Marr v Jollands
[2016] NZHC 1748
•25 July 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-003217 [2016] NZHC 1748
BETWEEN SEAN COLIN MARR AND TANIA
TROWBRIDGE Plaintiffs
AND
PETER REGINAL JOLLANDS and CATHERINE JANE JOLLANDS Defendants
Hearing: On the papers Judgment:
25 July 2016
JUDGMENT OF COURTNEY J
MARR & OR v JOLLANDS [2016] NZHC 1748 [25 July 2016]
Summary
[1] The plaintiffs were the assignees of a general security agreement (GSA) granted by TSL International Nelson Ltd (in liquidation). The defendants are the liquidators of TSL International. The liquidators conducted the liquidation on the basis that the security had been surrendered, despite having been advised that the plaintiffs held an assignment of it. The plaintiffs commenced this proceeding seeking an order that they be entitled to withdraw any surrender and rely on the
security.1
[2] The dispute was settled late last year, with consent orders providing for the GSA to be reinstated. The plaintiffs seek indemnity or increased costs against the liquidators, saying the liquidators pursued a defence that lacked merit, failed without reasonable justification to accept the plaintiffs’ legal argument until substantial costs had already been incurred and acted vexatiously, frivolously and unnecessarily. They also submit that the defendants should not be able to deduct the costs and expenses relating to the liquidation from the company’s assets.
[3] The liquidators say that costs on a 2A basis only should be permitted. As to the costs and expenses of the liquidation they maintain that they should be entitled to deduct those from the company’s assets either entirely or, at least, up to September
2014, when the plaintiffs’ solicitors wrote making demand for payment under the
GSA.
Background
[4] The defendants were appointed as liquidators of TSL International and another company in the same group on 19 December 2013 following the sale of the group (one of the terms of the sale was that the companies were to stop trading).
[5] TSL International had lending facilities with Westpac secured by a GSA over its assets and a personal guarantee from the plaintiffs. Within a day or so of being appointed the liquidators gave Westpac notice under s 305(8) of the Companies Act
1993 requiring it to elect which powers it wished to exercise. Westpac failed to
1 Companies Act 1993, s 305(10).
respond and, by virtue of s 305(9), was taken to have surrendered the charge to the liquidator for the general benefit of creditors. The liquidators proceeded on this basis. In early 2014 Westpac made demand on TSL International and when payment was not forthcoming made demand on the plaintiffs under the guarantee.
[6] The plaintiffs settled their liability with Westpac for $238,011.33 and on
7 March 2014 took an assignment from Westpac of its rights under the GSA. On
14 March 2014 the plaintiffs advised the liquidators saying:
Attached is GSA from Westpac to Myself and my ex wife. Can you please update as the amount of funds received and when I can expect a payment please.
[7] The liquidators responded:
….Not sure as yet as I am still dealing with Mercer. In this regard, could you please advise as matter of urgency the date on which you signed the Amending Agreement. The one I have is undated.
[8] On 11 April the plaintiffs replied:
As you know I have repaid Westpac from my personal funds and now hold the GSA over the company.
I am concerned that there has not yet been any payment from by liquidators to me as a secured creditor. …
I would like an explanation as to what has happened to the money that you have collected and when I can expect payment of amounts owing to me. …
[9] In that letter the plaintiffs also expressed concern at the (in their view) pointless proceedings that the liquidators had undertaken. The liquidators did not respond. In their second report dated 17 July 2014 the liquidators referred to Westpac as being the only secured creditor, with no mention of the plaintiffs’ interest.
[10] In September 2014 the plaintiffs’ solicitors wrote making demand for payment of the secured funds. The liquidators responded, expressing doubt for the first time about the validity of the Deed of Assignment and advising that, in any event, the GSA had been surrendered. A short time afterwards Westpac provided a further Deed of Assignment in relation to any residual interest Westpac may have had in the GSA to address the concerns raised by the liquidators.
[11] In November 2014 the liquidators’ solicitors wrote, declining to accept that the debt owed to Westpac had in fact been assigned without seeing further evidence, expressing doubt as to whether a court would exercise its discretion to allow the plaintiffs to withdraw the surrender and raising questions about the jurisdictional reach of s 305(10), which appeared to operate only prior to the security being realised. Finally, the liquidators’ position was that if reinstatement of the security were to be granted it would have to be on the basis that all costs and expenses, including the liquidators’ remuneration, together with the costs and expenses in considering the matter, should take priority over the secured claim. This proposal was unacceptable to the plaintiffs, who issued the present proceedings in December
2014.
Costs
Relevant principles
[12] The successful party is, as a general rule, entitled to costs in a proceeding determined by reference to the appropriate daily rate and the time considered reasonable for the step.2
[13] Increased and indemnity costs may be awarded in specific circumstances:3
(3) The Court may order a party to pay increased costs if –
…
(b) the party opposing the costs has contributed unnecessarily to the time or expense of the proceeding or step in it by –
…
(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
…
(4) The Court may order a party to pay indemnity costs if –
2 High Court Rules, r 14.2(2).
3 High Court Rules, r 14.6(3) and (4).
(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or …
[14] The circumstances warranting increased or indemnity costs were described by the Court of Appeal in Bradbury v Westpac Banking Corp:4
[27] The distinction among our three broad approaches – standard scale costs, increased costs and indemnity costs – may be summarised broadly:
(a) standard scale applies by default where cause is not shown to depart from it;
(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.
…
[29] We therefore endorse Goddard J’s adoption in Hedley v Kiwi Co- operative Dairies Ltd (2002) 16 PRNZ 694 at [11] of Sheppard J’s summary in Colgate v Cussons at [24]. While recognising the categories in respect of which the discretion may be exercised are not closed (see r 14.6(4)(f)), it listed the following circumstances 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 for 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 by French J’s “hopeless case” test.
[30] Each of these concerns conduct which would fall within r 14.6(4). A sixth instance given by Sheppard J, imprudent refusal of an offer of compromise, does not fall under the indemnity costs rule but may justify increased costs under r 14.6(3)(b), (c).
[15] The circumstances in which this matter arose seem to have been caused initially by Westpac’s failure to respond to the liquidators’ s 305 notice rather than any fault on the part of the plaintiffs or the liquidators. However, from the time the liquidators received the plaintiffs’ advice on 14 March 2014 that they held the GSA, they ought to have been alerted to the fact that there was a potential problem. At the least, had they advised the plaintiffs that they regarded the security as having been surrendered as a result of Westpac’s failure to make an election under s 305(1) the plaintiffs could have taken steps under s 305(10) before the liquidation proceeded any further.
[16] Mr Jollands, one of the liquidators, provided an affidavit in relation to the costs issue but gave no explanation for the failure of the liquidators to respond to the plaintiffs’ March and April 2014 correspondence. He simply said, rather disingenuously in my view, that neither the plaintiffs nor their solicitors asked him to cease incurring further costs and expenses. Not only does this fail entirely to deal with the real problem, which was the liquidators’ failure to advise the plaintiffs of the position, but it is clear from the plaintiffs’ 11 April 2014 letter that they were not happy at the costs being incurred.
[17] Ordinarily I would consider this proceeding to be categorised 2B. I consider, however, that the liquidators’ conduct falls within r 14.6(3) as having contributed unnecessarily to the time and expense of the proceeding by failing, without reasonable justification, to admit the existence of the plaintiffs’ interest and to deal with the issue in a responsible manner. An uplift of 50 per cent from the 2B scale that would otherwise be appropriate ought to be imposed.
[18] The plaintiffs’ quantification of time spent seems reasonable. They have reduced costs for preparing submissions for trial to recognise that the trial did not proceed and claimed one day for preparing costs submissions. In other respects their claimed costs correspond with the 2B time schedule. Considering the late stage at which the issue was settled, this does not seem out of the ordinary.
[19] The liquidators relied on the approach taken in Commissioner of Inland Revenue v NorthShore Taverns Ltd (in liquidation, in which a secured party had given notice of its intention to rely on its security at a very late stage.5 Associate Judge Hole said:
[38] If SDL had lodged a claim as a secured creditor, then it could have taken steps to realise its security. The liquidators would have been obliged to take no further steps in the liquidation until that had occurred. Because the liquidators were unaware that SDL was to claim as a secured creditor, they continued to act in the liquidation of the company and have incurred costs and expenses. They consider that those costs and expenses should be paid in priority to the claim by SDL and they consider that SDL is estopped from denying payment of their reasonably incurred liquidation costs expenses.
…
[40] Normally, of course, a liquidator would not incur costs and expenses until after the claim of any secured creditor has been met. In this case, initially because the liquidators were unaware of any secured interest, costs and expenses were incurred. By 25 September 2007, at the latest, the liquidators became aware that the Westpac loan had been repaid by SDL and that accordingly SDL might be entitled to subrogation. I doubt that it can be seriously argued that the liquidators are estopped either by representation or conduct from their claim for costs and expenses up to 25 September 2007. SDL had clearly represented that it was an unsecured creditor and the liquidators had no knowledge to the contrary until 11 September 2007 at the earliest. The position after the liquidators became aware of SDL’s true position is different. The liquidators, having the usual degree of skill and care implicit in their office, needed to be careful not to prejudice SDL’s position as to a possible secured creditor.
[20] While the approach taken in the NorthShore Taverns case is undoubtedly correct, the factual position here is different. For the reasons I have already discussed, the liquidators were on notice by 14 March 2014 that the plaintiffs were relying on the GSA and should have advised then that the liquidation was proceeding on the basis that the security had been surrendered. Had they done so the protracted dispute which took more than a year to resolve could have been avoided entirely. Taking the same approach as the NorthShore Tavern case but applying it to the present circumstances I consider that the liquidators are only entitled to deduct from
the company’s assts the costs and expenses of the liquidation prior to 14 March 2014 and subsequent to payment (if payment is made) of the secured debt.
Result
[21] The plaintiffs are entitled to costs on a 2B basis as per their calculation but uplifted by 50 per cent.
[22] The costs and expenses of the liquidation are to be paid from the assets of the company but are limited to those incurred before 14 March 2014 and after the date of
payment (if payment is made) of the secured debt.
P Courtney J
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