Ace Education New Zealand Limited v Pan
[2019] NZHC 390
•8 March 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-000360
[2019] NZHC 390
UNDER Part 18 of the High Court Rules IN THE MATTER OF
the Companies Act 1993
BETWEEN
ACE EDUCATION NEW ZEALAND LIMITED
Plaintiff
AND
QIFEI PAN
Defendant
LANHUA ZHANG
Third Party
Hearing: [On the Papers] Counsel:
B P Rooney for the Plaintiff and the Third Party D B Hickson and G J Ussher for the Defendant
Judgment:
8 March 2019
JUDGMENT OF EDWARDS J
[re Costs]
This judgment was delivered by Justice Edwards on 8 March 2019 at 3.30pm, pursuant to
r 11.56 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel: B P Rooney, Auckland
Solicitors: Fortune Manning, Auckland
D B Hickson, Auckland G J Ussher, Auckland
ACE EDUCATION NEW ZEALAND LTD v PAN & ANOR [2019] NZHC 390 [8 March 2019]
[1] In this proceeding ACE claimed that its former director, Mr Pan, had breached his director’s duties under the Companies Act 1993 by using ACE’s funds for his personal benefit, or for the benefit of third parties. In my judgment dated 26 November 2018, I found that Mr Pan had breached his duties in relation to some, but not all, of the disputed transactions. I ordered Mr Pan to pay ACE the sum of $78,112.13.1
[2] The parties have been unable to reach agreement on costs, and both now seek costs orders to be made in their favour. The issues to be determined are as follows:
(a)Who was the successful party?
(b)Who should be awarded costs for the discontinued counterclaim and third party claim?
(c)Are there grounds to reduce costs?
(d)Are the claimed disbursements reasonable?
Procedural history
[3] ACE commenced its claim on 7 March 2017. It comprised 10 causes of action, with a total of approximately $420,000 claimed at that time. The statement of claim annexed schedules of transactions which formed the basis of each cause of action.
[4] Mr Pan defended that claim, and counterclaimed for approximately $38,800, which he said was due to him once advances he had made to the company were accounted for. He also counterclaimed for the sum of approximately $9,000 in respect of the lease of ACE’s premises which Mr Pan had personally guaranteed. Mr Pan also joined Ms Zhang, a former shareholder, as a third party claiming that she owed ACE approximately $24,700, not him.
[5] ACE filed an amended statement of claim in August 2017. That claim comprised 11 causes of action, and claimed damages totalling approximately
1 Ace Education NZ Ltd v Pan [2018] NZHC 3074.
$425,000. Mr Pan’s amended pleadings in response repeated the counterclaim and the third-party claim.
[6] The trial commenced on 21 May 2018. On the first day of trial, ACE informed the Court that it was no longer pursuing two of the eleven pleaded causes of action, and that the quantum of damages had reduced to approximately $116,000. Mr Pan received a copy of ACE’s expert brief approximately five weeks prior to trial, and so was aware that the quantum sought had reduced.
[7] The trial took five days. The plaintiff called three witnesses; the defendant called five. As observed in my judgment, the scope of the claim shifted during trial.2 By the end of the trial the pleadings did not reflect the position agreed between the experts and the parties, and there was a lack of clarity as to what was in dispute and required determination. This necessitated an adjournment of the trial to allow the parties time to clarify the position prior to delivering closing submissions. I directed ACE to file an amended statement of claim and a joint schedule identifying which transactions remained in dispute and required determination. Mr Pan was directed to file an amended counterclaim and third party claim thereafter.
[8] ACE filed a second amended statement of claim on 1 June 2018. Eight causes of action were pleaded and a total sum of approximately $139,700 was claimed. That included two new claims for a total of $21,000 which had not been claimed in the prior statements of claim. I declined leave to amend the statement of claim in respect of that sum.3 Mr Pan subsequently discontinued his counterclaim and third-party claim.
[9] Accordingly, the final claim to be determined comprised eight causes of action, and damages of approximately $116,000. There was no counterclaim and no third-party claim.
Judgment
[10] I entered judgment in favour of the plaintiff for the total sum of $78,112.13. Of the eight causes of action, I entered judgment by consent for the sum of $8,817 on
2 At [19] to [23].
3 At [120] and [135].
the first cause of action, but otherwise dismissed that cause of action. I entered judgment in favour of ACE on the second to fifth causes of action, although not in the sums sought by ACE. I dismissed the sixth, seventh, and eighth causes of action.
[11] I made factual findings that some of the disputed transactions were made on behalf of Ms Zhang, or for her benefit. I observed that it was evident that Ms Zhang was prepared to use the company funds for her personal expenditure. Nevertheless, I held Mr Pan liable for these transactions because allowing the company funds to be used in this way was a breach of his directors’ duties.
Who was the successful party on the plaintiff’s claim?
[12] Part 14 of the High Court Rules 2016 governs the award of costs. Rule 14.2 sets out the principles applying to the determination of costs. The primary principle is that a party who fails with respect to a proceeding should pay costs to the party who succeeds.4 An assessment of the success or failure in a proceeding is to be undertaken by a “realistic appraisal” of the end result, rather than by focusing on who initiated each step and the extent to which each step succeeded or failed.5
[13] I consider that a realistic appraisal of the end result leads to the conclusion that ACE was the overall successful party. ACE obtained judgment against Mr Pan for breaches of his directors’ duties in relation to transactions which were either for his personal benefit, or for the benefit of third parties. Although ACE did not succeed in relation to all of the disputed transactions, success on more limited terms is nevertheless still success.
[14] That measure of success gives a more realistic appraisal of the outcome than totalling the results on each cause of action. Seven of the eight causes of action related to a different category of transaction, but the legal basis for that cause of action was the same - namely breach of directors’ duties under the Companies Act 1993.6 ACE
4 High Court Rules 2016 r 14.2(1); Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [19]; Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZSC 109, [2013] 1 NZLR 305 at [8].
5 Weaver v Auckland Council [2017] NZCA 330 at [23].
6 The eighth cause of action was for conversion and was pleaded as an alternative basis of liability for some of the other causes of action. That cause of action received little attention at trial.
succeeded in proving that claim, although not in relation to all the disputed transactions. Accordingly, despite winning on only half of the causes of action pleaded, ACE was, realistically, the successful party overall.
[15] For completeness, I note that counsel for ACE has submitted that it is entitled to costs due to the “generally reprehensible conduct” of the defendant, both pre-and post-trial. That is not a proper basis upon which to award costs. Such allegations are irrelevant to the assessment of who is the overall winner in the proceeding.
[16] In summary, I consider a realistic appraisal of the end result leads to the conclusion that ACE was the overall successor and is accordingly entitled to an award of costs on a category 2B basis.
Who should be awarded costs for the discontinued counterclaim and third-party claim?
[17] Mr Pan discontinued his counterclaim and third-party claim after trial and following receipt of the second amended statement of claim.
[18] The general presumption is that a party who discontinues a claim must pay the costs of and incidental to the proceeding up to and including the point of discontinuance. However, that presumption may be rebutted if there are circumstances which make it just and equitable that it should not apply.7
[19] There is no basis to displace the presumption insofar as the counterclaim is concerned. Although ACE appears to have accepted that Mr Pan made advances to ACE in the sum of $252,812, that did not resolve the counterclaim. To the contrary, I infer from the fact that Mr Pan consented to judgment being entered against him in the sum of $8,817 that he conceded that he owed ACE, rather than ACE owing him.
[20] However, the impact of that on ACE’s claim for costs is limited. ACE claims the cost of filing a statement of defence to the counterclaim in its schedule of costs. I accept that is appropriate. However, with that exception, costs specifically attributable to the counterclaim cannot be separated from the costs attributable to the claim. In
7 High Court Rules 2016, r 15.23.
reality, both the claim and the counterclaim turned on the same question, namely whether the transactions in issue were for the benefit of the company, Mr Pan or for third parties. ACE incurred one set of costs in relation to both the claim and the counterclaim, and I consider its costs should be treated as such.
[21] The third-party claim against Ms Zhang falls into a different category. I consider there are circumstances which make it just and equitable that the presumption not apply to the third party claim. That claim was for contribution and/or indemnity in respect of claims that were, for the most part, abandoned by ACE at trial. In addition, I made findings of fact that some of the disputed payments which ACE sought to have reimbursed by Mr Pan, were made at Ms Zhang’s direction.8 Those sums may have been recoverable on the third-party claim had it been maintained. In those circumstances a claim for costs in relation to the third-party claim cannot be justified. ACE’s claim for costs associated with the filing of a statement of defence to the third- party claim is accordingly disallowed.
Are there grounds to reduce costs?
[22] Rule 14.7 (d) of the High Court Rules 2016 provides that costs may be reduced where the successful party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs.
[23] That rule applies in this case. Although ACE succeeded overall, it failed to achieve what it was seeking in the proceeding. The time and resources necessary for Mr Pan to meet ACE’s unsuccessful arguments increased its costs. The key issue is how to measure the extent of ACE’s success.
[24] In the particular circumstances of this case, I consider that a comparison between the sum awarded to ACE, $78,112, and the maximum claimed by ACE in the course of the proceeding, $425,000, accurately captures the extent of ACE’s success. The quantum of the claim was reduced to approximately $116,000 shortly before trial. That was a concession that the position taken by Mr Pan (and, I infer, his expert) in
8 Ace Education NZ Ltd v Pan [2018] NZHC 3074 at [44]. See also [63] and [110].
relation to some of the transactions in issue, and the funds he had introduced into the company, was correct.
[25] Measuring the extent of ACE’s success in that way is consistent with the principles of an award of costs set out in r14.2. ACE only reduced the scope of its claim, and thus the total sum sought, five weeks before trial. By then Mr Pan had incurred the bulk of his costs in defending a claim of around $425,000. Costs should reflect the complexity and significance of a proceeding and should also be predictable.9 Had ACE identified the transactions at issue as being $116,000 from the outset, then Mr Pan could have assessed his costs exposure accordingly. Cost-effective alternatives to High Court litigation over the sum of $116,000 may also have been explored.
[26] Accordingly, while ACE was the successful party overall, it only succeeded to a limited extent. The total sum awarded was approximately 18 per cent of the $425,000 originally claimed.10 The defence of the claims on which ACE lost significantly increased Mr Pan’s costs. Accordingly, ACE’s entitlement to costs should be reduced to 18 per cent of what it would otherwise be entitled to claim.
Are the claimed disbursements reasonable?
[27] ACE claims disbursements, including the fees of its expert witness, in the sum of $40,310.51. Copies of the two invoices of ACE’s expert have been provided.
[28] The fees themselves are reasonable and cannot be considered excessive in the circumstances. However, the total sum claimed must be considered in light of the overall result of the proceeding. The judgment sum awarded reflects the acceptance of ACE’s expert evidence on some transactions, and the rejection of that evidence on others. As noted above, ACE only succeeded on 18 per cent of its claim. I consider
9 High Court Rules 2016, rr 14.2(b) and 14.2(g).
10 Mr Pan submits that the agreed sum of $8,817 should be excluded in the calculations leading to ACE succeeding on only 16 per cent of its claim. But I consider the overall sum should include the $8,817 awarded by consent on the first cause of action. For reasons already given, that effectively represented a concession by Mr Pan that, rather than ACE owing him as he claimed in the counterclaim, he owed ACE, albeit not in the total sums claimed.
that the expert’s fees should be reduced by the same amount to ensure proportionality with the overall costs award.
Result
[29] ACE is awarded category 2B costs for the filing of a statement of defence to the counterclaim.
[30]The claim to costs on the third-party claim is dismissed.
[31]ACE is awarded 18 per cent of the remaining category 2B costs.
[32] ACE is awarded reasonable disbursements, except that only 18 per cent of the claim for expert fees is allowed.
Edwards J
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