Churchill Group Holdings Ltd v Aral Property Holdings Ltd

[2010] NZCA 88

IN THE COURT OF APPEAL OF NEW ZEALAND

CA80/2010
[2010] NZCA 88

BETWEENCHURCHILL GROUP HOLDINGS LIMITED

First Appellant

ANDCACHINAL INVESTMENTS LTD

Second Appellant

ANDMATAM INVESTMENTS LTD

Third Appellant

ANDCLEVELAND INVESTMENTS LTD

Fourth Appellant

ANDPHILIP JOSEPH FAVA

Fifth Appellant

ANDARAL PROPERTY HOLDINGS LTD AND DAVID LEUNG

Respondents

Hearing:9 March 2010

Court:Chambers, O'Regan and Randerson JJ

Counsel:P J Fava in person and  for appellant companies

R G Simpson for Respondents

Judgment:23 March 2010 at 4 p.m.

JUDGMENT OF THE COURT

AThe application for a stay of execution in respect of the judgment of the High Court delivered on 22 December 2009 in CIV 2001-404-2302 is dismissed.

B        The costs of this application are reserved.
____________________________________________________________________

REASONS OF THE COURT

(Given by Randerson J)

Introduction

[1]        The appellant companies and Mr P J Fava personally seek a stay of execution of a costs judgment delivered by Hugh Williams J on 22 December 2009[1] in which he ordered the appellants, jointly and severally, to pay costs to the respondents of $2 million.  The costs judgment followed the entry of a default judgment against the appellant companies in favour of the respondents in 2006 in circumstances we later describe.  An application for stay of execution in respect of the costs judgment was declined by Venning J in a decision delivered on 27 January 2010.[2] 

[1]Churchill Group Holdings Ltd v Aral Property Holdings Ltd HC Auckland CIV-2001-404-2302, 22 December 2009.

[2]Churchill Group Holdings Ltd v Aral Property Holdings Ltd HC Auckland CIV-2001-404-2302, 27 January 2010.

[2]        In advancing the application for stay before us, Mr Fava submitted that the appeal against the costs judgment would be rendered nugatory unless a stay was granted.  He accepted that the winding up of the companies and his adjudication in bankruptcy (in consequence of proceedings now filed by the respondents) would mean the appellants could not proceed with their ultimate goal of setting aside the default judgment in the substantive proceedings and reviving the original litigation.  He also acknowledged that both he and the companies were impecunious, to the extent that it was necessary to borrow the sum of $4,740 to pay the standard sum ordered by way of security for costs on appeal.

The background in brief

[3]        The history of the proceedings in the High Court is unusual.  They arose from a joint venture between the parties in respect of a shopping centre at Whangaparaoa.  In proceedings issued in 2001, the appellant companies claimed from the respondents some $25 million for deceit and alleged breach of the Fair Trading Act 1986, essentially for the loss of the opportunity to buy the first respondent’s share in the shopping centre.  A further sum of $25 million was claimed for exemplary damages.  In describing the High Court litigation, we will refer to the appellant companies as plaintiffs and the respondents as defendants.

[4]        After lengthy interlocutory proceedings, the substantive hearing began before Hugh Williams J on 25 October 2006.  Shortly before the conclusion of the trial and after 31 days of hearing, Mr Fava was adjudicated bankrupt on 6 December 2006.  The bankruptcy arose from unpaid rent of a little over $3,500 plus accumulated costs amounting to just over $7,000 in all.  Mr Fava was the sole director of each of the four plaintiff companies which were substantially owned by him or his interests.  As a consequence of his bankruptcy, Mr Fava was no longer entitled to be a director of those companies.

[5]        On 13 December 2006, Hugh Williams J granted the plaintiffs’ counsel leave to withdraw from the proceedings and, upon the application of the defendants, entered judgment by default in their favour under r 485 of the High Court Rules then in force.  He did so on the basis that none of the shareholders of the plaintiff companies appeared likely to take any steps to appoint directors to replace Mr Fava or to give further instructions to counsel or his instructing solicitors.  The Judge determined that the plaintiffs were no longer “appearing” in terms of r 485.

[6]        Mr Fava’s bankruptcy terminated on 6 December 2009 after the statutory period of three years had expired.  He immediately began taking steps in an attempt to revive the substantive proceedings.  In the meantime, the defendants had sought an order for costs against the four plaintiff companies and Mr Fava personally (the latter on the footing that, although Mr Fava was not a party to the proceedings, he had nevertheless controlled them).  After a six day hearing in March 2009, Hugh Williams J delivered his costs judgment of 22 December 2009.[3]  His judgment was comprehensive, extending to some 156 pages and 504 paragraphs. 

[3]Churchill Group Holdings Ltd v Aral Property Holdings Ltd HC Auckland CIV-2001-404-2302, 22 December 2009.

[7]        The Judge explained that it was necessary to deal with the strengths and weaknesses of the respective cases since the defendants sought increased or indemnity costs under r 14.6 of the High Court Rules (on the grounds that the plaintiffs had improperly pursued a hopeless case) while the plaintiffs and Mr Fava submitted that costs should be refused or reduced under r 14.7 (asserting that the defendants and some of their professional advisers had acted improperly in a variety of respects).  The respective allegations were strongly denied on each side.

[8]        While acknowledging that definitive judgments could not be made since the substantive hearing had not been completed, Hugh Williams J observed that the four principal witnesses to the critical events and discussions had all given evidence and had been cross-examined by the time the trial was aborted.  The Judge therefore felt able to make credibility findings.  These were adverse to the plaintiffs and Mr Fava on the critical issues.  The Judge also rejected claims of misconduct on the part of the defendants and their advisers.  After full consideration of the issues, the Judge concluded that increased costs in the sum of $2 million were justified in favour of the defendants, having noted that their total solicitor and client costs were of the order of $3.158 million. 

Venning J’s reasons for refusing a stay

[9]        Venning J recorded that Mr Fava intended to regain control of two of the plaintiff companies and then apply, on behalf of all four companies, to have the default judgment set aside.  Mr Fava advanced the same argument as he did before us, namely that the refusal of a stay would mean that his right of appeal against the costs judgment would probably be rendered nugatory.  The Judge accepted this would be the practical consequence of declining a stay.  But a key factor in the Judge’s reasoning was that the same outcome was likely even if the appeal against the costs judgment was successful.  As the Judge put it:[4]

But what will the applicants (and Mr Fava) really lose if the appeal is not pursued?  Underlying the application for stay is the expectation that the appeal will succeed, the costs award will be set aside in its entirety and the applicant companies (under Mr Fava’s control) will then be free to pursue the application to set aside the default judgment.  But it is inevitable, given the background set out above in the passages from Hugh Williams J’s judgment and the circumstances which led to the judgment being entered under r 485 (now r 10.8) that even if the proposed appeal against the costs order were successful it would only be successful to the extent a reduction in quantum might be achieved.  Scale costs at category 3 for the 31 days of hearing amount to in excess of $520,000 in any event.  On Mr Fava’s admission the applicants could not meet an order for even one hundredth of that.

[4] At [25].

[10]      The Judge noted that, even if the appellants were successful in having the default judgment set aside, it would inevitably be on terms requiring a substantial contribution to the wasted costs of the respondents and that would effectively frustrate the ability of the appellants to advance the substantive litigation.  The Judge was also concerned that the interests of the respondents were an essential part of the balancing exercise in deciding whether a stay should be granted, noting they had already spent in excess of $3 million in defending the proceedings in the High Court and further cost and delay would result from the steps proposed by the appellants.

[11]      The Judge also took into account that the findings made by Hugh Williams J would present difficulties for the appellants on the merits of the appeal; there were no questions of novelty or general importance; the appeal was of interest only to the parties; and the appellants were in no position to offer any security for the judgment pending the hearing of the appeal.

Discussion

[12]      We entirely agree with the Judge’s reasoning.  Even if the Court were satisfied that a miscarriage of justice had occurred and the judgment should be set aside, this would inevitably be on terms requiring at least a substantial contribution to the wasted costs incurred by the respondents in relation to the first hearing.  Given the scale of the costs incurred during the trial, an award of several hundred thousand dollars would undoubtedly be made.  It was not the fault of the respondents that the proceedings were brought to an abrupt end.  That resulted from the failure by Mr Fava to pay a debt of a relatively trivial sum compared to the very large amount being claimed for damages against the respondents.  As Mr Fava accepted, neither he nor his companies would have any means to pay such an amount with the consequence that the substantive claim could not be pursued.

[13]      We note the same conclusion was reached by this Court in 2007 when dismissing an appeal by Mr Fava against a refusal by the High Court to approve a proposal under the Insolvency Act 1967 to have his 2006 adjudication set aside for the purpose of resuscitating the substantive litigation.[5]  This Court observed on that occasion:[6]

It certainly is possible that the judgment under r 485 might be set aside, a possibility that Williams J recognised in his 13 December 2006 judgment: see r  486.  On the other hand, it is difficult to see how that result could be achieved without Mr Fava (or the Churchill companies or some other party) meeting the defendants’ costs associated with the abandoned trial and providing substantial security for costs.  Further, given the circumstances in which the case collapsed, it is far from clear that the counsel and solicitors who were previously acting or any replacements would be prepared to proceed on a contingency basis.  There is a marked absence of information originating from Mr Fava as to how these problems can be addressed.

[5]      Fava v Zaghloul [2007] NZCA 594.

[6] At [14].

[14]      The position is no different now.  Not only are the appellants admittedly impecunious, but no material was put before the Court to explain how the original litigation would be funded or how security for costs would be provided.

[15]      Mr Fava sought to persuade us there were proper grounds for setting aside the default judgment.  Given the adverse findings made by Hugh Williams J in the costs judgment this may be a difficult task, but we decline to be drawn into this debate in light of the realities of Mr Fava’s position even if he were successful in setting aside the default judgment.

[16]      We add that Mr Fava has also to obtain an order under s 86 of the Insolvency Act 1967 in order to regain control from the Official Assignee of the shares in Matam Investments Ltd and Sabena Investments Ltd (as the owner of Churchill Group Holdings Ltd).  While he expressed great confidence that he would be able to gain control of those companies, the Official Assignee opposes the order sought and the High Court has not yet heard the matter.  Mr Fava accepted that he would not be able to proceed to set aside the judgment without control of all four of the appellant companies.

[17]      Mr Fava suggested in oral argument that he could achieve control of the companies by appointing a receiver, but this was not developed in argument.  We note that s 5 of the Receivership Act 1993 would prevent the appointment of Mr Fava himself as a receiver if he were a director of the company granting the security within the two year period prior to receivership, or if he were an undischarged bankrupt.  Any independent receiver appointed would have to weigh the costs and benefits of proceeding. 

[18]      Even if Mr Fava could somehow gain control of all the appellant companies, there would still be the insuperable hurdle of paying very substantial costs to the respondents.

Conclusion

[19]      This Court has jurisdiction to grant a stay pending appeal under r 12 of the Court of Appeal (Civil) Rules 2005.  The principles applicable are well known and are not in dispute.  The Court is required to balance the competing rights of the party who has obtained the judgment appealed from against the need to preserve the appellants’ position should the appeal succeed.[7]  A non-comprehensive list of the factors conventionally taken into account in balancing the competing interests as collected by Hammond J was endorsed by this Court in Bilgola Enterprises Ltd v Dymocks Franchise Systems (NSW) Pty Ltd[8] and in New Zealand Insulators Limited v ABB Ltd.[9]  The Court does not automatically order a stay where appeal rights would be rendered nugatory if the order is refused.[10]

[7]      Duncan v Osborne Buildings Ltd (1992) 6 PRNZ 85 at 87 (CA).

[8]Bilgola Enterprises Ltd v Dymocks Franchise Systems (NSW) Pty Ltd (1999) 13 PRNZ 48 (CA).

[9]      New Zealand Insulators Ltd v ABB Ltd (2006) 18 PRNZ 459 (CA) at [11].

[10]Hawkins v ANZ CA347/90, 16 July 1991; Petricevic v Bridgecorp [2008] NZCA 286 at [27]-[29]; Cousins v Heslop [2007] NZCA 377, (2007) 18 PRNZ 677 at [10] and [17]-[19].

[20]      While we do not doubt Mr Fava’s determination to pursue the appeal in an effort to revive the original litigation, regard must be had to the effects on the opposite parties.  While, as Mr Fava submitted, the respondents do not expect to receive the benefit of the costs judgment in view of the impecuniosity of the appellants, we accept the submission made by Mr Simpson on behalf of the respondents that they should not be put to the further time, trouble and cost of further litigation if there is no realistic prospect of the appellants ultimately achieving their goal.

[21]      We accept that if a stay is refused, the appellant companies will very probably be prevented from taking steps to revive the original litigation.  But, for the reasons discussed, we are satisfied the appellants have no realistic prospect of achieving their ultimate goal in any event and that the intended appeal and application to set aside the default judgment would be futile.

[22]      In the circumstances, the application for a stay is dismissed.  The costs of the application are reserved.

Solicitors:

Bell Gully, Auckland, for Respondents