Dalton v Avanti Finance Limited
[2020] NZHC 1287
•10 June 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-1823
[2020] NZHC 1287
UNDER the Companies Act 1993 IN THE MATTER OF
the liquidation of FABRI-CELL
INTERNATIONAL (In Receivership and In Liquidation)
BETWEEN
SIMON DALTON and PETER KEMP
Liquidators Plaintiffs
AND
AVANTI FINANCE LIMITED
Defendant
On the papers: 10 June 2020 Appearances:
Kalev Crossland and Jesvin Boparoy for the Plaintiffs Phillip Rice and Nicola Robertson for the Defendant
Judgment:
10 June 2020
COSTS JUDGMENT OF ASSOCIATE JUDGE R M BELL
This Costs Judgment was delivered by me on 10 June 2020 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Shieff Angland, Auckland, for the Plaintiffs Sanderson Weir, Auckland, for the Defendant
Copy for:
Phillip Rice, Barrister, Auckland, for the Defendant
DALTON and KEMP v AVANTI FINANCE LIMITED [2020] NZHC 1287 [10 June 2020]
[1] In my judgment of 13 May 2020, I dismissed the plaintiffs’ claim and ordered the plaintiffs to pay the defendant costs.1 The parties have not agreed costs. Memoranda have been filed. The defendant seeks costs of $96,078 (including a 50 percent uplift) and disbursements of $1,317. The disbursements are not in dispute.
[2] The plaintiffs, liquidators of Fabri-Cell International Ltd, sued Avanti Finance Ltd under s 297 of the Companies Act 1993 claiming that it had benefited from under- value transactions with Fabri-Cell International Ltd. In fact, at the request of Fabri- Cell, Avanti Finance Ltd made advances totalling $298,667.91. In return, Fabri-Cell paid it $208,650.67. It also received another payment of $26,931.00 but not from Fabri-Cell. Overall, it made a loss. In these circumstances, a claim that it had benefited from an under-value transaction under s 297 of the Companies Act was never going to succeed. The liquidators knew this from an early stage but carried on regardless. It is helpful to review aspects of the case.
[3] In their first statement of claim of 4 September 2019, the liquidators pleaded the payments Fabri-Cell made to Avanti totalling $208,650.37. They denied that Avanti was ever a creditor of Fabri-Cell and claimed that Fabri-Cell never received any value from Avanti. In its statement of defence of 16 October 2019, Avanti pleaded its invoice factoring facility with JSR Group Ltd. Specifically, it pleaded that Fabri- Cell requested drawdowns under that facility, and provided invoices, purchase orders and other documents in support of those requests. In response to those requests, Avanti made advances of $298,679.91. The liquidators were accordingly on notice that Avanti would give evidence of those facts and rely on them for its defence. While the pleadings were amended, that did not change. The liquidators formally denied these facts in their replies, but at trial did not seriously challenge that part of Avanti’s evidence.
[4] On 1 November 2019, Avanti’s lawyers wrote a Calderbank letter to the liquidators’ lawyers. The letter explained the facts behind the invoice factoring
1 Dalton v Avanti Finance Ltd [2020] NZHC 1020.
arrangements and that Avanti had advanced $298,695 at the request of Fabri-Cell. The letter also set out other matters of defence. Avanti made a “without prejudice except as to costs” offer of $50,000 in full and final settlement.
[5] In a letter of 5 November 2019, the liquidators’ lawyer rejected that offer. Instead, the liquidators sought $350,000 in full settlement, even though that was more than its claim. The letter said:
As unfortunate as this must be for Avanti to repay funds in circumstances where it lost money from belated lending, this offer represents a significant saving for Avanti. What is now a $350,000 problem for Avanti has the potential to be a problem of over $500,000 plus interest, plus liquidators’ adverse costs of ($40,000) and their own legal costs of approximately $70,000. Accepting this offer now offers a significant saving to Avanti.
Clearly the liquidators appreciated that Avanti had made a loss on its lending yet were still determined to pursue their claim under s 297.
[6]In response to Avanti the liquidators:
(a)denied that Fabri-Cell International Ltd was party to any invoice factoring arrangements with Avanti Finance Ltd - that was notwithstanding the clear evidence that Fabri-Cell requested the advances; and
(b)escalated their claim by saying that in addition to payments of
$208,650.37 Avanti had received other transfers of wealth, factored invoices and two forklifts left at the premises of Fabri-Cell International Ltd.
[7] The claim for the forklifts is insignificant, $7,500. It is irrelevant for the costs decision.
[8] In their amended statement of claim of 22 November 2019, the liquidators increased their claim to $601,763.34, mainly on account of factored invoices. In their second amended statement of claim of 2 March 2020, they increased it to
$1,565,787.74, relying on more factored invoices, and said that was the amount of their claim at the start of the hearing.
[9] The claim for the invoices triggered considerable work on both sides to analyse invoices, bank statements, other accounting materials to work out which invoices had been factored to Avanti, which had not, for which invoices Fabri-Cell had received payment from its customers, and whether it had accounted to Avanti for those payments. The liquidators said that Avanti would have to pay them the face value of invoices which had been factored to it but for which Fabri-Cell had not received any payment from its customers. They raised this claim after another secured creditor, Pacific Finance New Zealand Ltd, had appointed receivers who had collected Fabri- Cell’s unpaid receivables. No one suggested that Avanti actually received anything for these unpaid invoices. Moreover, for the reasons I gave in my judgment, the factoring of the invoices did not transfer any value to Avanti. Aside from the law, that was the position in fact.
[10] As to the law, I followed the English decision, Re MC Bacon Ltd where Millett J rejected an under-value claim where a liquidator relied on a security given by a company. In his costs decision he said:2
That was a hopeless claim which it was legally impossible to maintain…
[11] The liquidators’ claim for the invoices was a smoke and mirrors exercise. Its purpose was to divert attention from the fact that Avanti had made a loss on its lending to Fabri-Cell and to make it appear as though it had received considerable value from the invoices even though the claim was spurious.
[12] The liquidators try to deflect criticism for their continuing the claim by saying that Avanti did not make its position clear enough in its pleadings. Avanti did plead the facts on which it relied, even if its legal labels may have been confusing. But the criticism is beside the point. In pursuing a claim under s 297 of the Companies Act, the liquidators knew that they had to show that Avanti’s transactions with Fabri-Cell were at an under-value for Fabri-Cell. The transactions clearly were not, but the
2 In re MC Bacon Ltd [1991] Ch 127 (HC) at 136.
liquidators tried to avoid that by misdescribing the transactions between Avanti and Fabri-Cell. Denial of a creditor/debtor relationship, part of its primary pleading, did not make any sense when the evidence was clear that Fabri-Cell had requested advances under the invoice factoring facility.
[13]The parties agree that the case is category 2 for costs.
[14]Avanti claims 26.8 days. The liquidators disagree on three of their steps:
(a)Avanti has claimed for filing separate statements of defence to the amended statement of claim and the second amended statement of claim. The liquidators have allowed for only one amended statement of defence. There are differences between the two statements of defence. One is more than a re-hash of the other. Avanti is entitled to costs on both statements of defence.
(b)Under step 30, preparation of affidavits, Avanti has claimed for 8 days, whereas the liquidators have allowed three days. Under band B, the time allowance is two days for the first hearing day, and one day for each following hearing day.3 Under band C, there is four days for the first hearing day and two for each succeeding day.4 The liquidators’ allowance of three days is below that allowed under band B. I accept the claim under band C, primarily because of the considerable work required to oppose the invoice factoring claim. I accept that one of Avanti’s accountants, Mr Wetherell, carried out an exhaustive analysis of invoices and bank statements (on which he was vindicated) but I also find that Avanti’s lawyers were required to put in considerable time because of this issue. I allow Avanti’s claim for band C.
(c)Avanti has claimed four days for step 32, preparation for the hearing, whereas the liquidators have allowed three days. Under step 32, a party can claim two days’ preparation for the first hearing day and one day
3 Up to the fifth hearing day.
4 Up to the fifth hearing day.
for each succeeding day.5 Avanti is correct in allowing four days for preparation. The liquidators’ three days is not.
[15]Both sides had junior counsel. I allow for junior counsel.
[16]Accordingly, I uphold Avanti’s claim for 26.8 days, which makes a total of
$64,052.00 at $2,390 per day.
[17]Avanti seeks increased costs under r 14.6(3)(b) because –
“the party opposing costs has contributed unnecessarily to the time or expense of the proceeding, or a step in it by –
…
(ii)taking or pursuing an unnecessary step or an argument that lacks merit and –
…
(v) failing, without 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.
I find for Avanti under both heads.
[18] The liquidators were aware, at least from the time of Avanti’s lawyers’ letter of 1 November 2019, that there was a debtor/creditor relationship between Avanti and Fabri-Cell, and that when values conferred and received were assessed, Avanti was worse off. Part of its response was to construct an unrealistic argument intended to show that there was not a debtor/creditor relationship. The argument could not get past the facts that Fabri-Cell requested advances by factoring invoices to Avanti, requested that the advances be paid to JSR Group Ltd and that Fabri-Cell’s payments reduced its indebtedness. It compounded the problem by throwing into the mix the ill-conceived claim that the factoring of invoices transferred value to Avanti.
[19] Any reasonable liquidator would have appreciated that Avanti had not benefited from any under-value transactions with Fabri-Cell and would not have
5 Up to the fifth hearing day.
pressed on. The liquidators’ attempts in later pleadings to bolster their position only made it worse by adding further unnecessary time and effort.
[20] Avanti’s letter of 1 November 2019 is a reasonable settlement offer. It was well-timed, made early in the proceeding after the parties had exchanged their first round of pleadings. The liquidators were suing for $208,650.37. The settlement offer was just under 25 per cent of that sum. If the liquidators had accepted that offer, they could have paid their costs and also showed something for creditors. It was also worthwhile for Avanti. It avoided the risks of litigation, gave itself certainty and saved the costs of the proceeding. The letter gave the liquidators clear notice of the matters on which Avanti relied for its defence.
[21] The liquidators’ response was to come back with a counter-offer for a greater sum than they were suing for. They inflated the claim with their invoice factoring allegations. From there on, the liquidators continued to inflate their settlement offers to unrealistic levels. On the eve of the hearing, they said that they would not settle for less than $1.2 million. The liquidators’ failure to accept the settlement offer of $50,000 was unreasonable and warrants an increase in costs.
[22]I apply the increase for all steps taken after 1 November 2019. That covers
24.2 days. I increase the costs for that period by 40 per cent. This is not the most egregious case of pursuing hopeless litigation. I also allow some discount for a certain muddiness in that Avanti did not always give the correct legal labels to its defences (albeit there was no injustice to the liquidators). The amount of the increase is
$23,135.20. That gives total costs of $87,187.20.
[23] Accordingly, Avanti Finance Ltd recovers costs of $87,187.20 plus disbursements of $1,317.00, a total of $88,504.20.
[24] I also ask the liquidators to include a copy of this decision in their next report to creditors under s 255 of the Companies Act and in their final report under s 257. The creditors ought to know why the liquidators have incurred these costs.
………………………………
Associate Judge R M Bell
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