Blossom Wool 2007 Limited v Smith HC Auckland CIV 2009-404-4689

[2010] NZHC 1181

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2009-404-004689

IN THE MATTER OF     Section 290 of the Companies Act 1993

BETWEEN  BLOSSOM WOOL 2007 LIMITED Applicant

ANDGERALD SMITH Respondent

Hearing:         on papers

Counsel:         E J Morrison for applicant

N S Gedye for respondent

Judgment:      6 July 2010 at 2:00pm

COSTS JUDGMENT OF ASSOCIATE JUDGE ABBOTT

This judgment was delivered by me on 6 July 2010 at 2:00pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Kirkland Enright, PO Box 1290, Auckland 1140 for applicant

Romaniuk & Associates Law Office, PO Box 105763, Auckland 1143 for respondent

BLOSSOM WOOL 2007 LIMITED V SMITH HC AK CIV 2009-404-004689  6 July 2010

[1]      The applicant Blossom Wool 2007 Limited (BW2007) has applied for an award of costs of $6,940.56 on an indemnity basis, after it succeeded in having a statutory demand issued against it by the respondent, Mr Smith, set aside.  Mr Smith initially sought time to oppose the application to set aside, but did not pursue that opposition.  In the alternative BW2007 seeks an order for increased costs.

[2]      BW2007  contends  that  the  demand  arose  out  of  a  known  shareholders’ dispute.  It says that the demand was an abuse of process, and Mr Smith was warned that indemnity costs would be sought if the demand was not withdrawn and it had to bring this application.

[3]      Mr Smith accepts that he should be liable for costs on a standard scale basis ($3,440) but opposes indemnity or increased costs.  He contends that the dispute did not arise until BW2007 filed its affidavit in support of the application to set aside, and that he acted reasonably in withdrawing his demand in light of that dispute.

Background

[4]      At material times Mr Smith was a director and shareholder of BW2007.

[5]      On 20 July 2009 Mr Smith served a statutory demand on BW2007 claiming payment for the unpaid balance of an alleged salary, and services provided to BW2007 between 13 August 2008 and 12 July 2009.

[6]      BW2007’s solicitors responded to the demand on 29 July 2009.  They said there was no basis whatsoever for the claim, and questioned Mr Smith’s motivation. They contended that it was a stratagem to create “an insolvency event” designed to give Mr Smith the ability to cancel intellectual property rights in a natural fibre product which he had licensed to BW2007 on 17 December 2007 (Mr Smith was director and shareholder of the licensor, Natural Fibre Innovation Limited).

[7]      BW2007’s solicitors sought immediate withdrawal of the demand (as  an abuse of process) and advised the BW2007 would apply to set it aside, and seek indemnity costs, if it was not withdrawn by the end of that day (29 July 2009).

[8]      On the same date another of the shareholders in BW2007 served Mr Smith with notice of default under a shareholders’ agreement dated 17 December 2007.

[9]      Mr Smith did not withdraw his demand.  The following day (30 July 2009) BW2007 filed and served an application to set the demand aside.  The application was given a first call date of 21 August 2009.

[10]     On 17 August 2009 Natural Fibre Innovations Limited, which held shares in BW2007, applied to this Court for liquidation of BW2007 on the basis of oppressive conduct  (s  174  of  the  Companies  Act  1993).    On  the  same  day Natural  Fibre Innovations Limited gave notice of termination of the licence agreement, with immediate effect.

[11]     On the morning of 21 August 2009 Mr Smith filed and served notice of opposition BW2007’s application to set aside, but without an affidavit in support. The grounds of opposition stated were that there was no substantial dispute over the sum demanded, that BW2007 was not solvent, and that BW2007 did not have a set- off or counterclaim.

[12]     Counsel appeared for Mr Smith at the hearing on 21 August 2009 and sought extension  of  time  to  take  instructions  and  file  an  affidavit  in  support  of  the opposition.  He also said that he had not had opportunity, at that point, to take full instruction on the grounds of opposition advanced.  An order was made extending the time for filing notice of opposition and requiring any affidavit in support of the notice of opposition to be filed and served by 4 September 2009.  No affidavit was filed.

[13]     There was no appearance for Mr Smith when BW2007’s application was next called on 23 September 2009.  BW2007’s application was granted.

Principles for increased or indemnity costs

[14]     The Court’s power to award increased or indemnity costs is to be found in r 14.6 of the High Court Rules.  BW2007 seeks indemnity costs under r 14.6(4)(a) and (b):

14.6     Increased costs and indemnity costs

(4)      The court may order a party to pay indemnity costs if—

(a)the   party   has   acted   vexatiously,   frivolously,   improperly,   or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or

(b)the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party …

[15]     In the alternative, BW2007 seeks increased costs under r 14.6(3)(b)(i) and

(ii):

(3)      The court may order a party to pay increased costs if—

….

(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

(i)       failing to comply with these rules or with a direction of the court; or

(ii)      taking  or  pursuing  an  unnecessary  step  or  an argument that lacks merit …

[16]     The party claiming increased or indemnity costs has the onus of persuading the Court that such an award is justified: Radfords Ltd v Advertising Works New Zealand Ltd, T/A Olgivie Advertising Works.[1]

[1] Radfords Ltd v Advertising Works New Zealand Ltd, T/A Olgivie Advertising Works HC Auckland

CIV 2006-404-325, 24 April 2006.

[17]     The applicant must pass a high threshold before an order for indemnity costs will be made.   Such orders tend to be reserved for cases “where truly exceptional circumstances exist”, which can include proceedings issued for some ulterior motive

or commenced with wilful disregard of known facts, or with allegations that ought never to have been made:  Hedley v Kiwi Cooperative Dairies Ltd.[2]

[2] Hedley v Kiwi Cooperative Dairies Ltd (2002) 16 PRNZ 694.

[18]     Where a party seeks increased costs on the grounds that the opposing party has contributed unnecessarily to the time or expense of the proceeding, any award will be made only in respect of actions after the proceeding has been issued.[3]

Discussion

[3] Hong Kong and Shanghai Bank Corporation Ltd V Rick Dees Ltd HC Auckland CIV-2006-404-5278, Associate Judge Abbott at para 18.

[19]     The essence of BW2007’s case is that Mr Smith knew that he did not have a contract of employment, or a contract for services, but persisted with his demand as a mechanism for trying to resolve a dispute between the shareholders of BW2007.  It has long been accepted that it is inappropriate to issue a statutory demand for a debt which is known to be in dispute.   BW2007 says that there is no question that Mr Smith’s claim was in dispute, and that it pointed this out to him and asked him to withdraw the demand before this application to set aside was issued.

[20]     Before considering the evidence on the point, it is necessary to consider whether  BW2007’s  contentions  fall  within  r  14.6(4).     Counsel  for  BW2007 presented its case on the grounds that Mr Smith had acted vexatiously or improperly in failing to withdraw the statutory demand immediately.

[21]     Failure to withdraw the demand does not fit easily within the part of the rule on which counsel relied, namely r 14.6(4)(a).  A statutory demand is a precursor to a proceeding (as that term is defined by the High Court Rules) rather than a proceeding itself, or even a step in a proceeding.  R 14.6(4)(a) will apply where a party opposes an application to set aside (the opposition is a step in that proceeding) or files a liquidation proceeding based on the demand.  Where a party does no more that fail to withdraw a notice, leaving it to the company to apply to set the demand aside, the appropriate basis for an order for indemnity costs would appear to be the general provision to be found in r 14.6(4)(f):

(4)      The court may order a party to pay indemnity costs if—

…

(f)some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination  of  costs  should  be  predictable  and expeditious.

[22]     Assuming that there is a legal basis for an award of indemnity costs in this case, I am not persuaded that there is a sufficient evidential basis for it:

a)        There is a dearth of relevant evidence.    In its solicitors’ letter of

29 July 2009, BW2007 contended that it did not have a contract with Mr Smith for provision of services, and Mr Smith was not employed by it.  BW 2007’s director Ms Mearns, says in evidence that under the shareholders’ agreement one of the shareholders (Maxim Group) entered into a contract of services with Mr Smith, but not BW2007 (any contract with BW2007 was dependent on funding becoming available).

b)On the other hand, Mr Smith contends that there was a contract in place and his counsel, in his memorandum opposing costs, produced a statement on BW2007’s letterhead (signed by its general manager) to the effect that Mr Smith was employed permanently by BW2007 at an annual salary of $65,000.  That document is dated 2 December 2008 (within the period for which Mr Smith was claiming unpaid remuneration).  Counsel produced a signed (and subsequently sworn) statement by Mr Smith in which he sets out work carried out.  At least some of it could qualify as services for the joint enterprise.

[23]     It is impossible to determine, for the purposes of costs, where the merits lie in respect of the dispute, although it has to be said that Mr Smith’s entitlement may well have been contested, as part of the wider disputes between the parties, at the time that he issued his statutory demand.   Similarly, there is insufficient evidence before the Court to be able to come to a firm view on BW2007’s assertion that Mr Smith had an ulterior motive (putting pressure on his co-shareholders).

[24]     I note the following matters as also relevant to the decision:

a)       It was unrealistic of BW2007 to give Mr Smith less than 24 hours to withdraw (its solicitors’ letter of 29 June 2009);

b)BW2007 solvency has not been established (Ms Mearns has merely asserted that it is solvent); and

c)       It was always open to Mr Smith to have pursued his concerns in a different manner, as he subsequently did by issue of his shareholder oppression claim.

[25]     Weighing all of these matters, I am not persuaded on the evidence before the court that this is an appropriate case for indemnity costs.   I do consider that Mr Smith contributed unnecessarily to costs by seeking an adjournment of the application, at its first call, rather than withdrawing at that point.  On the material before the court I accept that BW2007 is entitled to an uplift of 75% on the costs for that appearance.

[26]     Mr Smith is to pay BW2007 costs of $3,800, being the costs set out in paragraph 9 of the memorandum of counsel for BW2007 dated 23 September 2009, together with an uplift of 75% on the costs for the appearance at the hearing on

21 August 2009.

Associate Judge Abbott