Keemati Ltd v MR Civil Ltd
[2020] NZHC 3496
•22 December 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000967
[2020] NZHC 3496
BETWEEN KEEMATI LIMITED
Plaintiff/First Counterclaim Defendant
AND
MR CIVIL LIMITED
First Defendant/First Counterclaim Plaintiff
AND
JIE GAO
Second Defendant
AND
QNZ LIMITED
Third Defendant/Second Counterclaim Plaintiff
AND
KEEMATI LAL ANGURALA
Second Counterclaim Defendant
Hearing: 17 November 2020 Appearances:
Keemati Angurala in Person for the Plaintiff/First Counterclaim Defendant
William Cheyne and Zared Wall-Manning for the Defendants and Counterclaim Plaintiffs
Judgment:
22 December 2020
JUDGMENT OF MOORE J
This judgment was delivered by me on 22 December 2020 at 10:30 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar Date:
KEEMATI LIMITED v MR CIVIL LIMITED & ORS [2020] NZHC 3496 [22 December 2020]
Introduction
[1] The defendants, MR Civil Limited (“MR Civil”), Jie Gao and QNZ Limited (“QNZ”) apply for an order for security for costs against the plaintiff, Keemati Limited (“Keemati”).
[2] They do so on the basis that Keemati’s 2019 financial statements show that it has only approximately $10,000 in net assets. The defendants claim that any award of costs in this proceeding is likely to significantly exceed $10,000 and there is thus a significant risk that Keemati will be unable to meet an award of costs out of its assets.
[3] Keemati opposes the application. It says the merits of its case mean it is likely to be successful and, in any event, there is no reason to believe it will be unable to pay the costs if unsuccessful. It owns plant, machinery and vehicles with values well in excess of any likely award of costs and it is involved in ongoing projects which, when complete, will realise several million dollars in profit. Additionally, Mr Angulara, Keemati’s sole director and shareholder holds considerable assets in his own name and is presently in the process of selling property. If sold, Mr Angulara’s equity would more than cover any costs award.
Factual background
[4] The following summary is taken from Associate Judge Paulsen’s judgment on Keemati’s application that certain caveats not lapse,1 the voluminous evidence filed by the parties, the pleadings and the parties’ oral and written submissions.
[5] The third defendant, QNZ, is a property development company. Mr Qiu is QNZ’s sole director and CEO.
[6] The first defendant, MR Civil is a construction contractor. It is a wholly owned subsidiary of QNZ. Mr Qiu is MR Civil’s sole director and CEO.
[7] The second defendant, Ms Gao, is Mr Qiu’s wife. She was formerly a director of MR Civil and QNZ. She is not a party to the present application.
1 Keemati Limited v QNZ Limited [2020] NZHC 299.
[8] In late 2016 QNZ2 employed Mr Angurala to carry out construction work on its residential subdivision at Flat Bush School Road.
[9] Shortly after this, Mr Angurala was made a director of MR Civil. QNZ engaged MR Civil as the construction contractor to carry out earthworks at Flat Bush School Road. MR Civil also carried out other construction projects which Mr Angurala supervised. These included two large earthwork projects on Matua Road.
[10] In November 2017, 40 per cent of the shares in MR Civil were transferred to Keemati. The circumstances and purposes of this transfer are disputed. Mr Angulara says the shares were gifted. Mr Qiu says they were a loan to enhance Mr Angulara’s credibility with suppliers and contractors.
[11] The relationship between Mr Angurala and Mr Qiu soured. Each attributes the breakdown to the other. In any event, on 3 September 2018, the two men met to discuss the basis on which Mr Angurala would exit MR Civil’s business. Mr Angurala took notes of what he claims was agreed between them. The notes were signed by Mr Qiu. Notwithstanding the notes, it appears to be common ground that they do not reflect everything which was agreed between the parties. In material respects, Mr Qiu does not accept the agreement as claimed by Mr Angurala. It is, however, accepted that it was agreed Keemati would relinquish its shares in MR Civil and Mr Angulara would resign as director. But there is a dispute as to the terms on which the shares would be transferred. Mr Angulara says that certain properties were to be transferred to Keemati in consideration for Keemati shares and upon titles becoming available. Mr Qiu says that QNZ was to pay nothing. The shares were, as they always had been, on loan to Keemati.
[12] The relationship between Mr Qiu and Mr Angurala remains hostile. Mr Angurala claims Mr Qiu made it impossible for Keemati to complete the Matua Road projects. And on 5 May 2019 Mr Angurala wrote to the Matua Road developers telling them he was quitting the projects and, as a consequence, the developer cancelled the contract with MR Civil.
2 At this time QNZ was called Chimbusco International Limited.
[13] There is also a dispute relating to whether the terms of the 3 September 2018 agreement were breached. Keemati claims that MR Civil did not pay the sums due as a result of the 3 September 2018 agreement. MR Civil disagrees. It says it has paid all the sums owing. Keemati sues MR Civil and QNZ in breach of contract. Mr Gao is sued in breach of trust and breach of directors’ duties. To a considerable extent the determination of these proceedings will turn on credibility findings.
Procedural background
[14] Keemati filed the proceedings on 22 May 2019. Contemporaneously, it sought freezing orders. The freezing orders were ultimately resolved by consent with MR Civil providing undertakings.
[15] Keemati then lodged caveats over two properties owned by QNZ. QNZ applied for those caveats to lapse. Keemati filed an application to sustain the caveats. Associate Judge Paulsen granted the application on the basis that the proceedings would be pursued with due diligence. Leave was reserved for QNZ to apply if they were not.3
[16] In May 2020, MR Civil withdrew its undertakings relative to the freezing orders and the application for freezing orders was set down for hearing. Again, this was resolved by consent before the hearing, with orders being granted over approximately $1.5 million of MR Civil’s assets.4
[17] Since at least that time the parties have been in discussions about how security for costs might be set but no agreement has been concluded. In the absence of an agreement, this matter came before me for determination.
Legal principles
[18] Rule 5.45 of the High Court Rules 2016 (“the Rules”) provides that the Court may, if it thinks it would be just in all the circumstances, order a plaintiff to give
3 Keemati Limited v QNZ Limited [2020] NZHC 299 at [45].
4 Minute of Hinton J dated 14 July 2020.
security for costs where there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in its claim.
[19]There are four questions the Court should ask:
(a)Is there reason to believe that the plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful? There is no onus or standard of proof; the rule simply requires the Court to be satisfied of the plaintiff’s inability to meet such an award.
(b)Is it “just in all the circumstances” to make an order for security for costs?
(c)In what form and quantum should the security be ordered?
(d)Should a stay be ordered if security is not paid?
[20] Whether an order for security for costs would be “just in all the circumstances”, whether or not to order security and, if so, what quantum should be paid, are all discretionary considerations.5 The Court’s discretion is not to be fettered by constructing principles from the facts of previous cases.6 The following considerations may, nonetheless, be relevant:7
(a)balancing the interests of the plaintiff and defendant is the overriding consideration.8 This includes the plaintiff’s right to access to justice;
(b)as far as possible, bearing in mind the early stage of the proceeding, the Court will endeavour to assess the merits and prospects of success of the claim.9 However, there is a very real limit as to how far such an enquiry can go, particularly at an early stage in the proceeding;10 and
5 AS McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747 (CA) at [15].
6 At [15].
7 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at [HR5.45.03].
8 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [24](c).
9 McGechan on Procedure, above n 7, at [HR5.45.03(2)].
10 Meates v Taylor (1992) 5 PRNZ 524 (CA); Lee v Lee [2019] NZCA 345 at [73].
(c)where the plaintiff’s impecuniosity results from the defendant’s actions, it may be unjust to order security for costs.11
[21] Setting the quantum of security involves the exercise of a discretion. The Court may consider the relief claimed, the estimated duration and complexity of the proceedings, and the probable costs if the plaintiff is unsuccessful.12
[22] As for the manner of giving security this, too, may vary; again dependent on the type of security. Orders for staged, staggered or deferred security are now frequently made. Typical procedural stages are up to the completion of discovery, up to the close of pleadings date, the date for serving the plaintiff’s briefs of evidence and, finally, up to a date shortly before the trial.
[23] The Court will generally direct a stay of the proceedings until the security ordered is given.13 The Court may also make a pre-emptive order to stay a proceeding if payment is not made by the date ordered.14
[24] I now turn to each consider each of the four questions relevant to the determination of an application for security for costs.
Is there reason to believe that the plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful?
[25] This was the most hotly contested aspect of the application. Mr Cheyne, for the defendants, submits that there is credible, circumstantial evidence which supports the inference Keemati will be unable to pay costs if unsuccessful.
[26] First, he says that Keemati’s 2019 financial statements show that it has only approximately $10,000 in net assets, an amount which would be wholly inadequate to meet any adverse costs order in the event Keemati is unsuccessful.
11 Bell-Booth Group Limited v Attorney-General (1986) 1 PRNZ 457 (HC).
12 McGechan on Procedure, above n 7, at [HR5.45.03].
13 Tomanovich Holdings Limited v Gibbston Community Water Company 2004 Ltd [2018] NZHC 990 at [68] and [85].
14 Westpac New Zealand Limited v Adams [2013] NZHC 3112 at [92](c).
[27] In meeting Mr Cheyne’s submission on this point, Mr Angurala relies on Keemati’s strong asset position. It owns various items of earthmoving and related heavy machinery and vehicles totalling over $280,000. He claims these are all unencumbered. Additionally, he says that Keemati is presently involved in three ongoing construction and development projects. These include the subdivision and construction of three houses at 48A Seacliffe Road, Hillsborough for which a resource consent was lodged by Keemati on 5 June 2020. No consent has yet been issued by Auckland Council.
[28] The second and third projects relate to properties on Dominion Road and in Blockhouse Bay which appear to be owned by Mr Angurala and his wife personally. In his affidavit Mr Angurala states that his intention is that both of these properties will be subdivided and new houses built on them. However, from his submissions it seems that the Dominion Road property is now on the market. Mr Angurala advises that he expects to sell it for a minimum of $1.7 million which would release equity in the order of $700,000. The development of the Blockhouse Bay property is apparently expected to provide a gross profit of between $350,000 and $400,000.
[29] Additionally, Mr Angurala says he has jewellery which valuations attached to his affidavit place at $132,500.
[30] Mr Angurala also deposes that in the course of discussions with the defendants’ solicitors, he proposed that a chattel security be placed over two items of heavy machinery owned by Keemati; a bulldozer valued at $115,000 plus GST and a roller valued at $36,000 plus GST. Annexed to his affidavit are valuations from a reputable auctioneer for these machines which support these figures.
[31] Despite these assets, I am satisfied that there is good reason to believe that if unsuccessful, Keemati will be unable to pay the defendants’ costs. As noted, on Keemati’s own balance sheet, the net value of the assets is wholly inadequate to satisfy an adverse costs order. It is artificial to all but ignore Keemati’s liabilities, which when taken into account reveal a net asset position of just over $10,000.
[32] Mr Angurala claims that he and Keemati earned a net income of $227,230. This figure does not appear anywhere in the accounts. I agree with Mr Cheyne that in any event that figure is irrelevant. It does not take account of expenses. When broken down the accounts reveal the following:
(a)Keemati’s net profit was $10,598;
(b)Keemati paid Mr Angurala a salary of $190,000; and
(c)Mr Angrala loaned Keemati $262,954.
[33] In other words, in 2019 Keemati earned a very modest profit and the salary it paid Mr Angurala was loaned back to it.
[34] As for Mr Angurala’s submission that Keemati has future projects which it is undertaking, I agree with Mr Cheyne that those will require funding. It is not readily apparent on the material before me from where that funding will be sourced but, inevitably, any borrowings will need to be secured.
[35] This leads to Mr Angurala’s personal financial position. He has provided evidence he currently owns the two properties referred to earlier. There is some equity in them and as noted in his submissions, Mr Angurala advises that one is on the market. It may well release the amount of equity he claims. These, however, are personal assets and although Mr Angurala insists that he will stand behind any award of costs and, “if necessary”, will give a personal undertaking “if required”, I agree with Mr Cheyne that these promises do not operate to relieve the defendants’ concern that Keemati is in an apparently poor financial position. Neither can it be overlooked that Keemati is the corporate vehicle through which Mr Angurala conducts his project management work.
[36] Furthermore, no work on any of the property development projects has been commenced apparently because consents are still outstanding. When and if the necessary consents will be granted is speculative.
[37] The jewellery would appear to be capable of releasing substantial funds if sold but, again, these are the personal property of Mr Angurala and not Keemati.
[38] Other than Mr Angurala’s assurances he would personally meet Keemati’s liability in the event of an adverse costs order, there is insufficient evidence of Keemati’s ability to meet costs for present purposes.
[39] I am thus satisfied there are reasonable grounds to believe Keemati will be unable to pay the defendants’ costs if they succeed.
Is it “just in all the circumstances” to make an order for security for costs?
[40] Under this question the Court may consider the merits of the plaintiff’s case and assess its prospects of success. However, given the early stage of these proceedings, despite Keemati filing its fourth amended statement of claim, any such assessment will, inevitably, be limited. No first case management conference has been convened. Discovery has not yet commenced and, certainly, no trial date has been fixed.
[41] Mr Cheyne claims Keemati’s case is weak. He submits it continues to change in ways which are inconsistent with the initial allegations. For example, Keemati initially pleaded that it remained a shareholder of MR Civil, but now claims that the act of giving up its shareholding in MR Civil was the consideration for the transfer from properties from QNZ to Keemati.
[42] Mr Cheyne also places considerable weight on what the defendants say is a lack of any commercial reality in Keemati’s claim. This was described by Mr Qiu in his affidavit for the caveat proceedings in the following way:
“Keemati did not invest any of his own money in MR Civil, or otherwise take on any risk associated with MR Civil’s business. As I have said in my previous affidavits, Keemati just carried out project management services and was paid a good salary for these services and offered various incentives if he completed the projects on time. However, Keemati claims I also agreed to invest
$2 million into the business and then give him a 50% shareholding in that business (i.e. $1 million equity and 50% of the profits of all future projects) for nothing. Keemati then claims that to purchase the shareholding back, I agreed to give him two sections, allow him to build brand new houses on those sections at my cost, and also pay him ‘400,000’ as an initial sum, with no other
strings attached. I obviously didn’t agree to this. No commercial party would ever agree to this. All Keemati has to rely on is a couple of his handwritten notes that record his version of discussions between us, but are not expressed to be agreements.”
[43] Mr Cheyne also submits that the defendants are incurring ongoing burdens as a consequence of their undertakings as to damages in respect of the freezing orders and, potentially, damages arising out of the caveats lodged by the plaintiff. He submits that these are factors which further diminish the likelihood that Keemati will have funds available to pay costs should it be unsuccessful.
[44] Unsurprisingly, Mr Angurala asserts that Keemati’s claim is a strong one. He points to the freezing orders made and the plaintiff’s success on the caveat litigation, noting that this proves Keemati’s case is “not hopeless and meritless”.
[45] While I accept that assessing the merits of any case at this very early stage is likely to be fraught, I agree with Mr Cheyne that Keemati’s claims do seem to lack commercial viability. However, it would be premature to venture comments much further than that.
[46] Mr Angurala also claims that the defendants have delayed making the application and should thus be denied the relief they seek. The plaintiff’s assets have not materially changed since the proceedings were issued and, contrary to the direction of Whata J that any application for security of costs should be filed by 26 June 2020,15 the defendants did not do so. Instead, they undertook searches of the Personal Property Securities Register and explored alternative means of obtaining security.
[47] Mr Angurala also says that the defendants, through their actions, have denied him his only source of income from MR Civil and now seek to take further funds on the present application in order to deny him relief. He says that the application is thus brought in bad faith and should be dismissed. To grant the application will have the effect of encouraging their “wrong conduct”, Mr Angurala asserts.
15 Minute of 26 May 2020.
[48] I am satisfied there is weight in Mr Cheyne’s submission that the pre-judgment security obtained by Keemati will, in the event of the defendants’ success, further diminish the likelihood Keemati will have sufficient funds to pay costs. That operates in favour of making the order.
[49] A further relevant consideration under this head is whether such an order might interfere with the plaintiff’s right to access justice. Plainly it would not. The essence of Mr Angurala’s submissions is that he, personally, has ample funds to pursue the litigation and is committed to doing so. Furthermore, he did offer to give personal undertakings to the defendants’ solicitors which he later withdrew. This is not a case where making an order for security would effectively deny the plaintiff’s ability to pursue the remedies it seeks.
[50] Furthermore, I do not accept Mr Angurala’s complaints regarding delay. Delay in applying for security may be relevant if it causes unfairness to a plaintiff.16 Mr Angurala has not pointed to any unfairness or prejudice and I am satisfied there is none for the following reasons. First, as noted, the proceedings are at a very early stage. Secondly, at or about the time of Whata J’s orders there were extensive negotiations designed to reach an agreement over security. While these ultimately proved fruitless, they are sufficient, in my view, to answer Mr Angurala’s complaint. And finally, if there is any delay it can be measured in just a few weeks or months at the most.
[51] I am thus satisfied it is just in all the circumstances to make an order for security for costs.
When and in what form and quantum should the security be ordered?
[52] The defendants seek an order for security in the sum of $130,000. This is based on an estimate of the costs and disbursements which might be awarded to the defendants in the event they succeed. Certain assumptions have been made. These include an assumption the proceedings would require only one judicial conference, the trial will last two weeks, scale costs would be awarded for just one counsel, expert
16 Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 945 at [26].
witness fees will be of the order of $50,000 and the judgment will not need to be enforced. The security sought is in accordance with 2B scale costs with the exception of discovery, which is calculated on a 2C basis.
[53] I agree these assumptions are conservative. In the event the defendants succeed any costs order is likely to exceed the figure sought by the defendants. I am thus satisfied the quantum is fair and appropriate.
[54] The next question is when security should be paid. Mr Cheyne suggests that the security be paid in the following tranches:
(a)$27,404 immediately to cover costs up to the end of discovery and inspection;
(b)$63,742.50 to be paid following the completion of discovery and inspection; and
(c)$38,837.50 to be paid two months in advance of trial.
[55] Mr Cheyne submits this staging provides an appropriate mechanism to ensure the security is reasonable and should mitigate any risk that Keemati will be unable to meet the order. I agree with Mr Cheyne for the reasons he gives. Any order framed in this fashion will reduce the burden on Keemati.
[56] As for the form of security, Mr Cheyne submits that Keemati’s offer of a charge over the bulldozer and roller will be of limited value. There are a number of secured creditors which have registered security interests over Keemati’s present and after- acquired property. The defendants would rank behind those secured creditors. He also expresses reservations relative to Mr Angurala’s suggestion that the jewellery be placed in a safe deposit box in the name of his solicitors. The defendants have concerns that the valuations are unlikely to represent the proceeds of any sale.
[57] For these reasons, Mr Cheyne submits that security should be provided in the form of cash paid into Court or into a solicitor’s trust account. Any other mechanism would be insufficient to provide adequate security.
[58] In the course of oral submissions, Mr Angurala pointed to three classes of asset which could be realised if sold. These are:
(a)the bulldozer and roller owned by Keemati with a combined valuation of $151,000;
(b)the residential property owned by Mr Angurala which he advises is on the market, which when sold is expected to realise equity of $700,000; and
(c)the jewellery owned by Mr Angurala valued at $132,500.
[59] For the reasons advanced by Mr Cheyne, I am not satisfied that any of Mr Angurala’s proposals provides sufficient certainty. At the end of the hearing I explored with Mr Cheyne and Mr Angurala whether the most appropriate course would be for the parties to consult with a view to reaching agreement as to what form any security held by this Court would take. My preliminary view is that security should take the form of either a cash payment into Court or, alternatively, security to the satisfaction of the Registrar. As for the latter option, it would be for the Registrar to satisfy himself that the security, in whatever alternative form, would be appropriate as an alternative to a cash payment. For example, if the Registrar was satisfied that the jewellery provided adequate security, he might order the plaintiff to obtain a secure safe deposit box and deliver its only key to the Registrar’s custody. There may be other workable options.
[60] Accordingly, I invite the parties to consult and file a joint memorandum no later than 5:00 pm on 19 February 2021 as to the form of security or, in the event of disagreement, separate memoranda addressing the issue. I shall then make whatever orders I consider appropriate on the papers.
Should a stay be ordered if security is not paid?
[61] Although discretionary, r 5.45(3)(b) of the Rules, the Court generally stays a proceeding until the security ordered is given.17
[62] Mr Angurala did not attempt to persuade me that in the event security is ordered, it would be inappropriate to stay the proceedings until the security is paid. In all the circumstances of this case, I do not regard a departure from the usual approach to be justified.
Result
[63]The first and third defendants’ application for security for costs is granted.
[64] The plaintiff is ordered to provide security of $129,984 for this proceeding in the amounts and on the dates set out below:
(a)subject to the filing of the further memoranda and in accordance with any order of the Court as to when payment is due – $27,404;
(b)following the completion of discovery and inspection (including security for expert witness fees) – $63,742.50; and
(c)two months in advance of the trial date – $38,837.50.
[65] The proceedings are to be stayed until the relevant security in terms of [64] of this judgment is paid.
Costs
[66] The parties did not address me on the question of costs on the present application. The defendants, having been successful, are entitled to costs. I invite the parties to confer with a view to reaching agreement on the question of costs but, in the event there is no such agreement, the parties are to file memoranda as to costs no later
17 Tomanovich Holdings Limited v Gibbston Community Water Company 2014 Ltd, above n 13 at
[68] and [85]; McGechan on Procedure, above n 7, at [HR5.45.11(1)].
than 5:00 pm on Friday, 26 February 2021. No memorandum is to exceed three pages.
Moore J
Solicitors:
Chapman Tripp, Auckland
Copy to:
The Plaintiff
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