Kim v Mao

[2022] NZHC 3500

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-1039

[2022] NZHC 3500

IN THE MATTER

AND

of the Insolvency Act 2006

IN THE MATTER

of the bankruptcy of LIANSEN MAO

BETWEEN

HYUN BIN KIM and DUK YOUNG LEE

Judgment Creditors

AND

LIANSEN MAO

Judgment Debtor

Hearing:	On the papers
Appearances:	C Fourie for the Judgment Creditors L Mao, Judgment Debtor in person
Judgment:	16 December 2022

COSTS JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 16 December 2022 at 4pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Hesketh Henry, Auckland

Copy to:
Liansen Mao

KIM & Anor v MAO [2022] NZHC 3500 [16 December 2022]

Introduction

[1]The judgment creditors are seeking the following orders:

(a)indemnity costs in the amount of $16,079.37 in respect of their successful opposition to the judgment debtor’s interlocutory application to set aside the bankruptcy notice by the respondents, Mao v Kim & Lee (Original Judgment);1 and

(b)indemnity costs in the amount of $6,440.16 in respect of the successful opposition to the judgment debtor’s applications to stay and to set aside the Original Judgment and to disqualify Hesketh Henry from acting for the judgment creditors, Kim & Lee v Mao (Strike Out Judgment).2

Background

[2]        In my Minute dated 3 August 2022, I directed that the judgment debtor was to file and serve any response to the judgment creditors’ memorandum on costs in respect of the Original Judgment by 12 August 2022.

[3]        A memorandum was filed on 5 September 2022 by the judgment debtor recording that he had filed an application to set aside the District Court judgment on which the bankruptcy notice that was the subject of the Original Judgment was based. Mr Mao further submits that the “judgment debtors” (presumably judgment creditors) purposely created “lots of costs in litigation” against Mr Mao in order to create costs and charge interest at 20 per cent per annum. Mr Mao goes on to say that he had only agreed on $5,000 including GST for costs matters and would like the costs matter to be stayed until determination of the application to set aside the District Court judgment.

[4]        Mr Mao attaches a copy of an application to set aside the District Court judgment to his memorandum.

1      Mao v Kim [2021] NZHC 3253 [Original Judgment].

2      Kim v Mao [2022] NZHC 1959 [Strike Out Judgment].

[5]        In my Minute of 3 August 2022, in addition to a response from Mr Mao on costs, I directed Mr Mao’s applications to stay and to set aside the Original Judgment and to disqualify Hesketh Henry from acting to the Duty Judge. This was because the judgment creditors had made applications pursuant to rr 5.35A and 5.35B of the High Court Rules 2016 for the applications to be struck out before service. Associate Judges do not have jurisdiction to determine such applications.

[6]        Lang J issued a decision on 9 August 2022 dismissing the judgment creditors’ application pursuant to rr 5.35A and 5.35B on the basis that those rules relate to the striking out of a proceeding rather than interlocutory applications. However, Lang J went on to strike out all three of the judgment debtor’s applications based on the Court’s inherent jurisdiction to protect its own procedure from abuse. His Honour considered the applications plainly to be abuses of the Court’s processes as he held that if Mr Mao was dissatisfied with the Original Judgment, he ought to have appealed to the Court of Appeal. Had he done so, Mr Mao could then have sought a stay of the judgment pending appeal. In the absence of any appeal to the Court of Appeal, Lang J held there was no basis on which the Original Judgment would be stayed or set aside.3

[7]        In addition, Lang J held the application for an order disqualifying Hesketh Henry from acting was plainly an abuse of process because the only remaining issue related to costs so the proceeding is effectively at an end.4

[8]        The judgment creditors then filed a memorandum dated 6 September 2022 seeking indemnity costs in respect of the three applications that had been struck out by Lang J.

[9]        No memorandum has been filed in response to the 6 September memorandum by Mr Mao. Sufficient time has now been allowed for such response. I therefore determine costs in respect of both the Original Judgment and the Strike Out Judgment.

3 Strike Out Judgment at [9].

4 At [10].

Relevant costs principles

[10]      The starting point is that costs are at the discretion of the Court.5 Although the discretion is wide, it is not unfettered. Rule 14.2 of the High Court Rules sets out the general principles and includes:

(a)the party who fails with respect to a proceeding or an interlocutory application should pay costs to the party who succeeds:

(b)an award of costs should reflect the complexity and significance of the proceeding:

…

[11]      Indemnity costs are provided for in r 14.6 and may relevantly be ordered where:6

(a)the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or

…

(e)the party claiming costs is entitled to indemnity costs under a contract or deed; or

…

[12]      As the Supreme Court held in Synlait Milk Ltd v New Zealand Industrial Park Ltd, determining whether there is an entitlement to indemnity costs in a particular situation is a matter of contractual interpretation with ordinary principles of contractual interpretation applying. 7

[13]      In Black v ASB Bank Ltd, the Court of Appeal held that when assessing whether indemnity costs claimed under a contract are reasonable, the Court is required to make an objective assessment of whether:8

(a)what tasks attract a costs indemnity on a proper construction of the contract;

(b)whether the tasks undertaken were those contemplated in the contract;

5      High Court Rules 2016, r 14.1.

6      Rule 14.6(4)(a).

7      Synlait Milk Ltd v New Zealand Industrial Park Ltd [2020] NZSC 157, [2020] 1 NZLR 657 at [192].

8      Black v ASB Bank Ltd [2012] NZCA 384 at [80], citing Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA) at 191,887 and Watson & Son Ltd v Active Manuka Honey Association [2009] NZCA 595 at [20].

(c)whether the steps undertaken were reasonably necessary in pursuance of those tasks;

(d)whether the rate at which the steps were charged was reasonable having regard to the principles normally applicable to solicitor/client costs; and

(e)whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment.

[14]      The judgment creditors further refer to Crown Money Corporation Ltd v Grassmere Estate Trust Co Ltd where the High Court held that in order to obtain an order for indemnity costs, the claimant should provide the following information:9

(a)whether the claimant is registered for GST purposes;

(b)a sufficient description of the work undertaken;

(c)what hourly rates were charged; and

(d)any additional evidence which is relied upon to show that the rate charged is a reasonable one having regard to the principles normally applicable to solicitor/client costs.

Grounds for orders sought

[15]      The judgment creditors submit that they are entitled to costs on an indemnity basis under a contract or deed as provided for in r 14.6(4)(e). They say the relevant provisions are clause 9 of the Development Loan Agreement entered into between Yintian Co Limited and Hyun Bin Kim and Duk Young Lee dated 13 July 2016 (Development Loan Agreement) and clause 19.1 of the Deed of Guarantee and Indemnity entered into between Liansen Mao and Hyun Bin Kim and Duk Young Lee dated 2017 (Guarantee).

[16]Clause 9 of the Development Loan Agreement provides as follows:

9      Crown Money Corporation Ltd v Grassmere Estate Trust Co Ltd (2008) 19 PRNZ 591 (HC) at [14].

The Borrower indemnifies the Lender upon demand against any loss, cost (including legal costs and disbursements on a full indemnity basis), expense, charge, damage, claim or liability which the Lender, may suffer or incur as a consequence of:

(a)The occurrence of an Event of Default;

(b)The exercise, contemplated exercise or attempted exercise of, or the failure to exercise, any power, right, authority, discretion or remedy under or in connection with any Loan Document;

(c)The receipt of any amount to be paid under any Loan Document on a date other than the due date;

(d)A Principal Sum advanced requested by the Borrower not being made for any reason (excluding default by the Lender) on the date notified by the Borrower to the Lender as the drawdown date.

…

[17]      “Borrower” is defined in the Development Loan Agreement as Yintian Co Limited and “Lender” as Hyun Bin Kim and Duk Young Lee.

[18]Clause 19.1 of the Guarantee provides:

19.Costs

19.1      The New Guarantor shall pay to the Lender all costs and expenses (including costs as between solicitor and own client) sustained or incurred by the Lender in obtaining or attempting to obtain payment of all or any of the monies for which the New Guarantor may from time to time be liable under the provisions of this Deed or enforcing or attempting to enforce any remedy or power expressed or implied under this Deed or the Loan Documents.

[19]      “New Guarantor” is defined as Liansen Mao. “Lender” is again defined as Hyun Bin Kim and Duk Young Lee.

[20]      The judgment creditors, Hyun Bin Kim and Duk Young Lee, submit that the indemnity costs sought are legal costs incurred as a result of an Event of Default as provided for in clause 9 of the Development Loan Agreement and which result from the judgment creditors’ attempts to obtain payment of monies for which the judgment debtor, as guarantor, is liable under the Guarantee.

[21]      In addition to the contractual right to indemnity costs, the judgment creditors further submit that they are entitled to indemnity costs on the grounds that the judgment debtor has acted unnecessarily and improperly by applying to have the

bankruptcy notice set aside and in making the three applications now struck out by Lang J, when he had no reasonable prospect of success, relying on r 14.6(4)(a).

[22]      The judgment creditors refer to the fact that in his application to set aside the bankruptcy notice the judgment debtor sought to rely on matters already decided in previous proceedings and that the substance of the judgment debtor’s allegations had been struck out in proceeding CIV-2019-404-2197.

[23]      In addition, they refer to my comment in the Original Judgment to the bankruptcy notice being for more than the amount of the GST figure disputed by the judgment debtor.10 The judgment creditors therefore submit that regardless of the judgment debtor’s assertions, there would still have been a shortfall payable to the judgment creditors.

[24]      The judgment creditors have filed a supporting affidavit by Ms Heather Juno, a legal secretary from Hesketh Henry which sets out the legal attendances for the bankruptcy proceeding, the hourly rates charged in comparison to the current legal market as well as to scale costs. Scale costs are calculated on a 2B basis at $11,223.

[25]      The judgment creditors submit by reference to the matters held to be relevant by the Court of Appeal in Black v ASB Bank Ltd, once the tasks undertaken have been assessed as being covered by the indemnity in the contract, that:

(a)the tasks undertaken by Hesketh Henry were reasonably necessary for the purpose of recovering the debt owed including opposing the application made by the applicant to set aside the bankruptcy notice, and defending the applications to stay or set aside the Original Judgment;

(b)the rates charged by Hesketh Henry are market rates and are reasonable in the circumstances as outlined with reference to the New Zealand Law Society average hourly charge-out rates study and by comparison to

10 Original Judgment at [38].

ordinary scale costs, noting that scale costs are intended to represent approximately two-thirds of the total costs claimed, specifically:

(i)the average hourly rate and the fees charged by Hesketh Henry in respect of all work is well below the industry average at the relevant times;

(ii)the majority of the work was conducted by junior to mid-level solicitors;

(iii)the charge-out rates for Hesketh Henry’s junior and mid-level solicitors is less than or equal to the CPI adjusted market average charge-out rates for solicitors for the same level of experience; and

(c)the amounts sought by the judgment creditors only include those attendances that are directly relevant to the bankruptcy proceedings which includes the opposition to the applications struck out by Lang J.

Discussion

[26]      The contractual clauses relied on by the judgment creditors provide an indemnity for legal costs arising from an Event of Default. “Event of Default” is defined in clause 1.1 of the Development Loan Agreement to include default by the Borrower in repayment of the Principal Sum or any interest when due where such default has not been remedied within seven business days of the due date.

[27]      As set out in the Original Judgment, Yintian Co Limited defaulted on payment of a $1,000,000 loan by the judgment creditors. This led to a mortgagee sale of a property at Chester Avenue, Greenhithe, that Yintian had granted a mortgage over as security for the loan.

[28]      The judgment debt on which the bankruptcy notice was based was a judgment of the District Court on 3 October 2018 for $216,723.92, representing the shortfall in the amount owing following sale of the property.11

11     Original Judgment at [8]–[16].

[29]      There has therefore clearly been an Event of Default under the Development Loan Agreement.

[30]      Under the Guarantee, the judgment debtor, Mr Mao, as the New Guarantor, agreed at clause 2 to unconditionally guarantee to the Lender “the due and punctual payment by the Borrower of the Secured Moneys”. “Secured Moneys” is defined to include loans under the Development Loan Agreement.

[31]      The judgment debtor has agreed by clause 19.1 of the Guarantee to pay costs including:

… (costs as between solicitor and own client) sustained or incurred by the Lender in obtaining or attempting to obtain payment of all or any of the monies for which the New Guarantor may from time to time be liable under the provisions of this Deed.

[32]      The judgment entered by the District Court was against the judgment debtor and so his liability in respect of the Event of Default under the Development Loan Agreement is established.

[33]      I therefore accept the judgment creditors are contractually entitled to indemnity costs in respect of Mr Mao’s unsuccessful applications determined by the Original Judgment and the Strike Out Judgment in accordance with the Development Loan Agreement and the Guarantee. All of these applications were in opposition to the judgment creditors’ attempts to obtain payment of money owed by the judgment debtor.

[34]      The judgment debtor’s memorandum dated 4 September 2022 opposes any costs award on the basis that he has filed an application to set aside the October 2018 judgment in the District Court. The copy of the application to set aside attached to Mr Mao’s memorandum refers to the judgment creditors erring by transferring GST and interest “say approximately $170,000 (subject to final accounting sheet from the plaintiffs) that overcharged to IRD”.  The District Court judgment was, however, for

$216,723.92. As I said in my Original Judgment there would still have been an amount owing even if the judgment debtor is correct and the District Court judgment should

not have been entered for the full amount because of the GST position. The fact that the judgment debtor is seeking to set aside the decision on which the bankruptcy application was based, does not therefore affect the judgment creditors’ claim for indemnity costs as they would have had a right to sue for the remaining amount in any event and to be paid legal costs in respect of enforcing that default.

[35]      In any event, an application to set aside the 2018 District Court decision does not prevent costs being awarded under the Guarantee as the Guarantee extends to the costs of “attempting to obtain payment”.12

[36]      Mr Mao says further that the judgment creditors purposefully created lots of cost and litigation against him in order to create costs and charge him interest. This submission is not supported by the facts. The judgment creditors obtained judgment in the District Court and have sought to enforce it in the High Court against Mr Mao and his daughter. Any extra costs have been as a result of Mr Mao’s, not the judgment creditors’, applications to set aside the bankruptcy notice, to apply to set aside and to stay the Original Judgment, and to disqualify Hesketh Henry from acting, none of which have been successful.

[37]      The final ground relied on by Mr Mao is that he only agreed to $5,000 including GST in costs. No documentary evidence is filed in support of this submission. Furthermore, it is contrary to the clear terms of the Guarantee. Mr Mao does not dispute the validity of the Guarantee signed by him and relied on by the judgment creditors. Furthermore, in an email on 14 December 2021 in reply to counsel for the judgment creditors proposal to agree costs, Mr Mao does not refer to any agreement that costs were to be limited to $5000. A copy of this email is annexed to the affidavit of Ms Juno filed in support of the judgment creditors’ memorandum on costs. In these circumstances I rely on the Guarantee as determining the judgment creditors’ entitlement to costs.

12     See discussion in Synlait Milk Ltd v New Zealand Industrial Park Ltd, above n 7, at [197]-[199].

Costs — Original Judgment

[38]      I have considered the supporting documentation for the indemnity costs sought of $16,079.37 claimed by the judgment creditors for the successful opposition to Mr Mao’s application to set aside the bankruptcy notice determined by the Original Judgment. I agree with the scale costs calculation on a 2B basis of $11,223 and record that the scale costs are approximately two thirds of the indemnity costs sought (including disbursements).

[39]In terms of the factors in Black v ASB Bank Ltd, I consider that:

(a)the tasks that attract a costs indemnity on a proper construction of the contract are relatively broad;

(b)the tasks include “obtaining or attempting to obtain payment of all or any of the monies for which the New Guarantor may from time to time be liable under the provisions of this Deed”13;

(c)the indemnity costs sought reflect fees for tasks undertaken that were reasonably necessary and are covered by the guarantee clause;

(d)the charge-out rates are reasonable; and

(e)there are no reasons under the contract why the judgment creditors ought not to be paid their indemnity.

[40]      I therefore award indemnity costs in respect of the Original Judgment as sought.

[41]      As I have found that indemnity costs are payable in accordance with the Guarantee, I do not need to determine whether the costs are payable on the basis that the applications fall within r 14.6(4)(a).

13     Guarantee, Clause 19.1.

Costs — Strike Out Judgment

[42]      The judgment creditors make similar submissions in respect of the indemnity costs sought for the applications to stay and to set aside the Original Judgment and to disqualify Hesketh Henry struck out by Lang J. The indemnity costs sought in respect of those applications are $6,440.16. Again, I agree with the scale costs calculation of

$2,868 on a 2B basis. The calculations for both indemnity costs and scale costs are annexed to the supporting affidavit of Ms Heather Juno, a legal secretary at Hesketh Henry.

[43]      As for the indemnity costs in respect of the Original Judgment, the costs relate to solicitor and client costs sustained by the judgment creditors in “obtaining or attempting to obtain payment of all or any of the money for which the New Guarantor may be liable”14 as the applications were only brought by the judgment debtor to resist the judgment creditors’ attempts to obtain payment from the judgment debtor. In these circumstances I consider the costs sought fall within the guarantee provided by the judgment debtor and are therefore payable on an indemnity basis.

[44]      Again, as I have found that indemnity costs are payable in accordance with the Guarantee, I do not need to determine whether the costs are payable on a r 14.6(4)(a) basis.

[45]      I therefore award indemnity costs to the judgment creditors as sought in respect of the applications struck out by Lang J.

Result

[46]      I order the judgment debtor, Mr Mao, to pay indemnity costs to the judgment creditors in the total amount of $22,537.53 comprising:

(a)$16,079.37 in respect of Mr Mao’s unsuccessful application to set aside the bankruptcy notice; and

14     Guarantee, clause 19.1.

(b)$6,440.16 in respect of Mr Mao’s unsuccessful applications to stay and to set aside the Original Judgment and to disqualify Hesketh Henry from acting.

Associate Judge Sussock