Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec)
[2023] NZHC 1934
•24 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-1302
[2023] NZHC 1934
UNDER s 290 of the Companies Act 1993 BETWEEN
MARYLAND BASSETT COMPANY LIMITED
Applicant
AND
TAIHE INNOVATION MANAGEMENT
LIMITED (in rec) Respondent
Hearing: On the papers Appearances:
RE Harrison KC and D Liu for the Applicant
RJ Hollyman KC and JD Ryan for the Respondent
Judgment:
24 July 2023
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
[Costs]
This judgment was delivered by me on 24 July 2023 at 4 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors/Counsel:
Heritage Law, Auckland
Claymore Partners, Auckland
RE Harrison KC, Auckland RJ Hollyman KC, Auckland
MARYLAND BASSETT CO LTD v TAIHE INNOVATION MANAGEMENT LTD [2023] NZHC 1934 [24 July 2023]
Introduction
[1] The applicant, Maryland Bassett Company Limited (Maryland), seeks indemnity costs of $54,541.55 following its successful application to set aside the statutory demand served on it by Taihe Innovation Management Limited (in receivership) (Taihe).1
[2]Indemnity costs are sought on the basis either:
(a)that there is a contractual indemnity in the deed of trust and indemnity dated 7 March 2022 (Deed) relying on r 14.6(4)(e) of the High Court Rules 2016; or
(b)that Taihe had a “hopeless case” and it acted vexatiously, frivolously, improperly and unnecessarily in opposing Maryland’s application to set aside the statutory demand, relying on r 14.6(4)(a) of the High Court Rules.
[3] In addition to costs against Taihe, Maryland seeks costs against the receivers on the basis that Taihe is insolvent, the receivers are actively participating, the receivers’ appointer has an interest in the proceeding and that it is in the interests of justice to do so.
[4] Taihe, in response, submits that the Deed forms part of a sham transaction with dishonest involvement by Maryland and so it would be contrary to public policy to allow an indemnity. Counsel for Taihe therefore submits that costs should lie where they fall or be reserved pending determination of liability. Furthermore, they say the receivers acted reasonably and no exceptional circumstances exist to make it just to award non-party costs or indemnity costs.
[5] I set out the relevant costs principles below before considering the appropriate award.
1 Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec) [2023] NZHC 801.
Relevant cost principles
[6] The starting point in any costs decision is r 14.1 of the High Court Rules which confirms that all matters relating to costs are at the court’s discretion. The discretion vested by r 14.1 is wide but must be exercised subject to the general principles in r 14.2 and the remaining costs provisions.
[7] Rule 14.6 provides for when increased or indemnity costs may be ordered and relevantly includes as follows:
14.6 Increased costs and indemnity costs
(1)Despite rules 14.2 to 14.5, the court may make an order—
(a)increasing costs otherwise payable under those rules (increased costs); or
(b)that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
(2) …
(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—
…
(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
…
…
(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
…
(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.
[8] In Bradbury v Westpac Banking Corp, the Court of Appeal summarised the principles applying to the award of indemnity costs as follows:2
We therefore endorse Goddard J’s adoption in Hedley v Kiwi Co-operative Dairies Ltd at [11] of Sheppard J’s summary in Colgate v Cussons at [24]. While recognising that 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;
(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.
[9] As the Supreme Court held in Synlait Milk Ltd v New Zealand Industrial Park Ltd, determining whether there is an entitlement to indemnity costs pursuant to a contract or deed is a matter of contractual interpretation, with ordinary principles of contractual interpretation applying.3
2 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [29] (citations omitted).
3 Synlait Milk Ltd v New Zealand Industrial Park Ltd [2020] NZSC 157, [2020] 1 NZLR 657 at [192].
[10] In ANZ Banking Group (NZ) Ltd v Gibson the Court held that a contractual obligation to pay costs on a full solicitor/client basis will be enforceable unless contrary to public policy.4
[11] Rule 14.7 provides that despite rr 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules including where the party claiming costs, although succeeding overall, has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs or where some other reason exists which justifies the court refusing costs or reducing costs despite the principle that the determination of costs should be predictable and expeditious.5
Should indemnity costs be awarded?
[12]Maryland seeks indemnity costs either pursuant to the Deed or r 14.6(4)(a).
[13] Clause 3.2 of the Deed provides an indemnity to Maryland by both Taihe and Mr Zhang, Taihe’s sole director, on the following terms:
3.2 Taihe and the Beneficiary will at all times indemnify and keep indemnified Maryland against any and all costs, claims, actions, damages, liabilities of any kind arising out of or in connection with the Loan Agreement, as well as Maryland’s enforcement or attempted enforcement of its rights and remedies under this deed.
[14] As I held in my judgment, Taihe did not challenge the authenticity of the Deed.6 Because it was an application to set aside a statutory demand, I did not need to reach a final view on whether the indemnity contained in clause 3.2 provided a basis for Maryland asserting that it had a cross demand exceeding or equal to the amount of debt that was the subject of the statutory demand. The applicant’s argument was that the indemnity applied in respect of the whole of the allegedly outstanding loan that was the subject of the statutory demand.
4 ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR 556 (CA) at 566.
5 Rules 14.7(d) and (g).
6 Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec), above n 1, at [81].
[15] The indemnity is now being relied on for legal costs in successfully applying to set aside the statutory demand in respect of the allegedly outstanding loan. For indemnity costs to be awarded on the basis of this clause, the question of whether it provides an indemnity for the allegedly outstanding loan needs to be determined as otherwise a question may remain as to whether Maryland was enforcing its rights and remedies under the Deed when seeking to set aside the statutory demand.
[16] I do not consider that I can award indemnity costs on the basis of the indemnity clause until that question is finally determined. I still consider, however, that costs other than those in reliance on the contractual indemnity ought to be determined now as that is consistent with the rules. If the contractual indemnity is found by the court at a later stage to operate as the applicant contends then the difference between the costs awarded here and indemnity costs may be sought.
What is the appropriate costs award?
[17] Counsel for Taihe set out their calculation for costs on a 2B basis as amounting to $10,994.00 plus disbursements of $1,180.00. Counsel for Maryland does not comment on this calculation in their reply, and it appears to be correct. Costs on at least this basis therefore ought to be awarded.
[18] Following the service of the statutory demand, the solicitor for Maryland wrote to the receivers attaching a copy of the Deed and asking for the statutory demand to be withdrawn. The letter closes by saying that if it is not, “costs [would] be sought against you and Taihe on an indemnity basis”.
[19] Although it comes close to being a “hopeless case”, I do not consider that Taihe’s steps to oppose the application meet the threshold for conduct described in Bradbury v Westpac Banking Corp (as set out above) because of the complication of the sham allegation. Indemnity costs are not therefore awarded.
[20] However, the existence of the Deed, the authenticity of which was not challenged, ought to have led to the withdrawal of the statutory demand at least following the filing of the application to set aside (if not earlier). The threshold for
setting aside statutory demands is low and so opposing the application in such circumstances clearly falls within r 14.6(3)(ii) and (iii) of the High Court Rules.
[21] The question is therefore what the appropriate uplift to scale costs is. As I said above, proceeding with the opposition was close to a hopeless case, especially where the authenticity of the Deed was not challenged. In these circumstances I consider that a 50 per cent uplift is appropriate.
Should costs be ordered against the receivers as non-parties?
[22] In ETB Realty Ltd v Eastlight Asset Trading No 3 Ltd Associate Judge Osbourne referred to Knight v FP Special Assets Ltd in which the High Court of Australia recognised a general category of cases in which an order for costs was appropriate against a non-party:7
General category of cases where appropriate:
That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.
[23] Maryland submits that all of the factors identified in Knight v FP Special Assets Limited militate in favour of an order for non-party costs against the receivers in this case as:
(a)Taihe’s solicitor’s letter dated 1 May 2023 (a copy of which was attached to Maryland’s costs memorandum) freely acknowledges that Taihe has no unsecured assets and the receivers’ latest report (copy also attached to memorandum) confirms that Taihe is hopelessly insolvent;
(b)the receivers instructed Claymore Partners and Bob Hollyman KC to oppose the application and one of the receivers provided an affidavit in opposition to Maryland’s application;
7 ETB Realty Ltd v Eastlight Asset Trading No 3 Ltd [2016] NZHC 609 at [29]; citing Knight v FP Special Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 at 192–193.
(c)the receivers’ appointor, Bing Guan NZ Capital No. 2 LP, has an interest in the proceeding in that any amount recovered from Maryland would be distributable to the appointor as secured creditor;
(d)the interests of justice require an order for non-party costs against the receivers because:
(i)the receivers’ latest report dated 3 March 2023 shows that the receivers’ legal fees from 5 July 2022 to 4 January 2023 totalled only $3,634.98 from which Maryland submits it can be inferred that Taihe’s legal costs are being funded by an undisclosed third party (presumably the receivers’ appointor) and it would be contrary to the interests of justice to allow the funder of the litigation to hide behind an insolvent Taihe;
(ii)no reasonable receiver who had sighted the Deed would have persisted with the statutory demand or opposed the application to set aside the demand.
[24] These factors may be present in this case but I have a concern that the receivers ought to be given a proper opportunity to respond before any costs award is made against them personally.
[25] In Easton Agriculture Ltd v Manawatu-Wanganui Regional Council, Kós J accepted that costs may be awarded against a receiver in certain circumstances and that the liability of the receiver would be as a non-party.8 The circumstances in that case are distinguishable as the relevant party had gone into receivership partway through the proceedings so the decisions in relation to the proceedings were not necessarily being made by the receivers in the same way as they were here.
[26] However, Kós J emphasised that an application on notice to the receiver is required before a costs award against them can be made.9 In that case Kós J held that
8 Easton Agriculture Ltd v Manawatu-Wanganui Regional Council HC Palmerston North CIV- 2008-454-31, 22 December 2011 at [46]–[47].
9 At [50].
such an application may have been premature as the relevant party may meet the costs award in their own right. Leave was therefore reserved to apply for costs against the receiver subsequently if appropriate.
[27] The Supreme Court referred to this decision in Haines v Memelink, where the Court of Appeal had held that the High Court had no jurisdiction to make a costs order against a non-party in the absence of a formal application.10 The Supreme Court held that the jurisdiction to award non-party costs arises through the Court’s inherent jurisdiction and the discretion afforded by r 14.1 of the High Court Rules so it was “arguable” whether the Court of Appeal in that case was correct in holding that the High Court had no jurisdiction where formal application had not been made. The Supreme Court commented however:11
… natural justice will generally require that the non-parties be given notice of the possibility of a costs order against them and be provided with an opportunity to respond.
[28] I am not satisfied in this case that adequate notice and opportunity to respond has been given to the receivers. Whilst it can be assumed that the receivers’ position has been taken into account by counsel for Taihe in its costs memorandum, there was no notice given in the application to set aside that costs would be sought against the receivers and the response to the claim for costs against the receivers is dealt with in one short paragraph in Taihe’s costs memorandum.
[29] In these circumstances I consider it is appropriate to reserve leave to Maryland to apply for non-party costs against the receivers if costs are not paid by or on behalf of Taihe.
Result
[30]I order:
(a)Taihe is to pay costs on a 2B basis with a 50 per cent uplift in the amount of $16,491.00 plus disbursements of $1,180.00; and
10 Haines v Memelink [2021] NZSC 14.
11 At [14].
(b)leave is reserved to Maryland to apply for costs against the receivers of the respondent.
Associate Judge Sussock
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