Draskovich v Goodfellow [2016] NZHC 496 (22 March 2016)

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BETWEEN	MARK STEPHEN DRASKOVICH and Q.T.L. TRUSTEES (NO. 22) LIMITED Plaintiffs
AND	WILLIAM GOODFELLOW First Defendant EXPLORE GROUP LIMITED Second Defendant AUCKLAND DOLPHIN AND WHALE SAFARI (2005) LIMITED _{Third Defendant}

Hearing:	8 - 12, 15 - 18 June and 12 August 2015
Appearances:	D J Chisholm QC and M J Lenihan for Plaintiffs A E Hansen for Defendants
_Judgment:	_{22 March 2016}

This judgment was delivered by Justice M Peters on 22 March 2016 at 5 pm pursuant to r 11.5 of the High Court Rules

[1] The Plaintiffs are the trustees of the Mark Draskovich Trust and own 50 per cent of the shares in the Third Defendant (“ADWS”). ADWS operates a marine mammal watching business on the Hauraki Gulf. One of the Plaintiffs, Mr Draskovich, is a director of ADWS. The other trustee (“QTL”) is a professional trustee company owned and controlled by the Plaintiffs’ solicitors, Blackwells,

[2] The Second Defendant (“Explore”) owns the other 50 per cent of the shares in ADWS. The First Defendant, Mr Goodfellow, is the other director of ADWS and the sole director of Explore. I refer to Mr Goodfellow and Explore as the Defendants.

[3] In addition to being a 50 per cent shareholder in ADWS, Explore has managed ADWS’s business since 2005, along with other, wholly owned Explore enterprises such as former America’s Cup yachts, “Pride of Auckland” vessels, ferries, and vessels in the Bay of Islands, Sydney and Hamilton Island, Australia.²

[4] The Plaintiffs contend that the Defendants’ management of ADWS’s affairs has been oppressive, unfairly discriminatory or unfairly prejudicial to them and they seek relief pursuant to s 174 Companies Act 1993 (“Act”).³

[5] The Plaintiffs contend that this oppression has manifested itself in various ways including a failure to manage ADWS in a prudent or satisfactory manner and to keep adequate accounting records; breach of provisions of a shareholder agreement between the parties (“shareholders agreement”); and that, as a director of ADWS, Mr Goodfellow breached duties to act in good faith, in what he believed to be

_{ADWS’s best interests, to exercise powers for a proper purpose and
to ensure that}

³Second Amended Statement of Claim dated 24 April 2015 at [35]. This case does not turn on distinctions between “oppressive”, “unfairly discriminatory” or “unfairly prejudicial” so I shall use oppressive throughout.

proper accounting records were kept.⁴The Plaintiffs also allege that the Defendants obstructed Mr Draskovich when he took over the management of ADWS in 2014.⁵

[6] Despite these many allegations, at trial and in the relief sought the Plaintiffs concentrated on claims that:

(a) Explore appropriated grossly excessive sums from ADWS by way of repair and maintenance (“r&m”), marketing and management charges from and including the year ended (“y/e”) 30 September 2011 up to and including 27 April 2014 (“period in dispute”).

(b) ADWS favoured Explore and discriminated against the Plaintiffs in its repayment of shareholder advances and in its treatment of interest on those advances. The complaint as to early repayment arises from a “netting off” in y/e 2012 of funds owed by Explore to ADWS against funds owed by ADWS to Explore. That netting off is recorded in ADWS’s financial statements for y/e 2012, which Mr Goodfellow and Mr Draskovich approved.

(c) They are entitled to relief in respect of other conduct of less financial consequence, being the misappropriation of a satellite dish owned by ADWS and a failure to pay the costs of a survey of ADWS’s vessel, the Dolphin Explorer.

(d) Explore overcharged ADWS commission on sales after 2006. In fact, the Defendants’ evidence at trial was to the effect that there is nothing in this point and in closing the Plaintiffs simply sought verification of the manner in which the Defendants said commission had been treated in ADWS’s financial statements. That is reasonable in the

⁴_{Shareholders Agreement, undated, at AB1/159; and Companies
Act 1993, ss 131, 133 and 194.}

(b) orders that the Defendants pay particular amounts arising from the allegations referred to above.⁷However, it was clear by the end of trial that the Plaintiffs’ quantification had been overtaken by the evidence, even if liability were proved. Given that, in closing the Plaintiffs sought their alternative relief, being the appointment of an independent chartered accountant to identify such sums as may be due from the Defendants to ADWS.⁸

[8] The Defendants’ case is that there has been no oppression. As to the fees, their case is that Explore charged ADWS in accordance with an agreement that the parties reached at the outset of the venture. As to the repayment of Explore’s loan by the “netting off” transaction to which I have referred, the Defendants’ case is that this was not oppressive on the facts. The Defendants also rely on an affirmative defence under the Limitation Act 1950 to the extent that the Plaintiffs complain of matters prior to 24 April 2009. I am satisfied that no limitation point arises given the ambit of the Plaintiffs’ claim.

[9] The Defendants also make a broad submission that the Court should not intervene in matters between these shareholders. This is because the Plaintiffs failed to utilise deadlock and dispute resolution provisions in the shareholders agreement and because the Plaintiffs rejected an offer by the Defendants to remedy matters

(a) section 174 of the Act and extracts from the leading authority, Thomas v Thomas;⁹

(c) the parties’ submissions and my findings on the fees in dispute; on the issues which arise as to repayment of Explore’s debt and as to interest; and on the miscellaneous matters to which I have referred;

(1) A shareholder ... who considers that the affairs of a company have been, or are being, or are likely to be, conducted in a manner that is, or any act or acts of the company have been, or are, or are likely to be, oppressive, unfairly discriminatory, or unfairly prejudicial to him or her in that capacity or in any other capacity, may apply to the Court for an order under this section.

(2) If, on an application under this section, the Court considers that it is just and equitable to do so, it may make such order as it thinks fit including, without limiting the generality of this subsection, an order—

(b) requiring the company or any other person to pay compensation to a person; or

(h) setting aside action taken by the company or the board in breach of this Act or the constitution of the company.

[12] The leading authority on is Thomas v H W Thomas Ltd. In that case, the Court of Appeal considered s 209 Companies Act 1955, the predecessor provision to s 174, and Richardson J said:¹⁰

... as ... three distinct alternatives which are to be considered separately in watertight compartments. The three expressions overlap, each in a sense

concern of the subsection that conduct of the company which is unjustly detrimental to any member of the company whatever form it takes and whether it adversely affects all members alike or discriminates against some only is a legitimate foundation for a complaint under s 209. The statutory concern is directed to instances or courses of conduct amounting to an unjust detriment to the interests of a member or members of the company. It follows that it is not necessary for a complainant to point to any actual irregularity or to an invasion of his legal rights or to a lack of probity or want of good faith towards him on the part of those in control of the company.

In the same way it is the unfairly detrimental effect of the conduct of the company on the interests of the complaining member which brings into play the just and equitable subs (2) of s 209. That detriment may be to the financial interests of the member as a member or it may be conduct which is adverse to his interests in other capacities, as where, for example, he is excluded from management participation in the company. Where the member is adversely affected in that sense, the determination as to whether it is unjustly so within subs (1) calling for the granting of relief under subs (2), must turn on an overall assessment of the position in the company. Fairness cannot be assessed in a vacuum or simply from one member’s point of view. It will often depend on weighing conflicting interests of different groups within the company. It is a matter of balancing all the interests involved in terms of the policies underlying the companies legislation in general and s 209 in particular: thus to have regard to the principles governing the duties of a director in the conduct of the affairs of a company and the rights and duties of a majority shareholder in relation to the minority; but to recognise that s 209 is a remedial provision designed to allow the Court to intervene where there is a visible departure from the standards of fair dealing; and in the light of the history and structure of the particular company and the reasonable expectations of the members to determine whether the detriment occasioned to the complaining member’s interests arising from the acts or conduct of the company in that way is justifiable.

[13] The approach set out in Thomas continues to apply to actions under s 174.¹¹

[14] In or about 1998, Mr Draskovich and several partners established a marine mammal watching business on the Hauraki Gulf. The business made a loss from the outset and by 2005 Mr Draskovich’s partners wished to exit. Mr Draskovich approached Mr Goodfellow of Explore as a possible new partner.¹²

[15] After discussions, which I need not address in detail, the parties agreed that each would be a 50 per cent shareholder in ADWS and that Explore would manage ADWS’s business. The terms on which Explore would do so were not recorded, other than as they appear from the shareholders agreement. Mr Draskovich’s expectation was that ADWS would benefit from Explore’s management through greater efficiency and reduced costs. Mr Goodfellow’s evidence was that he was reluctant to become involved in any capacity and that he agreed to do so only if Explore could manage ADWS as “just another line item”, that is as if ADWS were wholly owned by Explore. This latter point is material to the Defendants’ submission that the Plaintiffs’ complaints regarding fees are contrary to matters agreed at the outset.

[16] The Plaintiffs, Mr Draskovich personally, Explore and Mr Goodfellow entered into the shareholders agreement in or about November 2005, the relevant provisions of which are as follows.

$1.4 million. ADWS funded this by two loans of $700,000 each – one from the BNZ and the other from the Plaintiffs. The BNZ had first ranking security over ADWS’s assets, and both directors personally guaranteed repayment. The Plaintiffs held

¹¹_{Latimer Holdings Ltd v SEA Holdings NZ Ltd [2004] NZCA 226; [2005] 2
NZLR 328 (CA).}

[18] Secondly, the parties made provision as to the purposes for which, and the manner in which, the ADWS business would be conducted. ADWS’s primary objects were to develop the business and maximise shareholder value and profits. ADWS was to conduct business on sound commercial principles, so as to maximise the commercial return to shareholders, and provision was made for the application of

profit.¹³The parties were to ensure that ADWS kept proper books of account, and

financial statements, including a profit and loss statement and balance sheet, were to be prepared each financial year and in accordance with generally accepted accounting principles. Either shareholder was entitled to require an audit.¹⁴Subject to the Plaintiffs’ advance of $700,000 mentioned above, neither party was required to advance funds to the business but the parties made provision for any loans that they did make.¹⁵

[19] Thirdly, the parties made provision for the management of ADWS. Mr Draskovich and Mr Goodfellow were to be the initial directors. The directors were to determine the management structure of ADWS and were to meet at least every two months – as it turned out they did not meet regularly. No action was to be taken on particular matters in the absence of a unanimous resolution of the board.¹⁶

Subject to that, directors’ resolutions were to be determined by majority vote with no

[20] Fourthly, the parties agreed on a pre-emptive process to be followed if one shareholder wished to exit; for termination by consent or otherwise; for dispute resolution; and for resolution of deadlock between directors or shareholders.¹⁷

[21] Explore assumed the management of ADWS in late 2005. Mr Draskovich took no real interest in the business until mid-2010. Explore sent Mr Draskovich

Mr Goodfellow and Mr Draskovich spoke or met as circumstances allowed, but matters were largely left to Explore.

[22] ADWS’s revenue increased substantially under Explore’s management, in round terms from $400,000 in the 11 months to y/e 2006 to $1.1 million in y/e 2012. At the same time, however, the fees that Explore charged ADWS increased substantially. This led to dispute because, as Mr Draskovich saw it, the increased revenue was being paid to Explore as fees rather than being shared.

[23] As I have said, it is an important part of the Defendants’ case that the Plaintiffs are complaining of matters to which they, or rather Mr Draskovich, previously agreed or to which he acquiesced. Given that, it is necessary to say something of the communications relevant to this issue.

[24] Up to y/e 2010, Explore charged $67,500 per annum for managing the business. However, in August 2010 Mr Guy Barkwill, Explore’s (new) financial controller, advised Mr Draskovich that the management fee needed to be about

Mr Draskovich sought a detailed breakdown of the management services.¹⁹Explore increased the management fee substantially in y/e 2011, to $330,342.

[25] There were further communications regarding Explore’s management fees from September 2011 onwards. Mr Draskovich asked to be consulted on the management fee for the next financial year (that is to y/e 2012) and sought an analysis of the costs of Explore’s “management team”.²⁰

[26] In December 2011, Mr Barkwill provided draft financial statements to y/e 2011. Mr Draskovich asked for a breakdown of the maintenance, marketing and Explore’s Auckland overhead expenses. This breakdown was provided, with some

¹⁸_{Email G Barkwill to W Goodfellow and M S Draskovich dated
10 August 2010 at AB1/3.}

²¹Email M S Draskovich to W Goodfellow dated 10 December 2011 at AB1/7; and Email

[27] Mr Draskovich asked further detailed questions in early 2012 regarding ADWS’s actual and likely future financial performance, to which Mr Barkwill replied in February 2012.²²The point that the Defendants make regarding these emails is that Mr Draskovich knew that Explore was charging ADWS for a share of Explore’s overhead. Mr Barkwill also informed Mr Draskovich that the Dolphin Explorer was the most expensive Auckland vessel for Explore to run and maintain.

[28] At Mr Draskovich’s request, a (first) formal board meeting of the ADWS directors took place on 23 February 2012.²³At that meeting, Mr Draskovich advised that he would be much more involved in the ADWS business than he had been. This greater involvement did not come to pass for a further year. Amongst other things, Mr Draskovich referred to the significant increase in ADWS overheads and expressed concern that he (not the Plaintiffs but he) was funding these overheads when he “perceived they brought no value” to ADWS.

... came to the view that ADWS was getting exorbitantly overcharged for the services Explore was providing to it. There were only going to be two outcomes from this. Either Explore was going to drop its fees and charges to reasonable levels, or there was going to be litigation. However, in order for me to able to litigate the matter, I thought that I would need better documentary records of what was charged, and why, by Explore before I could go down that path.

[30] In cross-examination, Mr Draskovich said that he made “a strategic decision

... not to object to the fees” at the time and that he was “positioning” himself to

regarding Mr Draskovich’s “exit” from the ADWS business.²⁶These discussions came to nothing.

²²List of Questions M S Draskovich to W Goodfellow dated 15 February 2012 at AB1/13; and

[32] Mr Draskovich sought a further board meeting almost 12 months later, that meeting taking place on 27 June 2013.²⁷Shortly before the meeting, Mr Goodfellow wrote to Mr Draskovich stating that ADWS had made and would continue to make substantial losses and that the parties should establish their “exit options”, failing which ADWS should cease trading and be liquidated.²⁸

[33] The 27 June 2013 meeting is important because the directors approved ADWS’s financial statements for y/e 2012. The Defendants place considerable reliance on these financial statements for reasons I shall come to. But just on the matter of agreement or acquiescence for the moment, the minutes of the 27 June meeting (which Mr Draskovich prepared), record Mr Draskovich again expressing concern at the magnitude of the management and marketing fees and Mr Kit Nixon, Explore’s CEO, acknowledging that “a standalone boat would spend far less but the

[34] A month after this meeting, on 29 July 2013, Mr Draskovich wrote to Mr Goodfellow expressing “complete dissatisfaction” with the manner in which Explore was managing ADWS’s affairs and his concern that all profit was going to Explore by way of fees, rather than to both shareholders.³⁰Mr Draskovich proposed that Explore cease to manage the business from September 2013, but that it provide certain services at cost.

[35] Although further proposals were exchanged, by October 2013 relationships had deteriorated to the point whereby litigation had been threatened and the parties’ solicitors were involved.

[36] In October 2013, Mr Draskovich engaged Mr Aravinda Kumar of CST Nexia Limited (“Nexia”), accountants. Nexia carried out two assignments. The first was to report to Mr Draskovich on the financial statements to y/e 2013. The second was to report to the ADWS board on an audit of ADWS’s financial statements to y/e 2011,

_{2012 and 2013, undertaken at the Plaintiffs’ request in 2014. It
is unnecessary for}

me to comment in detail on Nexia’s reports. I accept that the reports are evidence of the wholly unsatisfactory manner in which Explore maintained ADWS’s financial records and the inability of a third party to deduce the basis for very significant transactions. By the end of the trial there was no dispute that Explore’s record keeping was deficient.

[37] The Plaintiffs commenced proceedings in December 2013 and Mr Draskovich took over the management of the business on 27 April 2014. It is common ground that ADWS has continued to make a loss since and indeed Mr Draskovich has not been charging the company for his time.

[38] I have already said that the Plaintiffs contend that Explore obstructed the handover by, for instance, refusing to allow Mr Draskovich to take over the “Trip Advisor” page. I do not propose to address this allegation further, however, because no relief is sought regarding the matter.

[39] The ADWS financial statements for y/e 2012 were the only financial statements that ADWS’s board approved and the Defendants rely on them for two reasons: they show the fees that Explore charged ADWS for marketing and management that year and in y/e 2011, as well as ADWS’s “Direct Expenses” which include the r&m charges, and the notes to the statements record the “netting off” transaction.

The Directors have approved the financial statements of [ADWS] for the year ended 30 September 2012 on pages 3 to 11. ...

[41] The Defendants’ case is that the Plaintiffs cannot now complain of matters that are implicit in the financial statements, given that Mr Draskovich approved them. The Plaintiffs’ case is that whatever the statements might disclose, the Plaintiffs are suing as shareholders and Mr Draskovich’s actions in his capacity as a director do not bind them.

[42] Mr Draskovich’s approval of the financial statements does not affect the Plaintiffs’ case as regards the fees but I consider it largely determinative of their claim on the netting off transaction.

[43] Mr Draskovich’s evidence was that he signed and thereby approved the financial statements at the 27 June 2013 meeting as a ploy to ensure that the Defendants continued to supply him with information and because, as the minutes record, Mr Goodfellow said they were accurate.³²

[44] A director who approves financial statements fulfils an important obligation imposed by the Act and can expect to be held to them. The Act requires a board to keep accounting records that correctly record the transactions of a company and it is an offence to do otherwise.³³

[45] In addition, Mr Draskovich is an experienced and successful businessman. It is apparent from the contemporaneous documents that he understood the import of financial statements.³⁴For instance, at the earlier board meeting in February 2012, Mr Draskovich asked for copies of monthly profit and loss statements.³⁵It was Mr Draskovich who prepared and circulated the agenda for the June 2013 meeting which included the 2012 financial statements.³⁶

[46] Accordingly, I am satisfied that Mr Draskovich, and Mr Goodfellow for that matter, are to be held to the consequences of approving the financial statements. The

_{next issue is whether that affects the Plaintiffs in their capacity as
shareholders.}

³⁴Email M S Draskovich to W Goodfellow, above n 21, at AB1/7; List of Questions M S Draskovich to W Goodfellow, above n 22; and G Barkwill Responses to M S Draskovich, above n 22.

[47] I accept the Defendants’ submission that the distinction the Plaintiffs seek to draw between Mr Draskovich on the one hand and the trustees on the other is artificial. At no time did Mr Draskovich himself draw that distinction, as is apparent from the following statements:³⁷

• ... As a partner in the business I have to wonder about the ability of the management team when something as simple as this is overlooked on a consistent basis. This is simply not good enough. ...

... If you needed me to exit the company this year, I would consider it on the following basis:

• ... It is exactly this lack of contact from you, after we have agreed to issues at meetings that you say you will come back to me on, that frustrates the hell out of me and reinforces how poorly the company I’m subsidizing is being run. ...

• ... I write to you in your capacity as co-director of [ADWS]. ... My concern arises as a director, a shareholder and also a secured lender to [ADWS]. ...

[48] Nor is there evidence of any involvement by QTL. No one from QTL gave evidence, except in an affidavit which I requested to ensure that the trustees had

³⁷Email G Barkwill to W Goodfellow and M S Draskovich, above n 18, at AB1/3; Email M S Draskovich to W Goodfellow dated 1 September 2011 at AB6/1153; Letter M S Draskovich to W Goodfellow dated 27 February 2012 at AB1/26; Email M S Draskovich to W Goodfellow dated 2 April 2013 at AB6/1179; and Letter M S Draskovich to W Goodfellow, above n 30, at AB1/42.

[49] For these reasons, I attribute the actions of Mr Draskovich to the Plaintiffs.

[50] I come now to the Plaintiffs’ claims regarding the r&m, marketing and management fees that ADWS paid to Explore in the period in dispute.

[51] The Plaintiffs contend the conduct was oppressive because the fees were appropriated by Explore without prior consultation with the Plaintiffs or the board of ADWS and, in any event, the fees are excessive. This was, after all, a business running one boat.

[52] The manner in which ADWS’s revenue was received and held enabled Explore to appropriate ADWS funds as it saw fit. Bar inconsequential income, all revenue was paid into Explore’s bank account, not ADWS’s. The Plaintiffs were highly critical of this practice but it was inevitable, at least in the first instance, given

[53] That said, ADWS’s revenue remained in Explore’s account throughout. At no time were any funds of consequence held in ADWS’s bank account. I have no doubt that ADWS would have insisted on a prompt transfer of all income to its bank account had Explore been at arm’s length.

[54] Similarly, with few exceptions, Explore paid all of ADWS’s expenses from Explore’s account. Accordingly, if Explore determined that ADWS was required to pay a particular expense then, to the extent ADWS had a “credit balance” in Explore’s account, Explore would apply funds accordingly.⁴⁰

[55] The fees in dispute were treated in the same way. Explore determined the fee that was due and then had ADWS “pay it”. There was no prior consultation with the

³⁹_{Mr Draskovich himself recognised this in a letter dated 29
July 2013 at AB1/44.}

Plaintiffs or ADWS board in advance. Nor did Explore render an invoice to ADWS. As the Plaintiffs submit, Explore appropriated ADWS funds as it saw fit.

Mr Murray Lazelle, the Plaintiffs’ expert chartered accountant, are as follows:⁴¹

[57] The Plaintiffs’ case is that the fees in the period in dispute were excessive –

r&m by $352,812; marketing by $189,030; and management fees by $523,743 – and oppressive.⁴²The Defendants’ response is that the fees include a share of the

Although the sums shown for marketing and management fees are apparent on the face of ADWS’s financial statements, r&m was one of several items included in “Direct Expenses”. Mr Lazelle’s chart has “stripped out” those charges to the extent possible and no issue has been taken with them. The sums shown for r&m expenditure in 2009 and 2010 derive from spreadsheets provided by Explore and those for 2011 and 2012 from BWA’s investigations.

⁴²The actual amount pleaded is $526,085 but a reduction in respect of y/e reduced the total to

$523,743. The amounts derive from an analysis by Mr Robert Masefield, an accountant that Mr Draskovich engaged to advise him in his discussions with Explore prior to proceedings being issued were overtaken by the evidence at trial but they give the scale of the Plaintiffs’ concerns, hence the proposal that an independent accountant be appointed.

overhead that Explore incurred in running all its operations, as Mr Goodfellow and

[58] Explore is unable to produce records evidencing the calculations that it undertook to determine the fees, ie a contemporaneous record of how, for instance, Explore determined that ADWS should pay a management fee of some $330,000 in y/e 2011. Such records should be available as a matter of course, particularly as ADWS was not wholly owned by Explore, because of the provisions of the shareholders agreement to which I have referred in [18] above and because of the sheer magnitude of the fees. Again, I have no doubt that ADWS would have insisted on knowing precisely how each fee had been determined had Explore been a third party.

[59] Mr Barkwill and Mr Hobson gave evidence as to how they calculated the fees Explore charged when each was financial controller. The gist of this evidence was that the r&m and marketing fees comprised direct costs incurred by or for ADWS such as specific repairs or maintenance work on the Dolphin Explorer, advertising brochures and so on. The balance of those fees and the entire management fee constituted a share of Explore overhead.

[60] This overhead in the case of r&m included a substantial share of the costs of Explore’s Auckland repair yard and employees. In the case of marketing it included costs such as sales staff and maintenance of the Explore website. In the case of management fees, it included costs such as the salaries of the CEO, financial controller and rent. In each case, a decision was made as to which product line should bear a share of the particular overhead and, that decision having been made, the cost was allocated on the basis of the product’s contribution to revenue.

[61] There is no dispute that ADWS must pay its own direct costs, ie for its brochures, work done to the Dolphin Explorer and such like. There is, however, considerable dispute as to whether ADWS should pay a share of overhead rather than, say, a flat fee; and if it should be required to pay a share of overhead, whether the method of allocation is fair.

[62] Taking r&m as an example, Mr Hobson’s evidence was that the costs of Explore’s Auckland repair yard, employees and contractor were shared across ADWS and two other Auckland products based on the contribution of each to their combined revenue.⁴³In the case of ADWS, that meant a contribution of 30 per cent of the costs in each of 2011, 2012 and 2013.⁴⁴

[63] The (disputed) evidence for the Plaintiffs was that this was grossly unfair because another firm did most of the maintenance work required on Dolphin Explorer and so ADWS made minimal use of Explore’s r&m facilities.⁴⁵

2013 to demonstrate the allocation methodology. There was considerable debate about the merits of the models and they did not purport to establish how the fees in issue were determined. They are however useful for illustrative purposes.

[65] The model for the management fee categorised Explore’s various expenses as

“Auckland Specific”, “NZ Shared”, “Hybrid” or “International”.⁴⁶

[66] Auckland Specific costs were shared between three product lines, including ADWS. The other expenses were allocated across all vessels listed, with the exception of “Sail Sydney”. There was further dispute at trial as to whether all Explore vessels were in fact listed and whether some such as “Dune Rider” might have been completely exempt.

[67] Explore also adduced evidence from Mr Andrew Williams of Bowden Williams & Associates Limited, chartered accountants (“BWA”). BWA had reviewed Explore’s general ledger to determine whether the fees had been charged in

⁴⁴_{Bowden Williams & Associates Report dated 12 March
2015 at AB4/748, 857, 943.}

⁴⁵See evidence for the Plaintiffs of Mr Andrew Light and Mr Tim Brown; and evidence for

[68] BWA’s analysis was that Explore had undercharged (or not charged at all) the overhead component in the r&m charges in 2011 and 2012; had undercharged the marketing overhead component in 2011, 2012 and 2013; and had overcharged the management fees in 2011 (by more than $120,000), undercharged in 2012 and had overcharged by a trivial sum in 2013. Looked at overall, BWA concluded Explore had undercharged ADWS by $149,324.

[69] It is no criticism of BWA to say that their analysis does not take matters very far, because it is predicated on Explore’s method of allocation. But in any event, some immediate questions arise on the BWA analysis and particularly on the extracts from Explore’s general ledger. There are, for instance, numerous expenses charged for payment of sums recorded on employees’ credit cards; substantial “true up” or reconciliation entries, the basis for which is not apparent; and Explore appears to have allocated to ADWS a share of costs such as legal expenses incurred in its solicitors’ communications with the Plaintiffs, as well as interest and overseas travel costs.

[70] Mr Lazelle also made the point that there is an air of unreality to the Explore methodology. For instance, ADWS’s r&m expenditure in y/e 2012 was $109,730. Of this, BWA determined that ADWS’s direct expenses were $65,568. On that basis, ADWS made a contribution to r&m overhead of $44,162. By BWA’s calculation, ADWS ought to have paid a further $68,034 towards Explore’s r&m overhead in that year.⁴⁷As Mr Lazelle said, if that were correct, ADWS’s total contribution to Explore’s r&m overhead in 2012 would have been $112,796, ie approximately 160 per cent of its direct expenditure.

[71] Subject to the matter of agreement or acquiescence, I consider that Explore’s conduct of ADWS’s affairs as regards the r&m, marketing and management fees for the period in dispute was oppressive in the sense indentified in Thomas. The fees were substantial. They were appropriated without prior consultation of ADWS’s board or of the Plaintiffs and there are no contemporaneous records evidencing how

_{they were calculated. Even if one accepts the Explore methodology, the
evidence}

raises substantial doubts about precisely what costs have been charged to ADWS and whether the company has been treated fairly as regards other Explore vessels.

[72] I am not persuaded that Mr Draskovich agreed at the outset that Explore would manage ADWS as if it were a wholly owned Explore enterprise, with the consequence that Explore were entitled to allocate cost to ADWS as it saw fit and without regard to the extent that ADWS benefited from the service provided. Not only did Mr Draskovich deny this, such an agreement would be inconsistent with the provisions of the shareholders agreement requiring that the business be conducted to maximise the return to shareholders.

[73] As to the financial statements for y/e 2012, I do not accept that Mr Draskovich’s approval of them constituted acquiescence to the fees for that year. Nothing more can be read into his approval than that the financial statements were accurate – that is, that ADWS had paid the fees shown. Whether Explore’s appropriation of them without prior consultation was oppressive conduct for the purposes of s 174 is a different matter. If I am wrong in this, as I have said, it is clear from the contemporaneous documents that the quantum of the fees were in dispute.

[75] The issue then becomes what relief I should order. On the basis of Thomas, the remedy must redress the oppression. The Plaintiffs pleaded, and the Defendants admitted, that Explore was to manage the business for a fair fee.⁴⁸I am satisfied a fair fee would be consistent with the provisions of the shareholders agreement.

[76] At trial the Plaintiffs put forward two possible approaches as to quantum. The first was based on an analysis by Mr Robert Masefield, a consultant engaged by Mr Draskovich. Mr Masefield made his best assessment of the percentage of costs

Mr Lazelle’s evidence as to the items of cost for which ADWS should or should not pay.

[77] Ultimately, however, the Plaintiffs were willing to have an independent accountant appointed and that is the course I shall adopt. The question of what was a fair fee must be determined by that expert but for the avoidance of doubt I am satisfied that ADWS must bear a reasonable share of the cost of all services from which it benefited, directly or indirectly.

[78] The issue which arises on this part of the case concerns ADWS’s “repayment” of a loan from Explore in y/e 2012. The relevant part of Mr Lazelle’s table summarising ADWS’s balance sheet is as follows:⁴⁹

BNZ Loans (543,167) (315,967) (66,380) (192,201) (153,170) (113,332) (90,000)

_{Net Assets
(Deficit) (924,820) (840,774) (724,280) (845,328) (723,459) (991,786) (1,250,354)}

[79] As can be seen, in y/e 2012 the sums due from Explore to ADWS on its operating loan and from ADWS to Explore on Explore’s capital contribution were “netted off”. The effect of the netting off was that ADWS repaid its debt to Explore.

_{It did not, however, make any corresponding repayment of the
Plaintiffs’ loans. The}

Plaintiffs contend that the netting off constituted oppressive conduct on the part of

[80] I have already referred to each of the BNZ’s and Plaintiffs’ advance to ADWS of $700,000. The BNZ advance was repayable within five years, at 9.5 per cent per annum.⁵⁰ADWS also obtained an overdraft facility of $200,000 from the BNZ in mid-2011, which it drew down immediately and which it on lent to Explore.⁵¹It is unnecessary for me to resolve the rights and wrongs of the use of this facility because nothing turns on it.

[81] The Plaintiffs made a further loan of $197,000 in y/e 2007 (“engine loan”). This loan remains outstanding and is interest bearing at 9.5 per cent per annum. ADWS’s liability for interest to the Plaintiffs on this loan has accrued (another cause of dispute), hence the increasing loan balance.

[82] Explore’s operating loan reflected the movement in revenue between Explore and ADWS. Up until y/e 2008 Explore advanced funds to ADWS to enable it to meet its expenses. Thereafter, ADWS was in credit, as can be seen from y/e 2009 onwards.

[83] The capital contribution from Explore to ADWS was to enable ADWS to repay the BNZ, failing which ADWS would have been in default and the BNZ might have enforced its security.

[84] The Plaintiffs’ case is that the netting off which occurred was in breach of clause 28 of the shareholders agreement which provides:

⁵⁰_{The Plaintiffs’ capital contribution has always been
treated as interest free.}

No amount owing ... by any Party to the Company may be set-off against any liability ... by an [sic] Party to the Company or on any other account whatsoever.

[85] Clause 28 may have been intended to preclude setting off but in fact it is meaningless and must be disregarded.

[86] Alternatively, the Plaintiffs contend that the early repayment effected by the netting off was in breach of the last sentence of clause 9.2 of the shareholders agreement, and was oppressive. Clause 9.2 provides:⁵²

9.2 Loans repayable on demand: The Parties agree that Shareholder Loans and all other moneys owed to any shareholder by the Company other than those referred to in clause 9.1 [being the Plaintiffs’ loan of $700,000] shall, unless expressly agreed in writing to the contrary, be payable on demand and such rate of interest shall accrue on the outstanding moneys from time to time as the Parties may unanimously agree in writing and notify to the Company in writing from time to time. Each Party agrees for so long as such Party owns any shares in the Company it shall not unless all the Parties unanimously agree make demand for payment of any moneys (including interest) owed by the Company to the Parties ...

[87] Explore did not accept that clause 9.2 applied in respect of Explore’s capital contribution given the reason for the contribution – that is because ADWS had to be put in funds to repay the BNZ. In response the Plaintiffs’ case that it was always agreed that Explore would put ADWS in funds to repay the BNZ, if ADWS could not pay from its own resources.⁵³

[88] There is some force in Mr Barkwill’s evidence that, in the circumstances, it must have been expected that Explore would be repaid as soon as ADWS’s finances permitted. And, as Mr Appleby said, the Plaintiffs’ advance of $700,000 was

[89] Regardless, however, I accept the Defendants’ submission that the Plaintiffs must be taken to have agreed to the netting off, given Mr Draskovich’s approval of ADWS’s financial statements for y/e 2012.

[90] In approving the financial statements the Directors approved the balance sheet and “accompanying notes”. The notes include the following:⁵⁴

8. Related Party Payables	2012	2011
Capital Contribution – Mark Draskovich	(700,000)	(700,000)
Operating Loan – Mark Draskovich	(521,395)	(472,632)
Operating Loan – Explore NZ	-	772,381
Capital Contribution – Explore	-	(865,890)
Total Related Party Payables	(1,221,395)	(1,226,141)

The Capital Contribution from Mark Draskovich relates to the initial purchase of the Company, and is a non-interest bearing loan repayable as and when the Company has the ability to repay the loan. The Capital Contribution from [Explore] relates to the funds that [Explore] has contributed to paying off the BNZ loan which was originally taken out to fund the purchase of the Company. This loan is interest bearing at 9.5% per annum, calculated monthly. The operating loan from [Explore] relates to the ongoing working capital requirements of the Company. Interest is payable at

9.5% per annum when this account is in credit, and is earned at 9.5% per annum when this account is in debit. The two loans from [Explore] are offset and considered together. The operating loan from Mark Draskovich relates primarily to new engines that were purchased for the boat and paid for via a loan from Mark Draskovich. Interest is payable on this loan at 9.5% per annum, calculated monthly.

[91] I accept the Defendants’ submission that the statement in italics is one of fact and is to the effect that the two loans were treated by ADWS as one. The loans could only be treated as one if ADWS, by resolution of its directors, agreed. I consider such resolution implicit in the directors’ approval of the financial statements in a form which included this note.

[92] Alternatively, as a result of the approval of the financial statements, the

Plaintiffs must be taken to have agreed to Explore making demand for repayment under clause 9.2 of the shareholders agreement (see [86] above). If Mr Draskovich

were opposed to the netting off, it was incumbent upon him to decline to approve the financial statements pending resolution of the matter.

[93] Mr Draskovich’s agreement to the transaction is also recorded in the following passage of the minutes of the meeting at which the financial statements were signed:⁵⁵

[Mr Draskovich] drew attention to the balance sheet, particularly the amount of money drawn down by Explore when at the same time the loan [from] himself had not been repaid. He asked that any forward arrangement included an undertaking to rebalance the balance sheet so that both partners share the debt and risk equally. ...

[94] It follows that I am not satisfied that the netting off constituted oppressive conduct, or at least not for which Explore should provide relief. If there has been oppressive conduct on this score – and I am not persuaded that there has been – ADWS must provide relief. No such relief has been sought.

[95] Although interest due to and from Explore on its capital contribution and operating loan was netted off and the balance paid to Explore when in Explore’s favour, interest was not paid, or even accrued for that matter, when the balance was in ADWS’s favour. There cannot be any dispute on this point. Explore must account to ADWS for any interest due and not paid.

[96] The Plaintiffs also contend that ADWS has acted oppressively in its treatment of interest on shareholder loans. ADWS has accrued the interest due to the Plaintiffs on the engine loan but has paid interest to Explore on the balance of Explore’s capital contribution. There can be no dispute that if ADWS were to pay interest on Explore’s loan, it was required to pay and not merely accrue the liability to the

[97] Mr Masefield’s evidence was that ADWS paid interest of $65,178 to Explore over the period in question.⁵⁶The evidence of Ms Moira Kemp of BWA was that the total interest paid was $53,086. The difference is immaterial but I prefer Ms Kemp’s evidence because she has referred to the source material. That is no criticism of Mr Masefield who will have done his best with the information available to him.

[98] As I said above, the Defendants reject the Plaintiffs’ allegations as to the treatment of commissions. The claim appears to have arisen from the manner in which ADWS’s financial statements were presented. As I have said, I shall order the Defendants to supply the information sought by the Plaintiffs confirming the Defendants’ explanation as to the treatment of the commissions and reserve leave to apply.

[99] ADWS paid for and installed a satellite dish on the Dolphin Explorer in September 2011.⁵⁷I accept that Explore removed the same and Explore should refund the cost of $6,598 (excluding GST) to ADWS accordingly.⁵⁸

[100] Mr Draskovich’s evidence was that the Dolphin Explorer was due for a survey after mid-October 2013 and that the necessary facilities had been booked six months earlier. The parties exchanged emails regarding the proposed work at around this time, with Mr Goodfellow suggesting it be deferred as the company did not have

_{sufficient funds to pay for it.}⁵⁹_{Mr Draskovich
declined to do so, proceeded with the}

⁵⁷_{Invoice 1473 Beacon Sails and Rigging
Electronics dated 12 September 2011 at AB3/594}

work, met the cost of $28,113.98 and now wishes Explore to reimburse him directly or through ADWS.⁶⁰

[101] The shareholders agreement provided that neither party was required to advance funds to ADWS.⁶¹Explore cannot be required to contribute the funds sought and I decline to make the order sought. It will be for ADWS to repay Mr Draskovich when it is in funds to do so.

[102] The Defendants submit that the Court should decline to grant relief, given that the Plaintiffs are 50 per cent shareholders, because the shareholders agreement makes provision for resolution of deadlock and/or dispute and because the Plaintiffs might have resolved this matter by acceptance of an offer made to them shortly before trial.

[103] I am not persuaded that the Plaintiffs should be denied relief on any or all of these grounds.

[104] As the Defendants acknowledged in their closing submissions, any shareholder may bring a claim under s 174 and the Court has power to order relief to cure any unfairness that the shareholder may establish.⁶²I am not satisfied that I should decline relief simply because some other course may have been open to the Plaintiffs.

[105] The dispute resolution provision in the shareholders agreement requires good faith discussions, with either party then having discretion, but not an obligation, to refer the dispute to mediation or arbitration. I do not consider the Plaintiffs can be criticised for preferring to commence legal proceedings. There had been protracted discussions and correspondence between the parties and their solicitors. The Defendants themselves could have referred the matter to dispute resolution if they

⁶⁰_{Brief of Evidence of M S Draskovich, above n 24, at
[12.10] to [12.14].}

[106] Implementation of the “deadlock” provisions in the shareholders agreement would result in one shareholder buying out the other. It may be that such an acquisition proves to be the best way to resolve matters. Certainly the parties have different views regarding the prospects for the business and the merits of the vessel. However, the first step that must be undertaken is to settle ADWS’s financial position. That is the relief sought by the Plaintiffs.

[107] The Defendants also rely on an offer they made to the Plaintiffs on 31 May

2015. This also was intended to see the Defendants purchase the Plaintiffs’ shares and their loans to ADWS at fair value, with terms proposed to enable the parties’ experts or appointed third parties to determine fair value.⁶³

[108] The Plaintiffs reject the submission that they should be denied relief because of this offer. The offer was made shortly before trial (not necessarily through any delay by the Defendants), and it proposed a necessarily detailed process to determine values. Regardless of these matters, as I have said the relief the Plaintiffs seek is different and more confined. It is intended to determine what sum, if any, is due to ADWS. Again I accept the Plaintiffs’ submission that they were entitled to pursue their proceeding in those circumstances.

[109] I have, however, been concerned by the evidence that Mr Draskovich gave as set out in [29] and [30] above. The Defendants’ view is that this evidence was an afterthought, and that Mr Draskovich was in fact content with the management at the time. I prefer to take the evidence at face value. As a general rule a director and/or trustee shareholder who considers the affairs of the company are being mismanaged in a significant way is required to act promptly and not sit back. I am not satisfied, however, that the delay and “strategising” in this case is such that I should deny relief.

[110] The Plaintiffs seek a declaration that Explore and Mr Goodfellow are constructive trustees of the ADWS revenue that was paid into Explore’s bank

⁶³Letter Heimsath Alexander to D J Chisholm QC and M J Lenihan dated 31 May 2015 at

account. I accept the Defendants’ submission that Mr Goodfellow was never in possession of any funds and that there is no evidence that Explore remains in possession of ADWS revenue. I decline to make the declaration sought.

(i) the sum representing a fair fee payable by ADWS as r&m, marketing and management fees in the period in dispute;

(ii) the sum due from Explore to ADWS by way of interest at 9.5 per cent per annum on Explore’s operating loan.

(b) to advise how equality of treatment is best effected between shareholders in respect of the matters referred to in [96]above;

(c) to advise on the accuracy or otherwise of the Defendants’ evidence and submissions as to the manner in which it has accounted for commissions on sales.

[112] Each party is required to co-operate with the appointee and to provide such information as he or she may require. I shall seek the parties’ assistance as to the appointee and their terms of reference.

[113] At trial, the Plaintiffs sought an order that Explore should pay interest at

9.5 per cent per annum on any part of the fees found to be excessive. Interest at some rate is likely to be payable if it is ultimately determined that Explore must account but the issue is best left until the independent accountant has reported.

[114] For the avoidance of doubt, I am not satisfied that there is any basis for ordering that Mr Goodfellow should provide relief. It will be apparent from what I have said that I have grave reservations about the quantum of the fees that are in dispute but I am not persuaded on the evidence that there was any bad faith on Mr Goodfellow’s part.

[115] I dismiss the Plaintiffs’ claim that the “netting off” transaction effected by ADWS’s financial statements to y/e 2012 was oppressive, unfairly discriminatory or unfairly prejudicial, alternatively decline to grant relief in respect of the same.

High Court of New Zealand Decisions

Draskovich v Goodfellow [2016] NZHC 496 (22 March 2016)