M Consultant Limited v Beaver Homes Limited
[2024] NZHC 487
•12 March 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2023-404-2925
[2024] NZHC 487
UNDER the Companies Act 1993, section 290 IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
M CONSULTANT LIMITED
Applicant
AND
BEAVER HOMES LIMITED
Respondent
Hearing: On the papers Appearances:
Greg Blanchard KC / Yoonjung Lee for the Applicant Tracy Chubb for the Respondent
Judgment:
12 March 2024
COSTS JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
This judgment was delivered by me on 12 March 2024 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Elite Legal (Elaine Sun), Auckland, for the Applicant Forest Harrison Lawyers, Auckland, for the Respondent
Copy for:
Greg Blanchard KC/Yoonjung Lee, Shortland Chambers, Auckland, for the Applicant Tracy Chubb, Auckland, for the Respondent
M CONSULTANT LIMITED v BEAVER HOMES LIMITED [2024] NZHC 487 [12 March 2024]
Introduction
[1] On 17 November 2023 the respondent, Beaver Homes Limited (Beaver Homes) served a statutory demand on the applicant, M Consultant Limited (MCL). On 1 December 2023, MCL filed an originating application to set aside the statutory demand. Beaver Homes did not file any opposition to MCL’s opposition and did not proceed with the statutory demand.
[2] On 2 February 2024, this matter was called before the Court and an order was made setting aside the statutory demand pursuant to s 290 of the Companies Act 1993. Therefore the only issue outstanding between the parties was the costs of MCL”s application.
[3] Mr Lee, counsel for MCL, submitted a memorandum as to costs dated 1 February 2024 and Ms Chubb, counsel for Beaver Homes, submitted a memorandum in response dated 23 February 2024. MCL are seeking indemnity costs from Beaver Homes and Beaver Homes’ position is that no costs should be awarded against it, but if the Court is minded to award any costs then they should be scale costs on a 2B basis.
Legal principles
Indemnity costs
[4] It is clear from the authorities that a high threshold must be passed before an order for indemnity costs is to be made. In Bradbury v Westpac Banking Corp the Court of Appeal summarised the distinction between the three broad approaches to costs as follows:1
(a)a standard scale applies by default where cause is not sown to depart from it;
1 Bradbury v Westpac Banking Corp [2009] NZCA 234; [2009] 3 NZLR 400; (2009) 19 PRNZ 385 at [27].
(b)increased costs may be ordered where there is a failure by the paying party to act reasonably; and
(c)indemnity costs may be ordered where that party has behaved either badly or very unreasonably.
[5] In Bradbury,2 the Court of Appeal endorsed Goddard J’s remarks as to some of the categories in which indemnity costs have been ordered:
(a)the making of allegations of fraud, knowing them to be false, and the making of irrelevant allegations of fraud;
(b)particular misconduct that causes loss of time to the court and to other parties;
(c)commencing or continuing proceedings with some ulterior motive;
(d)doing so in wilful disregard of known facts or clearly established law; or
(e)making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, summarised in French J’s “hopeless case” test.
Increased costs
[6] Rule 14.6(3) provides for when increased costs may be ordered and provides that:
(3) The court may order a party to pay increased costs if –
…
(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by –
…
2 Above, n 1.
(ii)taking or pursuing an unnecessary step or an argument that lacks merit; …
[7] In AA1 Ltd v Lichfield Limited (in rec and in liq),3 Dunningham J determined that a 100 per cent uplift in costs was justified due to: the statutory demand served being an abuse of process; the respondent in that case was aware that the alleged debt was disputed and served the statutory demand anyway; and the respondent had been warned that if it did not withdraw it risked a claim for increased or indemnity costs.4
[8] Where a statutory demand is withdrawn before a hearing, that is generally regarded as akin to a discontinuance.5 (Discontinuances, through the provisions of r 15.23, expressly attract the principle that costs follow the event). In that situation, the merits will generally not be examined. I adopt the observations of Tompkins J in North Shore City Council v Local Government Commission, in which His Honour said:6
To the extent that … submissions involving an examination of the respective merits of the claims of the parties as bearing on the costs issue, I do not accept them. It is now well established that as a general rule, in considering costs on discontinuance, the Court will not consider the merits of the competing contentions. I state this as a general rule because I accept that there will be some circumstances where the merits, one way or the other, are so obvious that they should influence the costs issue. But save in those circumstances, the Court should not embark on a consideration of the merits.
MCL’s position
[9] Mr Lee submits that MCL should be entitled to indemnity cost as the statutory demand was issued in circumstances where there was a dispute between the parties. He submits that MCL made it clear that there was a genuine and substantial dispute about the alleged debt, and MCL engaged in a timely manner with communications from Beaver Homes’ solicitors, explicitly denying any obligation regarding the goods,
3 AA1 Limited v Lichfield (in rec and in liq), [2016] NZHC 90.
4 Above, n 1, at [48].
5 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC); Furnz Ltd v Goode Industries Ltd, HC Auckland CIV-2008-404-001024, 13 October 2008, per Associate Judge Faire at [6].
6 Above, n 4, at 186, where the Court applied similar observations by Henry J in Chase Corporation Ltd v Rank Overseas Holdings Ltd ((1988) 2 PRNZ 426 at 430, and by Barker J in Commerce Commission v Qantas Airways Ltd (No.4) (1992) 5 PRNZ 457).
and raised specific and detailed concerns about the information that Beaver Homes’ solicitors had provided in support of its client’s position.
[10] At 6(e) of his submissions, Mr Lee sets out the issues that were raised in relation to third party invoices which Beaver Homes forwarded to MCL and which were included in the amount demanded by the statutory demand.
[11] Mr Lee submits that discrepancies identified by MCl in its communications were not based on a subjective view of the parties’ legal positions but were obvious discrepancies between what was being alleged by Beaver Home, as recorded in its own records, and what was stated in third party invoices that Beaver Homes had compiled and provided in support of its allegations.
[12] Mr Lee submits that at no stage did Beaver Homes raise any concerns about MCL’s solvency, and to the contrary, Beaver Homes was aware of substantial payments that MCL had recently made to a third party supplier.
[13] Mr Lee refers to the decision in National Advanced Drivers School Limited v Black Sheep Ent Limited,7 where the Court awarded indemnity costs on an application to set aside a statutory demand where the application was unopposed, and notes that Associate Judge Doogue observed that it was well known that the Court disapproves of the use of a statutory demand in situations where there is a genuine dispute. Mr Lee also refers to the decision in Nags Head Horse Hotel Limited v Epsom Woods Limited,8 where a statutory demand was set aside by consent and Fitzgerald J held that it was appropriate to take into account the propriety of the statutory demand being issued in the first place, given that issuing statutory demand is a serious step. Mr Lee refers to her Honour’s statement that it is incumbent on the party issuing the statutory demand to make proper enquiries as to whether there is a debt presently due and owing, and to carefully consider whether there is arguably a genuine and substantial factual or legal dispute as to the existence of the debt, such that it should be properly resolved through some means other than the statutory demand process.9
7 National Advanced Drivers School Limited v Black Sheep Ent Limited [2017] 2804; (2017) 24 PRNZ 734.
8 Nags Head Horse Hotel Limited v Epsom Woods Limited [2020] NZHC 2973.
9 Above, n 7, at [39].
[14] Mr Lee submits that the observations of the Court in the National Advanced Drivers School Ltd and Nags Head Horse Hotel Ltd10 are appliable to the present case and the use of the statutory demand by Beaver Homes was oppressive in the circumstances.
[15] Mr Lee submits that the demands by Beaver Homes continued to change over the course of its correspondence via its solicitors, and there were obvious and significant issues regarding the basis of the alleged debt and its quantum. He submits that instead of providing a response to the queries raised by MCL regarding the discrepancies, Beaver Homes proceeded with issuing a statutory demand for an even higher sum than in the most recent correspondence with its solicitors.
[16] Finally, Mr Lee submits that faced with a statutory demand, MCL had no option but to incur costs in urgently applying to set it aside and MCL should not have to bear any cost at all as there was no proper foundation for Beaver Homes to issue the statutory demand in the first place.
Beaver Homes’ position
[17] Ms Chubb submits that no costs should be awarded against Beaver Homes and if the Court is minded to award any costs, this should be costs on a 2B basis with certain exclusions.
[18] At [2] to [11] of her submissions Ms Chubb sets out the factual background to the construction contract entered into between the parties and its cancellation, and then a summary of correspondence between Ms Sun of MCL and Beaver Homes’ solicitors.
[19] Ms Chubb submits that the correspondence between Ms Sun and Beaver Homes’ solicitors prior to issuing the statutory demand was, in the main, related to Ms Sun’s refusal to pay the amount invoiced by Beaver Homes on the basis that there were alleged inconsistencies in the third party invoices, and she did not believe that the materials had been purchased for work on MCL’s property.
10 Above, n 7 and n 8.
[20] At [26] of her memorandum, Ms Chubb responds to the various inconsistencies which were raised by MCL and referred to at [6](e) of Mr Lee’s memorandum, and then submits that none of the claims raised by MCL were arguable as they were mostly allegations of fraudulent activity based on ill-conceived inferences and misconceptions. She submits that it was not until Ms Sun’s affidavit was received in relation to the proceedings that an allegation was made that the materials held were not in a usable condition due to moisture and mould issues. She submits that after the affidavit was received, Beaver Homes promptly withdrew its statutory demand.
[21] Ms Chubb submits that there should be no award of costs to MCL. She submits that prior to issuing the statutory demand MCL never raised a genuine or substantial dispute about the debt, but rather raised fanciful and misconceived allegations of fraud that had no factual foundation. She submits that in such circumstances the issuing of a statutory demand was an entirely appropriate measure, and Beaver Homes acted entirely appropriately when it withdrew the statutory demand upon receiving Ms Sun’s affidavit which raised new issues and which arguably raised a substantial dispute.
[22] As to whether indemnity costs are warranted, Ms Chubb submits that Beaver Homes’ actions did not evidence any bad or very unreasonable behaviour to warrant an award of indemnity costs, nor was it an abuse of process to issue the statutory demand as no reasonable dispute had been raised until Ms Sun filed her affidavit. She submits that rather MCL has acted badly by alleging fraudulent behaviour on the part of Beaver Homes with no evidence.
[23] Finally, Ms Chubb submits that if the Court was minded to award indemnity costs, there are various issues with the information which had been provided by MCL as to the calculation of indemnity costs. She submits that if the Court were to award costs on a 2B basis, then no allowance for the mentions hearing on 2 February 2024 should be made, or drafting the costs memorandum, and this equates to costs of
$5,258.00 together with disbursements of $1,946.90, totalling $7,204.90.
Result
[24] As has been noted at [8], the Court will not examine the merits of the application in circumstances where the statutory demand has been withdrawn prior to the hearing. Consequently I do not take any view on the merits of the list of discrepancies raised by Ms Sun, and the merits of the view of Beaver Homes that none of these were genuine issues.
[25] Turning to the fact that the statutory demand was withdrawn prior to the hearing, in my view the actions of Beaver Homes, given the background circumstances as set out by Ms Chubb in her memorandum, are not sufficiently bad or unreasonable to warrant the imposition of indemnity costs.
[26] However, there were clearly some grounds for dispute between the parties when the statutory demand was issued and correspondence between Ms Sun of MCL and Beaver Homes’ solicitors clearly involved adjustments to the amounts being claimed. Through the correspondence, it is arguable that there was a substantial dispute. Accordingly, in my view, MCL is entitled to 2B costs together with an uplift to reflect the fact that a statutory demand was issued, the application to set it aside remained unopposed, and the statutory demand was withdrawn prior to the hearing.
[27] As to the quantum of costs, I accept Ms Chubb’s point that costs on the memorandum as to costs filed by Mr Lee should not be allowed as “costs on costs”, but the circumstances relating to the call of the matter on 2 February 2024 are not sufficiently clear to exclude this from the calculation of 2B costs.
Orders
[28] I order that Beaver Homes is to pay MCL 2B costs on the application, with 50 per cent uplift plus disbursements, being the sum of $8,605.50 in costs together with disbursements of $1,946.90, totalling $10,552.40.
…………………………….. Associate Judge Taylor
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