Foundation Securities Limited v Direct Labour Services Limited HC Auckland CIV 2006-404-4391

[2007] NZHC 1646

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2006-404-4391

BETWEEN  FOUNDATION SECURITIES LIMITED Plaintiff

AND  DIRECT LABOUR SERVICES LIMITED First Defendant

AND  CASE BOREHAM ASSOCIATES LTD Second Defendant

Hearing:         21 February 2007

Appearances: P J K Spring for Plaintiff

G P Denholm for Defendants

W G Manning for Liquidators

Judgment:      21 February 2007

JUDGMENT OF KEANE J

Solicitors

Keegan Alexander, Auckland for Plaintiff

Foy & Halse, Epsom, Auckland for Defendants

C Taylor, Newmarket, Auckland for Liquidators

FOUNDATION SECURITIES  V DIRECT LABOUR SERVICES  HC AK CIV 2006-404-4391  21 February

2007

[1]      On 9 February 2007, following a contested hearing last year, Doogue AJ placed Direct Labour Services and Case Boreham in liquidation and appointed two liquidators. On 12 February 2007 the directors of both companies filed appeals on their behalf in the Court of Appeal and Case Boreham applied for a stay of the winding up until the appeal was determined; an application Foundation Securities and the liquidators have opposed.

[2]      The appeal, I have been told this morning, is now to be abandoned and a stay is no longer sought. The issue remaining is whether Foundation Securities and the liquidators are entitled to costs against a non-party, Robyn Case, a shareholder and director  of  Case  Boreham.  No  issue  arises  as  to  Direct  Labour  Services,  a non-trading company.

Stay application

[3]      The application for stay, made ostensibly by Case Boreham on 13 February

2007, when the appeal was filed in the Court of Appeal, warranted, Doogue AJ considered the following day, an immediate interim order staying the winding up of both companies until the grounds for a stay could be evaluated accurately.

[4]      On 16 February Doogue AJ heard incomplete argument on the issue whether there could be any basis for the stay continuing; an issue that hinged on whether the companies were competent to appeal. The directors had promoted the appeal independently of the liquidators and had not, themselves, obtained any independent standing under r 700R before the order sought to be appealed was made.

[5]      Doogue AJ said provisionally that, once account was taken of s 248 of the Companies Act 1993, which states the effect of an order for liquidation, the appeal appeared misconceived and with it the application. As he said at para [7]:

… the Court cannot in the guise of making an order for stay of execution displace the liquidators from the statutory office to which they have been appointed.

And again:

… if the liquidators are in office then it seems to logically follow that they have control of the company and … that is an inherent part of their role which they cannot be prevented from exercising so long as they occupy that office. Equally the other effects of making an order for liquidation are that the directors powers with unimportant exceptions expired.

[6]      Doogue AJ concluded, once more provisionally, at para [11], that so long as the liquidators were in office what Case Boreham, in reality Robyn Case as shareholder and director, was intent on was impossible in law and there could be no basis for the order for stay continuing. That said, he allowed the liquidators and Foundation Securities the opportunity to reply to Robyn Case’s affidavit and directed that the issue be set down for hearing.

[7]      That is how the application for stay came to me yesterday, as it turned out without any counsel being aware that it had been set down. I reviewed, therefore, with counsel the nature and implications of the issue that troubled Doogue AJ. And I directed, with their consent, that this be the only issue set down for hearing today leaving the merits of the application, if there were jurisdiction, until another day.

[8]     The affidavit evidence remained then and remains still incomplete. The liquidators have challenged Ms Case’s affidavit dated 13 February 2007 in which she said  that  Case Boreham was then solvent  but  critically dependent  on  continued Government funding; and hence the need for a stay. They say, in their very recent affidavits, that at all material times both companies were, on the balance sheet and cashflow tests, grossly insolvent and that Government funding appeared to have been diverted  from the  purpose  for  which  it  was  granted.  Ms  Case  has  not  had  the opportunity to respond.

[9]      A full inquiry into the evidence is, of course, no longer called for because the appeal and with that the application for stay are abandoned. It remains relevant still to the issue whether there should be an award of costs in favour of Foundation Securities and the liquidators, more especially a full indemnity.

Discretion

[10]     There is no issue that the application for stay having been abandoned, the ordinary principle in HCR 47(a) applies and that, on that basis anyway, Foundation Securities and the  liquidators are  entitled  to  costs;  and  as  HCR  48E  stipulates, immediately. Nor need costs be denied Foundation Securities and the liquidators because they claim, and apparently rightly, that the appeal and application for stay are nullities. Should there be any issue as to that, the Court has at least inherent jurisdiction: Hartner Trustee Ltd v Colin Mackenzie Plastering Ltd [15 PRNZ 318], Master Kennedy Grant, paras [27], [28]. The only issue can be whether costs should be awarded against Ms Case, a non-party.

[11]     The jurisdiction to order such costs is well established: Dimocks Franchise Systems v Todd (No 2) (2004) UKTC 39, PC. As Panckhurst J said however in De Vries v Queenstown Com Ltd (HC Invercargill, CIV 2003-425-000086, 23 December

2004), where the non-party is a director or shareholder of an insolvent company that is a party, any award calls for a lack of good faith.  Such a lack can, Panckhurst J held also, and I agree, be evident in any truly unreasonable use of or response to this Court’s process.  Frank dishonesty is not required.

Lack of good faith

[12]     Ms Case denies that a lack of good faith can be attributed to her. She says that she pursued the appeal, as a director of Case Boreham, because she continues to dispute the basis on which the order for liquidation was made. She asserted in her affidavit supporting the application for stay that Case Boreham remained solvent as long as it received Government funding only because, she says, the accounts as they then were said so.

[13]     The  liquidators  and  Foundation  Securities  dispute  this   in  two   ways, contending first that the appeal was brought and the application for stay with it, in entire disregard of the effect of the order for liquidation sought to be appealed; a decisive fact remarked on by Doogue AJ, though provisionally, on 16 February.

[14]     Section  248   of  the   Companies   Act,   they  say,   as   Doogue   AJ   said provisionally, has to be definitive. It says that on liquidation the liquidator assumes custody and control of the assets; and that the powers, functions and duties of the directors, though they remain in office, largely cease. None of the powers shareholders and directors retain, Foundation Securities and the liquidators say, entitled the directors to cause Case Boreham and Direct Labour Services to appeal or Case Boreham to seek a stay of the winding up.

[15]     The  directors,  Ms  Case   in  particular,   Foundation  Securities   and   the liquidators say also, need not have taken this illegitimate course. They could, under r

700R, have applied, before the order for liquidation was made, to appear to oppose it and obtained standing independent of the companies, ultimately to appeal; and that they did not do so should not shield Ms Case from responsibility for costs. Had she been a party, as she could easily have been, she would have been liable.

[16]     Secondly and more seriously, the liquidators and Foundation Securities say, when Ms Case made her affidavit in support of the application for stay she misled the Court. She deposed that the companies were solvent but would only remain so if able to continue to secure Government funding. Yet there was evidence that both were grossly insolvent and not just at the date of the appeal. They were insolvent when the statutory demands were issued to which they did not respond. The day before Ms Case gave her affidavit, it is the evidence of the former accountant to both companies, Mr Mercer, he told her that they were grossly insolvent. What she said in her affidavit she knew to be untrue.

[17]     Finally,  it  is said  in  support  of this application,  full  indemnity costs are justified because, as a result of the directors’ futile stratagem, that of Ms Case in particular, the cost burden assumed by the creditors of both companies inevitably will increase. Foundation Securities says that it is doubly compromised. It is not merely prejudiced as principal creditor; it has had to incur costs.

Conclusions

[18]     Despite what has been said  for Ms Case, I accept  as the liquidators and Foundation Securities urge me to, that an award of costs must be made against her personally.

[19]     Ms Case pressed the appeal despite s 248, as if she still had charge of Case Boreham not the  liquidators,  when  she  herself  could  have  obtained  standing  to appeal, had she entered an appearance under r 700R to oppose the order for liquidation. This complete disregard of the substantive law and the rules resulted in a misuse of the Court’s process, putting the liquidators and Foundation Securities to needless expense, and that in itself, I consider, shows a sufficient lack of good faith to justify an award against her.

[20]     I  cannot  on  the  state  of  the  evidence  conclude,  as  the  liquidators  in Foundation Securities wish, that in supporting the application for stay Ms Case has deliberately misled the Court as to Case Boreham’s financial state. She has not had the opportunity to contest either the opinion of the liquidators or the credibility of the former accountant  to the companies, Mr Mercer. The most that I can conclude, and I do, is that she has definitely a case to answer.

[21]     That being so, the award I will make will be an enhanced award but not one of full indemnity, though I am conscious of the burden that all creditors will carry as a result. The liquidators and Foundation Securities will each have scale 2C costs and their disbursements, both to be approved by the Registrar.

P.J. Keane  J