Kilbirnie Plymouth Investments Limited v White HC Wellington CIV-2009-485-797

[2011] NZHC 117

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2009-485-797

BETWEEN  KILBIRNIE PLYMOUTH INVESTMENTS LIMITED Plaintiff

ANDJOHN DAVID WHITE Defendant

Hearing:         7 February 2011 (Heard at Wellington)

Counsel:         R. Laurenson - Counsel for the Plaintiff

J.D. Haig - Counsel for the Defendant

Judgment:      15 February 2011 11:00:00

JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL

This judgment was delivered by Associate Judge Gendall on 15 February 2011 at

11.00 am under r 11.5 of the High Court Rules.

Solicitors:           Ian Hay, Barrister & Solicitor, PO Box 10759, Wellington 6143

Greenwood Roche Chisnall, Solicitors, PO Box 25501, Wellington

KILBIRNIE PLYMOUTH INVESTMENTS LIMITED V JOHN DAVID WHITE HC WN CIV-2009-485-797 15

February 2011

Introduction

[1]      The defendant, Mr John White (―Mr White‖), applies for an order for security for costs against the plaintiff, Kilbirnie Plymouth Investments Limited (KPIL).  This relates to an action by KPIL against Mr White to recover a debt due under an alleged personal guarantee.  The application is opposed on the basis that an order for security for costs would not be just in all the circumstances.

Background

[2]       On 21 December 2006, Kilbirnie Plymouth Trust entered into an agreement (the Agreement) to purchase a property at Nile Street in Nelson. In accordance with the agreement, Kilbirnie Plymouth Trust nominated the plaintiff, KPIL, as purchaser. The vendor was EP Nelson Limited, which formed part of a group of companies known as the Edpac group. The defendant, Mr White, was a director of EP Nelson Limited at that time, but was no longer living in New Zealand. KPIL’s directors, Mr Barrie Skinner and Mr David Rowley, worked as accountants for EP Nelson Limited at Tax Planning Services Limited.

[3]      The  Agreement  provided  for  a  purchase  price  of  $1,850,000.00  with settlement  on  20  September  2007.  The  purchaser  was  to  pay  a  deposit  of

$720,000.00, but was entitled to receive rental from the property until settlement at a rate of $90,000.00 per annum plus GST. The Agreement further provided that, if settlement had not taken place by 20 June 2007, the rental was to be adjusted to

$180,000.00 per annum plus GST.  There is a dispute whether KPIL did in fact pay the entire deposit of $720,000.00, or only the sum of about $450,000.00, because the alleged advance of the remaining $270,000.00 approximately does not appear to be recorded in the relevant accounts.

[4]      The vendor’s obligations under the Agreement were guaranteed by Mr White and by Mr Erne Joyce (Mr Joyce), also a director of EP Nelson Limited. Mr Joyce was adjudicated bankrupt on 7 May 2008.  EP Nelson Limited apparently did pay rental from the time of payment of the deposit on 22 December 2006 at the agreed rate of $90,000.00 p.a. plus GST.   Underpayments of rental at the higher rate of

$180,000.00 p.a. plus GST occurred from 20 June 2007 and rental payments stopped altogether  on  20   August  2007.     Mr  White  says   that  the  Agreement  was recommended by Mr Skinner as a way of obtaining short-term finance, and that the only reason the loan was set up as an Agreement for Sale and Purchase was because this had beneficial tax implications.   Accordingly, Mr White’s position is that the parties never intended that the property would actually be sold to KPIL. He also says that he felt pressured by Mr Joyce into signing the Agreement and that he had limited knowledge of the arrangements entered into.

[5]      On  11  March  2007,  Kilbirnie  Plymouth  Trust  as  purchaser  entered  into another  agreement  for  sale  and  purchase  with  EP  Nelson  Limited.  KPIL  again became the nominated purchaser, but this agreement was signed only by Mr Joyce, and not by Mr White. The purchase price was $1,750,000.00, with a deposit of

$250,000.00.

[6]      About 17 October 2007, because EP Nelson Limited had defaulted under both agreements, KPIL and EP Nelson Limited entered into a settlement agreement which provided that EP Nelson Limited would pay the sum of $1,142,914.10. Mr White denies that he was involved in the settlement. On 17 October 2007, EP Nelson Limited made a payment of $600,000.00 to KPIL. However, no further payments were made, and EP Nelson Limited was placed into liquidation on 1 April 2008.

[7]      KPIL now seeks to recover its losses from Mr White as guarantor. It claims that, as at 20 January 2009, the balance owing amounted to $753,901.63, based on an apportionment  of  the  payment  of  $600,000.00  between  the  two  agreements. However, Mr White says that the payment should have been applied to the first Agreement in its entirety, and that this would have covered both the principal and interest.

[8]      Mr  White  also  raises  a  number  of  affirmative  defences.  He  claims  that KPIL’s directors and shareholders breached their fiduciary duties, in their dual role as accountants and lenders, by failing to ensure that Mr White obtained independent legal  advice  in  executing  the  guarantee;  by entering  into  the  second  agreement without his knowledge or consent; and by wrongfully applying part of the settlement

payment to the second loan. In addition, Mr White claims that he was subject to undue influence by Mr Joyce, and that KPIL had notice that this was occurring. Finally, Mr White alleges that the agreements, including the guarantee, were sham transactions.

Counsel’s Arguments and My Decision

[9]      Rule 5.45 of the High Court Rules deals with security for costs applications and provides that a judge may order the giving of security if there is reason to believe that a plaintiff will be unable to pay the costs of the defendant, assuming the plaintiff is unsuccessful, and if the judge thinks that an order is ―just in all the circumstances‖.  R 5.45 provides in part:

5.45 Order for security of costs

(1)  Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

…

(b) that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)  A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)  An order under subclause (2)—

(a)  requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)         by paying that sum into court; or

(ii)        by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)  may stay the proceeding until the sum is paid or the security given.

[10]     There is no dispute here that the threshold question of impecuniosity in subs (1)(b) is made out, as KPIL admits to being insolvent. The only issue, therefore, is whether an order for security should be made.  Mr White submits that, without an order for security for costs, he will have no prospect of recovering costs against KPIL.

[11]     In AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747, the Court of Appeal emphasised that the ordering of security is a discretionary exercise, not to be fettered  by  constructing  principles,  but  that  it  is  necessary to  weigh  up  all  the relevant factors in each particular case:

[13] ... Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing ―principles‖ from the facts of previous cases.

[14] While collections of authorities such as that in the judgment of Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so -called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that  an  order  for  substantial  security  may,  in  effect,  prevent  the  plaintiff  from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.

[12]     KPIL raises a number of grounds of opposition to the present application. The first ground is that it has a good claim against Mr White. It argues that liability for a figure of at least $120,000.00 plus interest is the ―worst case scenario‖ here. Mr White disputes this, by reference to his defences that I have mentioned above, and notes also that KPIL has not filed a response to his affirmative defences pursuant to r

5.62.

[13]     It is often difficult, in the context of applications for security for costs, to gain a firm impression of the merits of a plaintiff’s claim, and there is a very real limit to the scope of such an assessment: see Meates v Taylor (1992) 5 PRNZ 524 (CA); McGechan on Procedure at HR5.45.03(2). Here, much would seem to depend on whether the full deposit of $720,000.00 was paid, and whether the alleged debt should have been extinguished by the payment of $600,000.00. In addition, there are defences raised of undue influence and breach of fiduciary duty. In my view, the material  available  is  insufficient  to  allow  a  real  indication  to  be  given  of  the respective strengths of each party’s position. At this stage, neither party’s case appears to be particularly weak or strong.

[14]     The  second  ground  of  opposition  is  that  the  claim  is  ―founded  on  a commercial transaction in respect of which [Mr White] obtained a benefit for his company of which he was a director and where he knew what he was doing‖.  Here, Mr White again refers to his defences, and also to his affidavit where he states that he had limited knowledge of the transactions because he was out of the country at the time and trusted Mr Joyce to act in his interest. Mr White’s involvement in the loan arrangement, or in the Agreement is clearly in issue in this proceeding, and there is no basis on which this Court could now draw an inference that Mr White

―knew what he was doing‖.

[15]     The third ground of opposition relates to the fact that Mr White lives overseas and it is said this first, places an additional financial burden on the plaintiff, and secondly makes enforcement of any judgment against him more difficult.  Mr White submits that this is not a relevant consideration, as the defendant’s place of residence is only taken into account in an application for security where a counterclaim is raised, and in any event, counsel for the defendant here is based in New Zealand. I agree that Mr White’s place of residence should not be taken into account as a factor in this application.  Mr White did not choose to become a party to this proceeding, and there is nothing to indicate that KPIL will be particularly prejudiced by his location overseas.

[16]     The fourth ground of opposition is that there has been delay in bringing the application.    KPIL  notes  that  the  proceedings  were  commenced  by  summary judgment application on 30 April 2009, and that an order for substituted service was initially required. It is acknowledged that this is not a case where there has been delay on the brink of an allocated trial, but counsel submits that the delay should nevertheless be taken into account. This argument is rejected by Mr White who says that any delay ―can be laid at the feet of the plaintiff‖ and that, in any event, the proceedings are not far advanced, given that discovery has not even been timetabled yet.

[17]     In Oceania Furniture Ltd v Debonaire Products Ltd HC Wellington CIV-

2008-485-1701, 24 April 2009, Clifford J noted that applications for security for costs that are made at a very late stage in the proceeding are often unsuccessful (see

[29]). Relevant considerations in determining whether delay is a factor may include whether the application was made as soon as the defendant became aware of the plaintiff’s likely inability to meet costs, whether there was any needless delay and whether the delay has prejudiced the plaintiff: McGechan at HR5.45.03(4).

[18]     Having regard to the chronology of the proceeding provided by counsel for Mr White, in my view it could not be said that there has been undue delay in bringing the present application. The plaintiff’s application for summary judgment was  discontinued  in  July  2010.  Shortly after  filing  his  statement  of  defence  in September 2010, Mr White indicated that security for costs could be an issue.  The matter was then adjourned for a number of weeks to enable the parties to discuss this issue. Mr White’s application was filed on 20 December 2010, in accordance with a timetable set on 29 November 2010. In these circumstances, there is no basis on which to argue that there has been ―needless‖ delay or prejudice to the plaintiff.

[19]     The fifth ground of opposition is that KPIL has assumed a role akin to a liquidator or receiver in bringing this proceeding, in order to maximise benefits to its creditors. Liquidators are afforded particular protection in security for costs applications, because they ―bring or support a proceeding to maximise returns for the benefit of all creditors and should not be inhibited in their statutory obligations by an order for security‖: McGechan at HR5.45.16(3).

[20]     On this, Mr White argues that the law does not recognise ―quasi-liquidators‖, and that a company appearing in its own capacity should not receive the same policy-based treatment  as liquidators. I agree.  There is no reason here why the protection ordinarily afforded to liquidators should be extended to also cover insolvent companies acting in their own right, even if one of the aims of the proceeding may be to benefit its creditors. In any event, I was not referred to any material before the Court to show that the proceeding is in fact brought for the ultimate purpose of satisfying creditors’ claims.

[21]     What would be a relevant consideration, however, is that the plaintiff should not be prevented from bringing this claim merely because it is impecunious.  KPIL submits that the ―flavour‖ of the litigation is such that security should be refused,

and that the defendant has not done enough to show that the discretion should be exercised in his favour.

[22]     Mr White, however, submits that there is no evidence or information before the Court that KPIL will be unable to proceed with its claim if security is ordered. He goes on to suggest that its shareholders or directors could advance funds to continue the litigation. It is true that there seems to be nothing before me – apart from the fact of KPIL’s insolvency - to support counsel’s assertion that an order for security would have a prohibitive effect on the plaintiff’s claim. Accordingly, as I see it, there is limited force in this argument. Counsel for KPIL also did not seem to place much reliance on this submission in argument before me.

[23]     Mr White also seems to suggest here that KPIL’s conduct is ―self-serving‖, because he says it has pleaded impecuniosity to shield itself from liability in other proceedings in a voidable preference claim by the liquidators of the Edpac Group, but wishes  at  the  same  time to  bring a  claim  against  Mr  White without  being required to provide security.  In my view there is little in this argument advanced by Mr White.  I cannot see how the plaintiff’s opposition could really be described as

―self-serving‖ in these circumstances.

[24]     In my view, on balance here, there seems to be little reason why an order for security for costs should not be made. While there may well be merit in KPIL’s claim, it could not be said that an order for security would be unjust on the bases advanced by KPIL. More particularly, I do not think that there has been delay, in bringing the application, or that KPIL should be treated as a ―quasi-liquidator.  In addition, the fact that Mr White resides overseas is not of any real significance here (subject to what I say in the next paragraph).  Further, it seems unlikely in my view that an order for security would prevent KPIL from bringing the present claim.  As I see it, this aspect particularly is an important factor in determining whether an order would be unjust in the circumstances of this case.

[25]     However, there is one further consideration that would seem to be of some relevance  here,  although  this  was  not  one  addressed  by  counsel.    This  is  the possibility that Mr White’s affirmative defences of breach of fiduciary duty and

undue influence will take up a substantial part of the trial. It has been accepted that the existence of an affirmative defence is a relevant factor in security for costs applications: Ansell v State Insurance Ltd (1996) 10 PRNZ 133. And to the extent that an affirmative defence would lead to an increase in costs, the location of a defendant overseas – and potential difficulties in enforcing any costs order against that defendant - might also weigh in favour of a plaintiff.

[26]     In the present case, I consider that this is a factor that can properly be taken into account in assessing quantum, but that it is not a factor that is of sufficient significance to render an order for security against KPIL inappropriate.

[27]     For all these reasons, an order for security for costs is to follow.

Quantum

[28]     Turning now to address quantum, this is equally in the Court’s discretion and

is not necessarily to be fixed by reference to likely costs awards – see McGechan HR

5.45.07.   Mr White submits that a minimum of $30,000.00 for security would be appropriate, based on what he says is a conservative estimate of category 2B scale costs of $40,000.00 for a three day trial here. Having regard to the factors just mentioned relating to Mr White’s affirmative defences, I consider that security for a lesser amount than $30,000.00 would be appropriate in this case. I note that the issues raised by this proceeding generally seem to be of limited complexity. On that basis, I conclude that security in the sum of $20,000.00 would be appropriate.

Orders

[29]     For  the  reasons  outlined  above  Mr  White’s  application  for  an  order  for security for costs succeeds.  An order is now made that the plaintiff KPIL is to give security for costs to the defendant Mr White in the sum of $20,000.00 by paying this sum into Court or by giving to the satisfaction of the Registrar proper security for this amount.

[30]    Pending the provision of this security a further order is made that this proceeding is stayed.

[31]     As to costs, Mr White has succeeded in his present application and is entitled to an order for costs on this application on a 2B basis together with disbursements as fixed by the Registrar.  An order to this effect is now made.

‘Associate Judge D.I. Gendall’