balance sheet notwithstanding that by then INZ’s assets had allegedly been stripped from it by the defendants. The largest remaining asset shown in the balance sheet was an overdrawn shareholder account for Mr Claydon in the amount of $431,839.

[38] Mr O’Connor also produced a copy of a profit and loss account for INZ for the period April 2008 to January 2009, in similar form to the balance sheet, showing a total net profit for the period of $627,278.02.

[39] Mr O’Connor concluded that, when he and Mr Johnson invested in Tyrion, it held assets worth about $378,000 (in addition to what he regarded as a good claim against the defendants).

[40] Mr O’Connor said that he had received no further financial statements for INZ of any kind, and he had no information to suggest that the financial position of INZ had changed since January 2009.

[41] Mr O’Connor noted that, while the dispute was continuing in the High Court and the Court of Appeal, Mr Claydon remained the sole director of INZ. He should have been filing annual returns for INZ, but he defaulted in that obligation and INZ was removed from the Companies Register.

[42] On 16 September 2019, Tyrion filed an application with the Registrar of Companies to have INZ restored to the register, with a view to having it put into liquidation. Surplus assets could then be distributed to shareholders, and Tyrion’s share could be used to pay the costs awarded against it in this proceeding.

[43] Mr O’Connor said that, although his name was shown on the Companies Register as the owner of all of the shares in Tyrion from as early as 3 September 2013, the defendants gave no warning that they might seek costs against the non-parties until the present application was filed.

Reply evidence for the second and third defendants

[44] The last affidavit filed was a reply affidavit by Mr Claydon. Mr Claydon produced copies of solicitors’ correspondence seeking payment of the costs, and a copy of the statutory demand issued on 26 September 2019.

[45] Mr Claydon noted that the value of INZ was a topic dealt with extensively in the hearings in the High Court and the Court of Appeal. He confirmed that INZ ceased trading in 2008, and that it had no assets. He used $23,000 of his own money to repay a credit facility with the bank

Registrar’s notice to remove Tyrion from the Companies Register

[46] On 17 October 2019, the Registrar gave notice of intention to remove a number of companies from the Companies Register, on the grounds that the Registrar had reasonable grounds to believe that they were not carrying on business and there was no proper reason for them to continue in existence. One of the listed companies was Tyrion. The notice advised that, unless written objection to the removal was filed under s 321 of the Act by 20 November 2019, the companies would be removed from the Register.

[47] An affidavit attaching the Registrar’s notice was produced at the hearing by Ms Hill. Mr Geiringer was apparently unaware of the notice, but he was able to obtain prompt instruction from Mr O’Connor, and he advised that he was authorised to undertake to the Court on behalf of Tyrion that an appropriate objection would be lodged with the Registrar before 20 November, and any outstanding annual returns would be filed.

Costs awards against non-parties — legal principles

[48] It is common ground that the Court has jurisdiction to award costs against a non-party in an appropriate case. It is also common ground that the present application
is not precluded by the fact that a costs award has already been made against the defendants.⁶

[49] The leading authorities are the decisions of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2),⁷ and the Court of Appeal in Kidd v Equity Realty (1995) Ltd.⁸

[50] In Dymocks, the Privy Council held that a non-party costs order will not usually be made against a mere funder of litigation, at least where the funder has no personal interest in the litigation, does not stand to benefit from it, does not seek to control the litigation, and has not provided the funding in the course of its business.

[51] However, the justice of the case may require that a non-party who not merely funded but also substantially controlled, or at least stood to benefit from, the litigation, should pay the successful party’s costs if the litigation failed. In such a case, the non-party was not so much facilitating access to justice by the funded party as gaining access to justice for the non-party’s own purposes. The ultimate issue will be whether, on the particular facts of the case, it is fair to make a non-party liable for an unsuccessful litigant’s costs.

[52] The case for a non-party costs order is likely to be stronger where the funded litigant was insolvent, and the funder has funded the litigation for its own financial benefit.

[53] The Privy Council noted that a non-party would not ordinarily be liable for costs if the costs would have been incurred in any event, without the non-party’s involvement. The party seeking the costs award needs to establish a causative link between the actions of the non-party and the litigation proceeding.

[54] The Board acknowledged earlier authority to the effect that costs will only be awarded against a non-party in an exceptional case, but held that the bar should not be

6. Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [17].

⁷ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 6.

⁸ Kidd v Equity Realty (1995) Ltd [2010] NZCA 452.

set too high on the meaning of “exceptional” — in the non-party costs context, the word should be understood as meaning “outside the ordinary run of cases”.⁹

[55] The Board noted with apparent approval the following passage from the judgment of Fisher J in Arklow Investments Ltd v MacLean, where the Judge said:¹⁰

[19] The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without the risk to himself or herself should the proceedings fail or be discontinued.

[20] ... Where a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation.

[21] ... the overall rationale is that it is wrong to allow someone to fund litigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.

[56] The Board summarised the effect of the authorities in the following terms:¹¹

[29] ... Their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially in its shareholders and creditors) than in his own interests.

[57] In Kidd, the Court of Appeal accepted that Mr Kidd was the guiding mind of his (ultimately unsuccessful) company, and in that way was responsible for the litigation strategy it pursued. Also, by the time the costs issue came to be dealt with, his company was insolvent.

[58] The Court of Appeal in Kidd noted that those who control a company necessarily control its conduct of the litigation, and any benefits derived directly by the company if it is successful will also, in most cases, be indirectly derived by those

⁹ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 6, at [25].

¹⁰ Arklow Investments Ltd v MacLean HC Auckland CP49/97, 19 May 2000.

¹¹ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 6, at [26].

who own and control the company. To that extent, it is almost always going to be possible to say that the litigation is conducted by the director/shareholder for his or her own personal benefit. Further, because the company will almost always fund its litigation either with its own funds applied to the litigation by direction of the director/shareholder, or with advances from him or her, the director/shareholder can likewise be said to have funded the litigation. If an extreme approach were taken, non-party cost claims against the director/shareholder in such cases would become almost routine.¹²

[59] The Court of Appeal in Kidd rejected that approach. The mere fact of control of the company, direction of the litigation, and direct or indirect funding of the litigation, cannot of themselves justify an order for costs against the director/shareholder. Something more is required.

[60] On the case before the Court, that “something more” requirement might be regarded as satisfied if:¹³

(a) there was any relevant impropriety on the part of Mr Kidd; or

(b) Mr Kidd was relevantly acting not in the interests of his company but rather in his own interests, and was thus the real party.

[61] The Court of Appeal observed that, where a company litigant was insolvent at the time of the litigation, a court might well be easily persuaded that its directors were acting for their own purposes rather than those of the company and its creditors. If so, the Court would probably conclude that they were the “real parties”, and that they ought to pay costs accordingly. The same conclusion would probably be reached where those promoting the litigation have sought to take advantage of the company’s insolvency, either expressly or by implication, or where the claim was speculative and/or devoid of merit.¹⁴

¹² Kidd v Equity Realty (1995) Ltd, above n 8, at [19]–[20].

¹³ At [16].

¹⁴ At [20].

[62] The last case to which I will refer is the decision of Asher J in Asset Building M Pritchard Ltd v Hambeg Ltd.¹⁵ The Judge confirmed that for a non-party costs award to be made against the non-party director of an insolvent company, the director must have promoted and funded the proceedings, solely or substantially for his or her own financial benefit.¹⁶

Discussion and conclusions

[63] Mr Geiringer submitted that the second and third defendants’ position was dependent on the idea that Tyrion was a shell, with nothing in it, when the non-parties acquired their shares. He submitted that that was not the position (or at very least the non-party reasonably believed that it was not); Tyrion may well be able to pay the costs that have been awarded against it.

[64] Mr O’Connor’s evidence was that the non-parties relied on the INZ balance sheet as at January 2009 when they acquired their shares in INZ, and that balance sheet showed total shareholders’ funds of $757,652.61. There appeared to be a substantial asset in the form of an overdrawn shareholder account for Mr Claydon, in the sum of
$431,839. Mr Geiringer submitted that the non-parties’ reasonable reliance on the figures shown in the January 2009 balance sheet is fatal to the application for costs against them.

[65] In response to this point, Ms Hill first submitted that the non-parties’ belief as to the solvency or otherwise of INZ is irrelevant, as the non-parties are jointly and severally liable for the costs.

[66] In the alternative, she submitted that there was no evidence from Mr Johnson, and it has not been shown whether the funding he provided was as the beneficial owner of shares in INZ or as a mere funder acting in his own interests. And Mr Claydon’s evidence was that INZ ceased trading in 2008, and had no assets. Mr Claydon said that the value of INZ was a topic dealt with extensively in the High Court and the

15. Asset Building M Pritchard Ltd v Hambeg Ltd HC Auckland CIV-2008-404-3781, 21 November 2008.

¹⁶ At [13].

Court of Appeal, and Ms Hill noted that the issue of salaries and shareholder accounts was addressed generally by Courtney J in her judgment.

[67] I do not accept Ms Hill’s submission that the solvency or otherwise of INZ when the non-parties acquired their shares is irrelevant to the non-party costs application. It is a factor the Court may take into account. But nor do I accept Mr Geiringer’s submission that the solvency of Tyrion, or even a genuine belief by the non-parties that it was solvent, is sufficient to defeat the non-party costs claim. The strength of the non-parties’ belief in the solvency of Tyrion may be a factor, but the ultimate questions will be:¹⁷

(a) whether the non-parties were acting for their own purposes in funding the litigation, rather than for the company’s purposes; and

(b) whether, in all the circumstances, it is fair that the non-parties should pay the costs.

[68] A finding of solvency or insolvency may help inform those issues in an appropriate case, but it will not determine them.

[69] Looking at the evidence on the issue of Tyrion’s solvency, I note that Courtney J had before her financial statements for INZ for the year ended 31 March 2008 which showed a figure of $75,661 for shareholders’ overdrawn current accounts. But the 2008 accounts were not signed, and Courtney J was satisfied from the evidence of Mr Campbell, the external accountant, that they were draft accounts only. Her Honour considered that the accounts were not reliable as regards money paid to shareholders, whether by salary or otherwise. She accepted that there had been shareholder advances to Mr Claydon in the year to March 2008, but she was unable to identify the extent of them. She noted the evidence of the external accountant, Mr Campbell, that the most likely explanation for the draft financial statements showing shareholder salaries of $255,000 (which exceeded Mr Claydon’s recollection of what he had been paid) was that there were concerns about INZ’s solvency at the time, and the draft accounts were prepared showing shareholders’ current accounts as

¹⁷ Kidd v Equity Realty (1995) Ltd, above n 8, at [20].

salary, mindful that, in the event of liquidation, a liquidator would look to recover overdrawn shareholder accounts from the shareholders.

[70] I note too that in his email dated 6 June 2008 to Mr Claydon, Mr Blomfield referred to a $370,000 shareholder advance that, in the event of a liquidation, the liquidator would ask Mr Claydon to repay.

[71] A further factor that might suggest that some value remained in INZ after mid- 2008, is that it appears that not all of INZ’s assets were transferred to ICL in 2008. For example, when Mr Blomfield uplifted a cheque for $99,000 intended for INZ in December 2008, INZ was subsequently reimbursed by the bank. Earlier, INZ’s bank accounts had been frozen.

[72] The January 2009 balance sheet does not appear to have been referred to by Courtney J in her judgment, and it is not clear where the balance sheet came from. Mr O’Connor simply said in his second affidavit that he was given the balance sheet, and that the shareholders’ funds of $757,652.61 shown in the balance sheet took no account of the assets the second and third defendants had removed from INZ in the course of the March 2009 financial year.

[73] I think the likelihood is that Mr O’Connor received the January 2009 management accounts from Mr Blomfield. They would have been understood to be management accounts only, without the end-of-year adjustments typically made by accountants when annual financial statements are prepared.

[74] On the available evidence, I think there probably was some money in INZ as at January 2009, although how much of it may have been used later to repay INZ’s trade creditors (shown at $408,125.43 in the January 2009 draft balance sheet) is not clear.

[75] I am unable to conclude that INZ had no value at the time the non-parties acquired their interests in 2013. The evidence is murky on the issue of how salaries and shareholders’ accounts were dealt with back in 2008/2009, and it is possible that
debts owed by shareholders, including Mr Claydon, may have been (wrongly) treated as salaries.

[76] On the non-parties’ belief in Tyrion’s solvency, I think a number of factors are against them. First, Tyrion appears to have taken no step to realise its shareholding in INZ. It issued a proceeding under s 174 of the Act, and one of the orders it could have sought in that proceeding was an order for liquidation of INZ.¹⁸ Mr O’Connor has not explained why, if there was understood to be unrealised value in INZ (in the form of a claim against Mr Claydon on an overdrawn shareholder’s account), a liquidation order was not sought as part of the relief sought under s 174.

[77] Secondly, any claim by INZ against Mr Claydon to recover an overdrawn shareholder’s account would now appear to be outside the six-year time limit for making such a claim — on the face of it, Tyrion and Mr Blomfield would have known of the claimed shareholder’s current account debt from soon after January 2009, and INZ would have been aware of the debt at the same time. If they believed INZ had a good claim against Mr Claydon, why did they not take steps to ensure that it was pursued?

[78] Thirdly, Mr Blomfield’s evidence in the Court of Appeal does not suggest he believed there was any value in Tyrion. Nor does Mr O’Connor say that he and/or Mr Johnson paid anything for the shares they acquired in Tyrion.

[79] In Arklow Investments Ltd, Fisher J noted that, where a person who provides funding for a company’s litigation is a major shareholder and dominant director of the company, the “something extra” that is required to justify a non-party costs order against the director/shareholder will often consist of a fresh injection of capital by the shareholder/director for the known purpose of funding the litigation.¹⁹ In this case, the non-parties became the major shareholders in Tyrion, and whether or not Tyrion was then balance-sheet solvent, it is clear that it could not then fund the litigation, and that it did not have cash available to promptly pay any adverse costs award. But for the funding from the non-parties, it would have been insolvent on a cash flow test.

¹⁸ Companies Act 1993, s 174(2)(g).

¹⁹ Arklow Investments Ltd v MacLean, above n 10, at [20].

[80] The non-parties acknowledge that they injected money into INZ following their acquisition of their shares, and the only purpose for them doing that was to pursue the claim against the defendants. The litigation would not have proceeded without that funding, and the causation requirement of Dymocks is therefore satisfied. INZ was not then carrying on any business, and it has apparently not done so since 2008. It apparently had no remaining creditors to pay and no goodwill or ongoing business undertaking to protect. Its only activity since 2008 appears to have been the commencement and prosecution of the claim against the defendants. In those circumstances, the non-parties could only have been acting in their own personal interests when they acquired their shares and funded the litigation.

[81] I accept Ms Hill’s submission that the facts in Kidd were different, because in that case Mr Kidd was an existing shareholder and director of the company when the relevant litigation was commenced. In this case, the non-parties came in with no other purpose than to fund the litigation. The situation is squarely within the category of case described by the Board in Dymocks, where a non-party promotes and funds proceedings by a company substantially for his or her own financial benefit.

[82] Mr Geiringer submitted that Tyrion’s claim against the defendants could not be categorised as speculative, or clearly devoid of merit. He referred in support to the conclusion of Courtney J that INZ’s undertaking was wrongly transferred to ICL,²⁰ and the fact that Tyrion’s claim was supported by Mr Beylefeld’s valuation. He submitted that the fact that the Court eventually rejected Mr Beylefeld’s approach does not mean that the claim should have been perceived as meritless from the beginning. He noted also that the Court did not award indemnity or increased costs for the litigation, except in respect of the period after a Calderbank offer was made very shortly before the trial.

[83] I accept Mr Geiringer’s submission on this point, but I do not think it affects the overall conclusion I reach that the non-parties should pay the costs that are sought. A finding that a claim was speculative or devoid of merit from the beginning is not a prerequisite to the making of an order for non-party costs: the essential questions are

²⁰ Tyrion Holdings Ltd v Infrastructure NZ Ltd, above n 1, at [51] and [54].

whether the non-party was acting in his or her own interest (rather than in the company’s interest) in funding the litigation, and was thus the “real party” in the litigation, and where the overall justice of the situation lies. In my view, the non- parties were clearly acting in their own interests in this case, and I do not see any reason why, in fairness, they should not be treated for costs purposes as the “real parties” to the litigation.

[84] Mr Geiringer also referred to the question of whether the second and third defendants should have given earlier notice of their intention to seek non-party costs, although he acknowledged in his submissions that any failure to give early notice would not be a decisive factor against the application; it would merely be one of a number of factors going to the exercise of the Court’s discretion. I do not think there is anything in this point. I accept that while the case was proceeding in this Court the defendants would have been aware of Mr O’Connor’s status as a new shareholder in Tyrion, but there is nothing before me to suggest that they knew of the circumstances in which he acquired his shares in Tyrion, including, for example, whether he may have paid for the shares, or introduced new assets into the company. The defendants would not have had sufficient knowledge of the true funding and shareholding positions until Mr Blomfield provided his affidavit in the Court of Appeal in November 2018 (for example, it was only then that they learned of Mr Johnson’s involvement). Once that information was provided, the second and third defendants did have sufficient information to put the non-parties on notice that costs would be sought against them, but I am only here concerned with costs in this Court, and by November 2018 those costs had already been substantially if not totally incurred by the second and third defendants.

[85] In the event of my finding that this is a proper case for the award of non-party costs, Mr Geiringer invited me to stay the application, to allow the non-parties and Tyrion to take steps to get INZ back on the Companies Register and then have it liquidated. I am not prepared to do that. If the non-parties believed there was value in INZ they have had over five years to take steps to liquidate INZ, and they elected not to take that step when they issued their proceeding under s 174 of the Act. Also, the possibility of recovery of any overdrawn shareholders’ accounts may be difficult
at this stage given the length of time that has passed since any debt owing to INZ by Mr Claydon (or any other debtor of INZ) would have been incurred.

[86] For all of those reasons, I find that the case is a proper one for the award of non-party costs. The costs of the High Court proceeding to date were not disputed by Mr Geiringer, and Ms Hill asked for an order in the total sum of $65,344.63 including disbursements. I make an order for costs against the non-parties in that sum accordingly. The non-parties are jointly and severally liable for that sum with Tyrion.

[87] I make a further order in favour of the second and third defendants on their application for non-party costs. Costs on that application are awarded on a 2B basis, plus disbursements to be fixed by the Registrar.

Associate Judge Smith