Opus International Consultants Ltd v Colac Bay Vision Ltd
[2015] NZHC 1782
•30 July 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-002959 [2015] NZHC 1782
IN THE MATTER of the Companies Act 1993 BETWEEN
OPUS INTERNATIONAL CONSULTANTS LIMITED Plaintiff
AND
COLAC BAY VISION LIMITED First Defendant
IAN ANDREWS Second Defendant
Hearing: 3 July 2015
(on papers submissions)
Appearances:
D S Lester for Plaintiff
G A D Neil for DefendantsJudgment:
30 July 2015
COSTS JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
30.07.15 at 5 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
OPUS INTERNATIONAL CONSULTANTS LIMITED v COLAC BAY VISION LIMITED & ANOR [2015] NZHC 1782 [30 July 2015]
Introduction
[1] Opus International Consultants Ltd (the plaintiff) filed liquidation proceedings seeking a liquidation of Colac Bay Vision Ltd (the first defendant). The plaintiff has now elected not to proceed with the application for liquidation order. The parties are in dispute concerning the issue of costs.
Background
[2] The argument over costs has turned into a considerable contest in its own right. The defendants have filed an affidavit of some 20 pages and a memorandum totalling 25 pages on the subject. The plaintiff has filed a memorandum of five pages and would have filed more material but for a direction of the Court limiting the extent of the papers to be filed.
[3] The defendants have invoked r 15.23 of the High Court Rules (Rules), which applies in the case of a discontinuance of a proceeding. The rule provides:
15.23 Costs
Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance
[4] The first defendant seeks indemnity costs or an uplift in costs. If neither of those two alternatives succeeds, the first defendant seeks costs on a 2B basis. The second defendant seeks an award of scale costs.
[5] The plaintiff seeks costs or that costs should lie where they fall.
[6] The way in which the costs dispute has developed and the amount of Court time that has to be allocated to this and other costs determinations does not seem to be consistent with the principle that is expressed in r 14.2 of the Rules that the determination of costs should:
(g) So far as possible… be predictable and expeditious.
Law
[7] The principles concerning the award of costs on a discontinuance were stated by the Court of Appeal in Kroma Colour Prints Ltd v Tridonicato NZ Ltd (Kroma) as follows:1
[12] The Judge correctly stated the law on r 476C. She referred to North Shore City Council v Local Government Commission (1995) 9 PRNZ 182, noting that the presumption in favour of awarding costs to a defendant against whom a proceeding had been discontinued may be displaced if there were just and equitable circumstances not to apply it. A court would not speculate on respective strengths and weaknesses of the parties’ cases. The reasonableness of the stance of both parties, however, had to be considered. She also referred to Oggi Advertising Limited v McKenzie (1998) 12 PRNZ 535 which recognised that the discretion reposing in r 46 could override the general principles relating to discontinuance.
[8] The guiding principle in relation to the cost discretion in r 15.23 of the Rules was described in FM Custodians Ltd v Pati, where Abbott AJ stated the principles governing the exercise of the discretion under that rule as follows:2
[11] The Court is not limited in the factors that can be taken into account when considering whether the presumption is displaced, but the following are matters which are taken into consideration:
(a) As the general rule the Court will not consider the merits of the respective cases (unless they are so obvious that they should influence the costs issue).
(b)The Court will consider the reasonableness of the stance of both parties in the proceeding (whether it was reasonable for the plaintiff to bring and continue the proceeding, and for the defendant to oppose and continue to oppose it, up to the point of discontinuance).
(c) Conduct prior to the commencement of the proceeding may be relevant (for example, if any conduct by a defendant has precipitated the litigation), as may be the reason for discontinuing (for example, where a change
1 Kroma Colour Prints Ltd v Tridonicatco NZ Ltd [Kroma] [2008] NZCA 150.
2 FM Custodians Ltd v Pati [2012] NZHC 1902 (footnotes omitted).
Analysis
of circumstances has made the proceedings unnecessary).
The dispute between the parties
[9] Counsel for the defendants, Mr Neil, has embarked upon a comprehensive discussion of the merits of the case and has provided an explanation for why the plaintiff has now discontinued the proceedings in an attempt to persuade the Court that it should depart from the approach set out in r 15.23. The material that the plaintiff has provided addresses the same issues.
[10] The points, in summary, made for the defendants are that the company was always solvent and that steps ought not to have been taken to wind it up. Even though the company was not able to meet the debt of the plaintiff, and other debts from its own resources, it had available to it financial assistance from external quarters which would enable it to do that. The first defendant also said that it had a substantial defence to the application for liquidation order because it had a valid counter-claim and set-off which exceeded the debt claimed. Further, to demonstrate its solvency, the first defendant had paid the amount of the claimed debt into its solicitor’s trust account and it was willing to have that sum held in a trust account on behalf of the plaintiff, presumably pending resolution of the underlying dispute. It also argued that the statutory demand, giving rise to the presumption of insolvency which the plaintiff relied upon, had not been correctly served.
[11] The plaintiff considered that the payment into the solicitor’s trust account of the amount allegedly owing was not effective to displace the allegation of insolvency in the statement of claim. That was supported, the plaintiff alleged, by the expiry of the statutory demand without compliance with the notice on the part of the first defendant.
[12] It was the defendants’ contention that the plaintiff’s actions in proceeding with the liquidation proceeding, in the circumstances where the debt was denied, savoured of unfairness and undue pressure and resulted in the proceeding being an abuse of process.
[13] The plaintiff’s view was that such disclosure as the first defendant had made of its financial circumstances made it clear that it was unable to pay its debts. That is to say, the plaintiff considers that the evidence before the Court supports the allegations it made that the defendant is insolvent.
[14] Also, the first defendant was criticised for changing the grounds of its defence. As well, the claim by the first defendant that it had a defence resting upon, inter alia, an assertion that there had been overcharging in the invoice which the plaintiff had rendered, was flawed because the evidence of the alleged overcharging was based upon a schedule of hourly rates that was from an outdated and historical version of that information.
[15] As to the assertion that the plaintiff had not properly served the statutory demand, the plaintiff’s point was that the first defendant knew of the existence of the statutory demand and had in fact taken abortive steps to set the statutory demand aside.
[16] The plaintiff contended that the submission that the first defendant had made that a statutory demand and subsequent liquidation cannot be used for debt collection was, although once orthodox, now no longer the law. Ms Lester, for the plaintiff, referred to the Court of Appeal decision of Pioneer Insurance Ltd v White Heron Motor Lodge Ltd for the proposition that a demand fulfils two purposes.3 A statutory demand is, first, issued to obtain payment of the debt, and, secondly, to fulfil the other function of giving rise to a presumption that the debtor is “unable to pay its debts” for the purpose of putting the company into liquidation.4
[17] Ms Lester submitted that the plaintiff had good reason to allege the insolvency of the first defendant where, as in this case, the statutory demand had not been complied with and had not been set aside under s 290 of the Companies Act
1993.
3 Pioneer Insurance Ltd v White Heron Motor Lodge Ltd [2008] NZCA 450.
4 At [24].
[18] Ms Lester also noted that the ground which would have been relied upon by the first defendant to set aside the statutory demand was that it was solvent. However, Ms Lester referred to AMC Construction Ltd v Frews Contracting Ltd, where the Court of Appeal expressed the view that it would be in rare cases that the solvency of the company might constitute a stand alone ground for setting aside a
statutory demand under s 290(4)(c) of the Act.5 The Court explained:
[7] We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company’s liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed. If it is not met, and an application for liquidation is filed, in reliance on the presumption in s 287(a) that the company is unable to pay its debts, then the company will have an opportunity on the liquidation application to rebut the statutory presumption, which applies "unless the contrary is proved". There might be circumstances in which it is appropriate to advance the inquiry as to solvency to the s 290 stage, but that would require some particular circumstance not present in this case.
Grounds in this case for departing from the presumption in r 15.23 of the Rules
[19] The first issue that arises in this case is whether the Court should enquire into the overall case to determine the merits or reasonableness of the parties.
[20] In accordance with the principles enunciated in the Kroma decision, one of the grounds for departing from the presumption contained in r 15.23 of the Rules arises from considerations of the reasonableness of the respective positions of the parties in instituting, on the one hand, and defending, on the other, the proceeding.
[21] The defendants do not, of course, have to demonstrate that the plaintiff was unreasonable in commencing and then discontinuing the proceeding. The defendants have the advantage of the presumption which applies even where there has been no
unreasonableness of that kind.
5 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389.
[22] However, where the conduct of the defendant is such that it would be an injustice for that party to have costs, the Court can depart from that presumption.
[23] In this case, the first defendant took the position that it was not insolvent and that it did not owe the debt. The plaintiff plainly took the reverse view of the facts.
[24] The limited survey of the factual background, which is possible on an application like this, does not disclose any aspect of the conduct of the first defendant which might be viewed as contributing to a mistaken decision by the plaintiff to institute winding-up proceedings. It would be possible to imagine a circumstance where the Court was able to conclude that it was only because of misleading conduct on the part of the defendant that the plaintiff formed the view that it had a viable proceeding against the defendant, when in fact it did not. In order to avoid the presumption in r 15.23 it would not seem to be sufficient for the plaintiff to show that, at one point, it had reasonable grounds, for believing that it would be the successful party in the proceedings that it intended to bring. If such an exception were recognised in the circumstances in which the presumption would apply, the presumption would be left with virtually no effect.
[25] The fact is that after a party has commenced litigation, it often obtains additional information which it did not have at the outset and which may persuade it that the initial decision to commence proceedings needs to be reviewed. The same is true of a party opposing claims brought against it. Something more than circumstances of that kind are required to show that it would be unjust to make a costs order in favour of the party discontinued against.
[26] At the commencement of the proceedings, the plaintiff plainly believed that it could establish that the first defendant was a debtor and that it was insolvent. Earlier in this judgment, I briefly canvassed some of the arguments for and against a claim that the first defendant was in fact a debtor of the plaintiff and insolvent. If the plaintiff was unable to succeed on either of those two key points, then its proceedings would fail. What appears to be the case is that it was always going to have difficulty in establishing insolvency, particularly without the assistance of the presumption arising under s 289 of the Companies Act 1993. The fact that it could
not invoke the presumption (because of doubtful validity of service) arises from its own actions and not those of the defendants.
[27] My conclusion is that while, to a limited extent, the Court can assess what the actual position is on various disputed matters, there is no reason to suppose that an injustice would result if a costs order was made against the plaintiff and that therefore there is no ground for not permitting the presumption in r 15.23 to have effect. The result must be that the defendants are entitled to costs.
Increased costs and indemnity costs
[28] The first defendant has sought indemnity costs or increased costs. The circumstances in which such orders can be made are set out in r 14.6 of the Rules, which provides as follows:
14.6 Increased costs and indemnity costs
(1) Despite rules 14.2 to 14.5, the court may make an order—
(a) increasing costs otherwise payable under those rules
(increased costs); or
(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).
(2) The court may make the order at any stage of a proceeding and in relation to any step in it.
(3) The court may order a party to pay increased costs if—
(a) the nature of the proceeding or the step in it is such that the time required by the party claiming costs would substantially exceed the time allocated under band C; or
(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—
(i) failing to comply with these rules or with a direction of the court; or
(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or
(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or
(iv) failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or
(v) failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or
(c) the proceeding is of general importance to persons other than just the parties and it was reasonably necessary for the party claiming costs to bring it or participate in it in the interests of those affected; or
(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.
(4) The court may order a party to pay indemnity costs if—
(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; or
(b) the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or
(c) costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or
(d) the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or
(e) the party claiming costs is entitled to indemnity costs under a contract or deed; or
(f) some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.
The conduct of the plaintiff relevant to indemnity costs under r 14.6(4)(a)
[29] Any assessment of whether the plaintiff acted improperly, frivolously or unnecessarily in commencing the proceedings requires the Court, to the extent possible, to review the circumstances in which the plaintiff found itself when issuing the liquidation proceedings.
[30] The plaintiff was required to make a judgment as to whether there were reasonable grounds for supposing that the Court would make a liquidation order. There was no doubt that, having provided professional services to it, the plaintiff had grounds for supposing that it was a creditor of the first defendant. The plaintiff needed to prove that the first defendant was insolvent. For this element of the case, the plaintiff thought it was able to rely upon the unsatisfied statutory demand which it had served upon the first defendant. As it turned out, a dispute later emerged as to whether the plaintiff had served the statutory demand correctly.
[31] While the Court has not heard evidence on the point, I understand that a brief outline of the argument is as follows. The plaintiff served the statutory demand by placing it in the letterbox at what it considered was the registered address of the first defendant. The first defendant said that that did not amount to acceptable service because the letterbox in which the statutory demand was left was not on the property of the first defendant, but located in an area owned in common by several parties. It is not possible to resolve the question of whether service, in the way described, would be adequate service of a statutory demand. However, it certainly could not be stated with confidence that the plaintiff had failed to carry out the first stage of bringing an insolvency proceeding, which relies upon an undischarged statutory demand.
[32] An unsuccessful attempt was later made to set aside the statutory demand. Apparently, the application was not filed appropriately and therefore the attempt to
set aside the statutory demand was admittedly defective. It would have reasonably been conveyed to the plaintiff that the statutory demand had been served (or at least brought to the attention of the first defendant) and that because the attempted application to set aside the demand had failed, the first defendant would seem to be impliedly admitting that it had been served with a demand which it needed to have set aside. In any event, even if the statutory demand had not been available, the plaintiff may well have had other grounds for expecting it would be able to establish
insolvency, including the non-payment of the invoice itself.6 The following passage
from Taylor’s Industrial Flooring Ltd reads as follows:7
The short answer to the judge's view is twofold. They run together. The first limb is that if a debt is due and an invoice sent and the debt is not disputed, then the failure of the debtor company to pay the debt is itself evidence of inability to pay. That appears from the judgment of Harman J. In Cornhill Insurance plc v Improvement Services Ltd [1986] 1 WLR 114; (1986) 2 BCC
98,942. The WLR headnote states correctly that,
“where a company was under an undisputed obligation to pay a specific sum and failed to do so, it could be inferred that it was unable to do so; that, accordingly, the defendants could properly swear to their belief in the plaintiff company's insolvency and present a petition for its winding up...”
The judge refers in passing to a statement by Vaisey J in an earlier case (Re a
Company (1950) 94 SJ 369):
“Rich men and rich companies who did not pay their debts had only themselves to blame if it were thought that they could not pay them.”
It is not right to say, as was submitted to us by Mr Sterling,
“well, it may be just that they do not want to pay and so you cannot from non-payment of an undisputed debt deduce inability to pay.”
[33] However, where there is a substantial ground for not doing so, non-payment of the debt will not be evidence of insolvency.8 It is difficult to know, from the information that the plaintiff had available to it, whether that was the case.
[34] I do not consider that the first defendant is able to demonstrate that any of the grounds for ordering indemnity costs that are set out in r 14.6(4) of the Rules are
applicable in the circumstances of this case.
6 See Taylor’s Industrial Flooring Ltd [1990] BCC 44 (CA) at 50.
7 At 50.
8 At 51.
Increased costs
[35] Nor do I consider that an order for increased costs is justified. Any increased costs order would presumably have to be justified by r 14.6(3)(b)(ii) of the Rules.
[36] The circumstances in which the plaintiff commenced the liquidation proceedings were no different from those in many other cases where a debtor has failed to pay an invoice and the creditor is driven to taking steps for recovery by means of a statutory demand and consequent liquidation proceedings. It is apparent that, at some point, the plaintiff appreciated that there could be difficulties in establishing the elements of its claim which the first defendant had disputed. Those elements were, broadly described, the status of the plaintiff as a creditor and whether the first defendant was actually insolvent.
[37] The only grounds which would justify an increased costs order in this case would appear to be that the plaintiff persisted with the claim for an unreasonable period after the fact that the first defendant had brought to its attention the difficulties that it would have in establishing the core elements of its claim.
[38] Because liquidation proceedings, even when defended, are disposed of after a short duration of time, it may be difficult to measure whether a plaintiff acted with sufficient promptness in abandoning the proceeding once it became aware of the stumbling blocks that lay in its path. Some factor of that kind would have to be present before the Court could fairly conclude that the circumstance of this case is one that comes within r 14.6(3)(b)(ii) that being the sub rule which most naturally would fit the circumstances of the case.
Who should receive costs?
[39] The second defendant sought to be joined to the proceeding based on the understanding that if the company was ordered to be liquidated, he would need to be a party affected by the order in order to initiate any appeal. While he has been at least nominally a party to the dispute concerning the costs, I do not consider that there are any substantial grounds why an order for costs should be made both in
favour of the company and in his capacity as a director of the company. One costs order would seem to be sufficient.
Conclusion
[40] In my view, the appropriate costs order should be that the plaintiff is to pay costs on a 2B basis to the first defendant together with disbursements fixed by the
Registrar and I order that accordingly.
J.P. Doogue
Associate Judge
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