McEwan (2003) Limited HC Tauranga CIV 2005-470-407
[2007] NZHC 1936
•29 June 2007
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
CIV 2005-470-407
BETWEEN MCEWAN (2003) LIMITED Plaintiff
AND P M CAMPBELL First Defendant
AND R E CAMPBELL Second Defendant
AND C D HURLEY Third Defendant
AND D K HURLEY Fourth Defendant
Hearing: 12 June 2007 (Heard at Rotorua)
Appearances: Mr Holmes for plaintiff
Mr Brittain for Defendants
Judgment: 29 June 2007 at 10.30 a.m
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
29.06.07 at 10.30 a.m, pursuant to
Rule 540(4) of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Counsel:
Mr J M Holmes, McLean Chambers, P O Box 13110, TaurangaMr G Brittain, Harrington House, P O Box 13-473, Tauranga
MCEWAN (2003) LTD V CAMPBELL AND ORS HC TAU CIV 2005-470-407 29 June 2007
Background
[1] The plaintiff company had as its main business and asset the leasehold interest in a Motor Inn at Tauranga which it purchased from a company called Donnelly Holdings Limited. The plaintiff acquired the business in January 2003 but in the following year it found that it was not making a success of it. The plaintiff complained that it had been misled about the business. In August of that year a mediation was carried out at Tauranga. Those involved were Donnelly Holdings Limited and the defendants of the one part, and Mr McEwan, a director of the plaintiff, of the other part. The result of the mediation was that an agreement was reached whereby McEwan would sell back the business and leasehold interest in the premises to Donnelly Holdings Limited. The details of the agreement were that Donnelly Holdings Limited would pay $427,000 plus GST. It was part of the agreement that the purchase price would be met by $100,000 being paid on the date of possession with $327,000 being deferred. Donnelly Holdings Limited also had to pay interest.
[2] The agreement also contained a provision as follows:
(g) The directors of Donnelly hereby guarantee the performance of this agreement and the Agreement for Sale and Purchase by Donnelly or its Nominee.
[3] Donnelly Holdings Limited has defaulted under the mediated settlement. The plaintiff company now looks for defendants who are directors of Donnelly Holdings Limited to enforce what it says was the guarantee that they gave. The defendants dispute that they had assigned personal guarantees. Their approach is that the only parties to the agreement were the plaintiff and Donnelly Holdings Limited.
[4] In due course the plaintiff issued proceedings and they were allocated a fixture in this Court for 7 and 8 August 2006. However in July 2006 Mr McEwan as director of the plaintiff wrote to the Court. In his letter, which was dated 4 July
2006, he said that the dispute had exhausted all the resources of the company and all the personal resources of himself and his wife from whom he was now estranged.
He and his wife were the two shareholders of the company. They did not have enough money to go on with the case at that point. The letter said that if they were unable to continue with the case the McEwans would lose their life savings. An adjournment was sought and granted.
[5] One result of that letter was that counsel for the first and fourth defendants then gave notice that security for costs would be required, given what counsel described as the plaintiff’s admission that it is insolvent. Some $10,000 was specified in respect of the third and fourth defendants. Counsel, Mr Brittain, said that he would await response.
[6] On 4 October 2006 the defendants filed an application seeking security for costs. The principal ground given was as follows:
1. There is reason to believe that the plaintiff will be unable to pay the costs of the defendants if the plaintiff is unsuccessful in the plaintiff’s proceeding.
[7] It is this application which has come before me today on an opposed basis. The plaintiff in due course filed a notice of opposition to the application. Mr Holmes, who I understand drew up the notice of opposition, candidly accepted that there would be problems with the plaintiff meeting an order for costs if the plaintiff was unsuccessful in its proceedings. The plaintiff however relied on the fact that whether or not to order security, and if so, the quantum of any order, are both discretionary matters. Further, the plaintiff in its notice of opposition alleged that its impecuniosity resulted from the defendants’ actions in the proceedings.
[8] If I may say so, the concessions made by Mr Holmes are properly made and the statement of position contained in the notice of opposition seems to be well- founded.
[9] The evidence that has been filed by Mr McEwan for the plaintiff is relatively skimpy. The affidavit which Mr McEwan swore in December 2006 repeats the acknowledgement that the plaintiff would have difficulty in meeting security for costs and again asserts without particularising, that the impecuniosity of the
company was caused by the actions of the defendants. Then in paragraph four this passage appears:
4.The plaintiff company had paid the defendants for an asset, the asset was sold back to those same defendants some 18 months later, these defendants failed to pay for the asset that was sold back to them quite simply, the failure of the defendants to pay for the assets sold to them or their nominees has caused the impecuniosity of the company, and by extension each of its shareholders and myself as director.
[10] I interpolate a comment at this point that the evidence is not wholly satisfactory. Where as here a plaintiff accepts that the threshold has been reached at which the Court will normally consider making orders for security for costs, then in order to resist the making of such an order the plaintiff should provide detailed evidence as to exactly what his financial position is. That is particularly the case where inpecuniosity attributable to the actions of the defendants is alleged.
Principles
[11] In his submissions Mr Holmes made extensive reference to the decision of the Court of Appeal in A S McLachlan & Others v Mel Network Limited (2002) 16
PRNZ 747.
[12] The relevant parts of the McLachlan judgment are as follows:
[13] Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
[14] While collections of authorities such as that in the judgment of
Master Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5
PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as
contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
[17] In this case evidence and argument were directed to whether the likelihood that the McLachlan interests would be unable to meet an award of costs could be causally linked to the alleged conduct for which remedies are claimed. It is, of course, open to the Court to order security for costs whether or not such a link exists. Potter J indicated in her judgment that if she had been satisfied of the linkage, that would have justified some reduction in the amount of the security ordered. It is not entirely clear from her judgment why she found the link “has not been established”. That conclusion is preceded by a passage in which she said it is too early to tell whether the joint venture was not viable or whether Network acted to the detriment of the McLachlan interests. This suggests that the link was not established because the McLachlan interests had not shown that their claims are sustainable. If that is what was intended, linkage could not be established until after trial and investigation on an application for security would be pointless.
Applicant’s submissions
[13] The defendants’ submitted that the threshold of reasonable belief, that the plaintiff will be unable to pay the costs of the defendants if the plaintiff is unsuccessful, has been meet in the case given the letter to the Court to which I have made reference above. The defendants’ pointed out that in McLachlan the Court said that there may be cases where ordering security will in effect prevent the plaintiff from pursuing the claim.
[14] The defendants referred to the fact that while ordering security for costs may have the effect of preventing a plaintiff from bringing its claim, the interests of the defendants also have to be considered. They must be protected against being drawn in to unjustified litigation particularly where it is overcomplicated and unnecessarily protracted.
[15] The defendants also referred to the other relevant factors identified in
McLachlan as including the extent to which impecuniosity of the plaintiff has been
caused by the defendants, whether there has been any delay, and the merits and prospects of success of the claim.
[16] As to the first matter, the plaintiff said that the affidavit filed by Mr McEwan was consistent with the letter that he wrote to the Registrar. There has been no attempt to suggest a way in which the company would be able to pay costs if it was unsuccessful. No undertakings for example had been given by a related party.
[17] On the merits of the case the defendant said the case was not strong because there was no written memorandum which is required if a personal guarantee is to be enforceable by virtue of the provisions of section 2 of the Contracts Enforcement Act
1956. The defendants pointed to the fact that the settlement agreement was signed by one person only and that person, the first defendant, said she was signing on behalf of the company. The point was made that where all the defendants but one were present, then one would have expected that they would all personally have signed the guarantee if that was intended to be the case, rather than leaving matters on the basis that one defendant signed on their behalf.
[18] The defendants resisted the suggestion that their actions had resulted in the inpecuniosity of the defendants. The point was made that it was the original sale by the company Donnelly Holdings Limited which had caused the plaintiff all its problems. The claim against the defendants was not based upon any misrepresentation of turnover or breach of turnover warranties relating to the business of the hotel; they were being pursued on the basis of an alleged guarantee.
[19] The defendants were critical of the way in which the proceedings had been conducted. This was clearly a case where evidence would be required to be heard and yet the plaintiff had applied for summary judgment which the defendants said was inappropriate and unlikely to succeed and simply added to the costs of the case.
[20] The defendants said the estimated duration of the trial was two days, and the amount that was being claimed was $327,000. To date the first and second defendants have paid in excess of $22,000 by way of solicitor/client costs and the costs of the third and fourth defendants were likely to be about the same. As against
that, the first and second defendants would only recover a figure of around about
$16,000 on a 2B basis if they were successful. The defendants submitted that an award of security for costs should be made. That would be in the vicinity of $20,000 for each defendant for a total of $80,000.
Respondents submissions
[21] The Respondent, responsibly in my view, accepted that the threshold has been reached where the Court has discretion to make an order. The Respondent submits, however, that in the exercise of my discretion I ought not to make one.
[22] Mr Holmes particularly emphasised the passage set out at [15] in McLachlan which was concerned with preventing access to the Courts for a genuine plaintiff being something that is not lightly contemplated.
[23] Mr Holmes submitted that even although the evidence of the financial circumstances of the plaintiff was limited, it was quite obvious that the plaintiff company had had no other asset other than the business and then subsequently that was converted into a claim against Donnelly Holdings Limited and the defendants from whom the sum of $327,000 was claimed. Mr Homes submitted that it would be impossible for the plaintiff to meet any order for security for costs and successfully prosecute the claim against the defendants.
Matters relevant to exercise of discretion in this case
[24] I consider that this is a case where security for costs should be ordered. The defendants are clearly exposed in the event that the plaintiff fails. The plaintiff has no other assets.
[25] I accept that a two-day trial is not at the upper end of trial length. This is relevant to the question of how expensive the proceedings are going to be. But at the least one can see the defendants having to significantly increase the amount of money that they contribute for legal costs.
[26] I accept that if an order for security for costs is made then there is a risk that the plaintiff will be prevented from bringing its claim. But that depends upon the level at which the order is set. It cannot be overlooked that $100,000 was actually obtained under the settlement agreement. I find it unlikely that that fund will have been entirely dissipated. I accept that some of that money may have been expended by the plaintiff retaining its own legal advisers. I am handicapped from coming to any further conclusions because of the lack of evidence from the plaintiff.
[27] I agree that there is some merit to the criticisms that the defendants make in respect of the strength of the plaintiff’s case. Suing on an alleged personal guarantee in the circumstances as I have outlined them it is not going to be easy. That is all I will say about the matter. It is difficult to come to any concluded view about the strength of the case on the limited material that I have available to me.
[28] I also accept that the plaintiff’s decision to apply for summary judgment does not seem to have been a particularly wise one given the nature of the claim in the proceedings. It must have added to the expense that the defendants incurred and at the same time reduced the funds available to the plaintiff – all this in the circumstances where the application would seem to have little chance of success.
[29] Both parties accept that the amount of security that I award is discretionary. In my view an order requiring payment of security of $10,000 should be made in favour of each of the defendants. I also determine that the proceedings should be stayed until such time as the security has been given. I do not think it is necessary to make any detailed orders as to the form of security, whether by way of payment of cash to the Registrar or by other means.
Costs
[30] The defendants seek costs of and incidental to this application and I agree that they should be paid by the plaintiff on a 2B basis.
J.P. Doogue
Associate Judge
0
0
1