Gilles Bakery Limited v Gillespie
[2014] NZHC 306
•27 February 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-000386 [2014] NZHC 306
BETWEEN GILLES BAKERY LIMITED First Plaintiff
TREVOR KEITH BOSS and BRIAN ERSKINE-SHAW as trustees of THE TREVOR BOSS FAMILY TRUST Second Plaintiff
ESTHER TCHOUA JACQUET and TREVOR KEITH BOSS as trustees of the ESTHER JACQUET FAMILY TRUST and JEAN PHILLIPPE THADDEE JACQUET and ESTHER TCHOUA JACQUET personally
Third Plaintiffs
ANDKEVIN JAMES GILLESPIE First Defendant
WARREN ALEXANDER DUNCAN Second Defendant
JOHN LELIEVRE Third Defendant
MICHAEL CHANNEL FINNEGAN Fourth Defendant
PAUL STEVEN YARROW Fifth Defendant
TREVOR NEIL PERRY Sixth Defendant
COLIN PETTIGREW Seventh Defendant
WESTPAC NEW ZEALAND LIMITED Eighth Defendant
DENNIS KING LAW Ninth Defendant
GILLES BAKERY LIMITED v KEVIN JAMES GILLESPIE [2014] NZHC 306 [27 February 2014]
Hearing: (On the papers) Judgment: 27 February 2014
JUDGMENT OF LANG J [on costs]
This judgment was delivered by me on 27 February 2014 at 11.30 am, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
[1] This file has been referred to me as Duty Judge in Auckland this week. In a judgment delivered on 28 June 2013 Associate Judge Abbott entered judgment for the first, second, fourth, sixth, seventh and eighth defendants against the plaintiff on the basis the plaintiffs’ claims against them could not succeed. Costs were reserved. Counsel exchanged memoranda as to costs last year. Because of other work commitments Associate Judge Abbott is not available conveniently to determine the issue of costs. Rule 14.9 applies. I propose to address the issue of costs in light of the judgment and the memoranda filed by counsel.
Brief background
[2] The substantive proceeding arose out of the circumstances in which Gilles Bakery Limited (GBL) guaranteed the loan obligations of Yarrows (The Bakers) Limited (Yarrows) to the eighth defendant, Westpac New Zealand Limited (Westpac).
[3] Yarrows was the holder of all of the ordinary shares in GBL. It had bought the shares from the second and third plaintiffs (trustees of family trusts associated with Trevor Boss and Jean Jacquet (the directors of GBL)). The second and third plaintiffs (the preference shareholders) received redeemable preference shares as part of the consideration for the sale of the ordinary shares.
[4] Shortly after acquiring 100 per cent of the ordinary shares in GBL, Yarrow sought an extension of an existing loan facility with Westpac. Westpac agreed on several conditions, including that GBL (together with a number of other companies in the Yarrows group) gave cross-guarantees of Yarrows’ obligations and a general security agreement in support of that guarantee.
[5] Yarrows’ board of directors instructed its Group Finance Director (the fourth defendant Mr Finnegan) and its CEO (the seventh defendant Mr Pettigrew) to obtain the guarantee and security from GBL. After expressing reluctance, Mr Boss and Mr Jacquet signed the guarantee on behalf of GBL and provided the documentation to the ninth defendants, the solicitors acting for GBL, to allow the loan transaction to proceed.
[6] Yarrows subsequently defaulted under the loan facility. Westpac appointed receivers. GBL’s bakery business was sold, and the proceeds of sale applied in reduction of the amount owing under the facility. As a consequence, the redeemable preference shares became worthless.
[7] The plaintiffs alleged that Yarrows, Mr Finnegan and Mr Pettigrew were deemed directors of GBL and that they had breached statutory and fiduciary duties owing both to GBL and to the preference shareholders by requiring GBL to enter into the guarantee, and by failing to inform Mr Boss and Mr Jacquet fully as to the potential consequences of doing so. The plaintiffs argued that Mr Finnegan and Mr Pettigrew were directly liable, and that Yarrows Board and Westpac were liable for dishonestly assisting Yarrows in its breaches of fiduciary duties.
[8] Three of the Yarrows’ directors (the first, second and sixth defendants) as well as the fourth and seventh defendants and Westpac applied to strike out the claims against them, or for summary judgment against the plaintiffs.
[9] In his judgment dated 28 June 2013 Associate Judge Abbott concluded that
none of the plaintiffs’ claims could succeed against the defendants because:
(a) It was not arguable that Yarrows breached any duty under s 131(1) of the Companies Act 1993, or that it owed or breached separate fiduciary duties to GBL or the preference shareholders, and therefore the Yarrows’ directors could not be liable for knowing assistance to a breach. It was also not arguable that the Yarrows’ directors acted dishonestly.
(b)It was not arguable that Mr Finnegan and Mr Pettigrew were deemed directors. Even if they were the claims against them could not succeed for the same reason as for the Yarrows’ directors.
(c) The claims against Westpac could not succeed as it was not arguable that Yarrows breached any duty under s 131(1), or that it owed or breached separate fiduciary duties to GBL or the preference
shareholders, and therefore Westpac could not be liable for knowing assistance to any breach. In addition, the plaintiffs could not succeed as it was not arguable that Westpac acted dishonestly in the circumstances.
The defendants’ positions as to costs
[10] Counsel for the first, second and sixth defendants have confirmed that costs have been agreed between those defendants and the plaintiffs.
[11] Westpac seeks indemnity costs against the plaintiffs relying on r 14.6(4)(e) and a clause in the Yarrows’ guarantee which provides for indemnity costs. Alternatively Westpac seeks indemnity costs under r 14.6(4)(a) on the basis the plaintiffs acted vexatiously, frivolously, and improperly in bringing their claims against Westpac.
[12] If unsuccessful in their submission for indemnity costs Westpac seeks costs on a category 3 time band B (except for an allowance for preparation at band C) basis with an uplift of 50 per cent.
[13] The fourth and seventh defendants (Messrs Finnegan and Pettigrew) also seek indemnity costs in reliance on r 14.6(4)(a) or, in the alternative, costs on a 3B basis together with an uplift.
The plaintiffs’ position
[14] The plaintiffs submit that Westpac are not entitled to indemnity costs because:
(a) the clause providing for indemnity costs in the guarantee does not apply; and
(b)Westpac is not able to make out a case for indemnity costs based on r 14.6(4)(a).
[15] The plaintiffs further submit that Westpac is not entitled to increased costs as there were no unnecessary steps taken or arguments that lacked merit. The plaintiffs submit that Westpac’s costs should be fixed on a category 3 basis but in accordance with time band B.
[16] The plaintiffs note that the fourth and seventh defendants’ memorandum was filed outside the time provided by the Judge. They submit the fourth and seventh defendants are not entitled to indemnity costs for the same reasons that apply to the alternative Westpac argument. They submit that the fourth and seventh defendants are not entitled to increased costs either, again for the same reasons set out in relation to Westpac.
[17] Mr Judd QC also makes the additional point that any award in favour of the fourth and seventh defendants’ costs cannot exceed the costs actually incurred of
$37,550.
Discussion
Westpac’s claim for indemnity costs in reliance on the clause in the guarantee
[18] As Mr Judd submits, this issue depends upon the interpretation to be given to cl 6.1 of the guarantee and whether, properly interpreted, that clause covers Westpac’s costs in defending this proceeding. Clause 6.1 of the guarantee provides:
6.1Each of the Guarantors hereby agrees to pay to Westpac all costs and expenses (including costs as between solicitor and own client or consultants and own client) sustained or incurred by Westpac in obtaining or attempting to obtain payment of all or any of the money for which the Guarantors or any of them may from time to time be liable under the provisions of this deed or in enforcing or attempting to enforce all or any of the obligations which the Guarantors or any of them may be liable to perform or observe under the provisions of this deed or in enforcing or attempting to enforce any remedy or power expressed or implied herein.
[19] GBL argues that Westpac’s costs in these proceedings were not costs sustained or incurred “in obtaining or attempting to obtain payment”, nor were they costs sustained or incurred “in enforcing or attempting to enforce” obligations under the guarantee. Westpac commenced attempting to enforce GBL’s obligations in
October 2011, and by November 2011 Westpac had “obtained payment of all that GBL had”. Therefore the costs incurred by Westpac following the commencement of these proceedings in January 2012 were not sustained in obtaining payment or enforcing obligations as those actions had already been taken.
[20] I consider this argument to be somewhat artificial. In this proceeding the plaintiffs directly challenged the validity of the guarantee. The plaintiffs alleged that the guarantee, indemnity and general security agreement were invalid. They sought a declaration to that effect. If the plaintiffs had succeeded, Westpac would have been obliged to refund the moneys it had received/taken from GBL in reliance on those securities. In opposing GBL’s claims in these proceedings, Westpac was at the least attempting to reinforce the guarantors’ obligations by resisting the guarantors’ argument the guarantee was unenforceable. Further, although Westpac has received payment it was on terms. When the securities were realised and payment made to Westpac, the solicitors then acting for GBL confirmed their consent to the release of the settlement funds to Westpac on the basis that such release was without prejudice to GBL’s claims in respect of that portion of the funds attributed to the sale of GBL’s assets. They denied that Westpac had any claim under the securities, and also claimed that the guarantee was invalid and inappropriately obtained and the security flawed.
[21] In Black v ASB Bank Limited,1 Mr Black sued a bank seeking a declaration he was not liable under a guarantee. He failed in the High Court. The Court of Appeal upheld the High Court’s decision to grant the Bank’s application for summary judgment, and to order Mr Black to pay indemnity costs under the guarantee. Like Mr Black, the plaintiffs in this case had called into question the validity of the guarantee that engaged the obligation for indemnity costs.
[22] Westpac also relies on the case of Gomba Holdings Limited v Minories Finance.2 In that case the English Court of Appeal affirmed a mortgagee’s contractual entitlement to costs incurred in relation to a mortgage. This included all costs incurred by the mortgagee in enforcing the security. The Court held that this
extended to the costs of or incidental to litigation between the mortgagor and mortgagee in regards to the basis on which the mortgagor was entitled to redeem the mortgage. Mr Judd made the point that the case was not analogous because the costs at issue were incurred during the enforcement of the security after demand was made but prior to payment. For the reasons given above, however, I do not consider that to be significant on the facts of this case.
[23] Westpac also refers to Parker-Tweedale v Dunbar Bank Plc No. 2,3 in which the English Court of Appeal held that, even in the absence of an express contractual provision, a mortgagee could add the costs of litigation with the mortgagor or guarantors to its security. However, given the express contractual provision in this case, it is unnecessary to rely on any common law right.
[24] I am satisfied that Westpac is entitled to indemnity costs in accordance with the relevant clause in the guarantee.
[25] In the alternative, and in the event I am wrong in reaching that conclusion, I address Westpac’s alternative argument for indemnity costs in reliance on r 14.6(4)(a). The leading case in relation to indemnity costs under that rule is Bradbury v Westpac Banking Corporation.4 Examples of the behaviour which will attract indemnity costs are:
(a) the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b)particular misconduct causing loss of time to the Court and to other parties;
(c) commencing or continuing a proceeding for some ulterior motive;
(d) doing so in wilful disregard of known facts or clearly established law;
(e) making allegations which ought never to have been made or unduly prolonging a case by groundless contentions – essentially, the “hopeless case” situation.
[26] The Associate Judge concluded that there was no evidential basis to support the pleading that Westpac dishonestly assisted any breach, nor “any evidence that the plaintiffs could succeed in this argument”. It therefore might be said the plaintiffs’ allegations come close to being a hopeless case, but I do not consider it quite reaches the point of supporting an award of indemnity costs. I note that in Prebble v Huata the Supreme Court noted indemnity costs are for “rare cases generally
entailing breach of confidence or flagrant misconduct”.5 In this case the plaintiffs’
claim and conduct fall short of being sufficiently flagrant so as to engage full indemnity costs on that basis.
[27] However, having reviewed the proceedings and the Judge’s findings, it is fair to say the plaintiffs acted unreasonably in bringing this claim against Westpac. On the basis of the Judge’s findings, the claims pursued lacked merit. For that reason increased costs under r 14.6(3)(b)(ii) are appropriate.
Messrs Finnegan and Pettigrew’s claim for costs
[28] The plaintiffs’ claim against Messrs Finnegan and Pettigrew involved more complex legal issues than those made against Westpac. I am not prepared to categorise the plaintiffs’ claim against them as constituting flagrant misconduct, but again I accept the defendants’ argument that there is a case for an uplift pursuant to r 14.6(3)(b)(ii) and (iii). In that regard I note the Judge’s finding that nothing in the evidence suggested a basis for the plaintiffs’ claims (that GBL’s directors were required to follow the instructions of Messrs Finnegan and Pettigrew or that Mr Finnegan could be a deemed director).
The quantum of the uplift
[29] In the present case having regard to the arguments raised and the approach taken by the plaintiffs, an uplift of 50 per cent is warranted.
5 Prebble v Huata [2005] NZSC 18 at [6].
[30] Although I accept Westpac is entitled to costs on an indemnity basis in accordance with the guarantee, I also address the scale costs sought in the alternative. Westpac calculates a total cost on a 3B basis of $31,458 plus disbursements of $942. The plaintiffs take issue with the claim for second counsel and also with the suggestion that time band C should be permitted for preparation of written submissions.
[31] I accept the force of the argument that on an application for strike out/summary judgment it would be rare for an allowance for second counsel. I disallow that claim. Further, I consider the allowance for written submissions is more than adequately covered by the uplift to the allocation of band B.
[32] In the end result the increased costs payable to Westpac would be, on the basis of 8.2 days at $2,940 a day, $24,108 together with an uplift of 50 per cent,
$36,162. Westpac would also be entitled to disbursements of $942.60. For the reasons given above, however, Westpac is entitled to costs on an indemnity basis.
[33] Mr Finnegan and Mr Pettigrew seek an uplift on scale costs of $25,872 plus disbursements of $838. In their case I also accept a 50 per cent uplift is appropriate. Disallowing the claim for second counsel leads to, in their case, costs of 7.8 x $2,940 ($22,932), uplifted by 50 per cent to $34,398 together with disbursements of $838.
Result/orders
[34] The plaintiffs are to pay Westpac indemnity costs in the sum of $112,170 plus disbursements of $2,135.58.
[35] The plaintiffs are to pay the fourth and seventh defendants costs in the sum of
$34,398 together with disbursements of $838.
Lang J
Solicitors:
McKechnie Quirke & Lewis, Rotorua
Buddle Findlay, Auckland
Simpson Grierson, Auckland
Hibiscus Law, WhangaparaoaCopy to:
G J Judd QC, Auckland
K J Patterson, TaurangaB Henry/P J Knapp, Auckland
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