Mason and Meltzer as Liquidators of Global Print Strategies Limited (in liq) v Lewis HC Auckland CIV 2003-404-936

[2011] NZHC 1323

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2003-404-936

BETWEEN  KAREN BETTY MASON AND JEFFREY PHILIP MELTZER AS LIQUIDATORS

OF GLOBAL PRINT STRATEGIES LMIITED (IN LIQUIDATION) Plaintiffs

ANDCONWAY LEWIS First Defendant

ANDJOHANNA LEWIS Second Defendant

Hearing:         12 May 2011

Appearances: C A Murphy for Plaintiffs

P J Davey for Defendants

Judgment:      22 July 2011 at 3:00 PM

JUDGMENT OF KEANE J

This judgment was delivered by  on 22 July 2011 at 3pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/ Deputy Registrar

Date:

Solicitors:

Shieff Angland, Auckland for Plaintiffs

Gill Coutts & Co., Auckland for Defendants

Copy to

P J Davey, Barrister, Auckland

KAREN BETTY MASON AND JEFFREY PHILIP MELTZER AS LIQUIDATORS OF GLOBAL PRINT STRATEGIES LMIITED (IN LIQUIDATION) V CONWAY LEWIS HC AK CIV 2003-404-936 22 July 2011

[1]      Karen Mason and Jeffrey Meltzer, the liquidators of Global Print Strategies Limited (in liquidation), have the benefit of two decisions of the Court of Appeal that are adverse to Mr and Mrs Lewis, Global's erstwhile shareholders and directors.

[2]      In the first decision, dated 30 March 2006, the Court of Appeal held Mr and

Mrs Lewis liable to compensate Global for reckless trading.1 In the second, dated 20

July 2009, it held them liable to compensate Global to the extent of $560,000, the outer limit of their liability that it had identified in its first decision.2

[3]      The liquidators seek, first, a final charging order over the shares Mr and Mrs Lewis hold in Rocon Printing Company Limited.  Mr and Mrs Lewis no longer contest that order as long as the liquidators accept, as they do, that if the liquidators do apply for an order for sale of those shares, relying on the charge, they must do so on notice and in the order they seek recognise the pre-emptive rights to take up those shares given by Rocon's constitution to Mr and Mrs Lewis's two daughters.

[4]      The liquidators seek, secondly, an award of costs on the two judgments of this Court that were aside by the Court of Appeal: an award of scale 2B costs on the judgment as to liability given by Salmon J on 25 November 2004,3 in which he had found that Mr and Mrs Lewis had not traded recklessly; and an award of increased costs on the judgment concerning quantum given by Stevens J on 1 October 2008, in which he had awarded compensation to Global, in excess of the $560,000 cap,

$1.26M.4

[5]      Salmon J has retired and Stevens J is now a member of the Court of Appeal. The decision as to the costs to which the liquidators are entitled in each instance,

therefore, falls to me.

1      Mason & Meltzer v Lewis CA267/04, 30 March 2006.

2      Lewis v Mason & Meltzer [2009] NZCA 306.

3      Mason & Meltzer v Lewis HC Auckland M459/IM03, 25 November 2004.

4      Mason & Meltzer v Lewis HC Auckland CIV 2003-404-0936, 1 October 2008.

Costs on first decision

[6]      In his decision, dated 25 November 2004, Salmon J, having found, contrary to the liquidators' claim for compensation on behalf of Global, that Mr and Mrs Lewis had not consciously traded recklessly, disallowed the liquidators' claim and awarded scale 2B costs to Mr and Mrs Lewis. He left costs to be resolved by agreement but said that he would make an award if they could not be agreed. Costs were not agreed but the Judge was never invited to make an award.

[7]      Instead, the liquidators succeeded in having the Judge's decision set aside by the Court of Appeal. That Court held that this was 'a paradigm case of reckless trading',5 and would have fixed the compensation payable had the liquidators' pleadings and evidence been adequate. Speaking of the extent to which both were deficient, the Court said:6

what was before the High Court was misleading, we do not know what the size of the pool of unmet debts created by the directors’ actions is, and the status of secured creditors is problematical. Further evidence is required on these matters, and fairness to unsecured creditors, as well as Commercial Factors, requires further evidential investigation.

[8]      The Court of Appeal remitted quantum to this Court on confined terms, its intent being to ensure that only quantum was in issue; and in doing so it also set an outer limit to Mr and Mrs Lewis's liability. It said this:7

While there are still unknown factors, it is difficult to see how the Lewises contribution, either to the company or to the creditors, could be less than a minimum of $100,000. At the other extreme, it would be inappropriate for them to be held liable for more than $560,000. That was the sum sought by the liquidators on the appeal before us.

[9]      As well as remitting the quantum issue to this Court, the Court of Appeal set aside Salmon J's costs order. Costs in this Court, it held, both as to liability and quantum, were to be fixed by the Judge who decided quantum. The liquidators did

obtain costs on the appeal itself. Once, therefore, Stevens J had decided the quantum

5      Mason & Meltzer v Lewis CA267/04, 30 March 2006 at [76].

6 At [106].

7 At [123].

issue the liquidators invited him to fix costs on both decisions in this Court.   His appointment to the Court of Appeal intervened.

[10]     The scale 2B award that the liquidators seek as to the liability hearing, for

$32,422.50, assumes daily rate of $1,300 or $1,450, depending on the date of the cost event. They claim $6,875.88 disbursements. Mr and Mrs Lewis do not contest the liquidators right to that award, given the outcome in the Court of Appeal. They do  put  in  issue  the  liquidators'  claim  to  costs  in  respect  of  an  application  for particular discovery and the issue of a third party notice, $1,504. That application, Mr and Mrs Lewis say, was the subject of a Master's award on 24 February 2004.

[11]     The costs award that Mr and Mrs Lewis conceded they cannot oppose, I agree, is the proper award to make. The liquidators are entitled, I consider, to an award of costs of $30,918.50 and $6,875.88 disbursements.

Costs on quantum decision

[12]     On the quantum decision, relying on their overall success as to quantum as well as liability, the liquidators seek an award of increased costs at twice what they calculate to be the scale 2B award, $34,640, that is to say $85,280, and $14,317 disbursements.

[13]     An award of increased costs, the liquidators contend, is justified for two reasons, the first of which is that after the first Court of Appeal decision and before the quantum hearing, Mr and Mrs Lewis rejected a Calderbank offer made on 5

September 2006 in which the liquidators offered to settle for compensation at the outer limit the Court of Appeal had recognised, $560,000. (In a ruling given on 4

April 20078 Harrison J had expressed the opinion that the $560,000 cap was no more

than a discretionary guide; thus the liquidators intended at the quantum hearing to claim $1.5M compensation.)

[14]     Secondly, the liquidators say, at the quantum hearing Mr and Mrs Lewis widened  the  issues  beyond  those  stipulated  by  the  Court  of Appeal,  they  were

8      Mason & Meltzer v Lewis HC Auckland CIV 2003-404-000936, 4 April 2007.

obdurate, uncooperative and evasive; and, as well as lengthening the hearing in those ways, caused an adjournment when they made late discovery. A case that should have taken two days took five.

[15]     Mr and Mrs Lewis do not contest the liquidators receiving a scale 2B award, but within a more confined focus. They resist any increased award. The Calderbank letter, they contend, was not a genuine offer in settlement. The liquidators invited them to pay the entire sum the Court of Appeal, in its first decision, had stated was at their outer level limit of liability. Their belief then was that their liability was less than the capped amount. There was no advantage to them in the offer.

[16]     The hearing took the form and length that it did, Mr and Mrs Lewis say, only because the liquidators pressed for a sum considerably in excess of the outer limit of the claim they had made before the Court of Appeal at the first hearing, the claim that  the  Court  recognised  as  marking  the  outer  limit  of  their  liability.  It  is  no accident, they say, that in its decision on costs, after its second decision, the Court of Appeal declined the liquidators any award.9

Costs principles

[17]     The paramount principle is that costs lie within the discretion of the Court.10

The usual principle is, however, that 'the party who fails with respect to a proceeding

... should pay costs to the party who succeeds'.11  That principle will apply unless

'although the party claiming costs has succeeded overall, that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs'.12 Whether that is so is to be assessed in broad terms.13

[18]     In Holdfast NZ Ltd v Selleys Pty Ltd14  the Court of Appeal held that any award of increased costs must be calculated not as a percentage of the actual costs

9      Lewis v Mason & Meltzer [2009] NZCA 449.

10     HCR 14.1.

11     HCR 14.2(a).

12     HCR 14.7(d).

13     Packing Inn Limited (in liq) formerly known as Bond Cargo Limited v Chilcott (2003) 16 PRNZ

869 (CA) at [5].

14     Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 at [41] - [43].

incurred by the successful party but by way of an uplift from scale costs. That uplift, the Court said, should rarely, if ever, exceed 50 percent of scale. It concluded:15

Where increased costs (as opposed to indemnity costs) are being considered, the focus remains on the notional solicitor or counsel appropriate for the category of proceedings, not the actual solicitor or counsel involved or the costs actually incurred by the party claiming costs.

[19]     As to an award of increased costs relying on a Calderbank letter, the first of the grounds on which the liquidators rely, the Court of Appeal held in Moore v McNabb16  that a Calderbank letter must serve the policy justifying costs awards on the basis of such letters. Such letters, the Court said, enable a litigant faced with the risk and sometimes potentially ruinous cost of litigation, to bring it to an end by a reasonable offer of settlement; an offer that can sound in costs if it is not accepted and the offer is vindicated in the outcome.

[20]     Inherent in that policy is that the offer made must be reasonable. It must offer to the party to whom it is addressed a genuine incentive to settle. There must some real advantage in the offer to that party. If the offer is no more than an invitation to capitulate, it will not serve the purposes of the policy.

Calderbank letter

[21]     In its decision declining the liquidators' costs on the second appeal the Court of Appeal treated as decisive the fact that the liquidators had pursued at the quantum hearing a sum in excess of the $560,000 outer limit of liability that the Court had identified in its first decision.

[22]     Speaking of the Calderbank letter, the Court said this:17

In respect of the respondents’ position, the Calderbank letter was, given our finding  as  to  the  liability  cap  from  the  first  judgment  of  this  Court, effectively an offer to settle for the full amount of their claim plus costs. When it was turned down, the respondent argued (successfully in the High Court) that the $560,000 figure set by this Court was not a cap, and that it was open to them to claim a greater amount. Ultimately, their strategy of

15 At [48].

16     Moore v McNabb (2005) 18 PRNZ 127 at [56].

pursuing an amount in excess of $560,000 proved to be unsuccessful in this

Court.

[23]     Though the Court does not say so in terms, it can only be saying that the letter was not a true Calderbank letter. In the letter the liquidators offered Mr and Mrs Lewis no real inducement to settle. The  liquidators invited them to capitulate and  pay the  full  sum  claimed  at  the first  Court  of Appeal  hearing,  against  the prospect that the claim would increase very significantly at the quantum hearing. Unsurprisingly the liquidators' offer was rejected.

Conduct of quantum hearing

[24]     As to the quantum hearing itself, the liquidators begin with the advantage that Stevens J clearly considered that, in the conduct of their defence, Mr and Mrs Lewis increased considerably the length of the hearing in the various ways the liquidators speak of. His judgment is replete with findings to that effect.

[25]     Those findings assume, however, that the liquidators were entitled, just as Harrison J had intimated in his earlier ruling, to pursue compensation well in excess of the $560,000 cap the Court of Appeal had identified in its first decision. Those findings assume equally that the strictures the Court of Appeal imposed as to the quantum hearing still applied to Mr and Mrs Lewis, though the cap was no more than a discretionary guide.

[26]     The premise on which those findings rest, however, as the Court of Appeal held in its second decision, reducing the liability of Mr and Mrs Lewis to the capped amount, was incorrect. The Court said this:18

... the terms on which this Court remitted the matter to the High Court included a stipulation that the liability of the Lewises was not to exceed

$560,000. That was a condition on which the case was remitted... .

[27]     Furthermore, the Court, in its second decision, as well as in its first, was critical of the liquidators' pleadings and  evidence at the original hearing before Salmon  J,  which  concerned  quantum  as  well  as  liability.  The  further  quantum

hearing was, the Court said, an 'indulgence'.19  It enabled the liquidators to 'call further quantum evidence and to patch up their pleadings'. Though the liquidators succeeded on the appeal in sustaining their claim up to the capped amount, that too proved to stand in the way of their claim for costs on the second appeal.

[28]     Once,  therefore,  the  liquidators  sought  both  before  and  at  the  quantum hearing to fix Mr and Mrs Lewis with a higher liability than the capped amount (a compensation claim for 70 percent of a $2.1M debt to the creditor pool), that hearing assumed a scale and character not anticipated by the Court of Appeal. In that climate, it is unsurprising that Mr and Mrs Lewis set out to test the proofs of debt to the extent they did.

[29]     I must still if I can, of course, reflect in the award to be made Stevens J's conclusions that Mr and Mrs Lewis were not merely too active in their defence, they were obdurate, unhelpful and evasive. But as I was not the trial Judge, I am not able to assess safely whether in those ways Mr and Mrs Lewis increased the cost of the hearing beyond that inherent in the liquidators' enlarged claim.

[30]     The upshot is that I am unable to uphold the liquidators' application for an award of costs in excess of scale. Standing in the way of any such award, ultimately, is the second decision of the Court of Appeal and its related costs decision. The scale

2B calculation the liquidators make, moreover, cannot in one respect be reconciled with either of those decisions.

[31]     The liquidators' claim for the hearing before Harrison J concerning their right to claim compensation in excess of the capped amount. Though Harrison J intimated that the liquidators were entitled to do so, and that the cap was no more than a discretionary guide, the Court of Appeal's second decision deprived them of the benefit of that decision. Their calculation must be reduced by $2,000 to $32,640.

[32]     As against that, the liquidators are entitled to be compensated in the award for the time wasted by Mr and Mrs Lewis making late discovery; an issue that only emerged at about 11.45 am on the fourth day of the quantum hearing, when Mr

Lewis's brother relied on undiscovered company documents recorded on five disks. That issue led Stevens J to adjourn the hearing for a week, when the evidence was completed within a day and submissions occupied half the following day.

[33]     The documents discovered late appear to have been relevant and, had they been discovered in a timely way, would have called for review. The time wasted therefore, I consider, as Mr and Mrs Lewis say, was half to three quarters of the Thursday when that became the focus.

[34]     One way to compensate the liquidators for that, as they say, may be to award them twice the preparation time for the additional hearing, though I question whether it was truly additional. Another way may be to allow the liquidators three quarters of the daily rate for the day lost regardless of their entitlement to the rate for that day anyway. They should have, I consider, whichever is the higher. I leave that to counsel to fix.

Order and award

[35]     The liquidators are, I hold, entitled unopposed to a final charging order over the shares of Mr and Mrs Lewis in Rocon Printing Company Limited. I make that order on the express basis that, if the liquidators, relying on that final order, apply for an order for sale of the shares, that is to be on notice and their order is to recognise the rights of pre-emption given Mr and Mrs Lewis's daughters by the Rocon constitution.

[36]     The  liquidators  will  have  scale  2B  costs  on  the  liability  judgment,

$30,918.50, and $6,875.88 disbursements. They will have scale 2B costs on the quantum judgment, $32,640, subject to any increase to which they may be entitled in terms of para [34] of this decision. If there is any issue between counsel as to that

calculation, it is to be resolved by the Registrar.

P.J. Keane J