Il Forno Limited v Kleine
[2018] NZHC 723
•19 April 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-000621
[2018] NZHC 723
BETWEEN IL FORNO LIMITED
Plaintiff
AND
DOUGLAS JAMES KLEINE
First Defendant
FLOW CONTROL LIMITED
Second DefendantANDREW MICHAEL KLEINE
Counterclaim Defendant
Hearing: 2 March 2018 Counsel:
J K Goodall and A Mitra for the Plaintiff and Counterclaim Defendant
J G Ussher for the Second Defendant
Judgment:
19 April 2018
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 19 April 2018 at 11.30 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Counsel: J K Goodall, Auckland
A Mitra, Auckland
Solicitor: J G Ussher, Auckland
IL FORNO LTD v KLEINE [2018] NZHC 723 [19 April 2018]
Introduction
[1] By decision dated 17 November 2017, Associate Judge Sargisson ordered the second defendant, Flow Control Ltd (Flow Control), to pay security for costs in the sum of $45,000.1 That sum was in relation to Flow Control’s counterclaim against the plaintiff, Il Forno Ltd (Il Forno), and the counterclaim defendant, Andrew Kleine.
[2] Both Il Forno and Flow Control apply to review that decision. Il Forno says the security ordered was not enough and it seeks security in the sum of $85,000. Flow Control Ltd says the security ordered was too much and a sum lower than
$45,000 is justified.
[3]The review applications raise the following issues for determination:
(a)What is the proper approach to review?
(b)Should leave be granted to Flow Control to bring the application for review?
(c)What quantum of security should be ordered?
(d)Should the Judge have awarded costs?
The claim and counterclaim
[4] Il Forno operates an artisan bakery in Ponsonby. Its sole registered director and shareholder is Andrew Kleine.
[5] Flow Control is a company which provides accounting and financial services. The first defendant, Douglas Kleine (referred to in these proceedings as Jim Kleine), is the sole director and shareholder of Flow Control. Jim Kleine is Andrew Kleine’s brother. To a large extent, these proceedings stem from a longstanding and bitter dispute between the two brothers.
1 Il Forno Ltd v Kleine [2017] NZHC 2809.
[6] Il Forno was incorporated in 2003. It was originally a 50/50 joint venture between Andrew Kleine and his then business partner, Antonio Crisci. Mr Crisci’s shareholding was held through his company, Toto Ltd.
[7] In October 2006, Andrew Kleine bought out Toto Ltd’s shareholding for the sum of $135,000. That sum was partly funded by a $100,000 loan from another brother of Andrew and Jim Kleine, and a $10,000 payment from Flow Control.
[8] There is a dispute about whether the $10,000 payment was a loan to allow Andrew Kleine to purchase Toto Ltd’s shareholding or whether it was to enable the purchase of the shares by Flow Control. In essence, there is a dispute about the ownership of shares in Il Forno stemming from this transaction.
[9] In 2006, Il Forno engaged Flow Control to provide accounting and tax services, including preparing annual financial accounts and preparing and filing income tax, GST and PAYE returns. Il Forno claimed these services were to be provided at an agreed fee of $500 per month which was later increased to $1,500 per month.
[10] On 15 September 2014, Il Forno was convicted in the District Court of 33 counts of failure to file tax returns and was sentenced to a fine and costs. This led to Andrew Kleine, on behalf of Il Forno, terminating Flow Control’s engagement and requesting a return of Il Forno’s property.
[11] Il Forno then commenced these proceedings on 31 March 2016 seeking return of all its property including company records, an order prohibiting Jim Kleine and Flow Control from accessing or using email accounts with the “Il Forno” name and any rights in relation to the Il Forno website, and damages. In an amended statement of claim Il Forno now also seeks declarations as to Il Forno’s shareholding and the cancellation of the contract with Flow Control and Jim Kleine.
[12] Flow Control defends those claims and advances three counterclaims. It seeks a declaration that Andrew Kleine holds 50 per cent of the shares in Il Forno on trust for Flow Control. It also pursues a counterclaim for breach of trust based on the alleged trust relating to the shareholding. The most significant of the counterclaims is
a claim in quantum meruit in which $650,000 plus GST is sought as remuneration for alleged unpaid services provided between 2006 and 2015.
[13]The counterclaims are denied by Il Forno and Andrew Kleine.
Judgment under review
[14] The Judge approached the application for security for costs by addressing the following four questions:2
(a)Is there reason to believe the counterclaim plaintiff will be unable to meet an award of costs against it?
(b)Is it appropriate for an order for security for costs to be made?
(c)How much security is appropriate?
(d)Should a stay be ordered?
[15] As to the first question, the Judge found that there was uncontroverted evidence before the Court that suggested Flow Control had no money and could not pay its tax obligations. The Judge referred to the bank statements which showed minimal activity over a significant period and a balance of around $8. Similarly, there was evidence of a failure to file tax returns and a failure to obtain legal representation which the Judge considered was due to a lack of resources to pay for its own legal costs, quite apart from those of the opposing parties.3 The Judge considered that all of this evidence pointed to a “highly probable state of insolvency”, and met the required threshold for believing that Flow Control had no prospect of meeting an adverse costs award should it be unsuccessful on its counterclaims.4
2 At [13], following the approach taken in Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [6]; and Busch v Zion Wildlife Gardens Ltd (in rec and in liq) [2012] NZHC 17 at [2].
3 At [15].
4 At [16].
[16] As to the second question, the Judge considered the merit of Flow Control’s quantum meruit counterclaim, and found that on a preliminary assessment that claim lacked merit.5 Furthermore, there was nothing before the Court to suggest any of the other counterclaims had any real merit.6
[17] In terms of oppression, the Judge found that an order against Flow Control would not be oppressive given that it had persisted in its proceeding without legal counsel which had resulted in “poorly articulated documents, and ostensibly excessive discovery claims”. Furthermore, the Judge held that it was difficult to avoid an adverse impression of Flow Control’s performance of its professional obligations, given the situation that Il Forno found itself in.7 The Judge considered that Flow Control’s right of access to the Court, and the importance of its claim being resolved at trial, did not weigh against Il Forno’s interest in being protected, to some degree, from the risk of a barren costs order.8
[18]As to the third question concerning the quantum of security, the Judge said:
[23] Whether counsel is right in his assessment of scale costs, in order that quantum should not be so high as to be totally oppressive, I think $45,000 by way of security would afford a reasonable measure of security on the counterclaims.
[19] The Judge ordered security to be provided in two tranches: $25,000 by 6 December 2017, and $20,000 to be paid on the close of pleadings date.
[20] Finally, regarding the fourth question, the Judge stayed the proceeding pending payment of security as ordered or further order of the Court. Costs were reserved.
What is the proper approach to review?
[21] The first issue to determine is whether the review proceeds by way of a full rehearing, or whether the appellate standards of review apply.
5 At [19].
6 At [20].
7 At [21].
8 At [22], citing Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837 at [4].
[22] That issue is to be determined by reference to the now-revoked r 2.3 of the High Court Rules which applies because the substantive proceeding was filed before 1 March 2017.9 Rule 2.3 applies to an application for review of an order or a decision made by an Associate Judge.10 Sub-rules (4) and (5) of that rule provide as follows:
2.3 Review of decision
…
(4)If the order or decision being reviewed was made following a defended hearing and is supported by documented reasons,—
(a)the review proceeds as a rehearing; and
(b)the Judge may, if he or she thinks it is in the interests of justice, rehear the whole or part of the evidence or receive further evidence.
(5)In all other cases,—
(a)a review proceeds as a full rehearing; and
(b)the Judge may give the order or decision the weight he or she thinks appropriate.
[23] The Judge’s decision is supported by documented reasons. Accordingly, the effect of sub-rr (4) and (5) in this case is as follows:
(a)If the decision followed a defended hearing, then the appellate standards of review apply. Because a decision to award security for costs is discretionary, the applicant must show that the Judge acted on a wrong principle, failed to take into account some relevant matter, took into account some irrelevant matter or was plainly wrong.11
(b)If the decision was not made following a defended hearing, then the review proceeds as a full rehearing, that is, the question of security for costs is considered afresh.
9 Senior Courts Act 2016, Sch 5, Part 2, cl 11. See also Sutcliffe v Tarr [2017] NZCA 360, [2018] 2 NZLR 92 at [33].
10 Such review being pursuant to the now-revoked s 26P(1) of the Judicature Act 1908.
11 Jaques v Main [2016] NZHC 1978 at [19].
[24] The authors of McGechan on Procedure refer to a “defended hearing” as being one which requires “full argument” to have been made by opposing parties.12 This passage was considered by Clark J in Caringrace Inc v Claridge. The Judge noted that “full argument” should not be confused with extensive argument13 and went on to say:
[36] In my view the requirement in r 2.3(4) for a defended hearing may be met where the hearing has afforded to all parties with a proper interest in the outcome an opportunity to say all that they reasonably might say. …
[25] Ms Mitra, who addressed this part of Il Forno’s submissions, submits that the hearing was undefended and accordingly the application for review should address the question of security afresh. She made four points in support of that submission:
(a)Jim Kleine did not have leave to represent Flow Control at the hearing. An application for leave had previously been declined. Essentially, therefore, Flow Control was unrepresented.
(b)There were no written submissions filed on behalf of Flow Control and therefore no argument put forward at the hearing on its behalf.
(c)The Judge afforded Jim Kleine a very limited right to make a few comments at the hearing, but this did not constitute “an opportunity to say all that [it] reasonably might say”.
(d)The Judge recorded in her judgment that the hearing for the application proceeded unopposed.14
[26] For Flow Control, Mr Ussher submits that it was given an opportunity to say all it reasonably might have said at the hearing, despite not being represented by counsel. He stresses that a notice of opposition and two affidavits filed by Jim Kleine were before the Court and these addressed Flow Control’s arguments. On that basis,
12 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR 2.3.02(1)(a)].
13 Caringrace Inc v Claridge [2016] NZHC 1704 at [35].
14 At [1].
Flow Control says the hearing was defended and the appellate standard of review applies.
[27] I consider that the hearing was undefended. The Judge recorded that the application proceeded unopposed in the opening paragraph of her judgment. Flow Control was unrepresented at the hearing because Jim Kleine was unable to represent its interests, and legal counsel had not been engaged. I do not consider an indulgence in allowing Mr Kleine to make a few limited comments amounts to a defended hearing. Accordingly, I consider that the matter should proceed as a full rehearing with the question of security considered afresh.
Should leave be granted to Flow Control to bring the application out of time?
[28] Flow Control’s application was not made within the five working days required under r 2.3. Accordingly, leave is required to bring the application. The essential question is where the interests of justice lie. This involves weighing the prejudice which would be suffered by an unsuccessful applicant against that which would be suffered by an unsuccessful opponent.15
[29] Factors relevant to the exercise of the Court’s discretion to grant leave include: the delay in applying, the explanation for that delay, any prejudice resulting from that delay, and the merit of the application.16 The importance of finality and the need to ensure that the proceeding as a whole proceeds expeditiously is also relevant to the decision on whether to extend time.17
[30] I am satisfied that time should be extended in this case for the following reasons:
(a)The extent of the delay is relatively short. The application for review was filed on 12 December 2017, twelve days past the required deadline.
15 Body Corporate 325261 v Stephen Mitchell Engineers Ltd [2014] NZHC 761 at [15].
16 See Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR2.3.03(a)]; citing Sutton v NZ Guardian Trust (1989) 2 PRNZ 111 (HC); and Crane Accessories Ltd v Lim Swee Hee [1989] 1 NZLR 221 (HC).
17 See Andrew Beck and others McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR2.3.03(b)]; citing Mu v Body Corporate 31241 [2012] NZHC 22.
(b)There is a reasonable explanation for the delay. At the time the decision was delivered, Flow Control was not legally represented. As a limited liability company, it was unable to make the application for review before the stated deadline. Associate Judge Sargisson made an unless order requiring it to obtain legal representation. Flow Control’s current solicitors were instructed on 5 December 2017 and the application for review was filed within five working days of that date.
(c)There is no prejudice to Il Forno if leave is granted to bring the application because the issues raised by it (the quantum of security) are squarely before the Court in relation to Il Forno’s application in any respect.
(d)Finally, I note that if the application for review had been filed under the new rules, it would have been filed within the stated time period which now applies for appeals from an Associate Judge’s decision.
[31] I consider the interests of justice favour granting the extension of time in this case and order accordingly.
What quantum of security should be ordered?
[32] There is no challenge to the Judge’s assessment of Flow Control’s impecuniosity, nor to the lack of any oppression if Flow Control is ordered to provide security. I respectfully concur and adopt the Judge’s assessment of those factors. The key issue concerns the quantum of security ordered.
[33] The quantum of security ordered is a question of discretion. The Court of Appeal has cautioned against fettering that discretion by constructing principles from the facts of previous cases.18 The general approach involves the balancing of two competing interests – the defendant’s interest in being protected from a barren costs order and the plaintiff’s right of access to the Court.19
18 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13]–[14].
19 Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837 at [4].
[34] Il Forno has estimated its total scale costs and disbursements for defending the quantum meruit counterclaim as $124,441. This sum comprises $64,001 in scale costs and $60,440 in disbursements. The scale costs have been calculated on a 2B basis except for the inspection of documents step which is assessed on a 2C basis. Scale costs have also been calculated on the basis of five trial days for evidence and argument on the quantum meruit counterclaim.
[35] The disbursements include the costs of two accounting experts which are estimated to total $41,440 plus GST.
[36] Counsel for Flow Control says that the quantum of security fixed by the Judge was too high because it was based on an overstatement of the scope of, and an understatement of the merit of, the counterclaim. Counsel referred to evidence, and to aspects of the pleading, which he submits suggests that Il Forno’s defence to the counterclaim is not as strong as the Judge considered.
[37] I accept, as did the Judge, that the review of the merits of the claim must only be preliminary at this early stage. There will always be room for debate about the extent of any defence, and accordingly the strength of any counterclaim. However, I do not consider that any of the matters raised by Flow Control’s counsel materially alter the overall assessment made by the Judge, and which I share, on the merits of the counterclaim.
[38] Next, counsel for Flow Control challenges Il Forno’s costs calculations. He submits that the calculations are also based on an overestimation of the scope of the quantum meruit claim, and that they allow for a “Rolls Royce” approach to the proceeding by the defendant. Counsel submits that experts in running a food business, rather that accounting experts, will be required to defend the claim, and that will reduce the estimated costs involved.
[39] I am satisfied that Il Forno’s estimate of its scale costs at this stage of the proceeding are fair and reasonable, and are not estimated on a Rolls Royce basis. The quantum meruit claim spans nine years and involves 42,000 documents. As the Judge noted in her decision, it threatens to engulf the entire proceeding. The very nature of
the claim demands analysis by expert accountants (whether in addition to other experts or not), and in the circumstances, the estimates of their fees appear reasonable. Although the final costs calculations may change, I am satisfied that the estimates at this stage of the proceeding are reasonable.
[40] As the Judge found, the counterclaim lacks merit and will put Il Forno to considerable cost in defending the claim. There also seems to be no real doubt that Flow Control is impecunious and is unlikely to meet any adverse costs award against it.
[41] Against that background, I do not consider $45,000 to be sufficient to protect Il Forno from an adverse costs award. That sum does not take into account the expert fees which will have to be incurred, nor the extensive discovery process which Il Forno is required to undertake, to defend the counterclaim. The $85,000 sum sought is still less than the likely costs award to be made at trial if Il Forno and Andrew Kleine are successful in defending the counterclaim. The sum does not provide an indemnity. Rather, it provides a reasonable level of security to ensure that Il Forno is protected against the possibility of Flow Control being unable to meet an adverse costs award against it should it be unsuccessful in establishing its counterclaim at trial.
[42] Although a higher figure will undoubtedly make it more difficult for Flow Control to pursue its claim, there is no evidence to suggest that it will prevent the pursuit of that claim completely. In addition, staging the payment of security so that further instalments are to be paid on the exchange of evidence and shortly before trial lessens the burden placed on Flow Control in having to post security in one lump sum.
[43] On balance, I am satisfied that the sum of $85,000 as security for costs is appropriate given the lack of merit in Flow Control’s counterclaim, and the very high risk that it will be unable to make any contribution towards Il Forno’s costs if it is unsuccessful at trial. Orders providing for security to be paid on that basis in accordance with this judgment are made at the end of this judgment.
Should the Judge have awarded costs?
[44] Il Forno says that the Judge erred in reserving costs on the application. It seeks an award of costs for the application before the Judge and for this review.
[45] Rule 14.8 provides that costs on an interlocutory application must be fixed when the application is determined unless there are special reasons to the contrary. The Judge did not identify any special reasons warranting reservation of costs in this instance, and I am unable to identify any such reasons. Accordingly, costs should have been awarded on determination of the application.
[46] Il Forno was successful on its application despite the award of security being less than what it sought. Flow Control argues that Il Forno’s strike-out application was not granted, and that this provides reason to reserve, if not reduce, costs. Associate Judge Sargisson made an unless order requiring Flow Control to obtain legal representation which addressed the substance of the strike-out application. I am informed from the bar that it did not take any hearing time. I do not consider those circumstances provide a reason not to award costs, or to reduce costs, on the security for costs application. Accordingly, I award costs on a 2B basis to Il Forno for the application before Associate Judge Sargisson.
[47] In addition, Il Forno is the successful party on the current application for review and is accordingly entitled to an award of costs on a 2B basis for this application also. In both cases I certify for one counsel only.
Result
[48] The application for leave to bring Flow Control’s application for review out of time is granted. Flow Control’s application for review is dismissed.
[49] Il Forno’s application for review is granted. The order for security for costs dated 17 November 2017 is set aside. Flow Control is ordered to pay security for costs in the total sum of $85,000 in stages as follows:
(a) $25,000 by 6 December 2017;
(b)$20,000 to be paid on the close of pleadings date;
(c)$20,000 on the exchange of evidence; and
(d)$20,000 fifteen working days prior to the commencement of trial.
[50] The payment in (a) was made on 8 December 2017. If payment of the remaining sums is not made on the due date then the proceeding shall be stayed pending payment of the security as ordered or further order of the Court.
[51] Il Forno is awarded costs on a 2B basis for both the application determined by Associate Judge Sargisson and the application for review. I certify for one counsel only.
Edwards J
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