C-Dax Limited v Franklin HC Palmerston North CIV 2009-454-517
[2010] NZHC 814
•21 April 2010
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2009-454-517
BETWEEN C-DAX LIMITED Applicant
ANDWILLIAM EDWARD FRANKLIN AND LESLEY FRANKLIN
Respondents
Judgment: 21 April 2010 at 3.30 pm
JUDGMENT AS TO COSTS OF ASSOCIATE JUDGE D.I. GENDALL
This judgment was delivered by Associate Judge Gendall on 21 April 2010 at 3.30 pm pursuant to r 11.5 of the High Court Rules.
Solicitors: Evans Henderson Woodbridge, Solicitors, PO Box 326, Marton 4741
Minter Ellison Rudd Watts, Solicitors, PO Box 3798, Auckland
C-DAX LIMITED V WE FRANKLIN AND L FRANKLIN HC PMN CIV-2009-454-517 21 April 2010
Introduction
[1] On 29 June 2009, Mr William Franklin and Ms Lesley Franklin, as trustees of Sydney House Trust (the respondents), issued C-Dax Limited (the applicant) with a statutory demand under s 289 of the Companies Act 1993, requiring payment of
$273,056. On 13 July 2009 the applicant filed an application in this Court to have this statutory demand set aside. On 26 February 2010, the respondents consented to the demand being set aside, and this Court made an order accordingly.
[2] Both parties now claim that they are entitled to costs. This judgment deals with this costs issue.
Facts and Background
[3] The respondents are shareholders of the applicant company and issued the statutory demand following the applicant’s refusal to make payment of an alleged current account debt of $273,056. One day before the scheduled hearing of this matter on 23 November 2009, the applicant filed an affidavit by Mr John Francis Clifford Henderson (Mr Henderson), who is a director of the applicant, producing a Deed of Subordination (the deed). The deed was entered into in December 2001 by the shareholders of the applicant C-Dax in favour of the company’s financier, the Hong Kong Shanghai Banking Corporation (HSBC), and precluded the shareholders from making demand on their current accounts in the absence of HSBC’s express consent. A further affidavit was filed on 25 November 2009, annexing powers of attorney by the respondents which conferred authority on Mr Henderson to sign the deed on their behalf. It appears that the deed was made available to the respondents on 19 November 2009, and that the powers of attorney were provided to them on 20
November 2009.
[4] The 19 November 2009 affidavit from Mr Henderson was his third affidavit in reply in this proceeding. His two previous affidavits were sworn on 9 September
2009 and 4 November 2009.
[5] At the hearing on 23 November 2009, the respondents took the position that they had been “ambushed” by the late provision of the affidavit. This proceeding was then adjourned to 9 December 2009. On 2 December 2009, the respondents sought a further adjournment, stating that the deed raised a number of issues and to address these would require additional time. In particular, the respondents questioned the relevance of the deed and the circumstances of its execution. A new hearing was scheduled for 1 March 2010 by consent. On 2 February 2010, the respondents again sought an adjournment of that fixture, which was declined however.
[6] As I have noted, on 26 February 2010 the respondents finally consented to the demand being set aside.
Counsel’s Submissions and My Decision
[7] In memoranda filed by counsel on the question of costs in this proceeding, the respondents submit that they are entitled to an award of costs on a 2B basis or, alternatively, that the application for costs by the applicant should be refused. The respondents’ argument centres on the contention that the applicant unjustifiably failed in a timely fashion to produce the Deed of Subordination as evidence in the proceeding until just prior to the hearing in November 2009. It is submitted that the deed was directly relevant to the proceeding, as it precluded the shareholders from making demand on their accounts in the absence of HSBC’s express consent, and that the respondents were thus left with no option but to finally agree to the setting aside of the demand.
[8] The respondents further contend that the deed was always in the possession or control of the applicant, and that there was no justification for the applicant’s failure to produce the deed as evidence at an earlier time. The respondents here refer to the fact first, that the deed was annexed to an affidavit filed one day before the hearing, which was Mr Henderson’s third affidavit filed in reply in this proceeding, and that secondly, Mr Henderson is a qualified practising solicitor who was instrumental in the execution of the financial documentation entered into by the applicant with HSBC, and who signed the deed on behalf of the respondents pursuant to powers of attorney. The respondents accordingly argue that the applicant
was or ought to have been aware of the deed. The respondents also rely on what they say was a request made to the applicant, prior to the proceeding being issued, that the applicant produce documentary evidence of its assertion that the parties had entered into an agreement which precluded the respondents from making a demand on their current account.
[9] Moreover, the respondents submit that, in contrast to the applicant, they were unaware of the relevance of the deed to the litigation. The first named respondent, Mr William Franklin (Mr Franklin) says that he does not recall receiving a copy of the deed or being advised of its terms or significance by Mr Henderson. As I have noted, the deed was executed on the respondents’ behalf by Mr Henderson. And it seems that following Mr Franklin’s resignation as Managing Director of the applicant in 2008, he no longer had access to the applicant’s records.
[10] The applicant, on the other hand, rejects the suggestion that it is liable to pay the respondents’ costs. It submits that the respondents issued the statutory demand despite clearly being warned that the debt was not due, and that their concession to set aside the demand only came more than three months after they were reminded of the existence of the deed. It thus disputes the respondents’ submission that they would not have issued the demand had they been aware of the deed.
[11] The applicant points out that Mr Franklin was the Managing Director of the applicant at the time the HSBC facilities were negotiated, and contends that Mr Franklin must have been aware therefore of the terms of the loan agreements and the deed. The applicant acknowledges that the respondents did not actually sign the deed, but submits that the respondents executed powers of attorney just two days before the deed was signed because they knew that they would not be there to execute the document.
[12] The applicant does concede that it “overlooked” the deed in earlier correspondence with the respondents, but Mr Henderson explains this oversight at paragraph 3 of his 19 November 2009 affidavit as follows:
3. At the time the initial affidavits from the applicants needed to be filed, I was absent and reliance was placed on people unfamiliar with the file, to locate material. This Deed was not among papers held by C-Dax Limited, nor by my firm as the company’s solicitors. A review by me this morning of the company’s
files has revealed that the solicitors for HSBC omitted to return the shareholders copy following execution by HSBC thus it had escaped detection during the applicant’s review of relevant material.
[13] It is a general principle applicable to the determination of costs that the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds: r 14.2(a). There needs to be a “good reason” for departing from this general principle: International Airline Trading (NZ) Ltd v Rohlig NZ Ltd HC Auckland CIV-2003-404-3464, 23 February 2004. However, the Court may refuse to make (or may reduce) an order for costs if the party claiming costs has contributed unnecessarily to the time or expense of a proceeding for example by failing, without reasonable justification, to admit facts, evidence or documents: r 14.7(f)(iii). An order against a successful party can only be made in extreme cases where, for example, the successful party raised issues or made allegations improperly or unreasonably: Body Corporate 97010 v Auckland City Council (2001) 15 PRNZ 372.
[14] Here, the respondents argue that the applicant knew or ought to have known that the deed was relevant to the litigation between the parties, and ought to have presented it as evidence at an earlier point and certainly before the end of November
2009. They claim that they would not have issued the statutory demand, or opposed the application to set aside the demand, if they had been aware of the deed. On that basis, they submit that the facts of this case amount to the type of extreme case envisaged by the Court of Appeal in Body Corporate 97010 v Auckland City Council, as the applicant was granted an indulgence to file an affidavit at the eleventh hour, annexing a document which had been in its possession or control since 2001 and which was directly relevant to the issues raised in the proceeding.
[15] On the one hand, I accept the respondents’ submission that the applicant ought to have made available the deed at an earlier stage in the proceeding. On 20
May 2009, before the proceedings were issued, the respondents wrote to the applicant’s solicitors requesting that it provide documentary evidence of its assertion that the parties had entered into an agreement which precluded the respondents from making demand on their current account. The applicant responded on 26 May 2009 by attaching a board resolution dated 16 April 2008 in support of its position.
[16] The deed was finally provided to the respondents on about 19 November
2009. The initial hearing of the application to set aside the statutory demand was scheduled for 23 November 2009. The deed was obviously relevant to the proceeding, as it was of direct concern to the respondents’ ability to claim payment of their shareholder advances. There is no reason however to doubt the truth of Mr Henderson’s explanation that the applicant’s failure to provide the deed to the respondents resulted from an oversight. Nevertheless, this was an oversight that should not have occurred and it has caused unnecessary delays. While I acknowledge that Mr Franklin was apparently “vaguely aware of the existence” of the finance documents and also recalled granting a power of attorney, it seems to me that, in the end, it was the applicant who had access to the relevant documentation and who was responsible for disclosing it. However, the applicant’s conduct here, in my view, could not in any sense be viewed as sufficiently objectionable to lead to the present situation being seen as an “extreme case”, and there is no suggestion that the applicant raised issues or made allegations that were improper or unreasonable.
[17] I also consider that there is merit in the applicant’s submission that the respondents were slow to concede that the demand should be set aside, seeking three adjournments once they had been provided with the document. While I would not go so far as to dismiss the respondents’ submission that they would never have issued the demand (or opposed the application to have it set aside) if they had been aware of the deed, I accept that their conduct following the scheduled hearing on 23
November unnecessarily dragged out the proceeding.
[18] Moreover, it is relevant in this context that the respondents decided to proceed with the statutory demand against the applicant despite the applicant’s clear position and warnings that the debt was not then due. Although the applicant failed to produce documentary evidence of the agreement reached in the deed at that stage, and also did not appear to give particulars of its claim that the respondents were not entitled to call for repayment of their account on the basis of an agreement between shareholders, I am satisfied that the respondents should have been slow to issue a statutory demand in the face of such opposition. It is well established that creditors need to be cautious before issuing statutory demands to ensure that there is in fact no
genuine dispute as to the debt: Keystone Ridge Limited v City Sales Limited HC AK M549-IM02 19 July 2002 at [10].
[19] In all these circumstances, I consider that it would be appropriate to award costs in favour of the applicant, but to make a modest reduction of 20 per cent of these costs on account of the applicant’s delay in providing the respondents with a document that was clearly essential to the proceeding.
[20] I also note briefly the respondents’ submission that it should be entitled to costs on the basis of the “conventional” rule that a party will be required to pay costs, irrespective of the outcome of the case, where it has asked for an indulgence of the Court: r 14.7(g); Tokoroa Earthmovers Ltd v Currie [1966] NZLR 989. The respondents claim that the late filing of Mr Henderson’s 19 November 2009 affidavit amounted to an indulgence that should now result in an order for costs against the applicant. I do not consider that any further costs award in terms of this principle is applicable in the present case, as any indulgence to the applicant is already sufficiently addressed by the costs reduction I have noted above.
[21] It follows that the applicant’s claim for costs is allowed, albeit on a slightly reduced basis. For the reasons outlined above the respondents’ claim is declined.
Quantum
[22] As to quantum, in this case the applicant seeks total costs on a Category 2B
scale basis of $6,240.00 and disbursements of $585.00.
[23] It seems to be fully accepted by the respondents that of the applicant’s total
$6,240.00 costs claim, $4,480.00 is appropriate in terms of items 26, 27, 28 and 29 of Schedule 3 of the High Court Rules – paragraph 22 of the 5 March 2010
Memorandum from counsel for the respondents.
[24] The applicant, however, seeks additional costs on the basis that the respondents’ adjournments required two additional memoranda to be prepared and one additional case management conference.
[25] The Category 2B costs claimed by the applicant for those two extra memoranda occasioned by the respondents’ adjournment requests totalled $1,280.00 in terms of Item 4.10 or 27 of the Third Schedule and the extra case management conference attendance totalled $480 in terms of Item 4.11 or 29 of the Third Schedule.
[26] Under all the circumstances here, that additional costs claim of $1,760.00 by the applicant is justified in my view, consequent upon the respondents’ last minute adjournment requests which merely served to prolong the inevitable outcome in this case that the statutory demand was to be set aside.
[27] Total Category 2B scale costs in this case therefore amount to $6,240.00. For the reasons noted in particular at paragraph [19] above the applicant is entitled to an award of 80% of those costs. This amounts to $4,992.00.
[28] Disbursements of $585.00 comprising a filing fee of $400.00 and photocopying charges for the common bundle and authorities of $185.00 are sought. In my view they too are appropriate.
Orders
[29] An order is now made therefore that the respondents are to pay to the applicant costs on this application of $4,992.00 and disbursements of $585.00.
‘Associate Judge D.I. Gendall’
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