DK Kelsey Limited v Matakana 2008 Limited

[2016] NZHC 2634

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-4829 [2016] NZHC 2634

BETWEEN

DK KELSEY LIMITED

Plaintiff

AND

MATAKANA 2008 LIMITED First Defendant

SUSAN THEREZIA BARANYAI Second Defendant

Hearing:

31 August 2016

(Supplementary submissions received:  31 October 2016)

Appearances:

T J Rainey for the Defendants in support
M Taylor for the Plaintiff to oppose

Judgment:

9 November 2016

JUDGMENT OF ASSOCIATE JUDGE R M BELL Security for Costs

This judgment was delivered by me on 9 November 2016 at 11:00am

pursuant to Rule 11.5 of the High Court Rules

…………………………………………………….

Registrar/Deputy Registrar

Solicitors:

Rainey Law (T J Rainey), Auckland for Defendant in support

Angela Parlane, Auckland, for Plaintiff to oppose

Counsel:

M Taylor, Barrister, Auckland, for Plaintiff

DK KELSEY LIMITED v MATAKANA 2008 LIMITED [2016] NZHC 2634 [9 November 2016]

[1]      This is a decision on the defendants’ application for security for costs against the plaintiff.  I heard the application on 31 August 2016, but adjourned the matter to see whether the plaintiff’s shareholders would give personal guarantees to the defendants to pay any costs ordered against the plaintiff.   The shareholders are unwilling to give the guarantee and accordingly I am required to decide the security for costs application.  Counsel filed supplementary submissions.

[2]      The people behind DK Kelsey Ltd are Mr and Mrs Brandt.  They established the company in 2011 after migrating to New Zealand from South Africa. On 27 June

2011 it entered into an agreement with Matakana 2008 Ltd to buy a café and art gallery business at Matakana called Dragonfly Café and Gallery.  Mrs Baranyai, the second defendant, is the director of Matakana 2008 Ltd.   That company occupied premises leased from another company controlled by Mrs Baranyai – Eger Properties Ltd. The purchase of the business settled on 18 August 2011.

[3]      DK Kelsey Ltd sues Matakana 2008 Ltd and Mrs Baranyai on the agreement for the sale and purchase of the business.  The statement of claim pleads causes of action against Matakana 2008 Ltd for breach of contract and misrepresentation. Mrs Baranyai is sued under the Fair Trading Act and in deceit.   One of the more significant causes of action is for breach of warranty as to turnover.  Matakana 2008

Ltd warranted that its turnover, exclusive of GST, for the year 1 April 2009 to

31 March 2010 was $941,231.  DK Kelsey Ltd says that it was in fact $786,167.83, some $155,063.17 less.  There are causes of action for breach of warranty as to title of assets; breach of contract in employing a second chef before settlement without the plaintiff’s consent; breach of warranty in not providing vendor assistance after possession; breach of contract in not replacing the vinyl floor in the kitchen; breach of contract for removing chattels the plaintiff had paid for; misrepresentation as to employees; misrepresentation as to stock in trade; and misrepresentation as to profit and loss statement.

[4]      DK Kelsey Ltd vacated the premises at Matakana on the expiry of the lease of Eger Properties Ltd in 2014.  Mr and Mrs Brandt had entered New Zealand on a work visa and, to obtain permanent residency, they had to show that they were

running a successful business.  They returned to South Africa in early 2015 because they were unable to show that they were operating a successful business.

[5]      DK Kelsey Ltd began this proceeding in 2013.  It was set down for hearing for five days starting on 18 April 2016.  DK Kelsey Ltd applied for an adjournment which Courtney J granted.  That was because Mr and Mrs Brandt had returned to South Africa.  They were having difficulties in re-establishing themselves there and also continuing with this proceeding.  DK Kelsey Ltd was ordered to pay costs of

$5,846.50 on the adjournment, but that has not been paid yet.  DK Kelsey Ltd points out that it obtained an order for costs against Eger Properties Ltd for $5,714.00 in a related  proceeding,1   and  it  is  willing  to  assign  that  costs  order  against  Eger Properties Ltd to the defendants so as to satisfy almost all of the costs order on the adjournment application.

[6]      Mr Brandt is the sole director of DK Kelsey Ltd.  Now that he has returned to South Africa the company no longer has a New Zealand resident director and no longer  complies  with  s  10(d)  of  the  Companies  Act  1993.    A  search  of  the Companies Office web page for the company shows that it has not filed an annual return and may be subject to removal from the register.   While the Brandts have returned to South Africa, they have not disclosed their present address.

[7]      The  defendants’  security  for  costs  application  relies  on  the  ground  in r 5.45(1)(b) of the High Court Rules 2016:

(b)       that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.

DK Kelsey Ltd accepts that the ground is made out.  Apart from its claims in this proceeding it appears to have no assets.  If the defendants succeed, there is every ground  for  believing  that  any  order  for  costs  may  be  barren.    That  risk  is increased  by the  possibility that  DK  Kelsey  Ltd  may  be  removed  from  the register for not having a New Zealand resident director and not having filed

annual returns.

1      Eger Properties Ltd v DK Kelsey Ltd [2014] NZHC 1101.

[8]      Making out one of the grounds under r 5.45(1) does not mean that an order for security for costs is made automatically.  Rather, that finding allows a Judge to make an order for security for costs if the Judge considers it just in all the circumstances.2   The discretion to order costs involves a balancing exercise in which the court must consider competing considerations:

[a]       protecting a defendant against the consequences of a barren costs order;  and

[b]       not barring or unduly impeding a plaintiff’s access to the court.3

The discretion is not to be fettered by constructing principles from the facts of the previous cases.

[9]      While it may be no more than a matter of impression, it is necessary to come to some view as to the merits of DK Kelsey Ltd’s claim.  At this stage, only limited information is available.  Even so, DK Kelsey Ltd appears to have a case of some substance, especially the claim for breach of turnover warranty.   The defendants concede that the turnover in the period under the agreement for sale and purchase of the business was not what the agreement stated.  Instead, they seek rectification so that the warranty period runs from 1 September 2009 to 31 August 2010.  At this stage, it seems strange that the warranty period should be for other than the normal financial year ending 31 March (which can be checked against annual financial statements).   DK Kelsey Ltd has also shown reason to doubt the document the defendants rely on for their rectification claim.  In comparison, the other causes of action are relatively minor, but as a matter of impression they cannot be dismissed out of hand.

[10]     As part of its opposition to the security for costs application, DK Kelsey Ltd says that the defendants caused its impecuniosity.  On that, I accept the defendants’ submission that at best DK Kelsey Ltd’s case shows that they breached warranties

and made misrepresentations with the result that DK Kelsey Ltd paid too much for

2      Rule 5.45(1)(b).

3      AS McLaughlin Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]-[16]; and Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017.

the business.  But that does not by itself show that the defendants’ conduct resulted in impecuniosity.  Consistent with that, DK Kelsey Ltd appears to have kept trading and paid its rent until the expiry of the lease in 2014.  DK Kelsey Ltd needs to show more to make out a case for impecuniosity caused by the defendants.

[11]     The risk to the defendants of a barren order for costs cannot be dismissed as trivial.  While the DK Kelsey Ltd appears to have a meritorious claim, success is not assured.  To the extent that it is not, the defendants have a prospect of obtaining costs as successful defendants.  Even so, my rough assessment is that so long as it runs its case competently, DK Kelsey Ltd may have a better than even chance on its turnover cause of action.

[12]     The Brandts’ unwillingness to guarantee payment of costs ordered against DK Kelsey Ltd highlights the defendants’ vulnerability to a barren costs order.  Even though they are behind DK Kelsey Ltd, they are not parties to the proceeding, do not live in New Zealand and have not submitted to the jurisdiction of this court.  Any order for non-party costs will not be enforceable against them in South Africa, because a South African court applying common law principles for enforcement of foreign judgments would not find that a New Zealand court has jurisdiction to order costs against the Brandts.

[13]     DK Kelsey Ltd criticised the defendants for delay in applying for security for costs.   I accept the defendants’ explanation that it was only when they received Mr Brandt’s affidavit in support of the adjournment application that they became aware of the position of DK Kelsey Ltd.  That gave them information they did not have before for a security application:  that the Brandts were in South Africa and that DK Kelsey Ltd was reliant on them to prosecute its claim.

[14]     However, it must be remembered these factors must be balanced against the consideration that a security for costs order should not unduly bar a plaintiff’s access to the court. The circumstances requiring DK Kelsey Ltd to seek an adjournment show the difficulties faced when litigating from abroad.     That factor counts in ensuring that the current difficulties in litigating in New Zealand are not made unduly worse by an order for heavy security for costs.

[15]     In weighing up these factors, I am satisfied that this is an appropriate case to order security but the amount should not be so great that it would effectively close the courtroom door to DK Kelsey Ltd.

[16]     At the hearing on 31 August 2016, the defendants proposed that security be fixed at $22,000.  Since then, they have toughened their stance.  They now propose that security be fixed at $65,000 on the basis that scale costs would come to approximately $65,000 and with disbursements a total cost order would be between

$70,000 and $80,000.   I do not disagree with those estimates, but I regard the defendants as having pitched the matter too high.  An order for security for costs at that level would be tantamount to closing the courtroom door to DK Kelsey Ltd. Instead, I regard the original amount proposed of $22,000 as appropriate.

[17]     DK Kelsey Ltd points out that there is a mechanism by which it can satisfy most of that.   On settlement of the purchase of the business the vendor and the purchaser each put funds into their respective solicitors’ trust accounts pending a mutual stocktake to determine the agreed value of the stock.  DK Kelsey Ltd paid

$17,400 into its solicitors’ trust account.   That fund has been kept there and with interest now amounts to $18,578.91.   It proposes that that fund may be used for security for costs.  The defendants do not accept that.  The stocktake is in contention in the proceeding.   DK Kelsey Ltd says that there was never an actual stocktake. The defendants rely on a stocktake undertaken by Mrs Baranyai alone.   The defendants say that Matakana 2008 Ltd is entitled to $10,000 from funds held in the solicitor’s trust account.

[18]     There is no evidence to guide me on the merits of that dispute, but there is help in the pleadings. Matakana 2008 Ltd has pleaded only a set-off of $6,553.96 (excluding GST).  It has not pleaded a counterclaim.  In other words, it recognises that it may be able to raise this as an adjustment to damages awarded in favour of DK Kelsey Ltd, but does not assert it in any pleaded counterclaim or cross claim. Because it asserts only a right of deduction, it does not need recourse against the money in the trust account.  On that basis, I find that the funds held in the solicitors’ trust account are no longer required for the purpose of the stocktake.  DK Kelsey Ltd may use those funds to provide security for costs.

[19]     In addition to providing security for costs of $22,000, DK Kelsey Ltd must also attend to matters to avoid being removed from the Companies Register:  appoint a New Zealand resident director and bring its annual return up to date.   That is required to ensure its continued existence.

[20]     Accordingly I make the following orders:

[c]       I fix security for costs to be paid into court by DK Kelsey Ltd at

$22,000.

[d]      The proceeding is stayed until all the following conditions are satisfied:

[i]        The sum of $22,000 is paid into court, to be held on an interest-bearing basis.

[ii]       DK Kelsey Ltd appoints a New Zealand resident director.

[iii]      DK Kelsey Ltd files an annual return with the Registrar of

Companies.

When  those  conditions  are  satisfied,  DK  Kelsey  Ltd  may  ask  for  a  case management conference to be set for further directions.

[c]       If  DK  Kelsey  Ltd  does  not  satisfy  all  these  conditions  by

31 March  2017,  the  defendants  may  apply  to  strike  out  this proceeding.

[d]      DK Kelsey Ltd is to pay the defendants’ costs on the security for costs application.  If counsel cannot agree costs, memoranda may be filed.

………………………...........

Associate Judge R M Bell