Moffat Road Limited v North Harbour Motors Limited (in liquidation)
[2018] NZHC 2840
•1 November 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-0832 [2018] NZHC 2840
BETWEEN MOFFAT ROAD LIMITED
Applicant
AND
NORTH HARBOUR MOTORS LIMITED (IN LIQUIDATION)
First Respondent
DIGBY JOHN NOYCE Second Respondent
On the papers: 1 November 2018 Counsel:
M J Ruffin for the Applicant
H L Thompson for the RespondentsJudgment:
1 November 2018
COSTS JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 1 November 2018 at 3.30pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Carson Fox Legal, Auckland
M J Ruffin, AucklandMcMahon Butterworth Thompson, Auckland
MOFFAT ROAD LTD v NORTH HARBOUR MOTORS LTD (in liq) [2018] NZHC 2840 [1 November 2018]
[1] On 9 August 2018 I gave judgment (the judgment) on an application by the applicant (Moffat) to set aside a statutory demand issued by the respondent (North Harbour).1 Although the statutory demand had been issued by North Harbour, in its application to set aside Moffat had also joined Mr Digby Noyce, the liquidator of North Harbour when the statutory demand was issued.
[2] In the judgment I indicated my view that costs should be awarded to Moffat on a 2B basis, but that I would receive written submissions on the question of whether the costs should be ordered solely against North Harbour, or whether North Harbour and Mr Noyce should be jointly and severally liable for the costs. Both counsel subsequently filed memoranda.
[3] There was no dispute over the calculation of the costs; Mr Thompson accepted that costs calculated on a 2B basis would be $10,258, with disbursements of $1,180. The only dispute was whether Mr Noyce should be liable personally with North Harbour for these costs.
[4] I now give judgment on Moffat's costs application.
Submissions of counsel
Moffat
[5] Mr Ruffin referred to the liquidator's first two reports, dated 22 December
2017 and 17 July 2018. In the first report, Mr Noyce estimated that there would be a deficit in the liquidation of $1,058,030, including GST owing to the Inland Revenue Department of $261,275. In the second report, covering the six month period to
20 June 2018, Mr Noyce indicated that North Harbour's liability for unpaid GST was expected to increase by at least $250,000, with a further likely significant increase in unsecured debt to Inland Revenue from interest and penalties. A statement of realisations and distributions attached to the second report showed no realisations, and
no distributions within the six month period.
1 Moffat Road Ltd v North Harbour Motors Ltd (in liq) [2018] NZHC 2023.
[6] Mr Ruffin submitted that when the liquidator issued the statutory demand on
20 April 2018 he knew that if Moffat was successful in setting aside the demand, it would be unable to recover costs from North Harbour — known priority claims in the liquidation would subsume any available funds.
[7] Mr Ruffin referred to sections in the Companies Act 1993 (the Act) governing the powers of a liquidator (s 260 and Schedule 6) and the liquidator's expenses and remuneration (payable out of the company's assets under s 278). He submits that the liquidator's entitlement to reimbursement of costs and expenses applies only to costs and expenses in the liquidation which have been properly incurred – not to inappropriate steps taken in the liquidation.
[8] Mr Ruffin developed this argument by submitting that it was totally inappropriate and unjust for the liquidator to issue the statutory demand in this case. The cause of action in "money had and received", which may in an appropriate case provide a basis for the issue of a statutory demand,2 was never a viable cause of action in this case, where Moffat was not even incorporated at the relevant time. Further, the Deed of Nomination (signed after Moffat had been incorporated) did not refer to the amount claimed as a debt.
[9] Mr Ruffin also referred to Glenvar Property Holdings Ltd (in liq) v 153
Holding Ltd, where arguments similar to those mounted by North Harbour in this case were rejected by Downs J.3
[10] Mr Ruffin was also critical of what he described as an attempt by North Harbour to justify the issue of the statutory demand on the basis that North Harbour was entitled to retain the deposits paid under the Onsale Agreements referred to in the judgment, without providing any evidence of involvement in the subdivision after the date of the Deed of Nomination.
[11] Mr Ruffin noted that unless Mr Noyce is also liable for Moffat's costs, Moffat will rank as an unsecured creditor in the liquidation, with no prospect of payment. He
2 Being a claim which is analogous to a claim in debt — OPC Managed Rehab Ltd v Accident
Compensation Corporation [2006] 1 NZLR 778.
3 Glenvar Property Holdings Ltd (in liq) v 153 Holding Ltd [2016] NZHC 2272.
submitted that, as it was inappropriate and unjust for Mr Noyce to issue the statutory demand, it is just and reasonable that he should be personally liable for Moffat's costs.
North Harbour and Mr Noyce
[12] Mr Thompson noted that the statutory demand was issued by North Harbour, not Mr Noyce. And, before issuing the statutory demand, North Harbour's solicitors wrote to Moffat in an effort to flush out any defence to the claim. No response was received, and Moffat did not explain its position before filing and serving its application to set aside the demand. The liquidator was justified in causing the demand to be issued, in the exercise of his statutory duty to get in North Harbour's assets.
[13] Furthermore the liquidator took independent legal advice before causing North Harbour to issue the demand: this was not a case where the statutory demand was so hopeless that its very issue could be regarded as improper.
[14] Mr Thompson referred to LSF Trustees Ltd v Footsteps Trustee Co Ltd (in liq), a recent decision of Associate Judge Bell in which the Associate Judge rejected an application for costs against liquidators personally.4 In that case, the liquidators had not taken any legal advice, and nor had they written to the applicant before serving the statutory demand. Further, the demand in that case arose from a claim for reimbursement of expenses under a trustee's right of indemnity/exoneration, and was within the exclusive jurisdiction of equity: it was not a "debt" which could be the subject of a statutory demand.5 Notwithstanding those factors, the Associate Judge found that the liquidators were not personally liable for costs on the setting aside application.
[15] Mr Thompson submitted that, on a costs application such as this, a non-party liquidator is in an analogous position to the position of non-party directors of a company — if the company had not been in liquidation, and the liquidators were the company's directors, there would be no basis for a claim against the directors. By analogy, there is no basis in this case for a costs order against liquidators.6
4 LSF Trustees Ltd v Footsteps Trustee Co Ltd (in liq) [2017] NZHC 2619.
5 At [12].
6 Referring to LSF Trustees Ltd v Footsteps Trustee Co Ltd (in liq), at [41].
[16] Mr Thompson also referred to the judgment of Blanchard J in Mana Property Trustee Ltd v James Developments Ltd for the proposition that, where proceedings have been brought bona fide for the benefit of a company, costs should not be ordered against a director in the absence of impropriety or bad faith.7
[17] Finally, Mr Thompson advised that the liquidator expects that there will be funds available in due course to enable North Harbour to pay Moffat's costs as liquidation expenses (the award of costs will be a liquidator's expense, which will have preferential status in terms of the 7th Schedule to the Act). The liquidator currently has proceedings on foot under s 298 of the Act against a relative of the director of North Harbour, and he considers this to be a good claim, worth approximately
$180,000. This claim is scheduled for trial in May 2019.
Discussion and conclusions
[18] The correct approach to claims for costs against a liquidator personally, in a proceeding brought by the liquidator in the name of the company in liquidation, was summarised by the Supreme Court in Mana Property Trustee Ltd v James Developments Ltd (No 2), as follows:8
[9] We deal first with Mana's application for costs against the liquidators personally. The commencement or continuance of a proceeding against a company in liquidation requires the consent of its liquidator or the Court but a liquidator has power under para (a) of sch 6 to the Companies Act 1993 to commence, continue or defend a proceeding on behalf of the company in liquidation without any court consent being needed. The party to the litigation is the company, not the liquidator, even in the case of a proceeding commenced against the company after it is in liquidation. It was therefore James itself which was the successful appellant in the Court of Appeal and the unsuccessful respondent in this Court. The liquidators were merely its agents in relation to the litigation, having taken over the conduct of its affairs from its director.
[10] A non-party like a director or liquidator is not at risk of a costs award in other than exceptional circumstances, that is, circumstances outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. In the case of a liquidator that is a principle of very long standing. There is certainly jurisdiction to order a liquidator as a
non-party to pay costs personally but such an order will not be made unless there has been some relevant impropriety on the part of the liquidator. The
7 Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 124, [2011] 2 NZLR 25 at
[10], referring to Metalloy Supplies Ltd v M A (UK) Ltd [1997] 1 WLR 1613 (CA).
8 At [9]-[11].
courts recognise that the other party can protect its position, should it be successful, through its ability to seek in advance an order for payment of security for costs. In Metalloy Supplies Ltd v MA (UK) Ltd Millett LJ summarised the position:
The court has a discretion to make a costs order against a
non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.
The position of a liquidation is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory
duty to collect in its assets. This may require him to bring proceedings. … If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do so) is it necessarily unreasonable.
[11] That passage has the approval of the Privy Council in what is now the leading case in this country on costs orders against a non-party, Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2). The Privy Council recognised that in some cases where a non-party may have both controlled the proceeding and funded it, or is to benefit from it, justice will require that if the proceeding fails, the non-party will pay the successful party's costs:
The non-party in these cases is not so much facilitating access to justice by the party as himself gaining access to justice for his own purposes.
Such a person is the real party to the litigation. But that is not ordinarily the position of a liquidator, although it may be the position of a creditor or shareholder who funds a liquidator. As the Privy Council remarked, where the non-party is a liquidator, he or she can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his or her own interests. The reluctance of courts to make awards against liquidators who are non-parties is for the very good
reason that otherwise they may not be prepared to take on the role and enter into litigation that may be beneficial for the company and thus for creditors.
[Citations omitted.]
[19] In this case, Mr Noyce clearly had the power to issue the statutory demand, and he was under a duty to take appropriate steps to get in North Harbour's assets (including any amounts owing to North Harbour).9
[20] On the authority of Mana Property Trustee Ltd, Moffat needed to make out exceptional circumstances to justify an award of costs against Mr Noyce. In my view, it has failed to do that. As in Mana Property Trustee Ltd, the unsuccessful litigant in this case was North Harbour, not Mr Noyce. He was merely North Harbour's agent in relation to the issue of the statutory demand, and the subsequent opposition to the setting aside application.
[21] Moffat has failed to point to any impropriety on the part of Mr Noyce. He took legal advice before issuing the statutory demand, and he was under no obligation to Moffat to protect Moffat's interests by ensuring that he had sufficient funds in hand to pay Moffat's costs as well as North Harbour's costs if the opposition to the setting aside application failed. I note also that, unlike the position in LSF Trustees Ltd, North Harbour's solicitors did write to Moffat before issuing the statutory demand, but they got no substantive response within the deadline they had given for payment.10 Moffat did not provide Mr Noyce with an explanation of its position after the demand was served — it simply filed its application to set aside the demand.
[22] There is no suggestion that Mr Noyce had any ulterior purpose in issuing the statutory demand and opposing the setting aside application, or that he acted in bad faith in any other way. He was simply moving to collect what he believed to be an asset of North Harbour. I accept Mr Thompson's submission that he had no personal stake in the matter.
9 Companies Act 1993, s 253.
10 In their letter dated 12 April 2018 the solicitors asked for payment by 19 April 2018. On that date, Mr Bradley of Moffat sent an email telling the solicitors that he would be back to them with a
response in the morning. Mr Bradley said in his evidence that he was unable to complete a substantive response due to work pressures. It seems likely that Mr Bradley did not get back to
the solicitors on the morning of 20 April; in any event the statutory demand was issued that day.
[23] Nor is it clear that this is a case where the statutory demand was issued by a liquidator knowing that, if he did not prevail on any setting aside application, there would be no funds available to meet an adverse costs award. It appears that there may well be another asset in the liquidation, in the form of the claim the liquidator is pursuing against a relative of North Harbour's director. Expenses properly incurred by a liquidator in carrying out the duties and exercising the powers of the liquidator rank as a first priority for distribution under s 312 and the Seventh Schedule of the Act, and it is by no means clear that costs to be awarded against North Harbour in this case, having been incurred in what I am satisfied was a bona fide attempt by Mr Noyce to get in what he believed to be a company asset, would not be regarded as an "expense properly incurred" within the meaning of clause 1(a) of the Seventh Schedule. (If it were not, that would appear to create a significant disincentive to liquidators seeking to recover company assets, and I doubt that that could have been Parliament's intention.)
[24] I do not need to decide that question on this application, and I do not do so. It is enough to note that it is not clear that Moffat will not recover the costs to be awarded to it, and that other considerations overwhelmingly favour the claim for costs against
Mr Noyce being rejected.
[25] Mr Ruffin endeavoured to distinguish Mana Property Trustee Ltd on the basis that the case did not concern the issue of a statutory demand and a subsequent setting aside application made by the recipient of the demand. He submitted that there was no realistic opportunity to apply to the Court in a case such as this for security for Moffat's costs. I am not sure that that is correct — r 5.45 provides that application for security for costs may be made by a "plaintiff", and the expression "plaintiff" is defined in r 1.3 to mean "the person by whom or on whose behalf a proceeding is brought". A "proceeding" includes an originating application such as that filed by Moffat in this case. Had an application for security been filed, with the setting aside application or shortly thereafter, it would presumably have been listed for hearing at the first call of the application to set aside the statutory demand, and arrangements could then have been made to deal with the security issue before further steps were taken in the setting aside application.
[26] But all of that might have been avoided if Moffat had promptly responded to the letter from North Harbour's solicitors, or even responded to the statutory demand within the period allowed for filing an application to set aside the demand, setting out the reasons it considered there was a genuine, substantial dispute, and that the demand should be withdrawn.
[27] Nor can it be said that North Harbour's case on the setting aside argument was beyond reasonable argument.
[28] Having considered counsel's submissions, I am not satisfied that this is an exceptional case, where costs should be awarded against Mr Noyce personally. Insofar as the costs application seeks an order against him, it is dismissed accordingly.
[29] There being no dispute over the claim for costs against North Harbour, I make an order in favour of Moffat against North Harbour for costs in the sum of $10,258, plus disbursements of $1,180.
Associate Judge Smith
0
4
1