Dalton
[2018] NZHC 1848
•24 July 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-2383
[2018] NZHC 1848
UNDER THE Companies Act 1993 IN THE MATTER
of an application for Orders under Section 284 of the Companies Act 1993
BETWEEN
SIMON DALTON AND MATTHEW
PETER KEMP as liquidators of British Pub Supplies Limited (In Liquidation)
First ApplicantAND
SIMON DALTON AND MATTHEW
PETER KEMP as liquidators of The English Corner Shop Limited (In Liquidation) Second Applicant
Hearing: On the papers Counsel:
M E Sullivan and B R Saldanha for the Applicants
P J Dale for the Secured Creditors Commercial Factors Limited and Commercial Finance and Securities Limited
Judgment:
24 July 2018
COSTS JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 24 July 2018 at 11.00am, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Jackson Russell, Auckland Neilsons Lawyers, Auckland P J Dale, Auckland
DALTON AND KEMP as liquidators of British Pub Supplies Ltd (in liq) v DALTON AND KEMP as liquidators of The English Corner Shop Ltd (in liq) [2018] NZHC 1848 [24 July 2018]
[1] In my judgment of 25 May 2018 (the judgment), I gave directions to the applicants (the liquidators), in their capacities as liquidators of The English Corner Shop Limited (English Corner) and British Pub Supplies Limited (British Pub), as to the ownership of certain funds held in the trust account of the liquidators' solicitors. I rejected the claims of Commercial Factors Limited and Commercial Finance and Securities Limited (collectively, "CFL") to entitlement to any part of the funds held in the trust account.
[2] I directed that the liquidators were entitled to costs on their application for directions, and I invited submissions on costs if the parties were unable to agree. I have now received written submissions from the liquidators and from CFL.
[3] CFL accepts that the liquidators are entitled to costs on a 2B basis. However, the liquidators seek indemnity, or increased costs, under r 14.6(4)(a) and 14.6(3)(b)(v) of the High Court Rules "as reasons to depart from the general principle of costs being awarded on a party and party basis in accordance with scale".
[4] The liquidators rely on certain correspondence which passed between the solicitors for the parties before the hearing, in which various offers were made on a "Calderbank"1 basis (ie without prejudice except as to costs). That correspondence was produced by counsel for the liquidators with their costs submissions.
Relevant provisions of the High Court Rules
[5]Rule 14.6 materially provides:
14.6 Increased costs and indemnity costs
(1)Despite rules 14.2 to 14.5, the court may make an order—
(a)increasing costs otherwise payable under those rules (increased costs); or
(b)that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
1 The description Calderbank letter is derived from the case Calderbank v Calderbank [1995] 3 All ER 333 (CA), in which the efficacy of the procedure was considered.
(2)The court may make the order at any stage of a proceeding and in relation to any step in it.
(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—
…
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or
…
(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
…
[6]Rules 14.10 and 14.11 deal with Calderbank offers. They provide:
14.10Written offers without prejudice except as to costs
(1)A party to a proceeding may make a written offer to another party at any time that—
(a)is expressly stated to be without prejudice except as to costs; and
(b)relates to an issue in the proceeding.
(2)The fact that the offer has been made must not be communicated to the court until the question of costs is to be decided.
14.11Effect on costs
(1)The effect (if any) that the making of an offer under rule 14.10 has on the question of costs is at the discretion of the court.
(2)Subclauses (3) and (4)—
(a)are subject to subclause (1); and
(b)do not limit rule 14.6 or 14.7; and
(c)apply to an offer made under rule 14.10 by a party to a proceeding (party A) to another party to it (party B).
(3)Party A is entitled to costs on the steps taken in the proceeding after the offer is made, if party A—
(a)offers a sum of money to party B that exceeds the amount of a judgment obtained by party B against party A; or
(b)makes an offer that would have been more beneficial to party B than the judgment obtained by party B against party A.
(4)The offer may be taken into account, if party A makes an offer that—
(a)does not fall within paragraph (a) or (b) of subclause (3); and
(b)is close to the value or benefit of the judgment obtained by party B.
The without prejudice correspondence on costs
[7] At the date of the liquidations, CFL was owed $118,661.59 under its factoring arrangements with English Corner. It had been paid a total of $11,700 by Bar Red before the liquidations, and those payments were not disturbed by the judgment. As at 20 September 2017, when the first of the without prejudice costs offers was made, the liquidators only held $24,700 which could have been available to apply to any settlement. That sum would only increase at the rate of $1,300 per week, being the weekly amount payable by Bar Red under the second sale agreement referred to at paragraphs [46] to [49] of the judgment. Assuming Bar Red made all of its weekly payments, the liquidators would only receive a further sum in the order of $120,000 to $130,000.
[8] Against that background, counsel attempted to negotiate a settlement. On 20 September 2017, CFL offered to take $50,000 in settlement, on the basis that
$20,000 would be paid by the liquidators immediately and the balance at the rate of
$5,200 per month. CFL would retain the $11,700 paid to it by Bar Red prior to the liquidations of British Pub and English Corner.
[9] That offer was rejected by the liquidators in a letter from their solicitors dated 25 September 2017. The liquidators proposed to pay CFL $25,000 (which would include the $11,700 paid to CFL by Bar Red prior to the liquidations). The balance of
$13,300 would be paid in one lump sum. In the alternative, the liquidators offered
$35,000 (again including the $11,700 paid by Bar Red prior to liquidation), with the
balance of $23,300 payable on a quarterly basis. The liquidators' solicitors provided with their letter a copy of a statement signed by Mr Lane setting out his account of the matter.
[10] The liquidators' offer was not accepted by CFL. In a letter dated 27 September 2017, CFL's counsel indicated his view that the matter would have to be referred to the Court "given the potential complexity of these issues". He advised that CFL did not intend to maintain its GSA over British Pub, and that the GSA would be released that day.
[11] A further attempt at settlement was made by the liquidators on 7 March 2018. They offered to divide the net proceeds from the sale of the Spitting Feathers Bar by allocating $20,000 to English Corner, allowing CFL to retain the $11,700 paid to it by Bar Red before the liquidations, and paying the balance to British Pub. That offer was declined by CFL in a letter from its counsel dated 8 March 2018. CFL indicated in that letter that it would accept the sum of $70,000 (in addition to the $11,700 paid pre-liquidation) in settlement, that sum being the previous $50,000 CFL had advised it would accept, together with its costs incurred since September 2017. That offer was not accepted by the liquidators.
The claim for increased or indemnity costs
[12] Counsel for the liquidators have not yet billed their costs, but they produced a draft invoice to the liquidators showing solicitor/client costs of $70,000 plus GST to 12 April 2018, with disbursements of $1,192.15.
[13] By contrast, they submit that costs on a 2B basis would be $15,655.50. If the Court were to award a 25 per cent uplift on 2B costs, the figure would be $18,916.87. With a 50 per cent or 75 per cent uplift, the costs figures would be $22,178.25 and
$25,439.62 respectively.
[14] Ms Saldanha relies principally on the liquidators' success with the application, and their willingness to attempt to sensibly resolve the matter without the need for a hearing.
[15] In support of the claim for indemnity costs, she submits that this is a case where CFL knew or ought to have known that its case had no prospect of success, and that it acted unreasonably by pursuing a wholly unmeritorious and hopeless claim.2 She submits that the liquidators' position was set out comprehensively in the letter from their solicitors dated 25 September 2017, and CFL was then aware of the evidence likely to be provided on behalf of the liquidators. She submits that on that basis it was untenable for CFL to maintain that the sale only concerned the lease of the premises, and that it was entitled to the entire sale proceeds.
[16] Ms Saldanha submits that CFL appears to have been gambling on the fact that the liquidators did not hold sufficient funds to fund any application for directions (or if an application were made, then the outcome would see a significantly reduced return to the creditors). The liquidators could not agree to what she characterises as unreasonable proposals from CFL, and they had no option but to file the Court proceeding. She described CFL's counter-offer in March 2018 as unrealistic, representing as it did close to 50 per cent of the entire proceeds from the sale of the bar.
[17]The liquidators seek an order for indemnity costs of $71,036.65.
[18] In the alternative, the liquidators seek an award of increased costs, relying on the Calderbank offers. Ultimately, the liquidators' position was upheld, but the costs of the application have had the effect of significantly reducing the pool of funds available to the liquidators and the creditors. An award of increased costs will likely see a greater return to the legitimate creditors of British Pub.
[19] The liquidators also seek costs on the preparation of the costs memorandum (estimated to be $2,500).
Submissions for CFL
[20] Mr Dale submits that the primary issue is whether the liquidators are entitled to indemnity or increased costs based on the Calderbank exchanges. He submits that,
2 Referring to Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 (CA).
in the end, the outcome turned on my interpretation of the lease-to-own agreement; the evidence of Mr Lane and Mr Green produced by the liquidators did not really take matters further. The liquidators conceded that the initial sale documentation was poorly executed, and the judgment did not contain any suggestion that the arguments advanced for CFL were totally without merit, or should otherwise not have been pursued. He submits that the case involved an orthodox interpretation issue, which took less than half a day to argue, and where both sides set out their positions in detail in advance of the hearing. The fact that the Court ultimately took a different view from the view advanced for CFL does not imply that CFL's arguments had no prospect of success.
[21] Mr Dale referred to the judgment of the Court of Appeal in Bradbury v Westpac Banking Corporation as the leading authority.3 In that case, Baragwanath J said of the costs regime generally:4
The distinction among our three broad approaches: standard scale costs; increased costs; and indemnity costs may be summarised broadly:
(a)standard scale applies by default where cause is not shown to depart from it;
(b)increased costs may be ordered where there is failure by the paying party to act reasonably; and
(c)indemnity costs may be ordered where that party has behaved either badly or very unreasonably.
[22] Mr Dale submits that none of the arguments advanced for the liquidators meet the criteria of subparagraphs (b) or (c) above. CFL acted reasonably by evidencing a willingness to settle, not pursuing its security claim based on the GSA over British Pub, and not relying on any arguments that were unmeritorious, or which could reasonably be described as hopeless.
[23]Mr Dale accepts that costs can be awarded on a costs application, and that the
$2,500 proposed by Ms Saldanha would be a reasonable figure. He asks for costs in that sum to be awarded to CFL.
3 Bradbury v Westpac Banking Corporation, above n 2.
4 At [27].
Discussions and conclusions
[24] I see no basis for an award of indemnity costs in this case. There is no question of CFL having acted vexatiously, frivolously, improperly or unnecessarily in continuing or defending its case (the criteria relied upon by the liquidators in support of their claim of an award of indemnity costs), and there is no question of CFL having behaved either "badly or very unreasonably". The principal document, being the lease-to-own agreement, was indeed poorly drafted, and I accept that it left open reasonable interpretation arguments that CFL was entitled to advance. I also accept Mr Dale's submission that the evidence from Mr Lane and Mr Green did not take matters much further.
[25]I accordingly decline to award indemnity costs under r 14.6(4)(a).
[26] Turning to the claim for increased costs, the liquidators rely on r 14.6(3)(b)(v). That rule applies where a party opposing costs has contributed unnecessarily to the time or expense of the proceeding, or a step in it, by:
(iii) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under r 14.10 or some other offer to settle or dispose of the proceeding.
[27] I think it would be a dangerous step to penalise a party in the position of CFL for arguing the interpretation issue over the lease-to-own agreement in this case. The fact that the lease-to-own agreement was not clearly executed on behalf of British Pub was just one of a number of interpretation issues, and I do not consider that CFL's position on the interpretation arguments was beyond reasonable argument.
[28] The real problem, it seems to me, is that the liquidators have accepted appointment as liquidators of companies with little in the way of assets, and then run into difficult legal issues which left them with the choice of settling for a sum they considered to be too low (having regard to their own costs to date, and the amount that would be left over for distribution to creditors), or incurring the costs of running the case to a hearing (which would further diminish the amount available to the creditors, and leave the liquidators exposed to personal liability to CFL for its costs if they did not succeed). Liquidators face the issue of how to deal with claims that are in the
"borderline economic" category every day, and I do not consider that the increased costs regime in r 14.6 is designed to improve the position for a liquidator or other party who finds himself or herself in that position.
[29] The Calderbank procedure enables costs to be sought where an offer has been rejected but a less beneficial outcome results for the party declining the offer.5 Rule 14.11(1) makes clear that the effect that the making of an offer under r 14.10 has on the question of costs is at the discretion of the court. Where more than one Calderbank offer has been made, the Court will take into account the terms of each offer, and its timing, in determining the proper costs order.
[30] There are two distinct questions that need to be considered in circumstances where a Calderbank offer has been turned down.6 The starting point must be the terms and circumstances of the Calderbank offers and whether rejection of the offer was unreasonable, in the sense described in r 14.6(3)(b)(v) of the Rules, so that the discretion to order increased costs may be exercised. If it is decided not to accept the submission as to unreasonableness in rejecting the offer, the second question is whether rejection of the offer justifies any other adjustment to the 2B costs claimed.
[31] In Auckland Trotting Club Inc v Ralf Enterprises Ltd 7 Harrison J was of the view that the plaintiff had contributed unnecessarily to, if not caused entirely, the time and expense of the proceeding by failing, without reasonable justification, to accept the defendant’s Calderbank offer. In contrast to the present case, Harrison J stated that the claim of the nature sought was "always doomed to failure".8 Here, CFL’s position was not beyond reasonable argument.
[32] The terms and circumstances of the Calderbank letters are discussed above.9 I do not consider that the Calderbank offers made by both parties alter the above assessment as to the reasonableness of the position taken by CFL. I take into account in that assessment the fact that, if it succeeded with its opposition, CFL would appear
5 Aldrie Holdings Ltd v Clover Bay Park Ltd [2016] NZHC 1482 at [14].
6 At [29].
7 Auckland Trotting Club (Inc) v Ralf Enterprises Ltd Ors (No 3) HC CIV-2001-404-002249 [14 August 2003].
8 At [24].
9 At [7] – [11] of this judgment.
to have had a good claim for solicitor/client costs under its GSA over English Corner, and it was entitled to take that into account in deciding whether the matter should be settled on the basis of one or other of the Calderbank offers made by the liquidators. The fact that CFL had the "luxury" of a solicitor/client costs clause and British Pub did not, cannot in my view provide a basis on which the Court could characterise CFL's decision to decline the liquidators' Calderbank offers as unreasonable.
[33] The separate question as to whether a party in the position of the liquidators is entitled to an adjustment to the 2B costs claimed remains subject to the overriding discretion of the Court. I am not satisfied that any adjustment on standard 2B costs is required on the basis of what I view as a reasonable justification for rejection of the Calderbank offers. The claim for increased costs fails.
[34]The liquidators' claim on a 2B basis is as follows:
Steps Allocated
Days
Daily rate Amount
37
Filing originating application and supporting affidavits 2
$2,230.00
$4,460.00
11
Filing Memorandum: Memorandum seeking directions as to service of originating application for directions under section 284 of the Companies
Act 1993 dated 12 October 2017
0.4
$2,230.00
$892.00
11
Filing Memorandum: Consent Memorandum as to timetabling dated 23 November 2017
0.4
$2,230.00
$892.00
40
Preparation of written submissions
1.5
$2,230.00
$3,345.00
41
Preparation of bundle for hearing
0.6
$2,230.00
$1,338.00
42
Appearance at hearing for principal counsel
0.50
$2,230.00
$1,115.00
43
Appearance at hearing for second counsel
0.25
$2,230.00
$557.50
29
Sealing order or judgment
0.2
$2,230.00
$446.00
Total scale costs
$13,045.50
Disbursements Description Amount Filing fee $540.00 Hearing fee $640.00 Scheduling fee $640.00
Bundles (copying and binding) $280.00 Sealing fee $50.00 Service fees (Secure Collections Ltd Invoices: 1251, 1252, 1253,
1254 and 1255)
$460.00
Total disbursements $2,610.00
TOTAL COSTS AND DISBURSEMENTS
$15,655.50
[35] Mr Dale challenges the claim for second counsel at the hearing (item 43 in the table above). He submits that the size and complexity of the case was not such as to warrant second counsel.
[36]I agree, and that item will be disallowed.
[37]The only other matter challenged by Mr Dale was the claim for service fees of
$460.00. He accepted service for CFL, and cannot see why these fees have been claimed.
[38] I do not appear to have copies of the invoices from Secure Collections Ltd that are referred to in the disbursements table above, but I note that the application was served on all secured creditors and preferred unsecured creditors of English Corner and British Pub, and it seems likely that the claim relates to service on those other parties.
[39] I am not satisfied that there is a basis for making CFL liable for the costs of serving those other parties, who would have had to be served regardless of the stance taken by CFL. For example, I note from the joint memorandum of counsel dated 13 November 2017 that one of the secured creditors (Fuji Xerox) had not then advised that it would abide the decision of the Court. In those circumstances, a decision of the Court appears to have been required whether or not CFL opposed the application. For that reason, I am not prepared to allow the disbursement of $460.00 for service fees.
[40] Subject to the issue of costs on the costs argument, the liquidators are entitled to costs on a 2B basis in the sum of $12,488, plus disbursements of $2,150.
[41] Both sides ask for costs of $2,500 on the costs argument. In the ordinary way, costs should follow the event, and Mr Dale did not dispute the liquidators' entitlement to costs on the application for directions, on a 2B basis. CFL has succeeded on the substantial costs arguments, which were over the claims for indemnity or increased costs, and it is accordingly entitled to costs of $2,500 on the costs argument.
Result
[42] The net result is that the liquidators are entitled to the sum of $12,138 for their costs and disbursements. I make an order accordingly.
Associate Judge Smith
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