Independent Security Consultants Limited v Farrelly

[2021] NZHC 1162

IN THE HIGH COURT OF NEW ZEALAND ROTORUA REGISTRY

I TE KŌTI MATUA O AOTEAROA

TE ROTORUA-NUI-A-KAHUMATAMOMOE ROHE

CIV-2019-463-000138

[2021] NZHC 1162

IN THE MATTER

of section 290 of the Companies Act 1993

BETWEEN

INDEPENDENT SECURITY CONSULTANTS LIMITED

Applicant

AND

DEREK FARRELLY and LADBROOKS SOLICITORS TRUSTEES LIMITED as

trustees of the Buchanan Trust Respondent

Hearing:	(On the papers)
Counsel:	David O’Neill for the Applicant Rachael Scott for the Respondent
Judgment:	25 May 2021

[COSTS] JUDGMENT OF MOORE J

This judgment was delivered me on 25 May 2021 at 2:15 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar Date:

INDEPENDENT SECURITY CONSULTANTS LIMITED v FARRELLY & ANOR [2021] NZHC 1162 [25 May 2021]

Introduction

[1]    This judgment follows the vacation of a fixture relating to an application to set aside a statutory demand after the respondents’ opposition was withdrawn and the statutory demand was set aside.

[2]    The parties are agreed that costs will be awarded against the respondents on a 2B basis. Remaining at issue is the applicant’s claim for a 25 per cent uplift and disbursements totalling $18,940.00.

Background

[3]    On 17 December 2019, the respondents served a statutory demand on the applicant claiming a debt of $150,000.00 plus interest of $129.48.

[4]    By application dated 19 December 2019 the applicant applied for an order to set aside the statutory demand on the basis that there was a substantial dispute as to whether or not that debt was owing or due and that it would be unjust to allow the respondents to proceed with the liquidation of the applicant.

[5]The respondents opposed the application which was set down for a hearing on

25 May 2020. Several timetabling breaches followed which counsel for the respondents claimed arose from personal difficulties experienced by Mr Farrelly, the first respondent and one of the trustees of the Buchanan Trust. By  Minute dated     21 May 2020, Hinton J declined to grant the adjournment sought by the respondents and determined that the matter  would  proceed  on  the  following  Monday,  being 25 May 2020 unless opposition was withdrawn.

[6]    Perhaps unsurprisingly, on Friday 22 May 2020 the respondents advised that they would withdraw their opposition. Accordingly, on 25 May 2020, Hinton J issued a Minute recording that she had vacated the hearing and directing that costs memoranda be filed if the parties were unable to agree.

[7]    On 27 May 2020, Hinton J minuted a joint memorandum of the parties setting out that:

(a)the matter had settled apart from costs; regarding which memoranda were to be referred to the Court for determination;

(b)the opposition to the application was withdrawn; and

(c)the statutory demand was set aside.

[8]    The parties agreed at that stage that costs in favour of the applicant, assessed on a 2B basis, were appropriate.

Parties’ submissions

Applicant

[9]By memorandum dated 27 May 2020, Mr O’Neill, for the applicant, seeks:

(a)$9,799.00 in costs; and

(b)$18,940.00 in disbursements (comprising $18,400.00 for the forensic accounting fee and $540.00 in filing fees).

[10]To both these sums he also seeks a 25 per cent uplift.

[11]   Mr O’Neill submits that the uplift claimed is appropriate because the respondents failed to accept a generous proposal in February 2020 that if the statutory demand was withdrawn, the application would be discontinued. As a consequence, the applicant would suspend its forensic investigation and costs would lie where they fell. Mr O’Neill submits that in rejecting that proposal and maintaining opposition, only to withdraw it “at the eleventh hour”, the respondents put the applicant to cost in preparing for the hearing and engaging a forensic accountant to examine the accounts.

[12]   In light of this ultimately unnecessary expense caused by the respondents’ conduct,  the  applicant  submits  that  it  is  appropriate  that  the  costs  of  the  work

undertaken by the forensic accountant be borne by the respondents, and that an uplift of 25 per cent be applied.

Respondents

[13]   Needless to say, Ms Scott, for the respondents, takes a different view. She opposes both the uplift and disbursements sought.

[14]The 25 per cent uplift is challenged on the basis that:

(a)the respondents did not contribute unnecessarily to time or expense in the proceeding;

(b)the COVID-19 lockdown caused practical issues when it came to obtaining instructions from Mr Farrelly;

(c)the respondents acted responsibly by withdrawing their demand before the hearing and accepting costs on a 2B basis; and

(d)there is no vexatious litigation before the Court.

[15]   The disbursements are opposed on the basis that while the forensic report may be recoverable in substantive proceedings, it ought not be recovered in these proceedings. Ms Scott submits that the report focuses on monies that may have been received by Mr Farrelly in his private capacity, whereas the statutory demand was issued by the Buchanan Trust. While Ms Scott accepts that there are inferences in the report in support of the setting aside application, that is a question for substantive trial if the matter proceeds to that step.

[16]   Consequently, Ms Scott submits that there is no real ability for the Court to assess whether this disbursement was reasonable at the relevant stage of proceedings.

Discussion

[17]It is not at issue that the applicant is entitled to the agreed 2B costs of

$9,799.00. The issues for determination relate only to the uplift and disbursements. I shall discuss each in turn.

Uplift

[18]   Though not  explicitly  stated,  Mr  O’Neill’s  submissions  seem  to  rely  on r 14.6(3)(b)(v) of the High Court Rules 2016: that the respondents contributed unnecessarily to the time and expense of the proceeding by failing without reasonable justification to accept the offer of settlement.

[19]   I do not consider that this ground justifies an uplift in this case. The context in which the respondents turned down the applicant’s proposal in February of 2020 was markedly different to the context in which they withdrew their application in May 2020. Ms Scott had repeatedly made it known that, as a result of the COVID-19 lockdowns which commenced in March 2020, the respondents’ ability to receive instructions from Mr Farrelly, who lived in a remote area with limited ability to communicate electronically with counsel and was suffering from medical conditions exacerbated during lockdown, had been materially compromised during those months.

[20]   I note that McGechan on Procedure makes clear that wasted costs when a fixture is vacated due to the other party’s default may come within r 14.6(3)(d).1 That may justify the making of an order for increased costs. However, I do not consider that in the present case such a course is justified.

[21]   In Fu Hao Construction Limited v Landco Albany Limited an uplift was deemed appropriate where the unsuccessful party – who had requested the vacation of the two week hearing approximately one week before the allocated fixture – had contributed unnecessarily to the costs by failing to comply with directions of the Court and failed to explain its non-compliance or seek an extension.2

1      Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HRPt14.6].

2      Fu Hao Construction Ltd v Landco Albany Ltd HC Auckland CIV-2004-404-006608, 23 May 2008 at [7].

[22]   That is plainly not the case here. Ms Scott had both sought extensions and attempted to explain the respondents’ compliance. When the one-month extension sought was not granted,3 the opposition was promptly withdrawn in order to avoid the Monday hearing for which the respondents recognised they were not prepared. This is not to excuse the extensive delays caused by the respondents’ delinquency in complying with directions. It simply recognises that the respondents had made some effort to explain themselves and seek variations.

[23]In such circumstances, I do not consider that an uplift is appropriate.

Disbursements

[24]   Disbursements, that is expenses paid or incurred for the purpose of the proceeding,4 are recoverable to the extent they are “reasonably necessary”, “reasonable in amount” and not held by the court to be “disproportionate in the circumstances of the proceeding”.5

[25]   It is common ground that the $540.00 filing fee sought is recoverable under this test.

[26]The question with relation to the claimed disbursement is whether the

$18,400.00 fee for forensic accounting advice and report carried out by a Mr Parsons, incurred in a context where the applicant was facing a statutory demand from the respondents worth $150,000.00, was reasonable in the circumstances.

[27]   I do not accept Ms Scott’s submission that this disbursement is not recoverable at this stage of proceedings as there is no ability for the court to assess whether the forensic evidence is a reasonable disbursement. It is inevitable that the court is not in the position to carry out as full an analysis of expert disbursements in the context of a vacated hearing. But this ought not preclude the granting of expert costs. Where the trial has been vacated because of the defendant’s default, it is inevitable that the

3      See Independent Security Consultants Limited v Farrelly and Ors HC Rotorua CIV-2019-463- 138, 21 May 2020 per Hinton J.

4      High Court Rules 2016, r 14.12(1)(a).

5      High Court Rules, r 14.12 (2) & (3).

plaintiffs will have  wasted  costs  as  a  result.6  As  Venning  J  observed  in  Jeffreys v Morgenstern, it is clear that in such circumstances the Court has jurisdiction to make an order for these wasted costs, including the costs of expert witnesses where incurred.7

[28]   The court’s consideration of wasted costs must involve the “impression and the best judgment of the court at the time”.8 While a hearing may have enabled a more full assessment of the reasonableness of the disbursements, I am prepared to proceed with my best judgment of this expert evidence in the circumstances.

[29]   I note that the forensic accounting expense arose in circumstances where the respondents knew that the cost was being incurred by the applicant. The applicant’s proposal in February expressly offered to cease the forensic examination if the respondents’   opposition   were   withdrawn.   A   joint   memorandum   filed    on 24 February 2020 provided that Mr Parson’s report would be filed by 22 March 2020. By withdrawing opposition mere days before the hearing in May, the respondents must have known this would expose them to a costs order relative to this disbursement. While this finding does not address the reasonableness of the quantum of the disbursement, it does speak to the context in which it was incurred.

[30]   The application in which the disbursement was incurred was for the setting aside of a statutory demand. This process is governed by s 290 of the Companies Act 1993. While a full and comprehensive forensic report may not have been necessary to support the grounds for setting aside the statutory demand, regarding which the applicant bears the onus, it is clear that evidence in the form of Mr Parson’s report was necessary to put in question whether there was in fact a sum owed by Mr Farrelly.

6      As stated in Tamihere v Hosking [2019] NZHC 2421 at [9], it is clear that when a party withdraws its application they do so knowing that they have “exposed themselves to an award of costs…for all steps taken to that point in defending the application”.

7      Jeffreys v Morgenstern [2013] NZHC 1361 at [31] and [38] – [39]; see also Fu Hao Construction Ltd v Landco Albany Ltd, above n 2.

8      Simpson v Hubbard HC Timaru CIV-2012-476-000144, 7 November 2012; and see also Jeffreys v Morgenstern, above n 7, at [34].

[31]   Whether or not these debts accrue to Mr Farrelly in his private capacity rather than in his capacity as trustee of the Buchanan Trust, as Ms Scott submits, would have been examined had the hearing not been vacated.

[32]   Faced with a statutory demand claiming a debt of $150,000.00,9 it was entirely reasonable for the applicant to respond by engaging a forensic accountant to provide evidence to support the strike out application. This is particularly so in circumstances where the respondents were aware the report was being prepared and took no steps to alert those commissioning it that it would not be necessary; even going to the extent of signing a joint statement.

[33]   Despite this, I do not accept that the cost of engaging Mr Parson’s forensic accounting services can be properly characterised as entirely wasted. This is not a situation where the cost incurred has been altogether sunk. Potentially, this evidence may still be useful in the context of the substantive proceedings (if those do go ahead). It does not, therefore, amount to a cost which will have to be paid twice as a result of the defendants’ default. In Jeffreys v Morgenstern, Venning J considered it appropriate to grant 50 per cent of the expert witnesses’ costs where they determined that there would be an additional cost incurred because of the delayed proceedings.10 It was also found to be appropriate to grant 50 per cent of the cost of preparation of briefs, issues and the common bundle for trial on the basis that these costs were partially wasted, having to be redone for the purposes of trial albeit on a refocused basis.11

[34]   I regard the circumstances of the present case to be similar. Here, the cost incurred was wasted only in part. It retains a residual prospective utility should the proceedings go to trial. On this basis I am satisfied that a 50 per cent recovery of

$9,200.00 is appropriate in the circumstances.

9      A demand which, the applicant claims, gave no further information to support the claim other than to state that the debt was owing.

10     Jeffreys v Morgenstern, above n 7, at [38] – [39].

11 At [37].

Result

[35]   I am satisfied that the applicant is entitled to 2B costs of $9,799.00, together with $9,740.00 in disbursements.

Moore J

Solicitors:

Mr O’Neill, Hamilton Tompkins Wake, Rotorua