O'Brien v Modern Built Investments Limited
[2021] NZHC 1203
•27 May 2021
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2019-419-125
[2021] NZHC 1203
UNDER Sections 174 and 241 of the Companies Act 1993 BETWEEN
T A O’BRIEN AND MCCAW LEWIS
TRUSTEES (T A O’BRIEN) LIMITED AS TRUSTEES OF THE T A O’BRIEN FAMILY TRUST
First Plaintiff
AND
T A O’BRIEN
Second Plaintiff
AND
MODERN BUILT INVESTMENTS LIMITED
Defendant
Hearing: On the papers Appearances:
P J Morgan QC & Z T Mora for Plaintiffs
C T Gudsell QC & R J Southall for Defendant
Judgment:
27 May 2021
JUDGMENT OF PAUL DAVISON J
[Re: Costs]
This judgment was delivered by me on 27 May 2021 at 11:30 am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Nielsen Law, Hamilton McCaw Lewis, Hamilton
T A O’BRIEN AND ANOR v MODERN BUILT INVESTMENTS [2021] NZHC 1203 [27 May 2021]
Background
[1] This case was heard over 24 – 26 June 2020. The plaintiffs, who claimed to be shareholders of the defendant, Modern Built Investments Ltd (MBI), sought orders for the rectification of the company’s share register, and an order putting the company into liquidation on the grounds that it was just and equitable to do so by reason of the unfairly prejudicial conduct of the company by its sole director, Mr Russell Spiers. MBI and Mr Spiers denied that the plaintiffs were shareholders in MBI and submitted the plaintiffs had no standing to seek the orders sought.
[2] By judgment dated 16 December 2020, I determined that the plaintiffs were shareholders of MBI and further, that they had been subject to prejudicial conduct by Mr Spiers.1 I observed that the plaintiffs, having succeeded, were entitled to an award of costs and directed the filing of memoranda.2
[3] The plaintiffs submit that they are, at minimum,3 entitled to 2B costs and reasonable disbursements. However, they submit that this case warrants the award of indemnity, or increased, costs. Further, that the costs order should be made against Mr Spiers.
[4] The defendant and Mr Spiers acknowledge that the plaintiffs are entitled to 2B costs and disbursements, however, submit this case does not warrant an award for increased or indemnity costs. Further, that the costs award should be made against both MBI and Mr Spiers.
The steps taken in the proceeding
[5] The plaintiffs’ costs schedule calculates their scale 2B costs at $70,146.50. This sum includes:
(a)$7,170 for an additional three days, beyond the standard four days, for discovery and inspection; and
1 O’Brien v Modern Built Investments Ltd [2020] NZHC 3349.
2 At [208].
3 And consistent with Associate Judge Smith’s Minute dated 12 November 2019.
(b)$4,182.50 for second counsel.
[6] Mr Morgan QC for the plaintiffs submits that the additional three days for discovery and inspection is justified by the considerable work required for those steps following their receipt of five substantial affidavits filed and served by MBI and Mr Spiers. Counsel submits there should be no dispute in respect of this uplift as counsel for the defendant and Mr Spiers sought the same uplift in his costs submissions dated 9 July 2020.
[7] Mr Gudsell QC for the defendant submits that costs for an additional three days for discovery as sought by the plaintiffs is not justified. Counsel acknowledges that the defendant and Mr Spiers also sought three additional days in their submissions. They did so because “considerable work was required to obtain, review and list historic files from Lyon O’Neale Arnold, Mr Williams and KPMG” and because MBI and Mr Spiers had thereby “assumed the burden of discovery”. Counsel submits that Ms O’Brien filed one affidavit which listed 74 documents in part 1 of the schedule and claimed privilege over eight categories of documents. Further, that not only was the volume of the defendant’s and Mr Spiers’ discovery material significantly greater than the plaintiffs’, but the work required to obtain it was greater.
[8] MBI and Mr Spiers are content to leave the plaintiffs’ claim for second counsel to the Court’s discretion and take no issue with the disbursements listed in the plaintiffs’ schedule, which amount to $9,454.61.
[9] I am satisfied that it is appropriate for the plaintiffs to receive costs for the additional three days for discovery and inspection. The defendant and Mr Spiers accept that they also took an additional three days for discovery and inspection. I do not accept that they thereby “assumed the burden” of the step. The step is for discovery and inspection. I am satisfied that if the defendant and Mr Spiers took this additional time to complete discovery, the plaintiffs will have had to undertake a corresponding amount of work in inspection.
[10] In relation to costs for second counsel, I observe Justice Gault’s recent comments in SKP Inc v Auckland Council:4
Allowance for second counsel is not automatic. It requires specific allowance. The key question is whether the nature of the proceeding was such as to justify requiring the losing party to contribute to the winning party’s costs in having a junior counsel present.5 There will usually need to be some unusual feature to the litigation to warrant allowances for second counsel.6
[11] I do not consider this proceeding to have been of the nature that justifies the award of costs for second counsel. There was no special complexity or unusual volume of evidential material. Accordingly, I do not certify costs for second counsel for the plaintiffs.
Quantum of costs order: scale, increased or indemnity
Submissions
[12]Without costs for second counsel, the plaintiffs’ 2B scale costs reduce to
$65,964. The plaintiffs seek either their actual costs, being $242,165.18, or an increase in their scale costs to 80 per cent of their actual costs, being $193,732.14.
[13] Counsel for the plaintiffs submits this Court should award indemnity costs because Mr Spiers acted improperly and/or unnecessarily in defending the proceeding.7 In particular, counsel submits that Mr Spiers did not act in the best interests of MBI, but rather pursued a self-serving and unmeritorious defence.
Counsel has highlighted the following excerpts from the judgment:8
[75] … Mr Spiers’ conduct in relation to the tax imputation credits and the provision of misinformation regarding the share transfer documents, informs my assessment of his credibility, and demonstrates that when motivated by financial advantage he is prepared to provide whatever version of events he thinks will best suit his objectives.
...
4 SKP Inc v Auckland Council [2020] NZHC 2215 at [5].
5 Nomoi Holdings Ltd v Elders Pastoral Holdings Ltd (2001) 15 PRNZ 155 (HC) at [21]; and Tao v Strata Title Administration Ltd [2016] NZHC 1821 at [52].
6 Tao v Strata Title Administration at [52]. See also ZYXCBA Developments Ltd v Auckland Council
[2015] NZHC 2224 at [16].
7 High Court Rules 2016, r 14.6.(4)(a).
8 O’Brien v Modern Built Investments Ltd [2020] NZHC 3349.
[141] … Mr Spiers’ self-serving reconstruction of past events.
…
[175] … Mr Spiers’ evidence was an elaborate and rather desperate attempt to ‘shoehorn’ his case into a state where it would satisfy the requisite elements of the defence of mistake which he has advanced.
…
[199] …I consider that Mr Spiers’ assertion to be the sole shareholder of MBI on the strength of the 2015 KPMG conclusion, and his denying of the validity of the shareholdings of the plaintiffs was an opportunistic and cynical adoption of that conclusion in order to suit his own interests and which has since resulted in significant prejudice to the plaintiffs as shareholders in MBI. The fact that Mr Spiers has continued to maintain his reliance on KPMG’s conclusion regarding the MBI shareholding despite Mr Lyon himself subsequently acknowledging that the information he provided to KPMG was incorrect, further illustrates the untenable nature of Mr Spiers’ position, and demonstrates the nature and extent of the prejudicial conduct of Mr Spiers as sole director of MBI and that the plaintiffs’ claim for relief is founded on.
(emphasis added).
[14] Counsel for MBI and Mr Spiers submits that the plaintiffs bear the onus of establishing that indemnity costs should be awarded, and that, by not citing any authority, they have not met the threshold.
[15] Counsel for the plaintiffs submits that should the Court not be minded to award indemnity costs, it should nevertheless award increased costs on the grounds that Mr Spiers contributed unnecessarily to the time and expense of the proceeding by:
(a)pursuing an argument that lacked merit;9
(b)failing, without reasonable justification, to admit facts, evidence, documents and the legal argument advanced by the plaintiffs;10 and
(c)failing, without reasonable justification, to accept offers of settlement.11
[16] In relation to the claimed failure of Mr Spiers to accept offers of settlement, counsel for the plaintiffs has outlined the following correspondence:
9 High Court Rules 2016, r 14.6(3)(b)(ii).
10 High Court Rules 2016, r 14.6(3)(b)(iii).
11 High Court Rules 2016, r 14.6(3)(b)(v).
(a)On 9 May 2019, immediately prior to the filing of the proceeding, Mr Spiers made a without prejudice save as to costs settlement offer. It included the statement, “Our client will purchase your client’s shares”. The plaintiffs submit that the statement demonstrated Mr Spiers’ acceptance that the plaintiffs owned shares in MBI. The plaintiffs did not accept this offer. They responded by letter dated 20 May 2019, saying that the offer was “totally unacceptable” as it involved a payment plan lasting more than five years, rather than offering a clean break, and was conditional on the sale of a property, and MBI obtaining a bank loan. Counsel for the defendant and Mr Spiers submits that this letter is not relevant as it was sent in the context of relationship property negotiations, and before this proceeding commenced.
(b)On 25 September 2019, counsel for the defendant and Mr Spiers sent a without prejudice except as to costs letter, which invited the plaintiffs to set out a settlement proposal.
(c)On 18 November 2019, the plaintiffs made a without prejudice except as to costs offer. The plaintiffs say that if this offer had been accepted, it would have saved the parties substantial costs and time.
(d)On 2 December 2019, counsel for the defendant and Mr Spiers wrote to the plaintiffs to communicate that the plaintiffs’ settlement proposal of 18 November 2019 was not acceptable to them.
(e)On 6 December 2019, the plaintiffs repeated their without prejudice except as to costs offer and stated:
5. If your clients are open to settlement discussions as claimed, then we suggest we immediately engage in settlement discussions/ negotiations.
…
8. If this offer is not acceptable to your clients, then we suggest your clients either counter offer or agree to attend mediation.
The plaintiffs did not receive any response to their letter of 6 December 2019, much less a counter-offer or agreement to attend mediation. The parties did not engage in settlement discussions.
[17] Counsel for MBI and Mr Spiers submits there is no basis for an award of increased costs on the basis of Mr Spiers’ failure to accept the offers of settlement, because the settlement offers did not relate solely to this proceeding, but also to a separate, undetermined proceeding. In relation to the correspondence exchanged between the parties commencing 25 September 2019, counsel submits it concerned a global settlement of issues in this proceeding as well as entitlements under the Property (Relationships) Act 1976, which were the subject of an, as yet undetermined, Family Court proceeding.
[18] Further, counsel for MBI and Mr Spiers submits that the plaintiffs are incorrect to seek an increase in their scale costs to 80 per cent of their actual costs.12 Counsel notes that McGechan on Procedure describes the correct approach as:13
The court uplifts from scale, it is not a question of awarding a percentage of actual costs.
Discussion
[19] This Court’s power to award increased or indemnity costs derives from r 14.6 of the High Court Rules 2016. The Court of Appeal commented on the distinction between the three broad options in Bradbury v Westpac Banking Corp:14
(a)standard scale applies by default where cause is not shown to depart from it;
(b)increased costs may be ordered where there is failure by the paying party to act reasonably; and
(c)indemnity costs may be ordered where that party has behaved either badly or very unreasonably.
12 For rationale see Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [41].
13 AC Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.02(2)(a)].
14 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] NZLR 400 at [27] and [28].
[20] The Court of Appeal also endorsed Goddard J’s adoption in Hedley v Kiwi Co- operative Dairies Ltd15 of Sheppard J’s summary in Colgate-Palmolive Co v Cussons Pty Ltd16 of conduct which has given rise to orders for indemnity costs:17
While recognising that the categories in respect of which the discretion may be exercised are not closed (see 14.6(4)(f)), [the Federal Court of Australia] listed the following circumstances in which indemnity costs have been ordered:
(a)the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b)particular misconduct that causes loss of time to the court and to other parties;
(c)commencing or continuing proceedings for some ulterior motive;
(d)doing so in wilful disregard of known facts or clearly established law;
(e)making allegations which ought never have been made or unduly prolonging a case by groundless contentions, summarised in French J’s “hopeless case” test.18
[21] As is apparent from my credibility findings in respect of Mr Spiers, quoted at [13], I consider Mr Spiers’ conduct to have approached, if not entirely risen to, the bad or very unreasonable behaviour which the Court of Appeal has signalled warrants the award of indemnity costs. In terms of the Colgate-Palmolive circumstances, I consider Mr Spiers to have continued proceedings to pursue his financial objectives in what was very close to wilful disregard of known facts. While I am not wholly persuaded that his conduct fell neatly over the threshold warranting an award of indemnity costs, I am nevertheless satisfied that the plaintiffs are entitled to an award of increased costs.
[22] In Holdfast NZ Ltd v Selleys Pty Ltd, the Court of Appeal held that “[a]n increase of 50% on scale costs should… grant the costs-claiming party a fair recovery for the step unnecessarily forced on it, assuming that the time allocated to the step has
15 Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11].
16 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.
17 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] NZLR 400 at [29]; AC Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.03(1)(c)].
18 J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 at 303.
been reasonably calculated”.19 The Court of Appeal noted however that it should not “be taken as saying that an uplift of more than 50 per cent can never be justified”.20
[23] Justice Dunningham considered that Wayne Graham Realty Ltd v Brook21 was an appropriate case for a greater uplift and she ordered the scale 2B costs to be uplifted by 100 per cent. She said: 22
…While I acknowledge that very few cases contemplate an uplift of more than 50 per cent, in this case I consider a 100 per cent uplift is warranted. My reasons for concluding this are:
(a)this will still be a long way short of the appellant’s actual costs…
which were incurred post settlement;
(b)the appellant’s legal costs reasonably included protracted attempts to progress the settlement which the appellant considered had been reached;
(c)the scale costs award will only reflect the formal steps taken of filing the application to strike out the plaintiff’s claim and attend the
…hearing and costs awarded for in those steps do not fairly reflect the additional cost prompted by the plaintiff’s stance;
(d)the respondent was clearly on notice that her stance would prompt an application for increased or indemnity costs; and
(e)while I have not found this case meets the high threshold required an award of indemnity costs, I nevertheless consider the respondent’s stance was not reasonable, by some margin. This is a case where the behaviour sits close on the spectrum to the kind of behaviour which might warrant indemnity costs.
(emphasis added).
[24] Another example is Mueller v Hendren, where Justice Heath ordered an uplift of 75 per cent of the 2B costs. He said:
[25] In my view, Ms Hendren’s conduct in maintaining a (legally) unsupportable caveat for a collateral purpose brings the case squarely within the category of proceeding for which indemnity costs might be ordered under r 14.6(4). I consider that she acted “improperly or unnecessarily” in opposing the application for probate when no proper grounds to do so existed. In reaching that conclusion, I accept that the use of the word “unnecessarily” in r 14.6(4)(a) involves a connotation of “distinctly bad behaviour”: see Bradbury v Westpac Banking Corporation (CA) at para [26].
19 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [47].
20 At [48].
21 Wayne Graham Realty Ltd v Brook [2016] NZHC 1135.
22 At [53].
[26] While indemnity costs may be ordered, I retain a discretion to award something less.
[27] The factors I consider are most important to the exercise of the discretion are:
a) The pursuit of a hopeless defence to the application for a grant of probate;
b) The modest size of the estate;
c) The ability for Ms Hendren to pursue claims of the type mentioned in the caveats, even after probate was granted;
d) The possibility of some duplication of costs incurred by Ms Mueller, in relation to the general administration of the estate (on the one hand) and the application for probate (on the other).
[28] As a matter of discretion, I prefer to make an order for increased costs to ensure no double counting of costs occurs…
[25] In the light of these authorities and the credibility findings I made concerning Mr Spiers in the substantive judgment, I consider it appropriate that the plaintiffs be awarded an uplift of 100 per cent from 2B scale costs in respect of all steps, resulting in a costs award of $131,928.
[26] It is not necessary for me to deal with Mr Spiers’ refusal to accept the plaintiffs’ settlement offers, as I consider his response to the proposed settlement, including his failure to respond at all to the last proposal, has been sufficiently taken account of in my discussion and assessment of his conduct in the proceeding. I note however, that I am not persuaded by his submission that the settlement offers were not relevant to the issue of costs in this proceeding by reason of them also encompassing the Family Court proceedings between him and Ms O’Brien. The two proceedings involved substantially similar issues and concerned largely the same factual background. Ms O’Brien acknowledged that her claim in the Family Court, in which she said that the shares in MBI should be divided between the parties as relationship property, was brought on an alternative basis, and was effectively brought as a backstop to the High Court proceeding.
Against whom should the costs order be made?
Submissions
[27] Counsel for the plaintiffs submits that any costs order should be made against Mr Spiers, as a non-party. Counsel notes that in Asset Building M Pritchard Ltd v Hambeg Ltd, Justice Asher summarised factors relevant to costs awards against non-parties.23 These included: whether the non-party controlled the litigation; whether the non-party stood to benefit from the outcome; and the merits of, and steps taken in, the litigation under the non-party’s control or influence. In that case, the plaintiff sought an order for costs against Mr Begley, who was the sole director of the defendant and one of its two shareholders. Justice Asher said:24
Mr Begley had control of the litigation and stood to benefit from it. These factors alone do not persuade me to order costs against him. However, Mr Begley’s late filings, when considered with Hambeg’s spurious defences, suggest an attempt to manipulate the Court system by delaying the making of a liquidation order. It must be borne in mind that Mr Begley’s actions have put Asset Building to considerable legal costs which are likely to considerably exceed scale costs. They have significantly delayed the date of liquidation, which can have important consequences for creditors in regard to relation back. These factors in my view combine to put this case outside the ordinary run of cases, and into that category where an order of costs against a non-party should in the interests of justice be made. I am therefore satisfied that it is appropriate to make an order that Mr Begley personally pay the costs of Asset Building in this proceeding.
[28] Here Mr Morgan submits that Mr Spiers controlled the litigation on behalf of the defendant, not just as sole director, but also in his personal capacity. Counsel notes that every document from 17 June 2019 on was filed on behalf of both the defendant and Mr Spiers. Further, counsel submits that Mr Spiers’ defence was meritless and self-serving. Counsel further submits that it would be unjust to make the costs order against the defendant as the plaintiffs own 50 per cent of the shares in the defendant. Such a costs award would therefore reduce the money available to the plaintiffs upon liquidation, and would effectively mean the plaintiffs would be paying for half of the costs award made in their favour.
23 Asset Building M Pritchard Ltd v Hambeg Ltd HC Auckland CIV-2008-404-3781, 21 November 2008.
24 At [33].
[29] Counsel for the defendant and Mr Spiers notes that Mr Spiers was a party to the proceeding, noting that r 1.3(1) of the High Court Rules 2016 defines a party as “any person who is a plaintiff or a defendant or a person added to a proceeding.” Pursuant to an order made by Associate Judge Andrew, Mr Spiers was served “in his personal capacity and also in his capacity as a trustee of the R D Spiers Family Trust”.25 Further, counsel submits that the relevant principle applicable to costs awards for s 174 applications is that:26
Where the true interest in the benefit of the litigation is an individual shareholder(s) rather than the company, then the shareholders should meet the costs.
[30] The defendant and Mr Spiers accept that, while the relief sought by the plaintiffs included liquidation of the defendant company, the shareholding dispute was a matter between the plaintiffs and Mr Spiers. Counsel submits that given the difficulty of differentiating between costs associated with the liquidation and shareholding issues, the costs award should be made against both the defendant and Mr Spiers. Counsel submits awarding costs against them together should not impact upon the plaintiffs’ interests in the defendant.
Discussion
[31] In my view, Mr Spiers was clearly a party to the proceeding. Rule 1.3 defines “defendant” as “a person served or intended to be served in a proceeding”, and “party” as “a person who is a plaintiff or a defendant or a person added to the proceeding”. Further, r 18.6 provides that “A person who becomes a defendant to a proceeding by being served under a direction of the court need not be named as defendant.”
[32] Whether Mr Spiers was or was not a party to the proceeding however in terms of the High Court Rules, it is clear to me that MBI’s participation in the litigation was controlled by Mr Spiers for the benefit of Mr Spiers. Accordingly I shall make an order for costs against Mr Spiers solely and personally.
25 Minute of Associate Judge Andrew dated 27 May 2019 at [12].
26 Totara Properties Whangarei Ltd v Cochrane [2013] NZCA 283 at [37].
Result
[33]Mr Spiers is to pay the plaintiffs:
(a)$131,928, being the plaintiffs’ 2B scale costs (per the plaintiffs’ schedule, less the amount sought for second counsel) uplifted by 100 per cent; and
(b)$9,454.61, being the plaintiffs’ disbursements.
Paul Davison J
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