Li v The Advancing Holdings Limited
[2020] NZHC 1479
•29 June 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2019-409-000690
[2020] NZHC 1479
UNDER the Companies Act 1993 IN THE MATTER
of an application to bring a derivative action and to set aside a statutory demand
BETWEEN
MIN LI
First Applicant
AND
2PM LIMITED
Second Applicant
AND
THE ADVANCING HOLDINGS LIMITED
Respondent
Hearing: Determined on the papers Counsel:
G J Ryan for Applicants
R G Smedley for Respondent
Judgment:
29 June 2020
COSTS JUDGMENT OF ASSOCIATE JUDGE PAULSEN
This judgment was delivered by me on 29 June 2020 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
MIN LI v 2PM LIMITED [2020] NZHC 1479 [29 June 2020]
Introduction
[1] The protagonists in this proceeding are Chinese but choose to go by English first-names and for that reason I refer to them in that manner.
[2] The first applicant (Michelle) applied to bring a derivative action to set aside a statutory demand served upon the second applicant (2PM) by the respondent (TAH). Before the application was heard, 2PM was put into liquidation by special resolution of its shareholders. Michelle has discontinued this proceeding but TAH seeks costs in reliance upon High Court Rule 15.23. Michelle argues costs should lie where they fall.
Background
[3] Michelle and Cheng-Hsin Shou (Alley) are the directors and shareholders of 2PM. 2PM operated a restaurant business. Michelle’s husband, Xu Yan (Kevin), and Alley’s husband, Shaobo Liu (Patrick), were business partners in TAH, which is a developer.
[4] In July 2019, Kevin resigned as a director of TAH due to concerns about his use of company money. BDO was instructed to investigate and report on the financial affairs of TAH as well as other companies. BDO issued a report which identified transactions of concern. Relevantly, BDO considered TAH had loaned $570,000 to 2PM of which $280,000 had been repaid by Kevin and Patrick and $13,000 by 2PM leaving a balance owing of $277,000.
[5] Anthony Harper wrote to Kevin on behalf of TAH on 9 October 2019 asking him to comment on BDO’s findings; the implication was that Kevin had misappropriated TAH money.
[6] Anthony Harper wrote to 2PM on 7 November 2019 demanding payment of the $277,000. TAH then issued a statutory demand to 2PM on 22 November 2019. Michelle wished to apply to set aside the statutory demand.
[7] On 29 November 2019, Michelle’s solicitors, White Fox & Jones, wrote to Alley asking for her consent to them applying to set aside the statutory demand on behalf of 2PM.
[8] On the same date, White Fox & Jones wrote to Anthony Harper advising the statutory demand was disputed and should be withdrawn. Enclosed with the letter were 2PM’s 2018 financial statements. There was no liability to TAH recorded in the financial statements. White Fox & Jones observed that as TAH and 2PM shared accountants (McCoy & Co) it was expected that TAH’s financial statements would reflect the same. The stated basis upon which the statutory demand should be withdrawn was, “The debt the subject of the demand appears to be the shareholder current accounts for Michelle and Alley, which are of course not owed to TAH.”
[9] On 3 December 2019, White Fox & Jones forwarded to Anthony Harper an email from McCoy & Co that stated it was its understanding from both Kevin and Patrick there were no loans between TAH and 2PM.
[10] On 5 December 2019, Anthony Harper wrote to White Fox & Jones that Alley did not authorise White Fox & Jones to act for 2PM or apply to set aside the statutory demand. TAH did not accept the statutory demand had been issued in error because:
(a)Alley was said to have received advice from Bevan Ralfe, a director at McCoy & Co, that the sum demanded had been loaned by TAH to 2PM;
(b)extracts and notations from bank transactions showed payments from TAH to 2PM annotated as loans; and
(c)there was other unidentified financial records supporting the existence of a loan.
[11] Michelle filed this proceeding on 6 December 2019. The respondent’s opposition was filed on 20 December 2019. On 20 February 2020, timetabling directions were made by consent. The hearing was to be on 18 May 2020. The affidavits in support of and opposition to the application were filed.
[12] On 30 April 2020, 2PM was put into liquidation by shareholders’ resolution. Michelle offered to discontinue on the basis that costs lie where they fall but TAH seeks costs. A notice of discontinuance has now been filed.
Rule 15.23
[13]Rule 15.23 provides as follows:
Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.
[14] There is a presumption in favour of awarding costs to a defendant against whom a proceeding has been discontinued. The presumption is designed to give a predictable outcome upon discontinuance avoiding any requirement for the defendant to demonstrate that the plaintiff acted unreasonably. The discontinuing party will not be able to avoid the presumption by showing that at one point it had reasonable grounds for believing it would be successful in the proceeding.
[15] The presumption can be displaced if it is just and equitable not to apply it. The court will not speculate on the respective strengths and weaknesses of the parties’ cases, but the merits may be considered when they are so obvious that they should influence costs. The circumstances surrounding the discontinuance and the reasonableness of the stance of both parties must be considered.1
[16] In FM Custodians Ltd v Pati, Associate Judge Abbott stated the principles governing the exercise of the discretion under r 15.23 as follows:2
The Court is not limited in the factors that can be taken into account when considering whether the presumption is displaced, but the following are matters which are taken into consideration:
(a)As the general rule the Court will not consider the merits of the respective cases (unless they are so obvious that they should influence the costs issue).
1 Kroma Colour Prints Ltd v Tridonicatco NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973 at [12]. at [12].
2 FM Custodians Ltd v Pati [2012] NZHC 1902 at [11].
(b)The Court will consider the reasonableness of the stance of both parties in the proceeding (whether it was reasonable for the plaintiff to bring and continue the proceeding, and for the defendant to oppose and continue to oppose it, up to the point of discontinuance).
(c)Conduct prior to the commencement of the proceeding may be relevant (for example, if any conduct by a defendant has precipitated the litigation), as may be the reason for discontinuing (for example, where a change of circumstances has made the proceedings unnecessary).
Submissions
[17] TAH argues the presumption in r 15.23 should apply. It submits the court should not consider the merits and, in any event, Michelle has failed to justify her application to bring a derivative action upon which the setting aside of the statutory demand was always dependent.
[18] Michelle argues it is just and equitable to depart from the presumption in r 15.23. Her application was not heard only because it was redundant. The shareholders’ resolution to appoint a liquidator had no relationship to the statutory demand and did not vindicate TAH’s position or confirm the existence of the debt in respect of which the statutory demand was issued. TAH is acting opportunistically relying on a presumption about assumed “winners and losers” which is inapt.
[19] Michelle also argues TAH issued and then persevered with the statutory demand despite being aware of a substantial dispute over the existence of the debt. The dispute was never going to be suitable for resolution in the context of an application to set aside a statutory demand. If the application had proceeded to a hearing there was a strong likelihood the statutory demand would have been set aside with costs.
Analysis
[20] The starting point is r 15.23. TAH is entitled to costs unless the court otherwise orders. There must be circumstances such that it is just and equitable that the presumption in r 15.23 should not apply. The onus of establishing such circumstances is upon Michelle. That onus will not be easily satisfied.
[21] As noted above, a change of circumstances rendering a proceeding unnecessary may be a relevant consideration.3 In this case there was a change of circumstances as a result of the liquidation of 2PM. I accept that event rendered this proceeding redundant.
[22] The circumstances under which a proceeding to set aside a statutory demand is discontinued may show that the position of the party issuing the statutory demand claiming as a creditor of the company is upheld.4 The unexplained withdrawal of an application to set aside a statutory demand, or the withdrawal upon the making of payment arrangements by the company, are circumstances that are consistent with the creditor’s position. Conversely, outcomes under which the party issuing the statutory demand must take other steps to establish itself as a creditor go to show that the company has succeeded. Other circumstances will be equivocal as to whether the position of the party issuing the statutory demand is upheld. This is such a case. Upon the liquidation of 2PM the application to set aside the statutory demand no longer served any purpose.5 Whether TAH is a creditor of 2PM became a matter between it and the liquidator.
[23] This then leads to Michelle’s submission that the merits should be considered. In most cases, any attempt to determine the merits before hearing will necessarily descend into impermissible speculation. The court will usually be unable to assess the merits without hearing from the witnesses and counsel. That will not always be the case. Here, all the evidence upon which the parties rely is before the court and I am able to assess the merits. Counsel have had an opportunity to address me on the merits but TAH chose not to engage on that issue taking the narrow stance the merits are irrelevant in this costs context. I do not agree.
[24] The court may set aside a statutory demand if it is satisfied there is a substantial dispute whether or not the debt is owing or is due.6 The onus upon a company applying to set aside a statutory demand is not onerous. It must show a fairly arguable basis the
3 FM Custodians Ltd v Pati, above n 2, at [11].
4 Grays Avenue Investments Ltd v New Zealand Mint Ltd [2015] NZHC 2633, (2015) 22 PRNZ 801 at [31].
5 Hedley v Albany Power Centre Ltd (in liq) [2005] 2 NZLR 196 (HC) at 208-209.
6 Companies Act 1993, s 290(4)(a).
debt upon which the statutory demand is founded is subject to substantial dispute. The court will not generally resolve a disputed question of fact or issues of credibility arising on affidavit evidence and cross-examination will rarely be allowed. If there is evidence of a substantial dispute, the matter should generally be resolved by ordinary proceedings and not in the liquidation jurisdiction.
[25] Here, the statutory demand was issued on the basis that the $277,000 was a loan from TAH to 2PM. Michelle says TAH did not make a loan to 2PM, rather Kevin and Patrick advanced money to her and Alley from their current accounts with TAH. In support of Michelle’s case there is no loan agreement between the companies despite the large sums said to have been loaned. There is no evidence of agreed terms as to when and on what basis the money would be repaid. The financial statements of 2PM and TAH do not record a loan. The financial statements of TAH were signed by both Patrick and Kevin and the financial accounts of 2PM were signed by both Michelle and Alley. There is evidence from Alley and Patrick that they understood money advanced by TAH to 2PM was a loan but they do not identify the date or circumstances when the loan was made. They offer no explanation why the loan was not documented and their evidence that they did not read financial statements of the companies is not convincing. If it was always understood there was a loan, Patrick’s evidence that when BDO provided its report “the loan [of] $277,000 was discovered… much to the surprise of TAH’s shareholders” makes little sense. The companies’ accountants, McCoy & Co, apparently understood there were no loans from TAH to 2PM. Furthermore, consistent with Michelle’s case, the BDO report notes that transfers from TAH to 2PM had been repaid by Kevin and Patrick.
[26] TAH relies substantially upon the BDO report which is explained in the affidavit of Ben Keall. BDO investigated a large number of irregular transactions Kevin made involving a number of entities and large sums of money. BDO’s conclusion that there was a loan from TAH to 2PM was made from an analysis of financial records capable of more than one interpretation. In relevant instances the records were created by Kevin who it is alleged was misappropriating company money casting suspicion upon the accuracy of the records he created. As an example, Mr Keall notes that a payment of $200,000 was made from TAH directly to 2PM and
recorded by Kevin as a loan but also that journal entries recorded this sum as drawings by Patrick and Kevin.
[27] I am satisfied there is ample evidence to make the assessment that Michelle satisfied the onus upon her to show a substantial dispute whether or not the debt claimed in the statutory demand is owing. At the latest, when TAH received the application to set aside the demand and the affidavit of Michelle, TAH should have withdrawn its statutory demand at which stage it had not incurred any costs.
[28] TAH also argues Michelle has not justified her application to bring a derivative action. That is not correct. I was referred to authority for the procedure Michelle pursued in this case.7 TAH has not raised any matters that suggest Michelle would not have been granted leave. Having considered the statutory criteria, I am satisfied leave would have been granted.8
Conclusion
[29] This proceeding was discontinued because it is, through a change of circumstances, redundant. The only sensible course for Michelle to adopt upon the liquidation of 2PM was to discontinue. The circumstances of the discontinuance do not justify TAH’s position to be a creditor of the company. I am satisfied the merits of the proceeding are sufficiently obvious that I can consider them and TAH should not have persevered with its statutory demand once served with Michelle’s application. It is just and equitable that the presumption in r 15.23 not apply and costs should lie where they fall.
7 Culling v Culling [2015] NZHC 3161.
8 Companies Act 1993, s 165(1).
Result
[30]The costs of this proceeding shall lie where they fall.
O G Paulsen Associate Judge
Solicitors:
White Fox & Jones, Christchurch Anthony Harper, Christchurch
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