Day v Official Assignee as liquidator of GN Networks Limited (in liquidation)

[2018] NZHC 2610

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2014-404-002428 [2018] NZHC 2610

UNDER

the Companies Act 1993;

the Insolvency Act 2006; and
the Declaratory Judgments Act 1908

IN THE MATTER OF

GN Networks Limited (in Liquidation)

BETWEEN

KENNETH PAUL DAY

Plaintiff

AND

OFFICIAL ASSIGNEE as Liquidator of GN NETWORKS LIMITED

(in Liquidation) First Defendant

Defendants continued over

Hearing:                   [On the Papers]

Appearances:           M J Matthew for the Plaintiff [granted leave to withdraw]

K M Wakelin for the First Defendant [granted leave to withdraw] A E Simkiss for the Second Defendant

K P Day in Person
R Ranchhod in Person

Judgment:                5 October 2018

JUDGMENT OF EDWARDS J

[re Costs]

This judgment was delivered by Justice Edwards on 5 October 2018 at 3.30 pm, pursuant to

r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

DAY v OFFICIAL ASSIGNEE [2018] NZHC 2610 [5 October 2018]

BABBELBEK FINANCE LIMITED

Second Defendant

ANTHONY JOHN McCULLAGH and STEPHEN MARK LAWRENCE
as former receivers of
GN NETWORKS LIMITED

(in Liquidation) Third Defendants

SHIPWRECK TRADERS LIMITED
Fourth Defendant

[1]    Mr Day discontinued these proceedings on 20 September 2017. The second defendant, Babbelbek Finance Ltd (Babbelbek), seeks costs from Mr Day and his funder, Mr Ranchhod, jointly and severally.1

[2]Babbelbek seeks an award of scale costs plus:

(a)an award of costs on a 3C basis, plus an uplift, for the filing of a statement of defence;

(b)fifty per cent of scale costs for trial preparation;

(c)increased or indemnity costs:

(i)from 30 November 2015 for failing to accept an offer of settlement; or

(ii)from 28 July 2017 for failing to inform the defendants that a discontinuance was likely, resulting in Babbelbek incurring costs it would not have incurred had it been informed of the discontinuance earlier; and

(d)an order confirming the award of disbursements, including expert fees incurred.

[3]    This is the third judgment in this proceeding. The first judgment, of Faire J, addressed numerous interlocutory applications brought by the parties.2 That judgment addressed the nature of the claim, and the procedural history up until that point which Faire J described as making for “very unhappy reading”.3 That judgment should be read together with this judgment. Following Faire J’s retirement, I determined the costs disputes arising out of that judgment in the second judgment in this proceeding.4

1      Mr Ranchhod provided an indemnity to the plaintiff and has accepted liability for costs.

2      Day v Official Assignee [2016] NZHC 2400.

3 At [7].

4      Day v Official Assignee [2017] NZHC 847.

Should Babbelbek be awarded scale costs?

[4]    Rule 15.23 of the High Court Rules 2016 sets out a presumption in favour of an award of costs to the defendant on the plaintiff’s discontinuance of proceedings. The starting point is that Babbelbek is entitled to an award of costs on the discontinuance. It is for Mr Day and Mr Ranchhod to displace that presumption.

[5]    I am not persuaded that the presumption can be displaced in this case, for the following reasons:

(a)First, there is no evidence to support Mr Ranchhod’s claim that Babbelbek employed “burn-off tactics” in the litigation. Although Babbelbek provided some further discovery of documents late in the piece, the material before the Court suggests that this was because the documents only came into Babbelbek’s possession at that time. There is no evidence that late provision of discovery was a tactic designed to drain the plaintiff of funds. Discovery appears to have been in compliance with the ongoing duties of discovery.5

(b)Second, the plaintiff’s concern regarding the growth and complexity of the claim does not provide a ground for rebutting the presumption. That growth was entirely of the plaintiff’s own making. Seven amended statements of claim were filed in the proceeding. Faire J considered the draft seventh amended statement of claim to be unnecessarily prolix and as giving rise to a number of problems which required further re- pleading.6 That re-pleaded claim (the eighth amended claim, and thus the ninth claim prepared in the proceeding) was 83 pages long and contained 69 paragraphs, with 320 substantial sub-paragraphs. That is despite only having three causes of action.

(c)Third, Mr Ranchhod’s submissions on the substantive claim do not assist. A court will not speculate on the respective strengths and

5      High Court Rules 2016, r 8.18.

6 At [41].

weaknesses of the parties’ cases in costs disputes following a discontinuance (unless so obvious that they should influence costs).7 A costs application is not an opportunity to advance the merits of a claim which has been discontinued by the plaintiff.

[6]    It follows that there is no reason to displace the presumption that costs are to be awarded to the defendant on the plaintiff’s discontinuance of the proceedings. Babbelbek is entitled to at least an award of scale costs on that discontinuance.

[7]    Those scale costs are set out in a schedule annexed to the affidavit filed in support of the application. Each step is calculated on either a schedule 2A or schedule 2B basis. I am satisfied that the steps for which costs are claimed (including discovery) are reasonable, and there is no double-up with the award of costs in my judgment dated 2 May 2017.

Should Babbelbek be awarded costs on a 3C basis, plus an uplift, for its statement of defence?

[8]    Babbelbek claims costs on a schedule 3C basis, plus an uplift, for the filing and service of its statement of defence in response to the seventh amended statement of claim.

[9]    In his judgment of 10 October 2016, Faire J found that the seventh amended statement of claim (which was then in draft, was 72 pages long, and contained 45 paragraphs and 276 sub-paragraphs) was unnecessarily prolix and complex,8 and the plaintiff was ordered to re-plead it.9 The re-pleaded claim, which was filed as the seventh amended statement of claim, was lengthy and difficult to follow.

[10]   I accept that responding to such a claim by way of amended statement of defence would have required more than the time allocated in band B. Assessment on a band C basis is accordingly justified. But there is no need to calculate costs on a

7      Kroma Colour Prints Ltd v Tridonicatco NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973 at [12];

FM Custodians Ltd v Pati [2012] NZHC 1902 at [11(a)].

8      Day v Official Assignee [2016] NZHC 2400 at [41].

9 At [95].

category 3, rather than a category 2, basis. Categorisation relates to the nature of the claim in its entirety.

[11]   Furthermore, I am not persuaded that an additional uplift is warranted. I consider an award of costs on a 2C basis is sufficient to reflect the nature of the pleadings Babbelbek was required to respond to, and is consistent with the principle that so far as possible the determination of costs should be predictable and expeditious.10 Assessment on a 2C basis is also consistent with my costs judgment where I allowed for the filing and service of amended statements of defence to the successive amended claims on a 2C basis.11

[12]   Accordingly, I award costs to Babbelbek on a 2C basis for the filing of a statement of defence to the plaintiff’s seventh amended statement of claim.

Should Babbelbek be awarded 50 per cent of scale costs for trial preparation?

[13]   Babbelbek seeks 50 per cent of scale costs for trial preparation. I am satisfied that such an allowance is reasonable in the circumstances. The proceeding was discontinued four weeks before Babbelbek’s briefs of evidence were due, and eight weeks before trial. Preparation for trial had already begun. This included briefing complex expert accounting evidence which, due to its complexity, had to be prepared well in advance. The basis for calculation, being 50 per cent of scale for trial preparation, is reasonable in the circumstances.

Should Babbelbek be awarded increased or indemnity costs for Mr Day’s failure to accept a settlement offer?

[14]   Babbelbek claims increased or indemnity costs for the plaintiff’s unreasonable failure to accept an offer of settlement. The settlement offer was made in a letter dated 30 November 2015. Babbelbek agreed not to seek costs if the plaintiff discontinued his claim (commonly referred to as a “walk-away” offer). The letter set out in some detail why the claim, as pleaded at that stage, would not succeed.

10     High Court Rules 2016, r 14.2(g).

11     Day v Official Assignee [2017] NZHC 847 at [48].

[15]   I am not satisfied that increased or indemnity costs should be awarded on this basis, for the following reasons:

(a)First, I am unable to assess whether the plaintiff’s refusal to accept the offer was unreasonable in the circumstances. That is because I do not have a substantive judgment against which to compare and contrast the settlement offer.

(b)Second, the assessment of reasonableness is even more difficult in this case because the pleaded claim as at the date of the offer was different to the claim as pleaded in the seventh amended statement of claim. And, although there are some aspects that remain the same, assessment of reasonableness would still require an engagement with the merits of the claim in circumstances where the merits have not been formally aired, considered, nor determined.

(c)Third, the courts have generally been reluctant to award increased costs for walk-away offers. The reasons for this were explained by Gendall J in Talbot v Talbot:12

[32]      What is clear to me in this case is that the offers in questions which were made by Ms Ormsby and Ms Paul were in the form of “walk away” offers. The authorities suggest that Courts should be “conventionally cautious” of uplifting costs on the basis of such an offer which effectively requires the offeree to have zero chance of success in a claim. This is clear from the decision in Easton Agriculture Ltd v Manawatu/Whanganui Regional Council. In situations such as this, strike-out proceedings are said to be the more appropriate way to proceed.

[33]      It is apparent too, as the Court of Appeal has noted, that defendants routinely make “walk away” type offers and, secondly, that reliance on such an offer to justify an increased costs claim would effectively lead to increased costs being sought  in  almost  every  unsuccessful  application  –  see Hira Bhana & Co Ltd v PGG Wrightson Ltd.

(footnotes omitted)

12     Talbot v Talbot [2017] NZHC 257.

[16]   Accordingly, I decline to award increased or indemnity costs for the failure to accept that offer of settlement.

Should increased or indemnity costs be awarded to Babbelbek for failure to advise of the discontinuance?

[17]   As an alternative, Babbelbek seeks increased or indemnity costs for the plaintiff’s failure to advise Babbelbek promptly that he intended to discontinue proceedings. Babbelbek asserts that the plaintiff formed an intention to discontinue the proceedings around two months prior to communicating that intention to Babbelbek’s counsel, and as a result Babbelbek incurred costs during this period which it would not have incurred had the plaintiff advised Babbelbek of its intention to discontinue in a timely way.

[18]   I am not persuaded that the failure to communicate the discontinuance earlier provides adequate grounds on which to either increase costs or award indemnity costs. The decision to discontinue the claim is for the plaintiff. The presumption in r 15.23 protects a defendant for the costs incurred up until the time of discontinuance. Indeed, in this case, an allowance has been afforded to the defendant for the trial costs incurred in this period. In the absence of any evidence to show that the conduct of the defendant was either wilful or vexatious, there are no grounds to depart from scale.

Should Babbelbek’s claim for disbursements be approved?

[19]   In addition to court filing fees (which are claimable under r 14.12(1)(b)(i)), Babbelbek claims the following disbursements:

(a)Expert fees for Babbelbek’s appointed experts (KordaMentha);

(b)Costs of external providers of services, being:

(i)Enprise Solutions Ltd which was engaged to resurrect RDL’s accounting database in order to enable KordaMentha to provide an expert opinion; and

(ii)Streamlined Litigations Services Ltd which provided litigation support services relating to discovery and document management;

(c)Fees charged by the firm of the third defendants, the former receivers, pursuant to an indemnity agreed between Babbelbek and those third defendants. Those fees include fees of the third defendants’ legal advisors.

[20]   The plaintiff’s former counsel took issue with the quantum of the KordaMentha fees. I am satisfied that they are reasonable. KordaMentha was instructed on 19 June 2017. A draft expert report was completed on 31 August 2017. The report was 19 pages long (excluding attachments) and addressed seven complex questions that required analysis of Babbelbek, RDL, ASOTV and GN Network Ltd’s accounting data. The draft report also had three appendices, being the management fee analysis, management services agreement ratio analysis, and management fee analysis adjusted for ASOTV/GNN media costs.

[21]   I am also satisfied that the disbursements claimed in (b) above are disbursements claimable in this proceeding, and the quantum of those disbursements are not disproportionate. These claims for disbursements are approved.

[22]   However, I do not consider that the disbursements in (c) above are recoverable against the plaintiff. The third defendants have not sought costs in this proceeding against the plaintiff. If they had done so costs would have only been allowed on a scale basis. To allow one defendant to recover the costs of another defendant as a disbursement, and on an indemnity basis, would circumvent the costs regime set out in the High Court Rules and be contrary to the principle that so far as possible costs should be predictable and expeditious.13 I disallow this disbursements claim.

[23]   Accordingly, I allow Babbelbek’s claim for disbursements, with the exception of the fees charged by and on behalf of the third defendants.

13     High Court Rules 2016, r 14.2(g).

Summary

[24]In summary, I have found that:

(a)There is no reason to depart from the presumption in r 15.23 of the High Court Rules that a discontinuing plaintiff is to pay costs. Babbelbek is entitled to scale costs on a 2A or 2B basis (as set out in the annexure referred to at [7]), up to and including the discontinuance.

(b)The costs of Babbelbek’s statement of defence is to be calculated on a 2C basis.

(c)Babbelbek is entitled to 50 per cent of scale costs (schedule 2B) for trial preparation.

(d)No uplift in costs is warranted for Mr Day’s failure to accept Babbelbek’s 2015 settlement offer.

(e)No uplift in costs is warranted for Mr Day’s failure to earlier communicate an intention to discontinue.

(f)Babbelbek is entitled to the disbursements claimed with the exception of the third defendants’ fees.

Result

[25]   I order Mr Day and Mr Ranchhod, jointly and severally, to pay costs to Babbelbek calculated in accordance with the findings in [24] above.

Edwards J

Solicitors:      Rennie Cox, Auckland

Meredith Connell (Office of the Crown Solicitor), Auckland Minter Ellison Rudd Watts, Auckland

Copies To:    K P Day, Auckland

R Ranchhod, Auckland