Menzies v Vaycay Trading Limited
[2020] NZHC 1413
•6 July 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-000935
[2020] NZHC 1413
BETWEEN CAROLYN JOY MENZIES
Plaintiff
AND
VAYCAY TRADING LIMITED
First Defendant
LEONARD BOURTON
Second Defendant
Hearing: 4 June 2020 Counsel:
J Burt for the Plaintiff
D Bennington for Second Defendant
Judgment:
6 July 2020
COSTS JUDGMENT OF ASSOCIATE JUDGE SARGISSON
This judgment was delivered by me on 6 July 2020 at 11.00 a.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Solicitors:
MacDonald Lewis Law, Auckland Duncan Cotterill, Auckland
J Burt, Auckland
MENZIES v VAYCAY TRADING LTD [2020] NZHC 1413 [6 July 2020]
Introduction
[1] This is an application for costs by the plaintiff, Ms Menzies, the sole director and half-share shareholder of the first defendant, Vaycay Trading Ltd.
[2] On 9 April 2020, I gave judgment in the plaintiff’s favour on an application to liquidate Vaycay.1 Her application was opposed by the second defendant, Mr Bourton, the other half-share shareholder. In my judgment, I indicated that Ms Menzies had a prima facie entitlement to costs on a 2B basis, but I allowed the parties an opportunity to file costs memoranda.
[3] In her costs memorandum, Ms Menzies seeks indemnity costs of $46,316.06 against both defendants jointly and severally. For comparative purposes, she submits that 2B scale costs and disbursements would be $20,793 and $1,523.57 respectively. Mr Bourton opposes any award of costs; he submits that costs should lie where they fall.
Background
[4] Vaycay ceased to trade in December 2017. Ms Menzies sought an order under the Companies Act 1993 placing Vaycay into liquidation on the grounds that it was unable to pay its debts and that it is just and equitable to put it into liquidation. Mr Bourton opposed the order essentially on the ground that the majority of Vaycay’s creditors would rather wait for their money from a company that is no longer trading than pick up any crumbs, so to speak, left over by a liquidator.
[5] In his statement of defence, Mr Bourton put forth an affirmative defence that a remedy other than liquidation was appropriate and reasonably available in this case. He noted the availability of, and sought in his statement of defence, relief under s 174 by way of an order requiring Ms Menzies’ 50 per cent shareholding to be transferred to Vaycay. However, Mr Bourton never formally made an application for an order under s 174. Instead, as the matter progressed, Mr Bourton’s position changed to
1 Menzies v Vaycay Trading Ltd [2020] NZHC 618. The judgment was originally published on 24 March 2020, but I later recalled and reissued it on 9 April 2020.
seeking time from the Court to give him an opportunity to pull together a creditor’s compromise as an alternative to liquidation.
[6] On that basis, Mr Bourton submitted at the hearing that the Court should not exercise its discretion in putting Vaycay into liquidation, or at least not just yet. He asked for five working days to achieve a compromise with Vaycay’s creditors. To that end, “[t]he parties agreed that I should not issue the decision immediately, to give Mr Bourton an opportunity to pull together a creditors’ compromise.”2
[7] In the end, however, I was not satisfied that a creditors’ compromise was reasonably available or realistic. Despite ample time Mr Bourton had not reached any agreement in principle with Vaycay’s creditors, nor had he put forward the details of any proposal which might be considered likely to be reasonably acceptable by Vaycay’s creditors. I therefore placed Vaycay into liquidation.
Should costs lie where they fall?
[8] Under the statutory costs regime, the general presumption is that costs follow the event. Rule 14.2(a) of the High Court Rules 2016 provides that “the party who fails with respect to a proceeding … should pay costs to the party who succeeds”.
[9] Where there is more than one party that fails, and they are ordered to pay costs, the general presumption laid out in r 14.14 is that their liability is joint and several unless the court otherwise orders.
[10] Rule 14.7 provides that the Court may refuse costs in various specified circumstances, despite the ordinary principle that costs follow the event. The specified circumstances include where:
…
(e)the proceeding concerned a matter of public interest, and the party opposing costs acted reasonably in the conduct of the proceeding; or
(f)the party claiming costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
2 At [8].
…
(ii)taking or pursuing an unnecessary step or an argument that lacks merit; or
…
(g)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.
[11]Mr Bourton says costs should lie where they fall on the following grounds.
[12] First, he says he opposed the liquidation at the request of Vaycay’s creditors, who considered that there was a better opportunity for repayment if he took control of Vaycay than if the company was liquidated. Mr Bourton therefore appears to rely on r 14.7(e), that is, that the proceeding concerned a matter of public interest.
[13] Justice Courtney’s decision in Reserve Bank of New Zealand v CBL Insurance Ltd is instructive.3 In that case, the Reserve Bank of New Zealand (RBNZ) brought liquidation proceedings against CBL Insurance Ltd. The progress of the proceeding was impeded by opposition from CBL itself (acting through its directors) and its shareholder, LBC Holdings Ltd. Their oppositions were eventually withdrawn at the last minute. RBNZ sought costs against LBC. Her Honour’s reasons in the following excerpt are particularly relevant to the issue at hand in the instant case:
[14] LBC opposes costs on the grounds that (1) in liquidation proceedings the principle that costs follow the event is satisfied by the award of costs against the company in liquidation (2) RBNZ settled with other parties who had a greater involvement in the case on a no-costs basis (3) the work that LBC did to explore a potential restructuring of the CBL group was to have been for the benefit of all creditors and it should not be penalised for that work.
[15] I do not accept any of these arguments. Costs on a defended liquidation fall to be determined under r 14 of the High Court Rules 2016 in the same way as other proceedings. There is no reason to take a different approach where the liquidation is at the suit of a regulator such as in this case. RBNZ is entitled to costs against one or more of the unsuccessful parties.
…
[18] Finally, I do not consider it relevant that LBC’s efforts at achieving an overall restructuring of the CBL group were for the benefit of all creditors. Although LBC maintained throughout that a [Deed of Company Arrangement
3 Reserve Bank of New Zealand v CBL Insurance Ltd [2019] NZHC 737.
(DoCA)] would be a better outcome that liquidation and opposed the liquidation on that ground, this alternative never developed to the point of being able to place a DoCA before the Court. …
[19] It is not for the Court to inquire into the motivations and potential benefits that might have resulted from LBC’s efforts to negotiate a restructuring. Ultimately, the position that LBC took was not vindicated and the principle that costs follow the event means that costs are properly determined on the basis of what did happen rather than what might have happened.
[14] Applying those principles to this case, Mr Bourton opposed the application for liquidation on the basis that if the creditors could agree on a compromise, that would be a better option than putting Vaycay into liquidation. However, his proposed creditors’ compromise never eventuated. As I noted in my judgment, “there was little advance on a potential negotiated resolution”.4 I also noted that counsel for Mr Bourton, in the submissions dated 21 October 2019, acknowledged that “[t]he workout offer is still vague”; further, in the updating memorandum of 1 November 2019, counsel acknowledged that the proposal was still vague at that point.5
[15] Mr Bourton says that progress was hampered by Ms Menzies’ lawyers. After the liquidation hearing, he says he engaged in genuine attempts to enter into compromises with Vaycay’s creditors. But, he says, Ms Menzies’ lawyers restricted his ability to conclude any agreements with the creditors.
[16] However, it is notable that, not only had Mr Bourton failed to reach any agreement with Vaycay’s creditors, he failed to even “put forward the details of any proposal which may be considered likely to be reasonably acceptable by Vaycay’s creditors”, nor had any “timeframe for entering into these arrangements or for payment of any agreed amount … been indicated”.6 Mr Bourton’s position was not vindicated; “the principle that costs follow the event means that costs are properly determined on the basis of what did happen rather than what might have happened”.7
4 Menzies v Vaycay Trading Ltd, above n 1, at [9].
5 At [17(a)].
6 At [17(a)].
7 Reserve Bank of New Zealand v CBL Insurance Ltd, above n 3, at [19].
[17] In any event, in my judgment, I found that “s 174 does not guard against liquidation on the grounds of the company’s inability to pay its debts”.8 The grounds for an order for liquidation were made out.
[18] Secondly, Mr Bourton, relying on r 14.7(f), says Ms Menzies has contributed unnecessarily to the time or expense of the proceeding by taking or pursuing an unnecessary step or argument that lacks merit. He says the proceeding should have been a half-day hearing, but Ms Menzies’ election to cross-examine Mr Bourton’s witnesses extended the proceeding to a full-day hearing. He also says the cross-examination was unnecessary as its sole purpose was to show the Court that no agreement had been reached between him and the creditors. But it was already accepted that what he had provided was a proposal, not a finalised agreement.
[19] In a minute dated 26 July 2019, Associate Judge Andrew set the matter down for a full-day hearing.9 The Judge deemed that a full-day hearing was appropriate given the issues to be addressed and the number of affidavits filed. There is nothing to suggest that Ms Menzies’ election to cross-examine converted the hearing from a half-day to a full-day, thereby contributing unnecessarily to the time or expense of the proceeding.
[20] Further, as Ms Menzies submits, the purpose of cross-examination was not to show that no agreement had been reached between Mr Bourton and the creditors — that was accepted. Indeed, had an agreement been reached, the application for liquidation itself would have been unnecessary. The purpose of cross-examination was to identify the nature of the relationship between Mr Bourton and the deponents (it being alleged that Mr Bourton had a close relationship with many of the deponents), identify if the creditors were aware of Mr Bourton’s principal role in Vaycay’s business and his withdrawal of funds from that business, ascertain the information Mr Bourton had provided to each of the deponents, and assess the reasonableness of each deponent’s belief that Mr Bourton’s proposed alternative was likely to result in a better outcome than liquidation. The Notes of Evidence for the cross-examination of Mr Jeremy Sinclair, a creditor of Vaycay, are consistent with that purpose.
8 Menzies v Vaycay Trading Ltd, above n 1, at [17(b)].
9 Menzies v Vaycay Trading Ltd HC Auckland CIV-2019-404-935, 26 July 2019 (Minute) at [2].
[21] Thirdly, Mr Bourton says that during negotiations with Vaycay’s creditors, he discovered that the total amounts allegedly owed by Vaycay to some of the creditors were being significantly overstated by Ms Menzies’ lawyers.
[22] However, in my judgment I found, on the basis of the evidence available to the Court at the time, that Vaycay is unable to pay its debts.10 While, at the hearing, Mr Bourton contested the claim that Vaycay’s debts substantially exceed its assets, I found that “he has adduced no evidence to contradict it”.11 In raising this argument again, Mr Bourton effectively seeks to relitigate the point; it is inappropriate to do so. This is not a ground to let costs lie where they fall.
[23] Fourthly, Mr Bourton says Ms Menzies would not agree to work with him in respect of the proposed creditors’ compromises unless he agreed to include in the settlement agreement between them a provision that precluded the bringing of any criminal or regulatory action against her and her professional advisers. He agreed not to bring any civil action against her, but he was not willing to make any commitments as to criminal or regulatory actions.
[24] This is not a ground on which the Court may depart from the ordinary principle that the successful party, here Ms Menzies, is entitled to costs. Ms Menzies’ concern to protect herself and her professional advisers against legal actions was understandable, especially in the light of Mr Bourton’s vindictive and accusatory correspondence with her professional advisers.
[25] For the above reasons, and in accordance with the ordinary principle that costs follow the event, Ms Menzies, as the successful party, is entitled to costs. In other words, costs should not lie where they fall.
[26] Next, I turn to the remaining issues of whether costs should be awarded against both defendants, and if so in what amount, and whether, in accordance with the presumption in r 14.14, their liability should be joint and several.
10 Menzies v Vaycay Trading Ltd, above n 1, at [15].
11 At [15(a)].
Should costs be awarded against both defendants? Should any order(s) be for indemnity costs?
[27]Ms Menzies seeks indemnity costs against Vaycay and Mr Bourton.
[28] Rule 14.6(1)(b) provides that the Court may make an order that the costs payable are the actual costs, disbursements and witness expenses reasonably incurred by a party. These are known as indemnity costs. Indemnity costs may be awarded under certain circumstances specified in r 14.6(4). Ms Menzies relies on r 14.6(4)(f), which provides that the Court may order indemnity costs if “some other reason exists which justifies the court making an order for indemnity costs despite the principle that determination of costs should be predictable and expeditious”. She submits that in relation to Vaycay “some other reason” exists by way of sch 7 of the Companies Act.
[29] Clause 1(1)(c) of sch 7 provides that the liquidator must pay, after the fees and expenses of the liquidator and the administrator:
… the reasonable costs of a person who applied to the court for an order that the company be put into liquidation, including costs incurred between lawyer and client in procuring the order [for liquidation].
(emphasis added)
[30] In Fankhauser v Strongline Buildings Ltd, Associate Judge Bell held sch 7 is justification for an award of indemnity costs under r 14.6(4)(f), reasoning that:12
[4] … In run of the mill undefended cases (for example, creditors’ applications against insolvent companies), the court awards costs to the plaintiff when making a liquidation order. The plaintiff’s costs rank third in the list of preferential claims under Schedule 7 of the Companies Act. The plaintiff is entitled to its actual and reasonable costs under clause 1(1)(c) of Schedule 7 …
[5] The right to recover actual and reasonable costs between lawyer and client was introduced under the Companies Amendment Act 200613 so as to “reflect more closely the actual costs incurred by the creditor so that creditors do not issue such proceedings and suffer further loss”.14
[6] Notwithstanding Schedule 7 of the Companies Act, on most unopposed applications, plaintiffs seek ordinary costs under Part 14 of the
12 Fankhauser v Strongline Buildings Ltd [2014] NZHC 2629.
13 Companies Amendment Act 2006, s 40.
14 Law Commission Priority Debts in the Distribution of Insolvent Estates (NZLC SP2, 1999) at [36].
High Court Rules without asking for indemnity costs under r 14.6. But Schedule 7 is justification for the Court’s award of indemnity costs under r 14.6(4)(f) …
…
[8] Priority is given to the plaintiff’s costs in applying for the liquidation order because it is considered to have acted in the interests of all who have claims against the company.
[9] … It can of course happen that despite that priority, the plaintiff may not be paid out because of a lack of sufficient assets in the company and because of prior claims. In those cases, the plaintiff has made a bad choice in applying for liquidation.
[10] While Parliament appears to have had the interests of creditors in mind in giving priority to the plaintiff’s actual costs in obtaining an order, the same provision applies when the Court orders liquidation when the plaintiff is a shareholder, as in applications on the just and equitable ground.
[31] Ms Menzies successfully applied to liquidate Vaycay. In accordance with sch 7, I accept that she is now entitled to look to the company in liquidation for the actual and reasonable costs of her application.
[32] Both cl 1(1)(c) of sch 7 of the Act and r 14.6 require that the actual costs claimed be reasonable. Ms Menzies seeks indemnity costs of $46,316.06. She has provided copies of her lawyers’ invoices setting out the fees incurred and the steps taken. Further, Ms Menzies clarifies that the actual and reasonable costs sought are in relation to this proceeding until October 2019. In other words, she does not seek costs in relation to memoranda filed with the Court updating it in relation to Mr Bourton’s unsuccessful attempt to reach a creditors’ compromise, the recall and reissue of my judgment, or the issue of costs itself. On that basis I am satisfied that the costs were reasonably incurred. Accordingly, Ms Menzies is entitled to look to the liquidator of Vaycay for the indemnity costs claimed.
[33] Ms Menzies submits that Mr Bourton should also be liable for the indemnity costs ordered against Vaycay. She says the same principles as above apply when a proceeding is actively defended, unsuccessfully, by a party (though not the defendant company itself) who has a vested interest in avoiding the company’s liquidation. She submits the liability should be joint and several as is the default position.
[34] I am not satisfied that that is entirely correct. Mr Bourton, as an active defendant (indeed he had carriage of the unsuccessful opposition to liquidation) must expect to bear liability for costs along with the company in liquidation. Ordinarily parties, other than the company being put into liquidation, who unsuccessfully oppose a company’s liquidation will be vulnerable to costs orders. That point was stated by Associate Judge Bell in Fankhauser:15
[11] Additional costs orders may be made in contested liquidation applications. If only the company opposes, an order for costs is made only against the company, except where the court exercises the power to order costs against a non-party. But others may oppose the liquidation application. Creditors and shareholders may file a statement of defence or appearance. A good reason for them to take part is to preserve appeal rights. … Creditors and shareholders who file a statement of defence or appearance are parties to the proceeding and, if unsuccessful, are vulnerable to costs orders.
[12] In a contested application for liquidation on the just and equitable ground where the plaintiff alleges a breakdown in relations between shareholders, the company is rarely active in the proceeding. Instead, the opposing shareholders become involved in the defence. … Once they become parties to the proceeding, orders for costs may be made against them if they lose.
(Emphasis added)
[35] I pause to say that the liquidator is liable to pay the actual and reasonable costs incurred by the party who succeeded in bringing an application for liquidation, regardless of whether the application was actively defended by the company or some other party, such as a creditor or shareholder. Any risk of double-dipping is avoided by the application of the default rule on joint and several liability. However, it does not follow that Mr Bourton is or should be automatically liable to pay the actual costs under sch 7. Clause 1(1) of sch 7 expressly states that it is “[t]he liquidator [who] must … pay”. Mr Bourton is not the liquidator; he is a shareholder. Therefore, sch 7 does not provide a basis for an order that he must pay indemnity costs. At issue then is whether he should be liable for the usual 2B costs, or for 2B costs with an uplift under r 14.6(3)(b), or for indemnity costs under r 14.6(4)(a).
[36] Ms Menzies submits that Mr Bourton should be liable for indemnity costs under r 14.6(4)(a). It is to be borne in mind that the focus of r 14.6(4)(a) is on the
15 Fankhauser v Strongline Buildings Ltd, above n 12.
party against whom costs are sought, unlike sch 7 where the focus is on the party by whom costs are sought. Ms Menzies submits that the outcome should be no different on the basis that Mr Bourton has acted vexatiously or unnecessarily in opposing her application and has contributed unnecessarily to the time or expense of the proceeding by pursuing arguments which lack merit. In particular, she says that Mr Bourton challenged the allegation that Vaycay’s debts substantially exceed its assets. In doing so, he put Ms Menzies to the proof of that allegation, but he himself adduced no evidence to contradict the evidence given by Ms Menzies or Mr Gallagher, who Vaycay engaged to assist it on commercial matters. Ms Menzies says further that Mr Bourton’s original basis for opposition, namely the availability of an alternative to liquidation, was without merit. Notably, Mr Bourton never made a formal application under s 174 despite Vaycay having ceased trading in 2017. And, in the end, no creditors’ compromise was reached.
[37] At this point, I note two trite principles of costs. The first is that all matters relating to costs are at the discretion of the Court.16 The second is that the overriding consideration when exercising the Court’s discretion to award costs is that any award ought to do justice between the parties.17
[38]I consider that Mr Bourton should not be liable to pay full indemnity costs.
[39] Mr Bourton’s eventual position at the hearing was that he was seeking time from the Court to reach a creditors’ compromise. He persisted with that approach to the point where his conduct became unreasonable. But it was not so egregious as to be vexatious or frivolous and thus to meet the threshold for an award of full indemnity costs under r 14.6(4)(a). Further, his position had the support of many of the company’s creditors, evident in the various affidavits filed. The creditors stood behind Mr Bourton and his opposition. Accordingly, the creditors, through the company, should bear some measure of Ms Menzies’ actual and reasonable costs independently of Mr Bourton.
16 High Court Rules 2016, r 14.1(1).
17 Packing In Ltd (in liq) v Chilcott (2003) 16 PRNZ 869 (CA) at [5].
[40] In the circumstances, I consider that the most appropriate approach is to determine Mr Bourton’s costs liability by reference to scale costs with some uplift for his pursuit of “an unnecessary step or an argument that lacks merit” and his failure without reasonable justification to admit the insolvency of the company in terms of r 14.6(3)(b)(ii) and (iii). In my judgment, I indicated that Ms Menzies had a prima facie entitlement to 2B costs, but my view was not a fixed view. Ms Menzies has helpfully set out 2B scale costs by way of comparison. Mr Bourton has not disputed the steps and amounts set out in Ms Menzies’ 2B scale costs schedule; his only submission was that costs should lie where they fall, and I have already rejected that position. I consider that the 2B scale costs and disbursements of $22,316.57 are justified, but subject to an uplift. Pursuant to r 14.6(3)(b)(ii) and (iii), and for the reasons set out at [36] above, I consider that a 30 per cent uplift on scale costs is appropriate, amounting to $27,030.90. Therefore, Mr Bourton is liable to bear a portion of the indemnity costs payable to Ms Menzies up to the amount of $27,030.90 plus disbursements of $1,523.57, being 2B scale costs with a 30 per cent uplift and disbursements respectively, for a total of $28,554.47.
Order for costs
[41]Accordingly, I order:
(a)the liquidator of Vaycay Trading Ltd (in liq) is liable to pay the actual and reasonable costs of Ms Menzies’ application for liquidation, being a total of $46,316.06.
(b)Mr Bourton, liable to pay increased costs and disbursements in the total amount of $28,554.47.
(c)The liability for costs under the above orders is joint and several in the amount of $28,554.47.
(d)All amounts are GST-inclusive.18
Associate Judge Sargisson
18 Ms Menzies advises that she is not GST-registered and consequently has not claimed a GST input credit for the legal fees she has incurred. Accordingly, the amount sought is GST-inclusive.
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