TYRION HOLDINGS LIMITED v INFRASTRUCTURE NZ LIMITED [2019] NZCA 308

TYRION HOLDINGS LIMITED v INFRASTRUCTURE NZ LIMITED [2019] NZCA 308 [12 July 2019]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA495/2018[2019] NZCA 308BETWEEN TYRION HOLDINGS LIMITEDAppellantAND INFRASTRUCTURE NZ LIMITEDFirst RespondentPAUL FREDRIC CLAYDONSecond RespondentINFRASTRUCTURE & CIVILWORKSLIMITEDThird RespondentHearing: 30 May 2019Court: Collins, Peters and Mander JJCounsel: P J Napier for AppellantG P Blanchard QC and E E Hill for Second and ThirdRespondentsNo appearance for First RespondentJudgment: 12 July 2019 at 3.00 pmJUDGMENT OF THE COURTA The application to adduce further evidence is declined.B The appeal against the substantive judgment of the High Court of30 July 2018 is dismissed.C The appeal against the costs judgment of the High Court of6 November 2018 is allowed. The High Court order for indemnity costsis quashed and substituted with an order that the appellant pay a 50 percent increase on a scale 2B basis for the steps taken after7 February 2018.D The appellant is liable to pay one set of costs to the second and thirdrespondents for a standard appeal on a band A basis and usualdisbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Collins J)Introduction[1] Tyrion Holdings Ltd (Tyrion) was formerly owned by Mr Blomfield.It acquired 50 per cent of the shares in a civil engineering and construction firm calledInfrastructure NZ Ltd (INZ). The other shareholder in INZ was Mr Claydon, a civilengineer who was also the company's managing director.[2] In the months before Tyrion acquired its 50 per cent shareholding in INZ,Mr Claydon took a number of steps that contributed to INZ ceasing to trade soon afterTyrion acquired its shares. We refer to those steps as "the assets transfer". The stepstaken by Mr Claydon involved him forming a new company, Infrastructure &CivilWorks Ltd (ICW). The new company managed two construction projects thathad previously been undertaken by INZ and acquired INZ's vehicles and constructionequipment after those items were repossessed by a finance company. Mr Claydon tookthese steps because he no longer trusted Mr Blomfield and because he wanted toprotect the creditors of INZ. He also wished to preserve his reputation in the civilengineering and construction industry.[3] Tyrion made application under s 174 of the Companies Act 1993, alleging thatthe assets transfer caused it unfair prejudice. It sought compensation based upon whatit argued was the value of its shares in INZ immediately before Mr Claydon and ICWcompleted the assets transfer. INZ remains registered as a company. It has, however,no assets and did not participate in the appeal.[4] Section 174(1) of the Companies Act provides:174 Prejudiced shareholders(1) A shareholder of a company who considers that the affairs ofa company have been, conducted in a manner that is, or havebeen, oppressive, unfairly discriminatory, or unfairly prejudicial tohim or her in that capacity may apply to the court for an order underthis section.[5] Relief may be ordered by a Court under s 174(2) of the Companies Act butonly if it is just and equitable to do so. The relief that may be ordered includes"requiring the company or any other person to pay compensation ".1 That isthe relief that Tyrion sought from Mr Claydon and ICW.[6] Section 175 of the Companies Act deems certain conduct to be unfairlyprejudicial for the purposes of an application under s 174. Included in the matters thatare deemed to be unfairly prejudicial is a failure to comply with s 129 ofthe Companies Act.[7] Under s 129 of the Companies Act a company must not enter into a majortransaction unless the transaction is approved by special resolution. The definition of"major transaction" in s 129(2)(b) includes:(b) the disposition of, or an agreement to dispose of, whether contingentor not, assets of the company the value of which is more than halfthe value of the company's assets before the disposition [8] "Assets" are defined in s 129(2) of the Companies Act, as including "propertyof any kind, whether tangible or intangible". There was no special resolutionauthorising the assets transfer.[9] In the High Court, Courtney J dismissed Tyrion's application.2 She found thatthe assets transfer was not a major transaction in terms of s 129 of the Companies Act.3She also found however, that Tyrion was unfairly prejudiced by the assets transfer.1 Companies Act 1993, s 174(2)(b).2 Tyrion Holdings Ltd v Infrastructure NZ Ltd [2018] NZHC 1899 [High Court judgment].3 At [45].Courtney J also concluded it would not be just and equitable to award damages toTyrion because of five factors:(a) the value of INZ's business at the time of the assets transfer;(b) the effect of Mr Claydon's actions on INZ;(c) the minimal prospects that INZ had of continuing its business;(d) Mr Blomfield's conduct; and(e) the fact Tyrion knew about INZ's precarious financial position when itacquired its shares in INZ.[10] The Judge, in a separate costs decision, directed Tyrion to pay indemnity costsfor steps taken after a Calderbank offer had been made by Mr Claydon and ICW.4[11] The key issues raised by Tyrion's appeal may be reduced to the following fourquestions:(a) Did the High Court Judge err in finding that the assets transfer was nota major transaction in terms of s 129 of the Companies Act?(b) Did the Judge err in not accepting Tyrion's expert evidence and inaccepting Mr Claydon and ICW's expert's evidence concerningthe value of the shares acquired by Tyrion at the time of the allegedmajor transaction?(c) Did the Judge err when taking into account Mr Blomfield's conductand Tyrion's knowledge of INZ's financial position at the timethe shares were transferred to it?4 Tyrion Holdings Ltd v Infrastructure NZ Ltd [2018] NZHC 2856 [Costs judgment].(d) Did the Judge err when ordering Tyrion to pay indemnity costs for stepstaken in the proceeding after the Calderbank offer expired?[12] The first question raises issues as to whether or not there was a majortransaction, thereby triggering the "unfairly prejudicial" provisions of s 174 ofthe Companies Act. As we explain however, little hinges on this question asCourtney J held that the conduct complained of caused unfair prejudice to Tyrion.That finding has not been challenged by Mr Claydon and ICW. The second and thirdquestions focus upon whether or not Courtney J was correct when she decided it wouldnot be fair and equitable to grant relief to Tyrion. The fourth question asks if it wasappropriate to award indemnity costs in the circumstances of this case.Background[13] It will already be apparent the real protagonists in this litigation areMr Claydon and Mr Blomfield. By mid-2007, Mr Claydon and Mr Blomfield eachowned 50 per cent of INZ with Mr Blomfield's shares being held in the names of twoof his companies, Blomfield Investments Ltd and Black Trading Ltd.In November 2008, another of Mr Blomfield's companies, Black Rural DevelopmentsLtd (Black Rural) acquired the shares that had been allocated to Mr Blomfield.Black Rural changed its name to Tyrion in 2012. The shareholder in Tyrion is nowMr O'Connor, who is one of Mr Blomfield's associates. These arrangements were putin place after Mr Blomfield was adjudged bankrupt and when the companies that hadpreviously held his shares struck financial difficulties.The formation of INZ[14] Before and during the events in question, Mr Blomfield had a number ofbusiness interests, including fast food franchises and a communications company.He was also involved in a property subdivision in Mangawhai. In 2005, Mr Blomfieldsuggested to Mr Claydon that they establish a civil engineering and constructionbusiness initially working on the Mangawhai subdivision. Mr Claydon agreed and asa consequence, INZ was incorporated in 2005.[15] Mr Claydon's evidence was that he paid for his shares in INZ but thatthe shareholders associated with Mr Blomfield failed to pay the $20,000 thatMr Claydon says they owed. Mr Blomfield's evidence was that his contribution toINZ was to be by way of "sweat equity". Courtney J rejected this explanation.5[16] It is common ground Mr Claydon worked full-time for INZ and thatMr Blomfield did not have a salaried role in the company. There is a dispute as to howmuch salary Mr Claydon was to be paid. Mr Claydon said he was to be paid $10,000per month. Mr Blomfield, on the other hand, maintained Mr Claydon was to be paid$5,000 per month.[17] In 2006, INZ commenced civil engineering work at the Mangawhaisubdivision. By August 2006, however, the Mangawhai developer had run out ofmoney. INZ was, by this time, owed $250,000. Mr Claydon started looking for othercontracts, which resulted in INZ undertaking a number of construction and civilengineering projects, mainly for local councils.[18] Towards the end of 2007, INZ entered into an agreement with UDC Finance(UDC) for the financing of trucks and earthmoving equipment for its projects.Between October 2007 and March 2008, INZ borrowed a total of $378,345.61 fromUDC for a Mercedes truck, a Mitsubishi truck and three excavators. INZ alsonegotiated a floating credit facility of $600,000 with ANZ, secured by way of a generalsecurity agreement guaranteed by the directors.Breakdown in the relationship between Mr Claydon and Mr Blomfield[19] In the High Court, allegations and counter-allegations of misconduct weremade by Mr Claydon and Mr Blomfield. It is not necessary to traverse all of thoseallegations. Suffice to record that in December 2007, Mr Claydon discoveredMr Blomfield had transferred $70,000 from INZ's bank account to use for his ownpurposes. Mr Claydon's evidence was that Mr Blomfield ignored his requests toreturn this money. In June 2008, Mr Blomfield transferred a further $30,000 fromINZ's bank account for his own purposes. This proved to be the "final straw" for5 High Court judgment, above 2, at [13].Mr Claydon who, at this time, took steps to sever his connections with Mr Blomfieldand to insulate himself from INZ which was, by this stage, in a precarious financialposition. By mid-2008, the dispute between Mr Claydon and Mr Blomfield wascommon knowledge in the civil engineering and construction industry in the areaswhere INZ was operating. INZ's bank had become so concerned that it had frozenINZ's bank account.The assets transfer[20] In July 2008, Mr Claydon incorporated a new company, ICW. Mr Claydon isthe sole director and shareholder of this company. Mr Claydon executed, on behalf ofINZ, two agreements with ICW. The first of those agreements involved ICWundertaking to supply various management services to INZ. Under this arrangement,ICW managed two projects that had been commenced by INZ. Mr Claydon's evidencewas that ICW applied any profits received from those contracts towards settling INZ'sdebts. He said ICW in fact ended up losing money on those projects. Under the secondagreement, INZ agreed to lease its vehicles and equipment to ICW. This enabled ICWto pay the loan amounts to UDC while INZ's bank account was frozen and avoiddefaulting on the loan. However, when INZ ultimately defaulted on its loanobligations to UDC, the vehicles and equipment were repossessed and purchased atmarket rates by ICW from UDC.[21] Mr Claydon's explanation for taking these steps was that the relationshipbetween himself and Mr Blomfield had deteriorated to such a point that INZ wasno longer viable. Mr Claydon said in his evidence that it was clear that INZ was notgoing to succeed and that his personal reputation was beginning to suffer because ofhis association with Mr Blomfield. Mr Claydon said that ICW started to engage inroad maintenance and other construction work that was quite separate from the localbody contracts that INZ had undertaken.[22] By August 2008, Mr Blomfield was aware that Mr Claydon had started a newbusiness venture. He spoke to Mr Claydon and accused him of stealing INZ's businessand appropriating it for himself. According to Mr Blomfield, Mr Claydonacknowledged what he had done but also said that there was nothing Mr Blomfieldcould do about it.[23] Over the next few months, Mr Blomfield and Mr Claydon exchanged emails,during which it was suggested Mr Claydon purchase Mr Blomfield's interests in INZ.Nothing came of those proposals.[24] In December 2008, Mr Blomfield uplifted a cheque for approximately $99,000from the Waitakere Council payable to INZ. When Mr Claydon discovered what hadhappened he arranged for the cheque to be cancelled. Mr Blomfield managed,however, to intercept a second cheque for $99,000 from the Waitakere Council thatwas made out to INZ. Mr Blomfield used that money for his own purposes. In duecourse, INZ was reimbursed by the bank that wrongly allowed the money to bemisappropriated by Mr Blomfield.High Court judgment[25] Tyrion's proceeding in the High Court involved two causes of action, the firstof which was for the orders that Tyrion sought under s 174 of the Companies Act.The second cause of action alleged various breaches of director's duties byMr Claydon. Courtney J dismissed both causes of action. Only the first cause ofaction based upon s 174 of the Companies Act was pursued in the appeal.[26] Courtney J found that the assets transfer arranged by Mr Claydon to ICW didnot constitute a major transaction under s 129 of the Companies Act.6 This conclusionwas reached because there was no evidence of the value of INZ's assets at the time ofthe transfers. Courtney J found, however, that in substance, INZ's assets had beentransferred to ICW and that the shareholders associated with Mr Blomfield's interestswere accordingly unfairly prejudiced.7[27] A number of experts gave evidence as to the value of the shares that Tyrionsubsequently acquired at the time of the transfer of INZ's undertakings to ICW.We explain in further detail at [41]–[54] the various approaches taken by the experts6 At [45].7 At [54].and their different conclusions. Suffice, for present purposes, to record that Courtney Jaccepted the valuation provided by a Mr Martin, an expert called by Mr Claydon andICW, and as a consequence of his evidence the value of the shares acquired by Tyrionwas held to be just $44,425.8[28] As noted earlier, Courtney J declined to grant any relief because she was notsatisfied that it would be just and equitable to grant a remedy in the circumstances ofthis case. We have previously summarised at [9] the factors that persuaded Courtney Jto reach this conclusion.[29] In her costs judgment, Courtney J directed, amongst other matters, thatMr Claydon and his interests were to receive costs on a 2B basis up until7 February 2018 and costs on an indemnity basis thereafter for the substantive hearingbecause a Calderbank offer that had been provided to Tyrion expired on7 February 2018.9 The Calderbank offer was for $30,000. Courtney J considered itwas unreasonable of Tyrion to have declined that offer.10Major transaction[30] Considerable effort was expended in both the High Court and in this Court inarguing whether or not the assets transfer constituted a major transaction for thepurposes of s 129 which in turn constituted conduct deemed to be unfairly prejudicialto Tyrion. Mr Blanchard QC properly acknowledged from the outset, however, thatCourtney J's finding that there was unfairly prejudicial conduct was independent ofher findings that there had not been a major transaction. The finding that Tyrion wasunfairly prejudiced has not been challenged on appeal. Thus, little hinges uponwhether or not there was a major transaction.[31] We will, however, for the sake of completeness, briefly address the issuesraised by the first ground of appeal.8 At [69].9 Costs judgment, above n 4.10 At [14].[32] Tyrion claimed that between July and December 2008, the assets transfercarried out by Mr Claydon essentially caused the business of INZ to be transferred toICW. Tyrion said the assets transfer comprised the following transactions:(a) the transfer of construction and earthmoving equipment as well asvehicles;(b) the transfer of the benefit of various contracts that INZ had for civilengineering work and project management, including the benefit ofunpaid invoices and work in progress;(c) the transfer of business relationships;(d) the transfer of money in INZ's bank accounts;(e) the transfer of employment relationships with various staff;(f) the transfer of office equipment; and(g) the transfer of goodwill and "branding".[33] Mr Napier criticised the approach taken by Courtney J, saying she had focusedonly on the transfer of the lease of construction and earthmoving equipment. WhilstMr Napier was correct to say that this was the focus of Courtney J's attention, forthe reasons which we shall briefly explain, none of the other transactions we havesummarised at [32] constituted a major transaction as defined in s 129 ofthe Companies Act for two reasons:(a) there was no evidence to establish that the transactions in questioninvolved the disposal of 50 per cent or more of the total value ofthe company's assets; and(b) a number of the transactions did not involve assets of INZ.(a) Construction, earthmoving equipment and vehicles[34] ICW acquired the construction and earthmoving equipment from UDC atmarket rates. The equipment in question was seized by UDC as a secured creditorafter INZ defaulted on its obligations to UDC. Therefore, the construction andearthmoving equipment was disposed of by UDC and not Mr Claydon or INZ. Therewas also no evidence of vehicles being transferred from INZ to ICW. On the contrary,the evidence clearly showed that two trucks that were acquired by ICW that hadpreviously been leased by INZ were purchased from UDC after they were repossessedfrom INZ.(b) The benefit of various contracts for civil engineering work and projectmanagement including the benefit of unpaid invoices and work in progress[35] Courtney J accepted Mr Claydon's evidence that he did not transfer the benefitof any contracts.11 Rather, he said that ICW carried out INZ's obligations under twocontracts and in doing so incurred losses. Unsurprisingly, Tyrion could not attributeany value to these contracts. Courtney J concluded that any money received by ICWfor completing the two projects that had been commenced by INZ was likely to havebeen used to pay INZ creditors.12 Tyrion has not put forward any reason for doubtingthis conclusion.(c) The benefit of business relationships[36] Tyrion was not able to identify any relationships that Mr Claydon moved toICW, let alone place a value on those relationships.(d) Money held in banks accounts[37] There was no evidence of money held in INZ bank accounts being transferredto ICW. This is also not surprising because, at the relevant time, INZ's bank accountswere frozen.11 High Court judgment, above n 2, at [49].12 At [51].(e) Employment relations[38] It is difficult to see how an employee is an asset as defined in s 129 ofthe Companies Act, which defines asset as "property of any kind whether tangible orintangible". In any event, Mr Claydon's evidence was that only he anda quantity surveyor were employed by INZ and that all other work was carried out bycontractors. Tyrion was not able to contradict this evidence.(f) Office equipment[39] Tyrion failed to identify any office equipment that was transferred to ICW fromINZ.(g) Goodwill and "branding"[40] Courtney J was not satisfied there was any significant goodwill that couldattach to INZ by mid-2008.13 She observed that the dispute between the directors wascommon knowledge and that its bank accounts were frozen. INZ was no longer gettingnew work. This conclusion was supported by the evidence of Mr Campbell, INZ'saccountant, and Mr Martin, an independent forensic accountant, who said that no valuecould be ascribed to goodwill because a willing purchaser would not pay over andabove the net value of tangible assets for a business that was providing a marginalreturn. Whilst Mr Napier was correct to point out that Mr Beylefeld, an accountantwho gave evidence for Tyrion, said that INZ's goodwill could be valued at $249,000as at mid-2008, as we explain at [52]–[53], we have major reservations aboutMr Beylefeld's methodology and see no basis upon which we could conclude that anygoodwill and branding that was transferred constituted a major transaction as definedin s 129 of the Companies Act.13 At [53].Value of the shares[41] Three accountants gave evidence concerning the value of INZ as at mid-2008:(a) Mr Beylefeld said the value of INZ at July 2008 was $464,000,meaning the value of Mr Blomfield's half interest in INZ at that timewas $232,000.(b) Mr Campbell, the external accountant for INZ and is nowthe accountant for ICW. He said the value of INZ as at July 2008 was$86,000. The value of Mr Blomfield's shares would therefore be$43,000.(c) Mr Martin, an independent forensic accountant who gave evidence forMr Claydon and ICW, said that the value of INZ in July 2008 was$88,850. The value of Mr Blomfield's shares would therefore be$44,425.[42] It is striking that there was such a divergence in the evidence concerningthe value of INZ as at July 2008 with Mr Campbell and Mr Martin being close in theirassessments and Mr Beylefeld having such a widely different opinion from them.Courtney J decided not to place much reliance on Mr Campbell's evidence because ofhis close association with Mr Claydon and ICW. She did, however, agree withthe approach and conclusions reached by Mr Martin. Although Mr Napier raiseda number of criticisms about Mr Campbell's methodology and assessments, the realcontest was between the evidence of Mr Beylefeld and Mr Martin.[43] There were six key points of difference in the approaches taken andconclusions reached by Mr Beylefeld and Mr Martin. We will examine each of thosedifferences in [44]–[54].(a) Modified capital asset pricing model[44] Mr Beylefeld explained that the modified capital asset pricing model(MCAPM) is "the most commonly applied theoretical model" that is applied tothe estimated Earnings Before Interest, Tax, Depreciation and Proprietor salaries(EBITDP) when calculating a business's enterprise value. Mr Beylefeld estimatedthe expected future maintainable earnings (FME) of INZ to be $275,000 as atJuly 2008. To this he added an EBITDP multiplier of 2.5, in accordance with whathe said was an appropriate MCAPM, reaching an enterprise value for the business of$688,000 as at July 2008.[45] There was, however, considerable disagreement about the appropriateness ofan MCAPM when calculating the value of INZ. Mr Martin said that an MCAPM wasan academic model that was used primarily for mergers and acquisitions inthe investment industry to determine what prices might be paid for publicly tradedshares on the stock exchange. Of more significance was the basis upon whichMr Beylefeld derived the 2.5 multiplier he used. He said in his evidence that this wasthe mid-point between two and three, which he said was the MCAPM "framework"derived from BizStats New Zealand Ltd research. There is, however, much force inMr Blanchard's criticism of Mr Beylefeld's evidence when he submitted that nowheredid Mr Beylefeld explain what specific analysis he carried out to reach the numbershe relied upon. In the absence of a clear explanation as to the credibility ofthe underlying calculations of INZ's enterprise value, Courtney J was entitled to rejectthis aspect of Mr Beylefeld's evidence.(b) MYOB information[46] Mr Beylefeld placed considerable weight on the MYOB information from INZ.The MYOB records showed the EBITDP for INZ as at July 2008 to be $202,000. Thatwas based on a four-month period. In contrast, the MYOB records showedthe EBITDP for the year ending 31 March 2008 to be negative $66,000.In the previous financial year, the MYOB records showed the EBITDP to be $482,000.It is clear the EBITDP fluctuated dramatically during the 28-month period to whichthe MYOB records related. Mr Beylefeld also increased the EBITDP shown inthe MYOB records for the four-month period ending July 2008 to $275,000 whencalculating the FME.[47] Mr Campbell and Mr Martin both explained in their evidence that the MYOBfigures for INZ were a source of information that should be examined when calculatingthe value of the company. They both, however, stressed that there were considerablerisks in relying solely on the MYOB records in this case. Mr Martin was concernedthe MYOB records could produce misleading assessments because:(a) the MYOB figures for July 2008 were based on just four months'information; and(b) the MYOB figures for July 2008 did not recognise deferred revenueand other standard adjustments.[48] Although we have not placed much weight on Mr Campbell's evidence, it issignificant that he had major misgivings about the MYOB data. These misgivingswere based upon his experience as the external accountant for INZ and the fact thatthey did not reflect reconciliations and adjustments that were always made whencompiling the true financial records for INZ. Mr Martin's evidence was consistentwith that of Mr Campbell's on this point. Having reviewed this aspect ofthe accountant's evidence, we agree with Courtney J's assessment that considerablecaution needed to be exercised before relying upon the MYOB data in this case.14(c) Normalisation of bad debt[49] All three accountants agreed that the income for INZ for the financial yearending 31 March 2008 had been reduced by $390,000, as a result of writing off baddebt. The point of difference between the accountants related to how that bad debtshould be treated. Mr Beylefeld said the 2008 bad debt should not be treated asa regular expense. Mr Martin and Mr Campbell however, believed that the bad debtsincurred by INZ in 2008 should not be considered as extraordinary or abnormalbecause of the type of business activity that INZ was engaged in. While Courtney Jdid not endeavour to resolve this particular dispute between the accountants, it is clearthat overall she favoured the evidence of Mr Martin. From the outset INZ incurredserious financial setbacks in relation to the Mangawhai subdivision. Construction and14 At [61].subdivision work can be notoriously precarious and unpredictable. Mr Martin'scautious approach to the 2008 bad debt was entirely justified when assessing the valueof INZ as at July 2008.(d) Discount for the global financial crisis[50] Tyrion endeavoured to argue that Mr Martin was wrong to factor in the globalfinancial crisis when assessing the value of INZ as at July 2008. This aspect ofTyrion's case was based on evidence that suggested that ready-mixed concrete salesfigures had not started to decline by July 2008. This argument is not persuasive.Ready-mixed concrete sales are but one factor and relate only to construction that isunderway. It is not an indicator of future work that is pivotal when assessing the valueof a construction company. The construction industry in New Zealand in July 2008was already feeling the effects of what shortly became the global financial crisis.Bridgecorp, a significant funder of property developers, had already collapsed in 2007.Mr Martin was fully justified in factoring the global financial crisis into hiscalculations of the value of INZ as at July 2008.(e) Loan to a subsidiary[51] A fifth difference between the experts was whether a $90,000 loan from INZto its subsidiary company should have been included as an asset of INZ. It wasimportant, however, to have regard to the assets of the subsidiary company.Mr Blanchard correctly submitted there was no evidence the subsidiary company hadany assets and that in all likelihood it did not, as all assets of any value as at July 2008were held by INZ. In these circumstances, we can see nothing wrong in Mr Martin'sdecision not to include the $90,000 as an asset of INZ.(f) Goodwill[52] As noted at [40], Mr Beylefeld valued the goodwill of INZ as being $249,000as at July 2008. Courtney J also rejected this aspect of his evidence, and preferred forthe following reasons the approach taken by Mr Martin, who ascribed no goodwill tothe business:1515 At [66].(a) INZ had been operating for just three years and therefore "had a limitedtrack record".(b) INZ's reputation had suffered because of the dispute betweenMr Claydon and Mr Blomfield.(c) INZ had no workforce and relied primarily on subcontractors.[53] To these factors we would add that INZ was trying to compete in a precariousenvironment. Mr Martin was correct when he said a willing purchaser, fully appraisedof INZ's circumstances, would not be likely to pay anything for the goodwill ofthe company in July 2008.[54] This analysis of the accounting evidence leads us to conclude that Courtney Jwas fully justified in accepting the evidence of Mr Martin, when he said the value ofINZ as at July 2008 was $88,850 and that Tyrion could expect no more than $44,425as compensation for the shares it acquired.Mr Blomfield's conduct/Tyrion's knowledge of INZ's financial position[55] The third ground of appeal alleges Courtney J erred by taking into accountMr Blomfield's conduct and Tyrion's knowledge of INZ's financial position atthe time Tyrion acquired its shares in INZ. Tyrion maintains that these matters neededto be affirmatively pleaded and that it was prejudiced by the absence of sucha pleading.Was an affirmative defence required?[56] An affirmative defence is one that relies upon facts beyond the admissions anddenials of the facts pleaded in a statement of claim.16[57] Under the High Court Rules 2016, an affirmative defence must be pleaded andif such a defence is pleaded, then the plaintiff is required to file a reply.17 The purpose16 Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZCA 154, (2012) 21 PRNZ 235 at [21].17 High Court Rules 2016, rr 5.48(4) and 5.62.of these rules is to ensure the parties understand their opponent's case and to ensurethe Court can properly understand and determine the issues in dispute.[58] Mr Blomfield's conduct and Tyrion's knowledge of INZ's precarious financialposition when it acquired its shares in INZ were matters that Courtney J needed toconsider when assessing whether it was just and equitable to grant the relief sought byTyrion. These were matters that related to the way Courtney J would exercise herdiscretion when considering whether a remedy was appropriate, rather than whetherMr Claydon and his interests had acted in a way that unfairly prejudiced Tyrion. Thesewere matters that were within the knowledge of Tyrion when the proceeding wascommenced. They were matters that were traversed in the evidence provided byMr Claydon and ICW in advance of the hearing. Tyrion could not have been genuinelysurprised or prejudiced when Mr Claydon and ICW submitted to Courtney J thatMr Blomfield's conduct, and Tyrion's knowledge of the precarious nature of INZ'sfinancial position were factors that weighed against her exercising her discretion inTyrion's favour.Mr Blomfield's conduct[59] Courtney J referred to four aspects of Mr Blomfield's conduct when decidingthat it would not be just and equitable to grant the relief sought by Tyrion:18(a) Mr Blomfield personally withdrew $70,000 from INZ inDecember 2007 and a further $30,000 in June 2008.(b) In 2008, two of Mr Blomfield's companies obtained loans from INZ.Those loans were never repaid.(c) In August 2008, when Mr Blomfield became concerned thatMr Claydon was transferring INZ's assets to ICW, he tookno meaningful steps to prevent Mr Claydon from taking that action.18 High Court judgment, above n 2, at [75].(d) In December 2008, Mr Blomfield misappropriated $99,000 that wasintended to be paid to INZ.[60] In his submissions, Mr Napier criticised Courtney J's reliance on just one ofthese matters, namely Mr Blomfield's withdrawal from INZ of $70,000 in December2007 and $30,000 in June 2008. Mr Napier raised concerns about a number of otherreferences to Mr Blomfield's conduct in the High Court judgment. We note, however,that the only matters relating to Mr Blomfield's conduct referred to by Courtney Jwhen considering whether it would be just and equitable to grant relief to Tyrion arethe four matters we have summarised at [59]. Mr Napier's decision not to refer tothe matters we have summarised at [59](b), (c) and (d) leads us to infer that no issueis taken with Courtney J's reliance on those matters. Thus, we will only examinethe criticisms levelled at Mr Blomfield for withdrawing from INZ $70,000 inDecember 2007 and $30,000 in June 2008.[61] These withdrawals were referred to by Mr Claydon in his written brief ofevidence when he said that neither withdrawal was discussed with him and that he didnot authorise Mr Blomfield taking this money. Mr Claydon said he only discoveredthe money had been taken after checking INZ's bank accounts.[62] Mr Blomfield endeavoured to explain his actions in his reply brief of evidence.The fact he addressed this matter in his reply brief undermines the complaint that thisissue was not pleaded as an affirmative defence.[63] Mr Blomfield acknowledged taking the money and said that he did so to recoupcosts he had incurred "for the office and staff" of INZ, which he said he was fundingthrough his other entities. Mr Blomfield also said he was mindful that his shareholdingwas potentially going to be worthless if Mr Clayton "was successful in stealingthe business".[64] Courtney J described this aspect of Mr Blomfield's evidence as"unconvincing".19 It is easy to understand why. The following five facts demonstratethat Mr Blomfield had no real excuse for withdrawing the funds he took from INZ:19 At [23].(a) The accounts of INZ show that it was paying for the rent and officeexpenses, not Mr Blomfield.(b) Mr Blomfield could not point to any agreement that would haveallowed him to withdraw the money in order to recoup expenses he saidhe had incurred.(c) The withdrawal in December 2007 was seven to eight months beforeMr Claydon set up ICW and took the steps that Tyrion complains of.(d) The withdrawal in June 2008 was at the time Mr Blomfield said he wasconcerned about INZ's financial viability. His removal of $30,000 atthat time breached his responsibilities to the company.(e) Mr Blomfield surreptitiously removed the money from INZ's bankaccount without explanation.[65] This evidence fully justified Courtney J's decision that it would not be just andequitable to grant relief to Tyrion. In a similar vein, no issue can be taken withCourtney J's reliance upon the other three matters that we have referred to at [59],when concluding that it would not be just and equitable to grant relief to Tyrion. It issignificant that Mr Napier took no issue with those three matters.Tyrion's knowledge of INZ's financial position when it acquired its shares[66] In deciding that it would not be just and equitable to grant relief to Tyrion,Courtney J took into account that Tyrion knew about INZ's difficult financial positionwhen it acquired its shares in that company in November 2008.20[67] Mr Napier criticised this aspect of the High Court judgment on the followinggrounds:20 At [78].(a) Tyrion's knowledge of INZ's financial position should have beenpleaded as an affirmative defence; and(b) Tyrion was prejudiced by the absence of an affirmative pleading asit would have adduced further evidence on this issue to the effect thatTyrion's acquisition of its shares in INZ was simply a mechanism toensure Mr Blomfield and his interests had a means of trying to obtaina remedy for the alleged misappropriation of INZ's business byMr Claydon and ICW.[68] There are two reasons why we do not accept an affirmative pleading wasrequired in relation to Tyrion's knowledge of INZ's financial position when it acquiredits shares:(a) This was an issue that Tyrion must have appreciated was a major hurdleto its claim for relief. In Bermuda Cable Vision Ltd v Colicia Trust CoLtd, Lord Steyn made it clear that prior knowledge of the matterscomplained of by an applicant will almost always be a relevantconsideration in deciding cases under a provision equivalent to s 174of the Companies Act. 21 The same caution was expressed by this Courtin Gavigan v Eichelbaum, in which Kós P explained that relief unders 174 may not be available for events that the applicant knew aboutprior to acquiring their shares.22 These judicial cautions should havebeen fully understood by Tyrion before the hearing. It was thereforenot necessary for Mr Claydon and his interests to affirmatively pleadthat Tyrion knew about INZ's precarious financial position at the timeit acquired its shares because it fully knew this was the case.(b) This issue solely relates to Courtney J's decision not to grant relief.It is therefore not an affirmative defence but a matter the Court wasinvited to take into account when determining that it would not be justand equitable to grant relief. A wide range of factors can inform21 Bermuda Cablevision Ltd v Colica Trust Co Ltd [1998] AC 198 (PC) at 212.22 Gavigan v Eichelbaum [2017] NZCA 442, [2018] 2 NZLR 530.the inquiry into what is just and equitable.23 The legal right to relieffrom prejudicial conduct may be tempered by the equitableconsiderations arising from the conduct of the parties.24[69] In this Court, Tyrion applied for leave to adduce a further affidavit fromMr Blomfield, explaining the share ownership of Tyrion. The essence of that evidencewas that Tyrion acquired the shares held by Black Trading and Blomfield Investmentson 21 November 2008. Subsequently, Mr Blomfield's shares in Tyrion weretransferred to his domestic partner and then to Mr O'Connor. Mr Blomfield also saysin his affidavit that this litigation was to be funded by Mr O'Connor and Tyrion'ssolicitor on the basis that Mr O'Connor, the solicitor and Blomfield Investments wouldshare the net proceeds of any successful judgment.[70] These arrangements for funding the litigation were not disclosed to Courtney Jbut, in any event, it is impossible to comprehend how such arrangements could impacton the obvious conclusion reached by Courtney J, namely that Tyrion acquired itsshares in INZ knowing that the company was in a precarious financial position.The evidence that Mr Blomfield now wishes to adduce raises a number of questionsabout the funding arrangements for this proceeding. These arrangements may notreflect positively upon him and his interests. They were, however, matters that couldeasily have been disclosed prior to the High Court hearing if they were genuinelyrelevant to the way Courtney J would exercise her discretion. We are satisfied theywere not relevant to that issue and are therefore matters that are neither fresh or cogentand should not be admitted.Indemnity costs[71] On 26 January 2018, Mr Claydon and ICW sent Tyrion a Calderbank offer of$30,000 that was to expire on 7 February 2018. The four-day trial commenced on12 February 2018.23 Lawrence v Glynbrook 2001 Ltd [2014] NZHC 2876 at [373]–[389].24 Sturgess v Dunphy [2014] NZCA 266 at [144].[72] In her costs judgment, Courtney J awarded Mr Claydon and ICW indemnitycosts from 7 February 2018.25 In doing so, she observed that "[t]his was a case inwhich neither of the protagonists emerged in a good light".26 She also said, however,that Tyrion had been unreasonable in not accepting the Calderbank offer and that asa consequence, should be required to pay indemnity costs for the steps taken after7 February 2018.[73] A clear distinction is drawn in the High Court Rules between "increased costs"and "indemnity costs". The circumstances in which a court may order a party to payincreased costs include where they fail, "without reasonable justification, to accept anoffer of settlement".27 Indemnity costs may be awarded in a number of circumstances,including where a party has "acted vexatiously, frivolously, improperly, orunnecessarily in continuing a proceeding".28[74] This Court has previously explained that indemnity costs "are exceptional andrequire exceptionally bad behaviour. That is why to justify an order for such coststhe misconduct must be 'flagrant'".29[75] In the present case, the litigation was rigorously contested by the two principalprotagonists, whose relationship had become marked by distrust and intransigence.While Courtney J was correct to describe Tyrion's decision to reject the Calderbankoffer as being unreasonable, its conduct, and that of Mr Blomfield, fell short ofthe high threshold that must be satisfied before an award of indemnity costs is justified.On the other hand, Tyrion's conduct, as described by Courtney J, mirrored the conductrequired for an uplift of costs.[76] In our assessment, Courtney J was right to conclude that Tyrion should paymore than the standard 2B costs for steps taken after the expiration of the Calderbankoffer. Its unreasonable conduct can, however, be appropriately reflected in an upliftin costs of 50 per cent on scale 2B for the steps taken after 7 February 2018. Ms Hill,25 Costs judgment, above n 4, at [16].26 At [14].27 High Court Rules 2016, r 14.6(3)(b)(v).28 Rule 14.6(4)(a).29 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [28]; citing Prebblev Awatere Huata (No 2) [2005] NZSC 18, [2005] 2 NZLR 467 at [6].who argued this part of the case for the respondents, acknowledged that an uplift ofcosts was an available option in this case.Result[77] The application to adduce further evidence is declined.[78] The appeal against the substantive decision of the High Court is dismissed.[79] The appeal against the High Court costs judgment is allowed. The order forindemnity costs for steps taken after the expiration of the Calderbank letter is quashedand substituted with an order that Tyrion pay a 50 per cent increase in costs on a scale2B basis for the steps taken after 7 February 2018.[80] Mr Claydon and ICW are entitled to one award of costs in this Court fora standard appeal on a band A basis and usual disbursements. We certify for a secondcounsel.Solicitors:Keegan Alexander, Auckland for AppellantBlackwells, Auckland for Second and Third Respondents