Khurana Trustee Ltd v Castle Backpacker K Road Ltd

[2021] NZHC 1315

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2020-404-000049

[2021] NZHC 1315

UNDER

Part 16 of the Companies Act 1993

IN THE MATTER OF

the liquidation of CASTLE BACKPACKER K ROAD LIMITED

BETWEEN

KHURANA TRUSTEE LIMITED

Plaintiff

AND

CASTLE BACKPACKER K ROAD LIMITED

Defendant

Hearing:	12 May 2021
Appearances:	S C I Jeffs for the Plaintiff T J P Bowler the Defendant
Judgment:	4 June 2021

JUDGMENT OF VAN BOHEMEN J

[application for leave to appeal and costs]

This judgment was delivered by me on 4 June 2021 at 4.00pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

Solicitors/Counsel:

Patel Nand Legal, Auckland Bankside Chambers, Auckland Neilsons Lawyers, Auckland

KHURANA TRUSTEE LIMITED v CASTLE BACKPACKER K ROAD LIMITED [application for leave to appeal and costs] [2021] NZHC 1315 [4 June 2021]

Introduction

[1]                The plaintiff, Khurana Trustee Ltd (Khurana), seeks leave to appeal my decision of 4 December 2020 in which I granted the defendant, Castle Backpacker K Road Ltd (Castle), leave to file out of time a statement of defence to the proceeding brought by Khurana to put Castle into liquidation.1 In addition, the parties have been unable to agree costs and have filed memoranda setting out their positions.

[2]This decision deals with both matters.

[3]                For the reasons explained in my minute dated 14 April 2021, there was some delay in dealing with both of these matters.   However, I heard submissions from   Mr Jeffs, counsel for Khurana, and from Mr Bowler, counsel for Castle, at a telephone conference on 12 May 2021. Neither counsel was instructed on the original application by Castle for leave to file a statement of defence out of time.

Relevant background

[4]In my decision, I found that:

(a)Castle had an arguable defence;2

(b)Castle’s failure to file a defence or to seek leave for an extension of time before the COVID-19 Level 3 lockdown began was understandable, if unwise. However, any prejudice from the delay was overtaken by the adjournment of the first call of the proceeding because of the lockdown;3

(c)Castle had rebutted the presumption of insolvency, albeit by a bare margin but that, even if I had not been satisfied that Castle has rebutted the presumption of insolvency, I would not have regarded that as the

1      Khurana Trustee Ltd v Castle Backpacker K Road Ltd [2020] NZHC 3192.

2 At [62].

3 At [72].

determining factor in deciding whether to exercise my discretion as to whether to grant leave to Castle;4 and

(d)There was no significant prejudice to Khurana.5

[5]                Khurana seeks leave to appeal on the basis that my judgment contains arguable errors of law. Khurana’s notice of leave to appeal alleges six such errors of importance to Khurana and identifies two of them as being of general and public importance.

[6]The two alleged errors of general and public importance are:

(a)I erred in treating the insolvency of Castle as an important, but not decisive, factor relevant to the exercise of the Court’s discretion to grant leave to Castle;

(b)I erred in finding that the balance sheet test of solvency was irrelevant, or of marginal relevance, to the assessment of Castle’s solvency for the purposes of s 241 of the Companies Act 1993.

[7]                The four other alleged errors, which are said to be of significance to Khurana, are:

(a)Finding that Castle had an arguable defence on the basis that Castle did not receive funds from Khurana and so was not liable under the loan agreement between Khurana and Castle;

(b)Finding that Castle had rebutted the presumption of insolvency based on the information before the Court;

(c)Taking into account Khurana’s rights against the guarantors of the loan when assessing Castle’s solvency;

4 At [96].

5 At [97].

(d)Finding that the overall interests of justice lay in granting Castle leave to file a defence out of time.

Requirement for leave

[8]Section 56(3) of the Senior Court Act 2016 provides:

No appeal, except an appeal under subsection (4), lies from any order or decision of the High Court made on an interlocutory application in respect of any civil proceeding unless leave to appeal to the Court of Appeal is given by the High Court on application made within 20 working days after the date of that order or decision or within any further time that the High Court may allow.

[9]                Khurana’s notice of leave to appeal, and the supporting affidavit of Preeti Kinra Khurana were filed on 25 January 2021, the 20th working day after the date of my judgment, taking into account the definition of “working day” in r 1.3 of the High Court Rules 2016.

Considerations relevant on an application for leave

[10]            In Greendrake v District Court of New Zealand,6 the Court of Appeal, referencing the decision of Fitzgerald J in Finewood Upholstery Ltd v Vaughan,7 agreed that the requirement for leave to appeal should serve as a “filtering mechanism,” to ensure that unmeritorious appeals of interlocutory orders, or appeals of interlocutory orders of no great significance to either the parties or more generally, do not unnecessarily delay the proceedings in which the orders were made.

[11]            The Court of Appeal in Greendrake also recognised the following considerations as relevant to an application for leave to appeal:

(a)a high threshold exists;

(b)the applicant must identify an arguable error of law or fact;

6      Greendrake v District Court of New Zealand [2020] NZCA 122 at [6].

7      Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [13].

(c)the alleged error should be of general or public importance warranting determination or otherwise of sufficient importance to the applicant to outweigh the lack of general or precedential value;

(d)the circumstances must warrant incurring further delay; and

(e)the ultimate question is whether the interests of justice are served by granting leave.

Submissions

[12] Mr Jeffs submitted that the asserted errors at [6] above are errors of general and public importance because:

(a)There is conflicting High Court authority on whether insolvency is an important or a decisive factor when a Court is deciding whether to grant leave to file a defence out of time; and

(b)The cashflow and balance sheet tests of solvency are both relevant to an assessment of solvency under s 241 of the Companies Act.

[13] Mr Jeffs submitted that the alleged errors at [7] above are of significant importance to Khurana and some may have broader significance, such as whether a court can have regard to a creditor’s rights against a third party when assessing a company’s solvency.

[14]            Mr Jeffs argued that further delay caused by an appeal is warranted because my judgment canvassed many of the issues that will need to be addressed on Khurana’s application to place Castle into liquidation and that, however those issues are decided, an appeal by Khurana or Castle is likely. On the other hand, if the Court of Appeal upholds Khurana’s appeal, that would be the end of the proceeding.

[15]            Mr Bowler submitted that there is no conflict in High Court authorities over whether solvency is an important or decisive factor and no real issue over the greater relevance of cash flow over balance sheet solvency. Mr Bowler also submitted there

is no substance to the other asserted errors and that, in any event, they are not matters of general and public importance.

[16]            Mr Bowler also said that Castle will need to file further evidence if Khurana’s application to put Castle into liquidation proceeds and that it would be much more efficient and in the interests of justice for the case to be decided on its substantive merits.

Analysis

[17]            As Fitzgerald J said in Finewood Upholstery, the court hearing an application for leave to appeal from an interlocutory order needs to stand back and assess, in a pragmatic and realistic way, whether the interests of justice are served by granting leave to appeal.8 As Her Honour further said, it is necessary to bear in mind the inherent tension of being the both Judge who delivered judgment in the matter and the Judge who then has to consider whether that judgment discloses arguable errors of law or fact.9

[18]            It is common ground that an applicant seeking leave to appeal must satisfy a high threshold. The principal points of contention are whether Khurana has identified arguable errors of fact or law and whether those errors are of general or public importance warranting determination or otherwise of sufficient importance to the applicant to outweigh the lack of general or precedential value.

Insolvency an important or decisive consideration?

[19]           Mr Jeffs says there are competing High Court authorities on whether solvency is an important or a decisive consideration when considering whether to grant leave to extend time to file a defence to an application to place a company into liquidation. Mr Jeffs refers, in particular, to the decisions in Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd,10  Matthew Mini Coaches Ltd (in liq) v Scotch Myst

8      Finewood Upholstery Ltd v Vaughan, above n 7, at [14].

9 At [15].

10     Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173.

Ltd11 and FV Aluminium 2011 Ltd v Firma Construction Co12 as authority for what he says is the correct position, namely that solvency is a decisive consideration. Mr Jeffs says, albeit by inference, that these decisions are to be preferred to those decisions where the Court has held that solvency is not always the decisive consideration.

[20]            One example of the latter is Body Corporate 62870 v Health Distributors (Holdings) Ltd, which I cited in my decision,13 in which Osborne AJ said that the insolvency of the defendant is an important consideration but that, in some cases, insolvency may not be decisive but is a strong factor against the exercise of the discretion.14

[21]            I do not consider that these decisions are in conflict or establish conflicting lines of authority.

[22]            In Fresh Cut Flowers Wholesalers, Paterson J did not state that the insolvency of the defendant was the decisive consideration. He decided not to grant leave to file a defence out of time on two bases. The first basis of his decision was that he did not accept that the defendant had an arguable defence to the allegation that it had failed to pay trade creditors when debts fell due.15 That the defendant was insolvent was a further issue that mitigated against granting leave.16

[23]            In Matthew Mini Coaches, Andrew AJ held only that the solvency of the defendant company was of “particular relevance.” He did not state that it was the decisive consideration. While the Associate Judge noted that the Court had stated on a number of occasions that, even if there is an arguable defence, leave should not be granted if the applicant is insolvent, in the footnote referring to the relevant cases including Fresh Cut Flowers Wholesalers, Andrew AJ stated:17

11     Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd [2019] NZHC 3015.

12     FV Aluminium 2011 Ltd v Firma Construction Co [2020] NZHC 1385.

13     Khurana Trustee Ltd v Castle Backpacker K Road Ltd, above, n 1 at [38].

14     Body Corporate 62870 v Health Distributors (Holdings) Ltd [2018] NZHC 1717 at [24].

15     Fresh Cut Flowers Wholesalers Ltd v The Living and Giving Gift Co Ltd, above n 10, at [20] and [23].

16     At [21] and [23].

17     Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd, above n 11 at [24].

In Body Corporate 62870 v Health Distributors (Holdings) Ltd, … the Court stated that while not always decisive, the insolvency of the defendant company is a strong factor against the exercise of the Court’s discretion.

[24]            Similarly, in FV Aluminium 2011, Osborne AJ, in reference to one of his earlier decisions,18 stated:19

As recognised in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd, the insolvency of the defendant is an important consideration. In some cases it may not be decisive but it is a strong factor against the exercise of the discretion.9

[25]            In short, there is no real divergence of position in the High Court decisions. It follows that the asserted error regarding whether solvency is an important or a decisive consideration is not an arguable error of law, let alone one of general or public importance.

Cashflow and balance sheet tests of solvency

[26]            Khurana says I erred in finding that the balance sheet test of solvency was irrelevant, or of marginal relevance, to the assessment of Castle’s solvency for the purposes of s 241 of the Companies Act. Khurana refers, in particular, to paragraphs

[75] and [90] of my judgment. Mr Jeffs says that, on appeal, Khurana will submit that the cash flow and balance sheet tests of solvency are both relevant to an assessment of solvency under s 241 of the Companies Act.

[27]   I did not find that the balance sheet test of solvency was irrelevant, or of marginal relevance, to the assessment of Castle’s solvency for the purposes of s 241. Rather, at [75] I noted that, as Doogue AJ had observed in Commissioner of Inland Revenue v F B Duvall Ltd,20 the “cash-flow” test of solvency, based on the ability of a company to pay its debts as they become due in the normal course of business as set out in s 4(1)(a) of the Companies Act, is the test that counts, rather than the “balance sheet” test of whether the value of a company’s assets exceeds the value of its liabilities, as set out in s 4(1)(b).21

18     Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd [2015] NZHC 1152.

19     FV Aluminium 2011 Ltd v Firma Construction Co, above n 12 at [24].

20     Commissioner of Inland Revenue v F B Duvall Ltd (2010) 10 NZCLC 264,455, (2009) 24 NZTC 23,135 at [10].

21 At [10].

[28]   At [90], when assessing the evidence of Mr Nair, an accountant who gave evidence for Khurana, I stated:

[90] I have taken account of the criticisms made by Mr Nair. However,  some of those criticisms were focused on balance sheet solvency which, as noted, is of lesser relevance in assessing whether a company can pay its bills as they fall due.

[29]   At neither [75] nor [90] did I find that the balance sheet test of solvency was irrelevant, or of marginal relevance, to the assessment of Castle’s solvency

[30]   Section 241(4)(a) of the Companies Act provides that the Court may appoint a liquidator if it is satisfied that the company is unable to pay its debts. That is the first leg of the meaning of solvency set out in s4 (1)(a) of the Act.

[31]   Brookers Insolvency Law and Practice, on which Doogue AJ based his observations in Commissioner of Inland Revenue v F B Duvall, states:22

The “cash flow” test of solvency, based on the ability of a company to pay its debts, must be contrasted with the “balance sheet” test of solvency which is concerned with whether the value of a company’s assets exceeds the value of its liabilities. In determining whether the liquidation of a company can be justified under s 241(1)(a), it is the cash flow test that counts

[32]   Given the language of ss 4(1)(a) and 241(4)(a) of the Companies Act, as well as the commentary in Brookers, I do not consider that it is seriously arguable that I was in error in holding that the cash flow test is the test that counts when determining whether a company can pay its debts.

[33]   For these reasons, I do not consider that this ground of Khurana’s application discloses an arguable error of law, let alone one of general or public importance.

Khurana’s other grounds for seeking leave

[34] Three of Khurana’s other grounds for seeking leave, as set out at [7] above relate to the substance of its contention that Castle owes it a debt which has not been

22 L Hampton and others, Brookers Insolvency Law and Practice, (looseleaf ed, Brookers Ltd, Wellington, 2007) vol 2 at [CA241.03]; and Commissioner of Inland Revenue v F B Duvall Ltd, above n 20.

paid and should be put into liquidation. The last ground relates to the overall justice of the granting Castle’s application for an extension of time.

[35]   The factual bases of the three grounds that relate to the substance of the dispute between Khurana and Castle can all be explored fully if Castle is able to file its defence and there is a substantive hearing of Khurana’s application. In that sense, Khurana will suffer no substantive prejudice in relation to those grounds if its application for leave is denied. For that reason, I do not accept these grounds are of such importance to Khurana that leave to appeal should be granted.

[36]   With one possible exception, none of the three grounds relating to the substance of the dispute has any precedential value. The possible exception is Khurana’s contention that I took into account Khurana’s rights against third party guarantors when assessing Castle’s solvency. However, I consider that that contention is based on a misreading of my decision of 4 December 2020.

[37]   At [94] I referred to the evidence of Mr Rajvanshi, who had confirmed that he and Mr Manvinder Singh had made advances to Castle. Mr Rajvanshi also provided evidence of a settlement offer Castle made to Khurana. I then stated:23

That supports the evidence of the company’s bank balance that Castle has sufficient funds to pay the sum in dispute if it is found liable under the Loan Agreement.

[38]That part of the paragraph was concerned with Castle’s solvency.

[39]I then stated:24

Any risk that those funds might be disbursed to those who advanced the funds to the detriment of Khurana  is offset by  the  fact  that  Mr Rajvanshi  and Mr Manvinder Singh have personally guaranteed the loan under the Loan Agreement so are liable regardless.

[40]   This sentence was not addressed to Castle’s solvency but rather to the risk that the funds that Castle had might be dissipated to the detriment of Castle’s creditors – which had been highlighted in the submissions of counsel for Khurana. While that

23     Khurana Trustee Ltd v Castle Backpacker K Road Ltd, above, n 1 at [94].

24 At [94].

sentence relates indirectly to the question of whether Castle can pay its bills, I do not consider that such a finding, which was made directly in response to submissions of Khurana, raises an issue of broader significance.

[41]   For these reasons, I do not consider that any of the three grounds relating to the substance of Khurana’s dispute with Castle provides any sufficient basis for granting leave to appeal, particularly having regard to the high threshold that applies.

[42]   Khurana’s final ground for seeking leave is that I was wrong in finding that the interests of justice lay in granting Castle leave to file a defence out of time.

[43]   I do not accept this ground for the reasons as set out at [100] of my earlier decision. I consider that this application is another example of Khurana looking to use statutory and Court processes to enforce, on a narrow technical basis, the debt they say is owed by Castle but being unwilling to address the wider issues that arise in relation to the circumstances in which the debt was incurred.

Conclusion and result on application for leave to appeal

[44]   For all these reasons, and standing back and assessing in a pragmatic and realistic way whether the interests of justice lie in granting leave to appeal, I am satisfied that leave to appeal should not be granted.

[45]Accordingly, Khurana’s application for leave to appeal is dismissed.

[46]   Castle is entitled to costs on this application on a 2B basis. If the parties counsel cannot agree costs, counsel may file memoranda of no more than four pages.

Costs on Castle’s application for leave to file a statement of defence out of time

[47]   In my decision of 4 December 2020, I held that Castle was entitled to costs on a 2B basis on its application to file a statement of defence out of time. I invited counsel to agree costs but gave leave to apply if they could not.25

25     At [104] – [105].

[48]   Counsel for Castle and Khurana filed a number of memoranda. For present purposes, the  relevant  memoranda  are  the  memorandum  of  Mr  Bowler  dated  22 January 2021 and the memorandum of Mr Jeffs dated 19 February 2021. Because I am deciding costs in the context of my decision dismissing Khurana’s application for leave to appeal, it is unnecessary to decide whether any order on costs should await that decision – as Mr Jeffs submitted but which Mr Bowler disputed.

[49]   In his memorandum Mr Bowler submitted a schedule of costs calculated on a 2B basis under sch 3 of the High Court Rules. According to that calculation, Castle is entitled to costs of $16,252.00 plus disbursements of $400.00 (exclusive of GST) for filing fee, photocopying and binding.

[50]   In his memorandum, Mr Jeffs took issue with a number of items claimed in Mr Bowler’s calculation of costs and with the claim for photocopying and binding. Mr Jeffs said Castle’s costs should be $8,126 plus disbursements of $226.09.

Disputed items

Step 22: Filing interlocutory application: $1,434.00

[51]   Mr Jeffs said Castle’s application for leave to file a defence out of time sought three orders, two of which were not pursued and that Castle should therefore receive only half the claimed amount.

[52]   This objection has no merit. If Castle had applied only for leave to file a defence out of time, it would have been entitled to the amount claimed. The fact the application also addressed other matters that were not pursued provides no basis for a deduction. I am satisfied this item is correctly claimed.

Step 32: Preparation for hearing: $$4,784.00

[53]   Mr Jeffs said Step 32 relates to preparation for an affidavits hearing and that costs for preparation of an interlocutory application can be claimed only under steps 24 to 26 of sch 3 of the High Court Rules.

[54]   Mr Jeffs is correct. The headings in sch 3 of the High Court Rules in relation to interlocutory applications can be claimed only under steps 22 to 29 and that step 32 relates to preparation for an affidavits hearing.

[55]The claim under this item should be deducted.

Step 11: Filing two memoranda of counsel: $956.00 x 2

[56]   Mr Jeffs said Castle should not be able to obtain costs that relate to the filing of memoranda after the hearing had concluded. Mr Jeffs said these memoranda were filed because of inadequacies in Castle’s preparation. He said further that I gave leave to Castle to file only one memorandum.

[57]   Mr Jeffs is not correct in his assertion that the memoranda were filed to address inadequacies in Castle’s preparation. In my decision, I observed that counsel for Khurana had made detailed criticisms of the accounts in order to impugn their credibility and had invited the Court to undertake a far more searching analysis of the company’s accounts than I considered was required or appropriate.26 Given the level of detail that counsel for Khurana had pursued, I considered it appropriate to give leave to counsel for Castle to respond.

[58]   I am satisfied, therefore, that Castle can appropriately claim the costs of preparing the first memorandum dated 11 September 2020. I agree, however, that I gave leave to Castle to file only one memorandum, and to Khurana to file a reply if it wished. I do not consider that Castle can claim the costs of preparing a memorandum in response to Khurana’s reply.

[59]   Accordingly, the costs of preparing the second memorandum should be deducted.

Step 11: Memorandum on costs: $478.00.

[60]   Mr Jeffs said Castle cannot claim the costs of preparing a costs memorandum and that to do so amounts to claiming costs on costs and should not be permitted.

26 At [85].

[61]   Mr Jeffs is correct that the Court does not usually allow a claim for costs on preparing a costs memorandum. While the Court has power to award such costs, this is unusual and the Court it is reluctant to do so.27 Counsel for Castle has pointed to no exceptional circumstances in this case sufficient to displace that reluctance.

[62]The claim under this item should be deducted.

Disbursements for filing fee, photocopying and binding: $400.00

[63]   Mr Jeffs accepted that Castle can recover the filing fee of $226.09 but submitted that Castle cannot recover the cost of “photocopying, binding etc.” These are overhead costs (unsupported by invoices) that are reflected in the general award of costs.

[64]   Rule 14.12 of the High Court Rules requires that a disbursement be specific to the conduct of the proceeding, reasonably necessary for the conduct of the proceeding and reasonable in amount. Office overheads which are usually absorbed by a party’s legal solicitors, for example an online search, are not recoverable.28 In contrast office expenses (such as photocopying and binding) which are “necessary and specific to the litigation” can be recovered.29

[65]   I do not accept that photocopying and binding can properly be described as overhead costs where they are carried out for the specific purpose of this proceeding. In this sense they can be properly characterised as disbursements that can be approved under r 14.12.

[66]   While Castle has not provided invoices or shown a breakdown between photocopying and binding, I am satisfied that the claim of $173.91 for these costs is unremarkable and appropriate.

27 See for example Jeffreys v Morgenstern [2013] NZHC 1361 at [40]; Epsom Woods Ltd v Waitakere Farms Ltd [2020] NZHC 3137 at [4]; and Combined Property Maintenance Limited v Singh [2021] NZHC 621.

28 See for example Todd Pohokura Ltd v Shell Exploration NZ Ltd HC Wellington CIV-2006-485-1600, 1 July 2011 at [61] and [70]; see also Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HRPt14.12].

29 Mawhinney v Waitakere City Council HC Auckland CIV-1999-404-1850, 26 September 2007 at [12].

Result on costs

[67]   The net result is that the sum of $6,218.00 should be deducted from the amount claimed by Castle, leaving a balance of $10,034.00 plus disbursements of $400.00.

Order

Accordingly, I order Khurana to pay Castle costs of $10,034.00 plus disbursements of

$400.00.

G J van Bohemen J