IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2017-404-2621
[2018] NZHC 2782	

BETWEEN	TEYFIK AYYILDIZ
First Plaintiff

BIRGUL AYYILDIZ
Second Plaintiff	
AND	CASABLANCA SYLVIA PARK LIMITED
First Defendant

KIWITURKS OREWA LIMITED
Second Defendant

HUSEYIN ISIK
Third Dft

NIGAR IVGEN
Fourth Defendant

MURAT AVCIOGLU
Fifth Defendant	

Hearing:	23 October 2018 at 10:00am	
Appearances:	E J Grove for the Plaintiffs
D P Weaver for the Defendants	
Judgment:	23 October 2018	

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:
KP Legal Ltd (Kirstin Poole), Auckland, for the Plaintiffs
Chris Patterson Barrister Ltd (E J Grove), Auckland, for the Plaintiffs David P Weaver, Tauranga, for the 3rd, 4th and 5th Defendants
Mehmet Ceran, Glenfield, Auckland (former director of 2nd Defendant)

AYYILDIZ v CASABLANCA SYLVIA PARK LIMITED [2018] NZHC 2782 [23 October 2018]

[1]	The plaintiffs apply for particular discovery. Since the application was filed, the defendants have provided additional documents beyond those initially provided. The matters in issue have reduced considerably. There are six heads of documents to be considered.

[2]	In the substantive proceeding the plaintiffs seek relief under s 174 of the Companies Act 1993. They are minority shareholders in two companies – Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd. Both companies operate licensed cafés and restaurants, one at the Sylvia Park shopping mall and the other at Orewa.

[3]	Since 2014 there have been five shareholders of Casablanca Sylvia Park Ltd: the plaintiffs and the fourth defendant (Nigar Ivgen), each having a one-sixth shareholding. Murat Avcioglu and Mustafa Demilrap who is not a party, each have a 25% shareholding.   Mr Weaver  acts for all the defendants and for Mr Demilrap.   Mr Demilrap has been served but he has not taken any formal steps in the proceeding. Nigar Ivgen and Murat Avcioglu are the directors of the company. The plaintiffs say, however, that Huseyin Isik (also known as Alex Isik) is a de facto director.

[4]	There are five equal shareholders of Kiwiturks Orewa Ltd: Teyfik Ayyildiz, Huseyin Isik, Nigar Ivgen, Murat Avcioglu and Mehmet Ceran. Mr Ceran has filed an appearance but he has taken no other active steps in the proceeding. He supports the plaintiffs. The directors of Kiwiturks Orewa Ltd are Huseyn Isik, Nigar Ivgen and Murat Avcioglu. Huseyn Isik and Nigar Ivgen are married. They have a company called Nazar Group Ltd, which has interests in other restaurants and brands: Mozaik Café, Bodrum Kitchen, Deco Eatery, Nomad and Devon. The plaintiffs have no interest in the Nazar Group Ltd or its other cafés and restaurants. Mr Ceran has an interest in some of the other restaurants. Nazar Group Ltd provides back office functions for Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd: administration, accounts, human resources and payroll. It also negotiates purchases for the group of restaurants as a whole.

[5]	In the statement of claim, Teyfik Ayyildiz, says that he had been a director of Casablanca Sylvia Park Ltd but was removed in October 2014. About the same time, he was also removed as an executive chef for Casablanca Sylvia Park Ltd and

Kiwiturks Orewa Ltd. The plaintiffs say that they have been removed from any participation in the companies. The companies have stopped making shareholder payments to them and they have been kept in the dark about the affairs of the companies or have been given misleading information. Their case is that the affairs of both companies have been run in a manner that is oppressive, unfairly discriminatory and unfairly prejudicial to them. For this decision, it is not necessary to go into the details of their allegations. They seek a range of relief under s 174 of the Companies Act, including orders for their shares to be valued, and for the other shareholders to buy out their shares.

[6]	While the proceeding was started at the end of 2017, the defendants have not yet filed statements of defence. I have not required it. At the first case management conference in February of this year, I gave directions for an exchange of information and for accountants to be instructed to give advice and value shares. That was with a view to seeing whether that would allow the parties to negotiate a resolution without the court being required to adjudicate on the merits of the claims and any defences that might be raised. I directed informal disclosure of documents. Counsel today have confirmed that both sides accept that the plaintiffs ought to be paid out for their shares in Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd and the real matter is to determine the appropriate value of their shareholdings. With that approach, it is unnecessary to enquire more deeply into how the differences between the parties arose and whether there is any need for relief under s 174. That has assumed the case is run very much on the basis that on a defended hearing the court will be required to determine how much the plaintiffs should be paid for their shareholdings.

[7]	At a conference in May this year, review of disclosure took place. The defendants had made disclosure of documents but the plaintiffs said that they did not consider the disclosure was adequate. I allowed further time for disclosure and the plaintiffs applied for formal orders as they considered that further disclosure was required. I indicated that that application would be for tailored discovery. That resulted in the present application filed on 6 July 2018.

[8]	Since the first conference, the defendants have instructed two accountants: one, Mr Morrison, acts for the companies generally. His practice prepares the

companies’ financial statements. He has assisted in providing financial information. The defendants have also instructed an independent accountant, Mr Shaw of Grant Thornton, to value the shares. That report has been provided. It was given to the plaintiffs in July this year. The defendants have given the plaintiffs extensive financial information.

[9]	Mr Weaver attached to his written submissions a schedule of documents that had been provided, which included the dates on which the documents were provided to the plaintiffs. The defendants have also given an accountant instructed for the plaintiffs read-only access to their cloud-based accounts system, Xero, and to their cloud-based payroll system. They say that they have provided about 11,500 pages of financial information in about 23 Eastlight folders. The defendants have also offered to buy out the plaintiffs’ shares at the values given by Mr Shaw. So far, the plaintiffs have not taken up that offer.

[10]	The plaintiffs have instructed two accountants, one a forensic accountant,   Mr Nair, and another to provide a share valuation, Mr Basrur. So far, they have not produced any share valuations. They say that they are not confident that the companies’ annual financial statements correctly reflect the performance of the companies. Mr Nair’s wish for more information has largely driven the present application.

[11]	The classes of documents in issue are these:

(i)	documents relating to IRD audits of the companies;

(ii)	documents relating to rebates paid by suppliers to the companies;

(iii)	staff rosters and other documents to corroborate the companies’ payroll records;

(iv)	any records of loans or credit contracts by the companies from 2014 onwards;

(v)	monthly till reports and printouts from the Wizbang point of sale system of monthly and annual sales for the companies, showing cash sales, credit card sales, voided sales, and details of how the sales were paid for; and

(vi)	records of bank accounts with the ANZ Bank.

[12]	To a large extent, the defendants accept that the documents requested are within their control, save for some staff rosters, of which they do not have a complete set. The question very much is whether all the documents which the plaintiffs seek are properly required to carry out a valuation of the shares. The accountants have approached the matter with a degree of suspicion, taking the view that the financial statements are not to be taken at face value and that it is necessary to have them corroborated.

[13]	In his written submissions, Mr Weaver referred to Nation J’s decision in Biggs v Biggs,1 where information requests made in a relationship property proceeding were held to be oppressive and disproportionate, given the respondent’s co-operation in providing documents, where there was no reason to believe that the annual financial statements could not be relied upon. That was also in the context of documents sought when valuing shares in a company. In this case, it is a question of assessing how far the accountants’ suspicions are to be accepted.

[14]	It is also helpful to bear in mind that the shareholders have substantive rights to disclosure of information held by the companies. That is provided in s 178 of the Companies Act:

178	Information for shareholders

(1)	A shareholder may at any time make a written request to a company for information held by the company.

(2)	The request must specify the information sought in sufficient detail to enable it to be identified.

(3)	Within 10 working days of receiving a request under subsection (1), the company must either—

1	Biggs v Biggs [2018] NZHC 1592.

(a)	provide the information; or

(b)	agree to provide the information within a specified period; or

(c)	agree to provide the information within a specified period if the shareholder pays a reasonable charge to the company (which must be specified and explained) to meet the cost of providing the information; or

(d)	refuse to provide the information specifying the reasons for the refusal.

(4)	Without limiting the reasons for which a company may refuse to provide information under this section, a company may refuse to provide information if—

(a)	the disclosure of the information would or would be likely to prejudice the commercial position of the company; or

(b)	the disclosure of the information would or would be likely to prejudice the commercial position of any other person, whether or not that person supplied the information to the company; or

(c)	the request for the information is frivolous or vexatious.

(5)	If the company requires the shareholder to pay a charge for the information, the shareholder may withdraw the request, and is deemed to have done so unless, within 10 working days of receiving notification of the charge, the shareholder informs the company—

(a)	that the shareholder will pay the charge; or

(b)	that the shareholder considers the charge to be unreasonable.

(6)	The court may, on the application of a person who has made a request for information, if it is satisfied that—

(a)	the period specified for providing the information is unreasonable; or

(b)	the charge set by the company is unreasonable,—

as the case may be, make an order requiring the company to supply the information within such time or on payment of such charge as the court thinks fit.

(7)	The court may, on the application of a person who has made a request for information, if it is satisfied that—

(a)	the company does not have sufficient reason to refuse to supply the information; or

(b)	the company has sufficient reason to refuse to supply the information but that other reasons exist that outweigh the refusal,—

make an order requiring the company to supply the information.

(8)	Where the court makes an order under subsection (7), it may specify the use that may be made of the information and the persons to whom it may be disclosed.

(9)	On an application for an order under this section, the court may make such order for the payment of costs as it thinks fit.

The purpose of s 178 is to ensure that those in control of a company, the directors and management, are accountable to shareholders. Accountability is enhanced by allowing shareholders access to company information. Under s 178, there is a wide range of reasons for refusing disclosure of information to shareholders. Some of them are noted in subsection (4), but they are not the only ones. If the company does not co-operate or if it refuses to provide information, the shareholder can come to court to seek orders under s 178(7). On such an application, the court considers whether there are outweighing reasons to justify a refusal of information to a shareholder. Potentially, s 178 can apply more widely than an order for procedural discovery. In procedural discovery, the court is concerned with whether the documents are in the control of parties, whether they are relevant, and whether it would be disproportionate to order discovery. Under s 178(4), reasons of irrelevance may have less importance. I take into account that in this case the shareholders require certain information from the companies.

[15]	Now for the classes of documents.

Documents relating to the IRD audits of the companies

[16]	In December 2017, the companies’ accountant wrote to the shareholders advising that the Inland Revenue had carried out an audit investigation. This had apparently been running for some years. The companies had been required to pay additional taxes, penalties and professional fees. These totalled $635,334. The email advised that Mr Isik had paid those taxes and the other shareholders were requested to make proportionate contributions for their share of the burden. Mr Teyfik Ayyildiz’s contribution was fixed at $122,794.

[17]	The plaintiffs have requested copies of documents relating to the audit. The defendants have provided a redacted copy of a deed of settlement with the Commissioner of Inland Revenue dated 19 October 2017. The parties to the deed are the Commissioner, Mr Isik, Ms Nigar Ivgen, other entities (all taxpayers whose names are blacked out), and Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd. Mr Isik and Ms Ivgen are recorded as the main shareholders and directors of all the companies which are parties.

[18]	The recitals state that the Commissioner found GST and income tax discrepancies in the tax positions taken by the taxpayers. The discrepancies show that non-deductible expenses were claimed through the business, fringe benefit tax on vehicles and omitted business income for the period from May 2011 to March 2016. The taxpayers agreed to settle all liabilities by two payments totalling $1,611,708. Schedules to the agreement show taxes unpaid by Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd. Unpaid taxes for other taxpayers have been blacked out. Casablanca Sylvia Park Ltd is shown as owing GST including shortfall penalties of
$22,890, and income tax of $50,358. Kiwiturks Orewa Ltd is shown as owing GST of $90,562.50 and income tax of $199,237.50. On my calculations, that makes a total of $363,810. The assessments include about $155,592 for shortfall penalties.

[19]	Mr Weaver acknowledged that the companies have made a settlement offer to the Commissioner but that document has not been disclosed. He said that privilege attached to that offer as it was made on a “without prejudice” basis. Although it may have been made on a “without prejudice” basis, I consider that the shareholders are jointly entitled to the privilege in that document and are accordingly entitled to see it, provided that they use the document only for the purpose of this proceeding. That document may be redacted so as not to show the tax positions of other entities than Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd.

[20]	There is a discrepancy between the amount stated in the email of the companies’ accountant of December 2017 of $635,334 and the amount owed by the two companies in the settlement deed of $363,810. Mr Weaver explained that in addition to the amount stated in the deed of settlement, there was use of money interest and late payment penalties. He says that the defendants’ disclosure sent on

4 September 2018 explained all these matters to the plaintiffs and the plaintiffs would be able to calculate how the amounts were all made up. I note, for example, that there is a reference to documents of “Tax Traders” and I infer that Kiwiturks Orewa Ltd and Casablanca Sylvia Park Ltd were able to buy tax credits from third party taxpayers.

[21]	Mr Weaver acknowledged that professional fees have been incurred but the documents relating to those professional fees have not yet been disclosed. He indicated that they could be made available.

[22]	There is another group of documents which overlaps with other heads of discovery. Mr Shaw’s report shows, in the balance sheets, that Maxim Trading Ltd is a creditor of Casablanca Sylvia Park Ltd for some $87,000 and Kiwiturks Orewa Ltd for some $331,000. Maxim Trading Ltd is one of Huseyin Isik’s companies. I gather from submissions that the debts to Maxim Trading Ltd are said to be for having discharged the tax indebtedness of Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd. Inter-company debts have not been explained. There ought to be proper disclosure of the documents as to the indebtedness of Casablanca Sylvia Park Ltd and Kiwiturks Orewa Ltd to Maxim Trading Ltd. The basis for that indebtedness needs to be established.

[23]	I am satisfied that these documents going to the tax audit of the companies and their indebtedness to the Commissioner of Inland Revenue in the settlement are all relevant to establishing the value of shares. That is because the tax audit is said to justify the indebtedness of the companies to Maxim Trading Ltd. That liability will bear on the value of the shares. In these circumstances, I direct further disclosure of documents relating to the tax audit: these are the settlement letter, the professional fees which were incurred, and any other documents which the defendants rely on to justify the companies’ indebtedness to Maxim Trading Ltd.

[24]	Mr Grove has asked whether the orders extend to the reasons for the tax defaults and the tax discrepancies. I would have thought those matters would speak for themselves. I put it this way. A natural inference arises from the fact that a taxpayer has not made correct tax returns. If the defendants wish to say that those were

justifiable mistakes and matters for which they are not responsible, they have the option of providing further documents if they wish but I do not require it.

Documents relating to the payment of rebates by the companies’ suppliers including supplier contracts

[25]	The companies earn rebates from suppliers. There are questions as to how much they earn and who is entitled to them. The defendants say that Nazar Group Ltd does account to the companies for the rebates but that the plaintiffs do not accept that. Mr Shaw’s report says that between February 2015 and March 2018 rebates for Casablanca Sylvia Park Ltd totalling $165,000 were paid to the Nazar Group Ltd. And for the same period rebates for Kiwiturks Orewa Ltd were $102,000. The plaintiffs are suspicious that rebates are being credited to other companies in the group. They want to see that the rebates have all been taken into account and have all been properly credited.

[26]	Mr Nair acknowledges that he had been provided with a list of rebates but he says that he cannot establish the rebates relevant to Casablanca Sylvia Park Ltd and to Kiwiturks Orewa Ltd. The defendants say that they have already given extensive information on this. They have given a consolidated schedule which shows the rebates and how they have been derived. Mr Nair ought to be able to follow them.

[27]	In these circumstances, it may be tedious to require the defendants to disclose more information and more documents than they have done to date. The matter may be advanced more sensibly by directing the accountants to confer. I expect Mr Nair to attend a meeting with Mr Morrison and, if appropriate, a representative of the Nazar Group Ltd so that they can explain to Mr Nair how the rebates have been earned in the first place, to show that rebates have been calculated, that no rebates have been omitted, and that they have been appropriately allocated. If the defendants say that the rebates have been credited to the companies, they should show how that has been done. If not, the companies should disclose any documentations which are said to justify Nazar Group Ltd retaining the rebates. I expect that meeting to take place within the next four weeks, with a view to that issue being resolved. I will direct a case management conference to give any further directions if there are any outstanding issues under this head.

Staff rosters and other documents to corroborate the companies’ payroll records

[28]	The plaintiffs are concerned that Nazar Group Ltd may be manipulating its control of the companies’ payroll to charge them with wages for employees working in other restaurants. Mr Nair has had access to the cloud-based payroll system. He has taken some samples. On the basis of those samples he says that wages appear to have been overstated in some cases. He therefore seeks staff rosters to verify the payroll entries.

[29]	Mr Weaver advises that there was a tax audit. The Inland Revenue had access to staff rosters and those staff rosters have now been made available to the plaintiffs. I gather that 15 months of staff rosters are missing. In my view that is not critical. The staff rosters ought to provide Mr Nair with enough samples to check the accuracy of the payroll records. If he sees consistent discrepancies, he may therefore have a case to doubt the accuracy of the payroll records. On the other hand if the samples tend to show a broad match between the staff rosters and the payroll records, then the absence of staff rosters should not be treated as grounds for suspicion. In my judgment, the plaintiffs should be able to manage with the documents that have now been provided. Further orders are not required.

Any records of loans or credit contracts made to or by Casablanca Sylvia Park Ltd or Kiwiturks Orewa Ltd from 2014 onwards

[30]	The plaintiffs requisition documents relating to liabilities of the companies. They note a debt of $305,156 to Silver Chef recorded in the accounts of Casablanca Sylvia Park Ltd. Mr Nair indicates that the finance contract relating to Silver Chef has been provided in the documents already disclosed. That financing agreement related to the refurbishment of the restaurant. That appears to be indebtedness to a third party creditor. I see no reason to require further disclosure of documents for debts to third party suppliers.

[31]	The plaintiffs also seek disclosure of documents for indebtedness to Maxim Trading Ltd and Nazar Group Ltd. In cases such as this, where minority shareholders are concerned that the affairs of the company are being run contrary to their interests, it can be a legitimate line of enquiry to establish whether those in control of the

company are using that control to their own advantage and not for the benefit of shareholders. Transactions with related entities are an obvious line of enquiry. Documents relating to transactions between the companies and Maxim Trading Ltd and Nazar Group Ltd ought to be disclosed. Mr Weaver said that Mr Nair should be able to identify those through his access to the cloud-based accounting system. I am not sure whether that might be an invitation to look for a needle in a haystack. To the extent that there may be documents relating to that indebtedness that cannot be found on the cloud-based accounting system, they should be disclosed. Mr Nair should confer with Mr Morrison as to the transactions that are said to make up this indebtedness. That should be dealt with at the same time as he deals with Mr Morrison on the rebates question.

Monthly till reports and printouts from the Wizbang point of sale system

[32]	The plaintiffs seek the companies’ actual point of sale till tapes. The purpose is to verify actual sales. Mr Nair has been provided with the records which are said to be electronic records of point of sale transactions. These are referred to as “till tapes” but in this context “till tape” does not have the same meaning as was understood in retailing before electronic transactions took over. The plaintiffs say that they have received photocopies of the printouts. Their request was put on the basis that Mr Nair wants to see the actual printouts generated by the point of sale software as a form of verification.

[33]	In my view, that is pushing the matter too hard. I see no reason at this stage to think that there would be any discrepancy between the till tape printouts which would normally be provided and what Mr Nair considers to be the actual printouts. In a case like this there might be reason to doubt the validity of transactions involving directors and related entities, but it is a stretch to suggest that electronic records of point of sale transactions from the cafés/restaurants had been somehow doctored. In my view that is taking Mr Nair’s suspicion too far. I do not regard the quest for discovery of that as justified.

ANZ Bank records

[34]	In the past, Casablanca Sylvia Park Ltd traded with the ANZ Bank. It switched to the Westpac Bank. It still retained a connection with the ANZ Bank. The ANZ bank continued to charge a merchant’s fee. A merchant’s fee is apparently a charge for having an EFTPOS facility at a retail point of sale. I have been provided with an email from the ANZ bank explaining that while there was a formal switch to Westpac in 2017, from March 2015 money was being settled into the Westpac account. I accept the explanation given by the ANZ Bank. I see no need to enquire further into these merchant facilities. Mr Nair says that he has been provided with the bank statements for an ANZ account, called a “premium call account”. It shows only lump sum deposits being taken in and taken out. It is not a trading or operating account. He says that the company also ought to disclose its operating account.

[35]	The question here is whether I should regard the companies accounting of its income as inadequate and as open to challenge because the ANZ Bank records have not been made available for verification. Again, I take the point that the point-of-sale records should provide reasonable confidence that all relevant transactions have been taken into account to establish the companies’ earnings. This is reinforced by the fact that there has been an IRD audit. The Inland Revenue would be just as keen as the plaintiffs to see that all transactions were properly recorded and taken into account.   I do not direct any discovery under this head.

Outcome

[36]	I direct the defendants to provide and serve an affidavit of documents within four weeks of today, making disclosure as directed in this decision.

[37]	I also direct Mr Nair to meet with Mr Morrison and a representative of the Nazar Group, to confer as to rebates and as to any indebtedness with related party entities such as Maxim Trading Ltd and Nazar Group Ltd.

[38]	I direct the Registrar to arrange a further face-to-face conference after four weeks. At that conference I will give further directions for this proceeding. I record,

however, that the proceeding is to be heard for three days beginning on 24 June 2019. Directions for the exchange of evidence will be given at the next conference.

[39]	I reserve costs. The results of the hearing are about 50/50. Mr Grove makes the point that between the filing of the application and the hearing additional materials were provided, which went some way to meeting his client’s application. His submission is that reserving costs is appropriate in the circumstances.

……………………………….
Associate Judge R M Bell