Austar Realty Limited v Anderson

[2023] NZHC 2483

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-1600

[2023] NZHC 2483

UNDER

the Companies Act 1993 section 290

IN THE MATTER OF

an application to set aside a statutory demand

BETWEEN

AUSTAR REALTY LIMITED

Applicant

AND

AMY MELINDA ANDERSON

Respondent

On the papers:

6 September 2023

Appearances:

M Kyriak for the Applicant

A J B Holmes/N Foulis for the Respondent

Judgment:

6 September 2023

COSTS JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR

This judgment was delivered by me on 6 September 2023 at 3:00pm

pursuant to Rule 11.5 of the High Court Rules

…………………………. Registrar/Deputy Registrar

Solicitors:

M T Kyriak, Kyriak Law, Auckland, for the Applicant

Smith and Partners (Alana Kalinowski), Auckland, for the Respondent

Copy for:
Antony Holmes/Nickki Foulis, Richmond Chambers, Auckland, for the Respondent

AUSTAR REALTY LIMITED v ANDERSON [2023] NZHC 2483 [6 September 2023]

Introduction

[1]                 The respondent, Ms Amy Melinda Anderson (Ms Anderson), seeks costs on the discontinued application by the applicant  company,  Austar  Realty  Limited  (the Company), to set aside a statutory demand issued under s 290 of the Companies Act 1993. Ms Anderson seeks orders that costs be set either on an increased costs basis or an indemnity basis. The Company eventually paid the demanded amount in full and abandoned its application. Ms Anderson incurred actual costs of $23,315.40 (plus $269.89 in disbursements).

[2]                 Counsel  for  Ms  Anderson  submitted  a  memorandum  as  to  costs  dated  9 February 2023, counsel for the Company submitted a response dated 16 February 2023, and counsel for Ms Anderson submitted a reply on 22 February 2023.

[3]The Court apologises that this matter was not referred to me until now.

Background

[4]                 Ms Anderson is a 13.3 per cent shareholder in the Company. The statutory demand served on 24 August 2022 required repayment of her shareholder current account, being an amount of $125,000. The Company made an application to set aside the statutory demand pursuant to s 290 of the Companies Act 2023, dated 7 September 2022.

[5]                 The amount demanded in the statutory demand (less a $172.00 adjustment) was paid on 31 January 2023 and the proceeding was discontinued on 2 February 2023.

Ms Anderson’s submissions

Costs on a 2B basis

[6]                 Mr Holmes, on behalf of Ms Anderson, submits that Ms Anderson was the successful party in the proceedings as her demand was never withdrawn and the

proceeding was discontinued without leave of the Court and without any agreement on costs. Mr Holmes submits Ms Anderson is therefore entitled to costs on a 2B basis, which are calculated at $7,528.50 plus disbursements of $269.89. He notes that the calculation includes 50 per cent of step 40 (preparation of submissions) as preparation had commenced prior to payment on 31 January 2023 due to the proximity of the hearing.

Indemnity costs or increased costs

[7]                 Mr Holmes submits that the application to set aside the statutory demand referred to three primary grounds, none of which was genuinely arguable on the evidence. These were:

(a)repayments of  $56,350.00  were  alleged  to  have  been  made  to  Ms Anderson in 2019. Ms Anderson explained that no such payment was ever made and there was no evidence of such. In a reply affidavit, the Company’s accountant confirmed the Company had corrected its accounting records to reverse the book entries it had incorrectly made. The ground was effectively withdrawn;

(b)the shareholder loan was not repayable unless there was unanimous agreement with the shareholders to do so. The Company proffered no admissible evidence of such, but relied on hearsay evidence given by the Company’s accountant which was vague at best and was inconsistent with the financial records. The only admissible evidence was that of Ms Anderson who denied there was such an agreement. The argument was neither genuine nor sustainable;

(c)the Company sought set-off of $92,624.00 it claimed Ms Anderson owed pursuant to a Bonus Share Agreement. This amount was never included in the current account shown in any of the financial statements for the  Company.  The  Bonus  Share  Agreement  did  not  require Ms Anderson to pay any such amount (it provided for the Company to

make payments to her) and in any event all liabilities under it had already been settled by a March 2019 Separation Agreement.

[8]                 Mr Homes submits that indemnity costs are appropriate on the basis that the Company acted vexatiously, frivolously, improperly and unnecessarily in commencing the proceeding (r 14.6)(4)). He submits that the application (as demonstrated at [7]) was without merit and that delay was the Company’s primary motivation. In support of this, he points to the following:

(a)payment was made in full two weeks before the hearing in circumstances where the Company had not filed submissions;

(b)the Company’s 31 March 2022 financial statements showed an after- tax profit of over $600,000 and sufficient assets to pay its liabilities (including the shareholder accounts). It claimed it was willing ready and able to pay the amount of the demand into Court, and instead chose not to pay Ms Anderson as she no longer worked for it;

(c)in January 2023 the parties made various without prejudice offers (save as to costs), but nothing was agreed. Costs that followed were not significant and Ms Anderson says that the relevance is the Company’s approach of avoiding any discussion on the merits and instead simply seeking a discount on the amount owed.

[9]                 Mr Holmes also refers to the decision of Gault J in Sealegs International Ltd v Yun Zhang First1 where the Court found that it was obvious and incontrovertible that the application was misconceived such that the applicant acted unreasonably. Increased costs were ordered, but not indemnity costs as there was no clear ulterior purpose. Mr Holmes submits that here the Company had such a purpose, which was using the Court processes to delay payment.

[10]On the above basis, Mr Holmes submits that indemnity costs are appropriate.

1      Sealegs International Ltd v Yun Zhang First [2020] NZHC 912.

[11]             In the alternative, Mr Holmes seeks increased costs. He submits that the Company brought an application that  lacked  merit  and  then  abandoned  it,  and Ms Anderson has not only paid to oppose it but also effectively paid 13.3 per cent of the Company’s costs as she is a 13.3 per cent shareholder in the Company. Mr Holmes submits that contribution justifies increasing the amount of the award significantly so that she is no longer personally out of pocket and, taking that into account, he submits that scale costs should be uplifted by 100 per cent, which totals $15,057.00 and amounts to 65 per cent of her actual costs.

The Company’s submissions

[12]             Mr Kyriak, for the Company, accepts that the Company is liable for scale costs but rejects the proposition that there is any basis for indemnity costs or increased costs. He submits that the Company disputed Ms Anderson’s right to demand payment on two grounds:

(a)the dispute as to the repayment terms of the undocumented shareholder loan;

(b)the counterclaim under the Bonus Share Agreement.

Dispute as to repayment terms of the shareholder loan

[13]             Mr Kyriak submits that the Company’s position was that it had been agreed by all contributing shareholders that the shareholder loans were to be repaid equally and only when the Company was in a financial position to do so. He submits that the Company’s position in relation to those terms as evidenced by the Company’s accountant with referential support from two other shareholders. He submits:

(a)the proposition that the shareholder loans were not repayable unless the Company was in a position to make that repayment was grounded in commercial sense;

(b)at the time the demand was made the Company was solvent but not in a strong financial position and therefore the Company’s position was

that the shareholder loan was not due and payable as at the demand date;

(c)there was no written agreement and therefore no express terms which confirm or rebut the position of either party.

Counterclaim under the Bonus Share Agreement

[14]             Mr Kyriak submits that the Company’s position is that its financial accounts recorded Ms Anderson’s repayment obligations under the Bonus Share Agreement over the course of a number of prior years and Ms Anderson, being aware of those financial accounts, did not dispute the claimed debt and her objections only arose in the context of the advance of the Company’s counterclaim argument in these proceedings.

[15]             Mr Kyriak submits (at [12] of his memorandum of 16 February 2023) that the Calderbank offers exchanged in correspondence between the parties demonstrates that Ms Anderson considered that the Company’s claim that she owed an amount under the Bonus Share Agreement had at least some merit on the basis that Ms Anderson had offered to abandon her claim for costs on the basis that the Company abandon its claim in respect of the Bonus Share Agreement.

[16]             Accordingly, Mr Kyriak submits that Ms Anderson has not established that the application to set aside the statutory demand had an obvious and incontrovertible lack of merit.

[17]             Mr Kyriak submits that Ms Anderson has not established that the Company acted unreasonably in bringing or continuing its application. He submits that the Company had little choice but to bring and pursue the application to set aside the statutory demand as the consequences of not doing so would have been disastrous to the Company. He submits the Company, for commercial and pragmatic reasons, actively engaged with Ms Anderson in the Calderbank offer process which was nearly, but not quite, successful. He submits that instead of maintaining the application the

Company chose instead to repay the claimed amount without prejudice to claims against Ms Anderson in respect of amounts owing under the Bonus Share Agreement.

[18]             Accordingly, Mr Kyriak submits there is no basis for increased costs or indemnity costs.

Ms Anderson’s reply submissions

[19]             In the reply submissions dated 22 February 2023, Mr Holmes makes the following points in reply:

(a)There is no evidence from the other shareholders, Mr Day or Mr Smith, regarding any oral agreement in respect of repayment of the shareholder loans and the only evidence is hearsay evidence from the Company’s accountant.

(b)There is no evidence that the Company was not in a position to make a repayment at the time of Ms Anderson’s demand. He submits that this is a submission made from the bar with no factual foundation and is contrary to the Company’s accountant’s evidence that the Company was solvent and willing and able to pay the demand amount into Court to satisfy the question of solvency.

(c)The Company has not, and cannot, identify any provision in the Bonus Share Agreement which requires Ms Anderson to pay it the sums it sought to set-off and not attempted to explain why such claims were not settled by cl 16 of the Separation Agreement.

(d)The Calderbank communications and offers did  not  establish  that Ms Anderson gave any weight to the Company’s counterclaim.

(e)The submission the Company had little choice but to pursue the application and that the Company’s decision not to pay until the eleventh hour was simply “commercial and pragmatic” are invalid reasons to apply to set aside a statutory demand of an amount which

was due and payable. Therefore an inference should be drawn that the Company was using the Court’s processes solely to delay payment, which is an abuse of process.

(f)The costs sought are reasonable  and  proportionate,  including  the  50 percent allocation of step 40 for preparation of submissions in advance of the hearing.

Result

[20]In my view:

(a)Ms Anderson has not established that the Company’s application was obviously and incontrovertibly lacking in merit. While Mr Holmes submits the grounds on which the application were made are not sustainable, there are responses from the Company to his criticisms of these grounds and the Court cannot, on the papers, come to a view that they are completely baseless.

(b)There is no convincing evidence before the Court that the Company was using the application to set aside the statutory demand for the ulterior purpose of delaying payment.

(c)There is insufficient evidence to demonstrate the Company was behaving unreasonably or exceptionally badly, justifying indemnity costs.

(d)Ms Anderson’s shareholding in the Company is not relevant to the assessment of costs as it does not have any bearing on the conduct of the proceeding.

(e)There should be a small uplift in scale costs to reflect the fact that the amount demanded was paid in full two weeks prior to the hearing, without the Company making any submissions.

[21]I make orders below accordingly.

Orders

[22]             I order that the Company is to pay Ms Anderson scale costs calculated on a 2B basis of $7,528.50 uplifted by 25 per cent to $9,410.62, together with disbursements of $269.89, totalling $9,680.51.

…………………………….

Associate Judge Taylor