Harlow Finance and Leasing Limited v Sterling Nominees Limited HC Auckland M.1992-im00

[2001] NZHC 511

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY M.1992-IM00

BETWEEN HARLOW FINANCE & LEASING LIMITED
Applicant

AND STERLING NOMINEES LIMITED
Respondent

AND B.185-IM95

BETWEEN WILFRED JOHNSON
Judgment Debtor

AND TRUST BANK NEW ZEALAND LIMITED
Judgment Creditor

Hearing: 18 June 2001

Counsel: P F Dalkie for Applicant (given leave to withdraw)
S O McAnally for Respondent
D A Watson for Kathryn Webber

Judgment: 18 June 2001

ORAL JUDGMENT OF RODNEY HANSEN J

Solicitors: Mr PF Dalkie, P O Box 392, Auckland for Applicant
Keegan Alexander Tedcastle & Friedlander, DX CP21504, Auckland for Respondent
Kathryn Webber, P O Box 331-361, Takapuna, Auckland

[1] This is an application by the respondent (“Sterling”) to rescind an order granting relief against forfeiture and for costs on an indemnity basis against the applicant (“Harlow”), a director of the applicant, Wilfred Johnson, and the applicant’s solicitor, Kathryn Webber.

Background

[2] Harlow acquired the leasehold interest to premises situated in Fort Street, Auckland in April 1998. Sterling acquired the freehold in October 1998. Since Sterling became owner, there has been a history of alleged breaches of the lease by Harlow. Initially they were for the most part a claimed failure to pay rental and rates.

[3] On 30 July 2000, Sterling re-entered as a result of Harlow’s failure to pay the quarterly rental payment due on 1 July 2000. Harlow applied for relief against forfeiture and obtained a grant on 17 August 2000. In his judgment Randerson J commented on the record of prior breaches of the lease by Harlow but said that he was not persuaded that a point had been reached which disentitled Harlow to relief.

[4] A further application by Harlow for relief against forfeiture came before me on 20 December 2000. Sterling had sought to terminate the lease as a result of a number of alleged breaches by Harlow of the covenant to repair. Many were acknowledged to be of a relatively minor nature. I concluded that forfeiture would be a disproportionate response having regard to that consideration and the existence of what appeared to be bona fide disputes as to whether or not the breaches came within the scope of the covenant to repair. As recorded in paragraph [7] of my judgment, I expressed concern to the parties that an unconditional grant of relief could simply perpetuate the problems which had brought the parties before the Court, unless they were prepared to adopt some mechanism which would permit a determination of whether the matters about which the landlord complained constituted a breach of the covenant.

[5] Although Sterling maintained its opposition to relief being granted, it cooperated in settling conditions to be associated with the grant of relief. These conditions, which are set out in paragraph [9] of the judgment, included the appointment of an arbitrator to determine whether Harlow was liable to repair specified items included in the Property Law Act notice issued by Sterling. The conditions also included a specific direction that Harlow repair one specified item by 31 January 2001 and pay overdue council rates amounting to $1,870.99 by 10 January 2001.

[6] The arbitrator was duly appointed. On 8 February he published a partial award. He directed that specified remedial work be carried out by Harlow. On inspection on 30 March, he found that only some 50% of the work had been done. As a result, on 12 April, Sterling applied to rescind the order granting relief against forfeiture. It did so pursuant to leave reserved in my judgment. The application was made on the grounds that the application for relief against forfeiture had been made by Harlow without proper authority and that there had been breaches of the conditions to which relief was subject.

[7] The first ground of the application was based on an allegation that the director of Harlow, Mr Johnson, who had initiated the proceedings, was an undischarged bankrupt who, pursuant to s 62(1)(a) of the Insolvency Act 1967, was prohibited from taking part in the management of a company and, by s 151(2) of the Companies Act 1993, was prohibited from holding office as a director of a company.

[8] The application also recited that there had been breaches of the lease, specifically a failure to pay rental due on 1 April 2001 and to pay further rates which had fallen due. As a result of those further breaches, Sterling re-entered on 30 April. That step has not been resisted. In fact, Harlow has taken no steps either to challenge the re-entry or to oppose the current application. It has failed to file an affidavit in opposition to the application in accordance with directions made on 26 April to which it had consented.

[9] Mr Dalkie informed me that he had continued to act as counsel following the December Court hearing and had represented Harlow in the arbitration proceeding. However, since the consent order on 26 April, Harlow’s solicitor had received no instructions to oppose the application further. Mr Dalkie said he had written to the company advising them of the hearing date and of the likely consequences of a failure to participate. No instructions have, however, been received and he sought and I granted leave for Harlow’s solicitor to withdraw. Mr Dalkie was then excused from further participation in the hearing.

Application to rescind

[10] As earlier mentioned, the order for relief against forfeiture was made subject to a condition that Harlow repair a specified item by 31 January 2001 to the satisfaction of the arbitrator and to a further condition that it pay overdue council rates. Harlow has failed to carry out the repair of the specified item or to pay the rates due on the premises. Harlow having failed in these respects to meet the conditions associated with the order, I am satisfied that there are proper grounds to rescind the order granting relief against forfeiture and I make an order accordingly. It is therefore unnecessary for me to consider the alternative ground on which the application was advanced, namely the absence of any proper authority for the issue of the proceeding seeking relief.

Application for costs - introduction

[11] Sterling seeks an order for costs on an indemnity basis against Harlow, its director, Wilfred Johnson, and its solicitor, Kathryn Webber. Mr McAnally sought the order on the basis that the application for relief against forfeiture was without foundation and ought never to have been made. He relied on the dicta of Fisher J in Turner v Whitehead (1993) 7 PRNZ 79 at 88.

[12] So far as Harlow is concerned, it seems to me that the order for costs is being sought pursuant to r 48C(4)(a) which permits the Court to order a party to pay indemnity costs if “the party has acted vexatiously, frivolously, improperly or unnecessarily in commencing, continuing or defending a proceeding or a step in a proceeding”.

[13] The jurisdiction to award costs against a non-party such as Mr Johnson is conferred by s 51G of the Judicature Act 1908. That power has been used in appropriate cases to make an award of costs against the directors of a company: see Carborundum Abrasives Limited v Bank of New Zealand(No 2) [1992] 3 NZLR 757, (1992) 5 PRNZ 418.

[14] An award of costs against a party’s solicitor is made pursuant to the inherent jurisdiction of the Court, recently affirmed by the Privy Council in Harley v McDonald (PC9/2000, 10 April 2001).

Application for costs against Harlow

[15] The grounds on which indemnity costs against Harlow are sought are, firstly, that it never intended to remedy the breaches of the lease or was unable to do so and, secondly, that the proceeding should never have been brought because, to use counsel’s words, Harlow did not authorise anyone to issue the proceedings on its behalf.

[16] It was accepted by Mr McAnally that for Sterling to succeed on the first ground, it would be necessary for me to draw an inference that the company, through Mr Johnson, had brought the application without any serious intention of complying with the conditions on which relief was granted. I am unable to draw such an inference. In fact, the application was pursued with vigour and, in my view, was brought with justification. Following the making of the orders Harlow, initially at least, cooperated in ensuring the conditions were fulfilled. It participated in the arbitration and met the costs necessary to uplift the award. It was only over the last two or three months that Harlow apparently ceased to have any interest in resisting termination of the lease. Against this background there is no conceivable basis on which I could find that the initial application was advanced and argued vexatiously or unreasonably.

[17] The argument in support of the second ground proceeds on the basis that the proceeding was a nullity from the outset because Harlow never gave any authority for the proceeding to be brought. That is because Mr Johnson, as an undischarged bankrupt, was prohibited from holding office as a director or participating in the management of a company under the Insolvency Act 1967 and the Companies Act 1993.

[18] I was not referred to any direct authority to support the proposition that actions on behalf of a company by a person, such as an undischarged bankrupt who is prohibited from holding office or participating in its management, could not bind the company. Mr McAnally referred me to New Zealand Experience (Rotorua) Limited (In Receivership) v Blakely & ors (High Court, Auckland, CP2142/91, 8 October 1996) where a receiver had commenced legal proceedings after the commencement of a winding up without the knowledge or consent of the liquidator of the company or the Court. Although there was not authority for the commencement of the proceedings, Master Gambrill held that the proceeding was not a nullity and the proper course was to strike it out. Mr McAnally sought to distinguish this decision on the grounds that the receiver could nevertheless have brought proceedings before the company had gone into liquidation and that the order striking out the proceeding was made before judgment had been given.

[19] I do not see either ground as establishing any relevant point of distinction. I am unable to see any reason why this proceedings should be treated as a nullity. The fact that a director is prohibited from holding office or participating in the management of the company does not invalidate actions taken on behalf of the company: s 158 Companies Act 1993. Mr Johnson was the company’s director and responsible for its management in fact, even if it was an offence for him to do so. The proceedings were properly constituted. The order of this Court was properly made and could not be set aside as a nullity: R v Nakhla (No 2) [1974] 1 NZLR 453.

[20] I conclude that neither of the grounds put forward on behalf of Sterling for an award of indemnity costs against the company have been made out. However, I see no reason why the company should not be liable for costs in the ordinary way and I make an order that it pay in accordance with Category 2, Band B.

Application for costs against Wilfred Johnson

[21] The application for costs against Mr Johnson was included in Sterling’s amended application of 5 June which sought to set aside the order for relief against forfeiture and for orders for costs against the company and its solicitor. The application was served on Harlow’s solicitor but there is no indication that she had Mr Johnson’s authority to accept service. In relation to this proceeding she acted for the company. There is no indication that she acted for Mr Johnson personally. In my view, the application has not been served on him. He has not had an opportunity to be heard. Even if there were grounds on which he could be liable for costs, either on an indemnity basis or on some other basis, I am satisfied that I have no jurisdiction to make an order against him.

Application for costs against Harlow’s solicitor

[22] It was submitted that Harlow’s solicitor, Ms Webber, should be liable because of her failure to ascertain that Mr Johnson is an undischarged bankrupt and without the authority to initiate proceedings on behalf of Harlow. I have already expressed my view that Mr Johnson’s disabilities were not of such a nature as to prevent his binding the company, either by authorising the issue of proceedings on its behalf or by entering into other transactions. That of itself is fatal to application for costs against the solicitor. Regardless, I am satisfied that this is not a case in which it would be appropriate to make the solicitor liable for costs on any basis.

[23] Mr McAnally accepted that there is a high threshold for the making of an order for costs against a solicitor. He referred me to para [48] of the Privy Council’s decision in Harley v McDonald in which it was said that the jurisdiction to make such an award “can be invoked only in cases where there has been a serious dereliction of the solicitor’s duty to the Court”.

[24] As the Committee went on to say at paragraph 49:

“A costs award against one of its officers is a sanction imposed by the Court. The inherent jurisdiction enables the Court to design a sanction for a breach of duty in a way that will enable it to provide compensation for the disadvantaged litigant. But a costs award is also punitive. Although it may be expressed in terms which are compensatory, its purpose is to punish the offending practitioner for a failure to fulfil his duty to the Court . . . . The jurisdiction is compensatory in that the Court directs its attention to costs that would not have been incurred but for the failure in duty.”

On behalf of Sterling, it was argued that it would not have incurred the costs of defending the proceeding had Harlow’s solicitor established that Mr Johnson had no authority to act.

[25] Mr McAnally submitted that the solicitor’s failure to ensure that she had a proper retainer to act was a serious dereliction of her duty. He cited again from Harley v McDonald where the Court at para [55] after referring to Myers v Elman [1940] AC 282 said:

“At p 319 Lord Wright said that, while a mere mistake or error of judgment is not generally sufficient, a gross neglect or inaccuracy in a matter which it was a solicitor’s duty to ascertain with accuracy, such as whether he had a retainer to act, might suffice.”

[26] Mr McAnally submitted that on receiving instructions from Mr Johnson, Ms Webber should have taken steps to establish whether or not there was any impediment to his acting as a director of the company or otherwise instructing her on its behalf. He relied on an affidavit from a legal secretary which was filed to show that, with the use of the internet, it is possible within a matter of minutes to obtain a company search disclosing the names of directors and of ascertaining whether a named director is a bankrupt. He submitted that Ms Webber should have taken these steps as a matter of routine even if she had no reason to think that Mr Johnson may not be entitled to act for the company.

[27] In my opinion, his argument fails, as does the application against Ms Webber for costs, for three principal reasons.

[28] First, I accept Ms Watson’s submissions that the evidence filed on behalf of Sterling does not establish to the requisite standard that Mr Johnson is indeed a bankrupt. For this purpose I accept that the normal civil standard of the balance of probabilities is applicable but I consider that, having regard to the seriousness of the consequences, that is a standard which must be applied rigorously. There seems to be no doubt that there is a Wilfred Johnson who is an undischarged bankrupt. The question is whether that person is the Wilfred Johnson involved in the current proceeding.

[29] An affidavit has been filed by a private investigator who knew personally a Wilfred Johnson who was a former member of the police force. By tracking down Mr Johnson’s former wife and questioning her and linking Mr Johnson’s current address with the address at which he formerly cohabited with his wife, the investigator was able to establish a strong basis for inferring that the Wilfred Johnson involved with Harlow was indeed the undischarged bankrupt.

[30] Mr Johnson has chosen not to file an affidavit but, as Ms Watson points out, that is not something which should result in any adverse inference against Ms Webber, particularly as she deposes that he has denied to her that he is a bankrupt. Furthermore, her affidavit establishes that over a period of some four years now she has acted for him and Harlow without any indication that he was not entitled to be involved in the management of the company. Her dealings with him included the offer by a bank of substantial finance to permit the purchase of the leasehold interest in the Fort Street property. Ms Watson also points out that much of the evidence relied on on behalf of Sterling is of a strictly hearsay nature. Having regard to the evidence as a whole, I do not find it proved that Mr Johnson is a bankrupt for the purpose of an order for costs against Ms Webber.

[31] Secondly, I consider that as a general rule it would cast an unrealistically and unnecessarily high duty on a solicitor issuing proceedings to be required to carry out a detailed enquiry to verify a persons authority to issue proceedings on behalf of a company or other entity. It is elementary that a solicitor should not act if he or she has any reason to doubt that the person from whom instructions are being received has no authority or lacks the relevant legal capacity. But, in the absence of some indication of a disability, I see no reason in principle or any practical necessity for a solicitor to go behind the word of a client. That would be antithetical to the relationship of solicitor and client and, as Ms Watson submitted, would put a solicitor under a continuing obligation to monitor the financial and legal status of their clients.

[32] Thirdly, on the facts as deposed to by Ms Webber there could have been no reason why she should have been put on enquiry as to Mr Johnson’s status. She states that over the period 1997/2000 she received instructions from Mr Johnson in relation to eleven or twelve property transactions, some of which involved Harlow. In many of these she was required to deal with financial institutions, none of whom ever gave her reason to think that Mr Johnson’s financial standing was in question. When she first received instructions from him, on behalf of Harlow, she carried out a company search which showed him as a director.

[33] I can find no dereliction of duty by Ms Webber which could make her liable to an award of costs.

Application for costs against Sterling

[34] Ms Watson sought an award of costs in favour of Ms Webber on an indemnity basis. She pointed out that, apart from the financial consequences, an application for costs against a solicitor carries serious implications for his or her professional competence and reputation. Ms Webber was entitled to treat the application seriously. She was obliged to instruct counsel. She has filed a very full affidavit. She has incurred costs which, including today’s hearing, are likely to be in the vicinity of $4,000.

[35] I have previously referred to the power of the Court under r 48C(4)(a) to order a party to pay indemnity costs if that party has acted vexatiously, frivolously, improperly or unnecessarily in commencing, continuing or defending a proceeding or a step in a proceeding.

[36] In my view, there was never any reasonable prospect of an order for costs being made against Ms Webber. With the greatest of respect to Sterling’s legal advisers, I consider the application to have been misconceived. Although, as the decision in Harley v McDonald has reaffirmed, the Court should not shrink from making an order for costs against a solicitor in cases of clear dereliction of duty, care must be taken to ensure that applications of this nature are made only when arguable grounds exist. In my view, no such grounds existed in this case and Ms Webber should be indemnified for her costs in opposing the application.

Result

[37] The order for relief against forfeiture made on 20 December 2000 is rescinded.

[38] Harlow must pay the costs of this proceeding on a Category 2, Band B basis.

[39] Sterling must pay Ms Webber’s costs in the sum of $4,000.