Manning v Smith
[2020] NZHC 2780
•22 October 2020
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2019-470-000069
[2020] NZHC 2780
UNDER The Companies Act 1993, s 284(1) IN THE MATTER OF
MEDICANN HOLDINGS LIMITED (IN LIQUIDATION)
BETWEEN
PAUL THOMAS MANNING and
KENNETH PETER BROWN, as liquidators of MEDICANN NZ HOLDINGS LIMITED (IN LIQUIDATION)
Applicants
AND
ROSS HENRY SMITH and BRENDON GEORGE OGILVY
Respondents
Hearing: On the papers Counsel:
J Burt and J Tunna for Applicants
M Macfarlane for Respondent (R Smith) B Gustafson for Respondent (G Ogilvy)
Judgment:
22 October 2020
COSTS JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 22 October 2020 at 4.00 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar
Date………………………
MANNING v SMITH [2020] NZHC 2780 [22 October 2020]
Introduction
[1] In my judgment of 31 July 2020,1 I made directions, on application by the plaintiff liquidators, under s 284(1) of the Companies Act 1993, as to whether shares held in Medicann Holdings Ltd (in liquidation) by Mr Ross Smith and interests associated with him, either became void or were validly cancelled prior to liquidation.
[2]This is my judgment on costs.
[3] The applicant liquidators seek indemnity costs totalling $61,947.86 jointly and severally against Mr Smith and interests associated with him, or alternatively, an award of increased costs and disbursements totalling $39,208.86.
[4] Mr Brendon Ogilvy also seeks indemnity costs, or in the alternative, increased costs (a 50 per cent uplift on scale).
[5] In opposition, Mr Smith contends that costs should be awarded on a 2B basis only and that this is far from an appropriate case for either indemnity or increased costs.
Relevant legal principles
[6] Increased costs and indemnity costs are provided for in r 14.6 of the High Court Rules 2016.
[7]Rule 14.6(3) provides:
(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
1 Manning & Brown v Smith & Ogilvy [2020] NZHC 1888.
(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 t o 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.
[8]Rule 14.6(4) provides:
(4)The court may order a party to pay indemnity costs if –
(a) the party has acted vexatiously, frivolously, improperly, or 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.
[9] Increased costs may be ordered where there is a failure by the paying party to act reasonably.2 However, generally costs are to reflect how parties acted during litigation, not before it.3
[10] The Court is required to consider the extent to which the failure to act reasonably contributed to the time or expense of the proceedings. Only to that extent can any percentage uplift from scale be justified.4
[11] As to indemnity costs, the situations listed in r 14.6(4)(c) – (n) are not related to behaviour. However, apart from those categories, indemnity costs are awarded where a party has behaved either badly or very unreasonably, for example a breach of confidence or flagrant misconduct.5 The word unnecessarily in r 14.6(4)(a) takes its meaning and flavour from the preceding adverbs: “vexatiously, frivolously, improperly”.6
Application for costs by Mr Brendon Ogilvy
[12] Mr Ogilvy seeks costs on an increase above scale or on an indemnity basis and for the following reasons:
(a)Mr Smith made baseless allegations of fraud and dishonesty against Mr Ogilvy and Mr Kramer; and
(b)Mr Smith took an unreasonable and meritless opposition to the application for directions for the ulterior motive of exhausting the funds in the liquidation so there was little or no distribution by the liquidators to the shareholders; and
(c)The application for directions was of general importance to the company’s shareholders (who subscribed in cash for the company’s shares in reliance on the information memorandum) and it was
2 Bradbury v Westpac Banking Corp [2009] 3 NZLR 400, (2009) 19 PRNZ 385 (CA) at [27].
3 Paper Reclaim Ltd v Aotearoa International Ltd [2006] 3 NZLR 188 (CA) at [160].
4 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400, (2010) 24 NZTC 24,500 at [165].
5 Bradbury v Westpac Banking Corp, above n 2; see also Prebble v Huata [2005] NZSC 18, [2005] 2 NZLR 467, (2005) 17 PRNZ 581 at [6].
6 Saunders v Winton Stock Feed Ltd (2009) 19 PRNZ 342 (CA) at [30], endorsed in Bradbury v Westpac Banking Corp, above n 2, at [26].
reasonably necessary for Mr Ogilvy to participate in the application for directions to protect those shareholders’ interests (it is also to be noted that Mr Ogilvy is not participating as a shareholder in any distribution by the liquidators).
[13] It is understandable that Mr Ogilvy and Mr Kramer and parties associated with them would take the view that Mr Smith had an ulterior motive of exhausting the funds in the liquidation. The circumstances giving rise to the litigation provide some basis for reaching that view. However, generally costs are to reflect how parties acted during litigation, not before it.7 The critical issue to address is the extent to which any failure by Mr Smith to act reasonably contributed to the time or expense of the proceedings.
Only to that extent can any percentage uplift from scale be justified.8
[14] Mr Smith was fortunate to be represented by Mr Macfarlane, who responsibly sought to focus on the critical legal issues and to bring some clearly needed discipline to the proceedings. No criticism can be made of Mr Macfarlane’s role and his professional conduct. I also accept that the applicant liquidators clearly believed that there was a genuine legal issue to be addressed. However, the problem for Mr Smith, as I outlined in my judgment, was that the alleged factual premise for his claims was not made out. I concluded that the critical issue of interpretation was clearly to be determined against Mr Smith because his account of the contested transactions was largely not credible. His claims lacked merit.
[15] Despite my misgivings about Mr Smith’s conduct and his motives, I find that the high threshold for an award of indemnity costs has not been made out. In large part, that is a result of the efforts of Mr Macfarlane. However, I accept that the destructive and cavalier approach taken by Mr Smith, and correctly anticipated by the Ogilvy parties, was unreasonable and did contribute unnecessarily to the time and expense of the proceedings. That his claims ultimately lacked merit is also relevant. On this basis an award of increased costs against Mr Smith is justified.
[16] While Mr Smith’s affidavit properly focused on the legal issues, his wide- ranging oral evidence, as the Ogilvy parties obviously anticipated, was intemperate
7 Paper Reclaim Ltd v Aotearoa International, above n 3.
8 Commissioner of Inland Revenue v Chesterfields Preschools Ltd, above n 4.
and contained numerous unsubstantiated allegations attacking the credibility and integrity of Mr Ogilvy, Mr Kramer and others. In the circumstances, it was reasonable for the Ogilvy parties to address the allegations of forgery previously made by Mr Smith.
[17] It is also relevant to note that the parties did go to mediation on 9 November 2019, and the Smith entities indicated their acceptance of the Ogilvy parties’ offer of a payment of $100,000 subject to minor matters and a small delay. It is not apparent to the Court as to why the parties did not ultimately reach a settlement (there were no outstanding issues to resolve). However, the result of the proceedings is that Mr Smith has no entitlement to the shares in Medicann Holdings Ltd and is clearly in a far worse financial position than he would have been had he accepted the settlement offer. In my view, Mr Smith has to accept some significant responsibility for that outcome.
[18] In all the circumstances, I conclude that Mr Smith should pay costs on a 2B basis together with a 25 per cent uplift. I also find that band C should be used for the preparation of evidence and written submissions, as sought by the Ogilvy parties. The legal issues were novel and somewhat complex (particularly the doctrine of equitable limitation) and, as noted above, it was reasonable and appropriate for the Ogilvy parties to anticipate that they would need to address the fraud and conspiracy allegations.
[19] I accept Mr Macfarlane’s submission that there is no basis for any award of increased costs to be made against Ms Desire. Her position is different from that of Mr Smith and she should be ordered to pay costs on a 2B basis only – and with the preparation of evidence and written submissions being based on band B.
[20] For completeness, I further conclude that the Ogilvy interests cannot rely upon r 14.6(3)(c) for an award of increased costs. That rule is generally directed to proceedings brought or defended in the public interest.9 This Court held in Mainzeal Property & Construction Ltd (in liq) v Yan10 that liquidators acting on behalf of creditors was not the kind of situation that r 14.6(4)(c) contemplates.
9 New Zealand Maori Council v Attorney-General (No 3) HC Wellington, CB942/88, 28 April 1995 at [9].
10 Mainzeal Property & Construction Ltd (in liq) v Yan [2019] NZHC 1637 at [64]–[66].
Application for costs by the applicant liquidators
[21] The liquidators seek indemnity costs pursuant to r 14.6(4)(c) on the basis that legal costs incurred by them are payable from the fund that would otherwise be available for distribution to the shareholders of Medicann NZ Holdings Ltd (in liquidation). Mr Burt, on behalf of the liquidators, accepts that there is no case known to either counsel where liquidators have been awarded indemnity costs under r 14.6(4)(c) on an application for directions. However, he submits that there is no difference in principle between a trustee holding a fund on behalf of beneficiaries and liquidators holding a fund on behalf of creditors and/or shareholders.
[22] Mr Burt relies on the decision Official Assignee v Registrar of Companies,11 where the assignee of the property and a shareholder in the company sought costs. The Court held:
[23] An award of indemnity costs is justified under both r 14.6(4)(c) and r 14.6(f) of the High Court Rules. First, there is a close analogy between the availability of BCL’s funds in this case to pay for the costs of litigation and the situation directly addressed by r 14.6(4)(c) where costs are payable from a fund and the claimant is a necessary party to the proceeding affecting the fund. If those circumstances were not viewed as falling within the express words of r 14.6(4)(c), they are matter of which for “some other reason” (under r 14.6(4)(f)) justify the making of an order of indemnity costs.
[23]Mr Macfarlane takes issue with the approach for which Mr Burt contends.
[24] I find that it is not necessary for me to address the application of r 14.6(4)(c) in this case. As a matter of discretion, I find that there is no basis for an award of indemnity costs and particularly in the circumstances where, having made the election to seek directions, the liquidators clearly appear to have taken the position that there were genuine legal questions to be addressed. Having said that, and for the reasons set out above, I nevertheless find that the liquidators should be entitled to costs on an increased basis, namely a 25 per cent uplift. There should also be a reduction in the allowance for step 37 as acknowledged by Mr Burt in his memorandum in reply dated 2 September 2020. I also find that the liquidators’ scale costs should be deducted by 10 per cent, as further accepted by Mr Burt at paragraph 9 of that memorandum.
11 Official Assignee v Registrar of Companies [2016] NZHC 1176.
Result
[25] I order that Mr Ross Smith, Mr Ross Smith and Ruahine Professional Trustee Company Ltd (RPTCL), as trustees of the Mohaka Capital Trust, and RPTCL as trustee of the Waitara Capital Trust, jointly and severally are to pay costs plus disbursements to Mr Ogilvy on a 2B basis (but with band C to apply to the preparation of evidence and preparation of written submissions), together with a 25 per cent uplift (i.e. a 25 per cent uplift on the sum of $34,535.35 as set out at paragraph 18 of Mr Gustafson’s memorandum of 14 August 2020).
[26] I order that Solange Kelly Mary Desire is to pay costs and disbursements on a 2B basis, jointly and severally with the parties referred to in [25] above to Mr Ogilvy (with the same adjustments made for band C in relation to preparation of evidence and written submissions) and in the sum of $34,535.35 as set out at paragraph 18 of Mr Gustafson’s memorandum dated 14 August 2020).
[27] I order that Mr Ross Smith, Mr Ross Smith and RPTCL, as trustees of the Mohaka Capital Trust, and RPTCL as the trustee of the Waitara Capital Trust, jointly and severally are to pay costs and disbursements on a 2B basis to the applicant liquidators in the sum of $22,705.00 (as set out at paragraph 9 of Mr Burt’s memorandum dated 2 September 2020), plus a 25 per cent uplift.
[28] I order that Solange Kelly Mary Desire, jointly and severally with the parties referred to in [27] above, is to pay costs on a 2B basis, plus disbursements, in the sum of $22,705 (as set out in at paragraph 9 of Mr Burt’s memorandum dated 2 September 2020), to the applicant liquidators.
Associate Judge P J Andrew
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