McNaughton v Miller
[2021] NZHC 2688
•8 October 2021
IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE
CIV-2021-435-01
[2021] NZHC 2688
BETWEEN RICHARD MCNAUGHTON
Plaintiff
AND
RODNEY MILLER
First Defendant
AARON SLIGHT
Second Defendant (Discontinued)RIGG ZSCHOKKE LIMITED
Third Defendant (Discontinued)GARY KAYE
Fourth DefendantTAVERNER KEYS & CO
Fifth Defendant
Hearing: 15 September 2021 Appearances:
Plaintiff in person
D Bleier for first defendant
V Wethey for fourth defendant J Forrest for fifth defendant
Judgment:
8 October 2021
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] In this proceeding the plaintiff, Mr Richard McNaughton, is suing the first, fourth and fifth defendants, Mr Rodney Miller, Mr Gary Kaye and Taverner Keys &
MCNAUGHTON v MILLER [2021] NZHC 2688 [8 October 2021]
Co, in connection with a transaction that took place in mid-2017 whereby he or his interests acquired from Mr Miller or his interests a Masterton plumbing and drain laying business. Originally, Mr McNaughton was suing two other parties, cited as the second and third defendants, but he has since discontinued his claims against them.
[2] Mr McNaughton’s statement of claim which, although headed “First Amended Statement of Claim” is, I am informed, the third iteration of that document, is not especially easy to follow. It is irregular in a number of respects, an example being that the pleaded causes of action are not each followed by a prayer for relief. Rather, there is one omnibus prayer for relief. As a result, it is difficult to discern what relief is being claimed against which defendants on what grounds.
[3] In any event, Mr McNaughton pleads at least five causes of action that include allegations of breach of contract, breach of the Fair Trading Act 1986, negligent misstatement, fraud, conspiracy and promissory estoppel. He is seeking substantial damages of an amount over $5,984,000.
[4] At the heart of his claim is an allegation that certain forward orders included in the material provided to him prior to entering into the agreement for sale and purchase of the business, which were presented as demonstrating the health of the business and on which he relied, turned out to be under quoted; he alleges that as a consequence the company he incorporated to acquire the business did not make the projected profit and that this lead to its demise. On that basis, he claims the profit that he says the company should have made on these projects and consequential losses including profits the company would have made in the future had it not failed.
The current application
[5] The three continuing defendant applicants have all applied for orders for security for costs.
[6] By the time their applications were heard these had been refined so that each of them sought $75,000 by way of security and proposed that in each case security is staggered, with
(a)$25,000 ($75,000 in total) to be paid within five working days of any order;
(b)$20,000 ($60,000 in total) to be paid after the first case management conference; and
(c)$30,000 ($90,000 in total) to be paid following the service of the plaintiff’s briefs of evidence.
Analysis
[7] Security for costs is governed by r 5.45 of the High Court Rules which provides as follows:
5.45 Order for security of costs
(1)Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—
(a)that a plaintiff—
(i)is resident out of New Zealand; or
(ii)is a corporation incorporated outside New Zealand; or
(iii)is a subsidiary (within the meaning of section 5 of the Companies Act 1993) of a corporation incorporated outside New Zealand; or
(b)that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.
(2)A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.
(3)An order under subclause (2)—
(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—
(i)by paying that sum into court; or
(ii)by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and
(b)may stay the proceeding until the sum is paid or the security given.
(4)A Judge may treat a plaintiff as being resident out of New Zealand even though the plaintiff is temporarily resident in New Zealand.
(5)A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.
(6)References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.
[8] Applying r 5.45 to the circumstances of particular cases is always difficult. It involves balancing the interests of a plaintiff or other claimant to pursue his, her or its claim against the interests of a defendant or other respondent not to be subjected to unreasonable risks in connection with costs.
[9] The essential questions that the Court must address in relation to any application are:
(a)whether the applicant can establish that the threshold test in r 5.45(1) is met;
(b)whether, in all the circumstances, it is just to make an order by reference to the test set out in r 5.45(2); and
(c)if so, the form that the order should take.
[10] Once the Court is satisfied that the threshold test is met, and is considering whether an order should be made, it must consider such factors as:
(a)the apparent strengths and weaknesses of the case;
(b)whether, if the plaintiff is impecunious, this has been brought about by the very circumstances on which he relies in his claim; and
(c)any delay on the part of the applicant for security which the Court regards as counting against his, her or its application.
[11] Over and above these general considerations which arise in virtually every case, a wide range of further considerations arise, bearing in mind the obligation in r 5.45(2) for the Court has to consider all the circumstances of the case in determining whether it is just to make an order.
[12] The argument in this case did not focus in any concentrated way on the merits of the claim. To the extent that I have had an opportunity to form any impression, it is not obvious to me that Mr McNaughton’s claim is a strong one. This is essentially because the damages he is claiming are largely consequential. This, in my assessment, is likely to give rise to remoteness issues. I need say no more than that at this stage.
[13] Although Mr McNaughton did not emphasise this, there is no doubt that he would say that his financial position has been brought about by the actions of the defendants, though the tentative view I have reached as to the merits of his claim does somewhat blunt the force of that point.
[14] The proceeding is at a relatively early stage and it was not suggested by Mr McNaughton that there has been any delay on the part of the defendant applicants which should count against them in this application.
[15] Although Mr McNaughton assiduously filed detailed notices of opposition to each of the applications before the Court, and submissions responding to the submissions filed on behalf of each of the defendant applicants, when the matter came for hearing he made a number of responsible and very important concessions, and his argument was a model of succinctness.
[16]Essentially:
(a)He accepted that he could not resist the contention advanced by the three applicants that the threshold test was met.
(b)Nor did he resist the contention that the applicants were prima facie entitled to orders for security for costs.
(c)Although I understood him to be inviting the Court to consider whether the amount being claimed was excessive, he did not develop an argument suggesting that any order should be for any particular amount.
(d)He was frank in saying that an order requiring him to provide substantial security for costs in cash at this stage would effectively prevent him from prosecuting his claim, and he submitted — quite correctly in my view — that the Court should have regard to that in making an assessment as to how to deal with this matter.
(e)Finally, he drew my attention to his evidence to the effect that he has an equitable interest in a property registered in his parents’ name at 48a Pownall Street, and invited the Court to consider making an order granting a charge over that property by way of security. I enquired of Mr McNaughton as to whether his parents would, as the registered owners of the property, consent to the granting of a mortgage security over it and he indicated that they would. I also asked him whether there was sufficient equity in the property to cover the security being sought by the defendants and he pointed to the most recent valuation, which indicates that there was.
[17] Having regard to the position taken by Mr McNaughton, I do not see that it is necessary to burden the parties with a lengthy judgment.
[18] The view I have reached is that the first, fourth and fifth defendants are entitled to an order for security for costs.
[19] As to quantum, I accept the estimate made by the defendant parties that the trial of the case will occupy ten days, and I can find no fault with the assessment made by Mr Bleier on behalf of the first defendant of likely scale costs for a ten day trial of
$75,000 per defendant.
[20] Standing back from the matter as best I can, the view I have come to is that the adjusted claims of the defendants are reasonable and that substantial justice would be done if security for costs orders were made in favour of each of the three remaining defendants in the total sum of $75,000 each. That figure appears to me to strike the right balance between the interests of the parties.
[21] That brings me to what seems to be the most important issue here, which is the form of the order.
[22] The purpose of security for costs orders is not to enable defendants to fund their defences. Even when ordered to be paid in cash, security is invariably held in escrow until the litigation is concluded. The purpose is to protect the defendant against the possibility of a worthless costs award in his, her or its favour in the event of the plaintiff’s claim being unsuccessful.
[23] As already said, the plaintiff has been frank in saying that he is not in a position to provide security in the form of cash. However, r 5.45 contemplates security in other forms, and in this case Mr McNaughton effectively invited the Court to order security in the form of a charge over the property in which he says he has a substituted equitable interest. It seems to me that in the circumstances such an order would be just, having regard to the interests of the defendant applicants and Mr McNaughton.
[24] For those reasons I propose to order the plaintiff to provide such security. That leaves just one further point, that is to say whether an order should be made to stay the proceeding pending security being put in place. I have no doubt that such an order should follow, in order to ensure that the order for security for costs is efficacious.
Conclusion
[25] Pursuant to r 5.45 of the High Court Rules, the plaintiff is to provide security for costs to the first, fourth and fifth defendants. Such security is to be in the form of a second registered mortgage security over the property registered in the names of the plaintiff’s parents at 48a Pownall Street in the sum of $225,000 in favour of the first, fourth and fifth defendants jointly (or a single person or entity nominated by them). The plaintiff, and his parents as the registered owners of the property, are also to file
and serve formal written undertakings to the Court not to increase the borrowings secured by the first registered mortgage security in favour of First Mortgage Custodians Limited beyond the amount secured as at the date of the hearing of this application — 15 September 2021 — in the absence of the written consent of the first, fourth and fifth defendants, or pursuant to a further order of this Court.
[26] I make an order staying this proceeding pending provision of the security and undertakings referred to in [23] above.
[27] Costs of this application are reserved. My preliminary view is that the first, fourth and fifth defendants, having been successful, are entitled to their costs of and incidental to this interlocutory application on a 2B basis, and that these should be fixed, but payable when the litigation in this Court has been concluded.
Associate Judge Johnston
Solicitors:
Gawith Burridge, Masterton for first defendant Fee Langstone, Auckland for fourth defendant Janey Forrest, Wellington for fifth defendant
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