Lumen Business Solutions Limited v Wallace Corporation Limited
[2023] NZHC 3030
•30 October 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-000010
[2023] NZHC 3030
BETWEEN LUMEN BUSINESS SOLUTIONS LIMITED
Applicant
AND
WALLACE CORPORATION LIMITED
Respondent
Hearing: On the papers Appearances:
K Puddle for the Applicant
G D Simms / I J Shores for the Respondent
Judgment:
30 October 2023
COSTS JUDGMENT OF ASSOCIATE JUDGE GARDINER
This judgment was delivered by me on 30 October 2023 at 3.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date.......................................
Solicitors:
TWA Legal Limited, Auckland Wynn Williams, Auckland
LUMEN BUSINESS SOLUTIONS LTD v WALLACE CORPORATION LTD [2023] NZHC 3030
[30 October 2023]
Introduction
[1] On 9 December 2022, Wallace Corporation Limited (WCL) issued a statutory demand on Lumen Business Solutions Limited (Lumen) for debt allegedly owing under a guarantee securing a loan agreement between Podular Housing System Limited (Podular) and WCL (the Guarantee). Under cl 27 of the Guarantee Lumen’s liability was limited to a sum equal to any amounts Lumen received from Podular to repay advances that Lumen had made to Podular.
[2] On 25 November 2022, Podular was placed into liquidation. As a result, the guaranteed monies became owing.
[3] WCL made demand on Lumen on 30 November 2022 for $1,192,796 it was owed by Podular. WCL says that it demanded the full amount Podular owed it because it had no means of ascertaining what amounts Lumen had received from Podular.
[4] Lumen responded by instructing lawyers who wrote to WCL’s lawyers on 8 December 2022 requesting full details of the sum said to be owing under the Guarantee with specific reference to cl 27 of the Guarantee and supporting information.
[5] On 9 December 2022 WCL served the statutory demand for $1,192,796. WCL’s lawyers also responded to Lumen’s lawyers. They provided a spreadsheet said to show the sums owing by Lumen. They did not respond to the cl 27 point.
[6] On 21 December 2022 Lumen applied to set aside the statutory demand. It raised the cl 27 limitation and said that it had no liability to WCL under the Guarantee because it had not, at the date of the statutory demand, received any sums from Podular in relation to advances, loans, credits or facilities it had provided to Podular.
[7] Lumen also raised several other arguments, including that the Guarantee was not properly executed, did not have the approval of Lumen’s sole shareholder and should be set aside due to unconscionable conduct. In an affidavit filed in support of the application Ilan Gross set out the background to the execution of the Guarantee. He highlighted the cl 27 limitation. He provided screenshots obtained from Podular’s
records which showed payments made by Lumen to Podular of $1,601,963 and by Podular to Lumen of $121,143. Mr Gross explained that most of the payments from Podular to Lumen were for IT services Lumen provided Podular and were made before the Guarantee was signed on 4 November 2022.
[8] WCL filed a notice of opposition to the application on 25 January 2023 together with an affidavit from James Wallace. Mr Wallace acknowledged the cl 27 limitation. He challenged Mr Gross’s evidence that the payments made by Podular to Lumen were for IT services, saying there was a lack of supporting information, and that he was making enquiries with Podular’s liquidators.
[9] By consent, WCL was given until 17 March 2023 to file and serve any additional evidence, Lumen was to file and serve any evidence in reply within 10 working days and the application was set down to be heard on 1 June 2023.
[10] WCL filed a further affidavit from WCL’s accountant, Roger Hatrick-Smith on 20 March 2023.
[11] On 17 April 2023 Lumen filed and served a reply affidavit from Mr Gross. Mr Gross replied to Mr Wallace’s challenges to his evidence about the payments from Podular to Lumen.
[12] WCL withdrew the statutory demand on 25 May 2023, explaining that based on the explanation in Mr Gross’s reply affidavit and further enquiries with the liquidators, it accepted that there was insufficient information for the correct application of the limitation to the payments received by Lumen to be determined in the context of the application to set aside the statutory demand. WCL expressly did not accept the allegations made in Lumen’s application, which it said would be determined in ordinary proceedings. Lumen’s application was accordingly dismissed on 26 May 2023.
[13] WCL accepts that scale costs are payable to Lumen for discontinuance. Lumen seeks increased or indemnity costs. On that basis, the parties have been unable to agree on costs.
Legal Principles
[14] The Court’s jurisdiction to award increased or indemnity costs is derived from r 14.6 of the High Court Rules 2016. Rule 14.6 provides:
14.6 Increased costs and indemnity costs
[…]
(3) The court may order a party to pay increased costs if—
(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or
(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
(i) failing to comply with these rules or with a direction of the court; or
(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or
(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or
(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or
(c) the proceeding is of general importance to persons other than just the parties and it was reasonably necessary for the party claiming costs to bring it or participate in it in the interests of those affected; or
(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.
(4) The court may order a party to pay indemnity costs if—
(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or
(b) the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or
(c) costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or
(d) the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or
(e) the party claiming costs is entitled to indemnity costs under a contract or deed; or
(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.
[15] In terms of increased costs, only to the extent to which a failure to act reasonably contributed to the time and or expense of the proceeding should any percentage uplift be awarded.1
[16] Indemnity costs are awarded where a party has behaved badly or very unreasonably.2 Unreasonableness is determined by the conduct of the party against whom costs are sought.3 They may also be awarded when a party’s case was obviously ‘hopeless’, meaning ‘totally without merit’ or ‘bound to fail’.4
[17] It is well settled that where statutory demands are issued inappropriately, increased costs are routinely awarded.5 In Norwich Properties Ltd v Mark Gray Architect, the Court held that an uplift on 2B scale costs of up to 50 per cent was not uncommon where an “ill-advised” statutory demand was improperly issued and set aside by the Court.6
[18] In two recent decisions,7 the Court ordered a 50 per cent uplift in costs against the issuer of a statutory demand where the issuer knew, or ought to have known, the
1 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400 at [165] .
2 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27]–[28].
3 Body Corporate 166208 v York Trustees Ltd [2021] NZHC 1974 at [18].
4 TheCircle.co.nz Ltd v Trends Publishing International Ltd (in liq and rec) [2021] NZCA 235 at [34].
5 Andrew Beck and others McGechan on Procedure at [HR14.6.02(2)(a)(i)], as cited in Herbert Construction Co Ltd v Viking Group Ltd HC Napier CIV-2011-441-206, 19 September 2011 at [17].
6 Norwich Properties Ltd v Mark Gray Architect [2015] NZHC 994 at [31].
7 Haines v Memelink [2019] NZHC 2169 at [39]–[50]; and Haines v Memelink [2021] NZHC 1063 at [19]–[27].
debt claimed was disputed; no legal advice was taken prior to the issue of the statutory demand; and the issuer had the opportunity to withdraw but did not do so.
[19] It is incumbent on the issuer of a statutory demand to ensure that the demand was issued on a proper basis, and that the statutory demand was not the subject of a genuine dispute.8
Submissions
[20] Lumen submits that indemnity or increased costs are justified because the statutory demand was served over a clearly disputed debt for an ulterior motive, relying on affidavits that lack credibility or at worst contain knowingly false statements.
[21] Lumen says that while it was unable to verify that it had received no money from Podular, it should have been obvious before the statutory demand was issued that the limitation within the Guarantee would be disputed. Lumen cites correspondence that its shareholder had not consented to the Guarantee and was stressed and pressured by WCL’s lawyer.
[22] Lumen submits that WCL should have contacted Podular’s liquidators to quantify the sum Lumen received from Podular and ascertain the amount to be demanded before it served the statutory demand. It says that before the statutory demand was withdrawn it had gone to the expense of preparing submissions and the bundle.
[23] WCL submits that Lumen was in the best position to confirm what amounts (if any) it had received from Podular and supply this evidence to WCL. WCL says that as Lumen did not provide it with any information, WCL was justified in serving the statutory demand for the full amount.
[24] WCL notes that at the time of the statutory demand Lumen elected to apply to set aside the demand rather than inform WCL that Lumen had received no amounts
8 AAI Ltd v 92 Lichfield Street (in req and in liq) [2016] NZHC 90 at [20], citing Rembrandt Custodians Ltd v Pro-Drill (Auckland) Ltd HC Auckland M337/IN03, 13 June 2003 at [38].
from Podular. WCL submits that the application, which pleads a range of defences including that the Guarantee was not properly executed, was unconscionable and was not approved by Lumen’s shareholder, contradicts Lumen’s current position.
[25] WCL says that it withdrew the statutory demand due to the late updating affidavit of Mr Gross providing more information about the nature of the payments from Podular to Lumen. WCL submits that had Lumen provided this information earlier, the statutory demand would have been withdrawn sooner or not been issued at all. Instead, Lumen’s evidence up until that point showed that Lumen had, in fact, received payments from Podular. WCL says that it relied on this fact to file an opposition to Lumen’s application.
Assessment
[26] I have set out the chronology of events in some detail as I consider that it shows that an order for increased costs should be made against WCL, because the statutory demand should not have been issued or should have been withdrawn when Lumen filed its application and supporting affidavit.
[27] The short point is that the statutory demand procedure should only be invoked for debts that are owing and due. It should have been readily apparent to WCL that Lumen’s indebtedness to WCL under the Guarantee was limited to an amount equal to any sums Lumen had received from Podular in relation to advances, loans, credits, or facilities it had provided to Podular, according to cl 27 of the Guarantee. It was WCL’s lawyer who negotiated and drafted that limitation clause with Mr Gross. It was incumbent on WCL to ascertain the amount Lumen owed WCL, taking into account the limitation, before serving a statutory demand. Instead, it wrongly served a statutory demand on Lumen for the amount Podular owed WCL.
[28] Furthermore, Lumen’s lawyer asked WCL to explain how the amount demanded had been calculated with reference to cl 27 before the statutory demand was issued. That should have been a further indication to WCL that it needed to ascertain the correct amount of the debt considering cl 27 before it proceeded further.
[29] At the latest, WCL should have reconsidered when Lumen applied to set aside the statutory demand and served the affidavit of Mr Gross. Mr Gross put the limitation in issue and furthermore contended, with reference to Podular’s records, that Lumen had not received any payments from Podular after the Guarantee was agreed and any payments received prior were for IT services. This evidence could have been more fulsome, but it should have been readily apparent to WCL at this point, if not earlier, that the debt it had demanded was potentially substantially incorrect.
[30] In this respect I do not accept that this ought not to have been apparent to WCL until Mr Gross served his reply affidavit. In this reply affidavit Mr Gross responds to Mr Wallace’s challenges to his evidence by referring back to his earlier evidence of the payments made by Podular to Lumen and the related transaction records exhibited to that affidavit. The key information was present in Mr Gross’s earlier affidavit filed in support of the application to set aside.
[31] For these reasons I consider that, consistent with earlier authorities, it is appropriate that WCL should pay Lumen its 2B costs with an uplift of 50 per cent.
[32] Lumen was required by the Court to file and serve its submissions and the hearing bundle 10 working days before the hearing, which was before WCL withdrew the statutory demand on 25 May 2023. Accordingly, its costs should include this step.
Result
[33] Accordingly, I order that Wallace Corporation Ltd pay Lumen Business Solutions Ltd:
(a)Costs and increased costs of $16,132.50; and
(b)Disbursements of $498.81.
Associate Judge Gardiner
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