Pacific International Lodges Limited (in liq) v McCallum HC Auckland CIV 2008-404-2009

[2010] NZHC 1163

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2008-404-2009

UNDER  Sections 34 and 35 of the Receiverships

Act 1993

IN THE MATTER OF     Pacific International Lodges Limited (in receivership)

BETWEEN  PACIFIC INTERNATIONAL LODGES LIMITED (IN RECEIVERSHIP) Plaintiff

ANDBRUCE MCCALLUM AND HENRY DAVID LEVIN

Defendants

Hearing:         22 June 2010

Counsel:         P Cogswell for the Plaintiff

D Broadmore for the Defendants

Judgment:      22 June 2010

(ORAL) JUDGMENT OF STEVENS J

Solicitors/Counsel:

P Cogswell, Cogswell+Jaduram, PO Box 6343, Wellesley Street, Auckland 1141

D Broadmore, Buddle Findlay, PO Box 2694, Wellington 6140

PACIFIC INTERNATIONAL LODGES LIMITED (IN RECEIVERSHIP) V BRUCE MCCALLUM AND HENRY DAVID LEVIN HC AK CIV-2008-404-2009  22 June 2010

Introduction

[1]      The substantive proceeding involves an originating application filed under s 34  of  the  Receiverships  Act  1993  (the  Act)  for  an  order  fixing  the  level  of remuneration  of  receivers  involved  in  the  receivership  of  Pacific  International Lodges Ltd (in receivership) (the plaintiff).  There is also an application for an order under s 35 of the Act dealing with the termination of the receivership.

[2]      The matter for decision today concerns an application by the receivers (the defendants) under  r 5.45 of the High Court Rules (HCR) for an order that the plaintiff pay security for costs in respect of the claim.   In their application the defendants sought security in the sum of $31,520.  The application was supported by an affidavit from one of the defendants.  The plaintiff has filed a notice of opposition relying upon an affidavit of the sole shareholder of the plaintiff, a Mr Colin Jessen.

[3]      The grounds upon which the defendants apply for security for costs are that:

a)        The plaintiff is insolvent and will manifestly be unable to pay the costs of the defendants if it is unsuccessful in its claim against them;

b)An  order  for  security  for  costs  is  just  and  appropriate  in  the circumstances; and

c)        A stay is appropriate pending payment of the security for costs in order to avoid prejudice and unnecessary cost to the defendants.

Factual background

[4]      On 3 April 2002, the plaintiff purchased the buildings and the motel lease for a motel business located at 104 Great South Road, Remuera.  The motel traded under the name Oak Tree Motel.  The motel was used for casual by the hour hire, as well as longer term stays.

[5]      On 26 August 2006, the defendants were appointed receivers of all of the property and assets of the plaintiff.  They were appointed by a security holder, GE Commercial Finance New Zealand (GE) which held a security interest in all the present and after acquired property of the plaintiff.

[6]      When the defendants were appointed as receivers, they found that there were overdue amounts of principal and interest owed on the loan to GE.  The plaintiff was also in arrears with ground rent and rates payable in respect of the land on which the motel was  situated.    The  plaintiff  did  not  own  the  land,  it  being held  under  a Dilworth lease.  Had the landlord exercised its rights under the lease, it could have taken possession of the motel buildings to the exclusion of the plaintiff.   The defendants were required to deal urgently with this aspect under the receivership.

[7]      It also transpired that the plaintiff was hopelessly insolvent and that the Oak Tree Motel business had been poorly managed over a considerable period. Apparently, there was little or no financial information or operational data available and such records as existed, were incomplete and unreliable.  The motel buildings were in a state of disrepair and some of the rooms were almost uninhabitable.

[8]      It  seems  that  the  receivership  proved  to  be  extremely difficult.    This  is confirmed in an affidavit from Mr McCallum, one of the defendants, setting out some of the significant matters encountered by the receivers and the nature of the difficulties that arose in the implementation of the instructions of the secured creditor GE.  The orderly sale of the motel took a considerable period of time and significant costs were involved.

Applicable principles for security for costs

[9]      Rule 5.45 of the HCR relevantly provides:

5.45  Order for security of costs

(1)   Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

…

(b)that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff's proceeding.

(2)   A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)   An order under subclause (2)—

(a)requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)    by paying that sum into court; or

(ii)  by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)   may stay the proceeding until the sum is paid or the security given.

…

(5)   A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.

(6)   References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.

[10]     Rule 5.45(1)(b) provides a threshold test being whether the Court is satisfied that there is reason to believe that the plaintiff will be unable to pay the costs of the defendants if the claim is unsuccessful.

[11]     The general approach to security for costs has been outlined by the Court of Appeal in A S McLachlan Ltd v MEL Network Ltd.[1]   Although the case was decided by reference to r 60(1)(b) of the now repealed HCR, this rule was equivalent to r 5.45(1)(b),  the  two  rules  being  essentially identical.    The  correct  approach  in matters of security was set out by Hammond J in Hamilton v Papakura District Council.[2]   The Judge stated:

[1] A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at paras 13 and 14.

[2] Hamilton v Papakura District Council (1997) 11 PRNZ 333 at 335.

[The words or r 60(1)(b)] …That necessarily raises a threshold test; but I respectfully agree with those authorities which hold that what is required is a broad overall assessment under that head. Further, in my view, that exercise is not one to be conducted in a vacuum: the Court has to have regard to the real situation of the parties, the nature of the proceeding, and to cast a realistic eye over the course which the proceeding has, and will likely take.

…in contemporary circumstances, it really will not do for courts to approach these sorts of issues on a simplistic "the plaintiff is entitled to a day in court" thesis. The economic realities of a case must be looked to.

[12]     Once the threshold has been met, the Court has a discretion under r 5.45(2) as to whether security for costs will be ordered.  In the A S McLachlan Ltd case, the Court  of  Appeal  warned  against  construing  principles  from  previous  cases. However, McGechan on Procedure at 5.45.03 notes that there are several factors to be considered:

a)        The need to balance the interests of the parties.  The Court is required to attempt to balance fairly the interests of the plaintiff and defendants: see A S McLachlan Ltd at paras 15 and 16.

b)Examining the merits.  This factor requires a broad assessment of the prospects of success of the plaintiff’s claim.   But obviously at this stage there are limits as to how far such an inquiry can be taken.

c)        The cause of the plaintiff’s impecuniosity.  This aspect is only one factor in the exercise of the Court’s discretion and does not automatically lead to the dismissal of an application for security for costs: see Weld Street Takeaways and Fisheries Ltd v Westpac Banking Corporation.[3]

d)Any question of delay.  The issue is whether there has been any needless or undue delay by the defendants in bringing the application for security for costs and if so to what extent such delay has prejudiced the plaintiff.

[3] Weld Street Takeaways and Fisheries Ltd v Westpac Banking Corporation [1986] 1 NZLR

741 at 743.

[13]     In terms of the amount of any security ordered, this is at the discretion of the Court.  The Court is required to fix such sum as it thinks just, having regard to all of the circumstances of the case including: the amount or nature of the relief claimed; the type and nature of the proceeding, including the complexity of the issues; the

estimated duration of trial and the probable costs payable if the plaintiff is unsuccessful; and perhaps also the defendants’ actual costs: see A S McLachlan Ltd. The authorities suggest that the discretion is not to be fettered by the application of strict principles, but is to be exercised based on a careful assessment of all of the circumstances of the particular case.

Submissions on behalf of the defendants

[14]     Mr Broadmore, counsel for the defendants, submitted that the threshold test in r 5.45(1)(b) has been satisfied.   There is no dispute that the plaintiff is in receivership.    Therefore,  it  is  deemed  to  be  insolvent  under  s  287(c)  of  the Companies Act 1993.  Mr Levin confirmed in his affidavit that the plaintiff has no available cash on hand and no other realisable assets.   This factual aspect is not disputed by the plaintiff.

[15]     Mr Broadmore also submitted that, if the plaintiff is unsuccessful, plainly it will be unable to meet any award of cost made against it.  He relied on the passage at

5.45.16(3) of McGechan where the learned authors stated:

The very fact that the proceeding has been brought in the name of the company [In Receivership] … means that the defendants are likely to face an added difficulty in obtaining a worthwhile order for costs in the event that they are ultimately successful.

[16]     As to the exercise of the Court’s discretion, Mr Broadmore submitted that this was a case where the Court should exercise its discretion to award security for costs.   He submitted that there had been no significant delay.   In terms of the chronology, he noted that the plaintiff’s originating application was filed on 11 April

2008.  However, having been set down for a two day hearing in September 2009 it was later adjourned, by consent, on the basis that the parties agreed that the application should not be resolved until the release of the decision of the Full Court of the High Court in Re Roslea Path Limited (In Liquidation).[4]   Because of delays in the release of this decision, the parties continued to adjourn the application until

[4] Re Roslea Path Limited (In Liquidation) HC Tauranga CIV-2005-470-611, 4 February 2010

10 March 2010.

[17]     On 17 March 2010, the defendants filed an application for security for costs. Mr Broadmore submitted that taking the consent adjournments into account, there had not been a significant delay by the defendants in filing their application.  Further, he submitted that there had been no prejudice caused to the plaintiff.  Other than any financial impost resulting from an award of security, which may fall on the sole shareholder of the plaintiff, Mr Jessen, no other prejudice had been demonstrated.

[18]     With respect to the funds of $27,641 held by the defendants as at October

2007, Mr Broadmore submitted that these had now been expended by the defendants acting in the course of the receivership.   He emphasised that the plaintiff had no assets.  As a result there are no funds available for the plaintiff to meet the costs of the defendants if successful in the proceeding.

[19]     Mr Broadmore submitted that the defendants’ conduct had not caused the loss claimed by the plaintiff.  The plaintiff had been placed in receivership as a result of mismanagement by its officers and any inability to pay its debts as they fell due was caused by such mismanagement.   He noted that the defendants obtained sufficient proceeds from the sale of the assets of the plaintiff to repay the obligations to the secured creditor GE and to certain other creditors.  It seems that there may have still been outstanding sums to unsecured creditors.

[20]     Mr Broadmore accepted that, if the plaintiff was successful in its claim, the defendants may be ordered to refund amounts that they had charged if in excess of a reasonable fee in respect of the services provided during the receivership.  However, he submitted that the plaintiff’s impecuniosity was not caused by the defendants – it arose and was caused by the mismanagement of the plaintiff in carrying out the business at the Oak Tree Motel.

[21]     Mr Broadmore submitted that fairness and equity were in favour of a grant of security for costs.   He noted that the claim had been brought in the name of the plaintiff.  However, the claim was being funded by the plaintiff’s sole shareholder and director Mr Jessen.   As sole shareholder, it is Mr Jessen who will obtain the benefit of any order in favour of the plaintiff.   Mr Broadmore submitted that he should not be allowed to hide behind the corporate veil and avoid any liability for

costs in the event that the plaintiff’s claim is unsuccessful.  The plaintiff could not have it both ways.  Given that the proceeding was filed in the name of the company rather than brought by Mr Jessen as a shareholder and director, Mr Jessen should not be able to run the litigation immune from any liability for costs whilst at the same time being in a position to benefit substantially if an order were made in favour of the plaintiff.

[22]     Finally, Mr Broadmore submitted that an award of security would not prevent the plaintiff from pursuing its claim.  Should he wish to do so, Mr Jessen would be able to continue to fund the litigation.  There was no suggestion in the evidence that he could not do so.

[23]     In terms of the merits, Mr Broadmore accepted that the Court was not able to make a definitive determination at this stage.  But he submitted that this was not a case of the defence being hopeless or clearly unmeritorious.  He also noted that in terms of the potential actual costs based on a three day hearing, these were likely to be at or above the sum of $40,000.

Submissions on behalf of the plaintiff

[24]     In helpful written submissions, Mr Cogswell set out four grounds on which the application for security was opposed.   These were: delay; the existence of available security as at the time when the receivers paid the secured creditors out; the fact that the defendants’ conduct caused the loss; and fairness and equity.   In summary,  Mr Cogswell  submitted  that  the  plaintiff’s  contention  was  that  the application for security had been filed far too late and to order security against the plaintiff at this juncture would be oppressive, unfair and unjust.  He noted that the application for security was only raised for the first time in response to the plaintiff’s request for the allocation of a fixture, after the release of the Roslea Path decision.

[25]     Elaborating on the question of delay, Mr Cogswell referred to the chronology which has been set out above.   He accepted that the adjournments to await the release of the Roslea Path decision had been by consent.  But he submitted that prior to  March  2010  the  defendants  had  never  previously  raised  any  concern  about

security for costs.  Further, the defendants had been content to complete a number of interlocutory steps and allow the proceeding to be allocated a two day fixture set to commence in September 2009 without security being sought.

[26]     Mr  Cogswell  referred  to  a  decision  of  Clifford  J  in  Oceania  Furniture Limited v Debonaire Products Limited[5]  where the Court rejected an application for security for costs which was filed late.  However, he accepted that the facts in that case were extreme and that the Judge noted the principle at [29] that “applications for security for costs, at a very late stage in a proceeding as here, are often not successful”.  Clifford J noted that each case must turn on its own particular facts.

[5] Oceania Furniture Limited v Debonaire Products Limited HC Wellington CIV-2008-485-

1701, 24 April 2009.

[27]     An important part of the plaintiff’s argument in opposition was that at the time of payment out of GE, the receivers had on hand a sum of cash in excess of

$27,000.  Mr Cogswell noted that one of the orders that the plaintiff seeks is an order under s 35 of the Act that the defendants retire as receivers.  He referred to the report of the receivers noting the time when the debenture holder had been fully repaid and he  referred  in  his  written  submissions  to  other  passages  of  the  reports  of  the receivers.

[28]     Mr Cogswell accepted that, as well as owing duties to the secured creditor GE, the receivers also owed duties to unsecured creditors.  There is some doubt as to the precise number of unsecured creditors and the amounts owed to them, but it seems that as at November 2007 a reasonable estimate would have been that there were  unsecured  creditors  possibly  owed  up  to  $20,000.    There  was  also  the possibility that a significant sum was outstanding to a bank by way of unsecured amount.  Details of creditor claims will need to be clarified in the evidence at trial.

[29]     Mr Cogswell accepted that the issues as to the timing of termination of the receivership will need to be examined during the hearing.  Accordingly, it is difficult for the Court to be able to make a definitive assessment as to the merits.  However, Mr Cogswell correctly submitted that the Court was entitled to take a factor such as this into account in terms of any assessment as to equity and fairness.

[30]     Mr Cogswell also submitted that it was the defendants’ conduct that caused the loss.  In this regard, he focussed on the level of remuneration of the defendants and the prospect of the plaintiff securing a refund in respect of such remuneration. He submitted that, if the plaintiff succeeds in its claims, then the defendants will have been held to have charged amounts which were not reasonable and will be ordered to refund such amounts in excess of a reasonable fee.  He submitted that it followed that the defendants’ conduct will have therefore caused or contributed to any impecuniosity.

[31]     As to the amount of the security, Mr Cogswell submitted that the amount sought was too high.   He accepted that it was likely, given the information now available to the Court, that three days was a realistic estimate for the hearing.  He also accepted that a further interlocutory application in the form of an application for particular discovery remains outstanding.  Further, Mr Cogswell submitted that the full amount of the security claimed should not include amounts the defendants have been content to incur without security to date.   However, he very properly acknowledged that he had been unable to identify any authority for this proposition.

[32]     Finally, Mr Cogswell referred to the question of equity and fairness and submitted that these factors favour the refusal of security for costs.  He pointed to the public policy factor that the provisions of s 34 of the Act provide a means of review to parties such as the plaintiff to challenge the amount of remuneration charged by receivers.  He submitted that the grantor of a security, such as the plaintiff, should not be “closed out” from any right to challenge the appropriateness of the remuneration.  In summary, he relied on the various factors set out above, including delay, equity and fairness, and challenged the amount of the security sought.   He submitted that it would be oppressive and wrong to order security at this time.

Discussion

Delay

[33]     The first point to be considered is that of delay.   I am required to assess whether  there  has  been  any needless  or  undue  delay by the  party bringing the

application for security for costs.   If such delay is present then it is necessary to consider the extent to which any such delay has prejudiced the plaintiff.

[34]     Given the chronology set out above, I am not satisfied that there has been needless or undue delay by the defendants in this case.  It seems that once it became clear that the case was to be actively prosecuted including the filing of a fresh interlocutory application by the plaintiff, then the defendants immediately filed an application for security for costs.  In the overall scheme of the litigation, it is true that the application was brought at a late stage.  But the case has been adjourned by consent for a significant part of the period since it was issued.  Further, it has not yet been set down for hearing.  As already noted, there is an outstanding interlocutory application concerning discovery issues.

[35]     It  emerged  from  discussions  during  the  hearing  that  there  is  also  the possibility of expert evidence being called by the plaintiff.   If that is the case, no doubt the defendants will wish to consider whether they would want to call any expert evidence in reply.  I am satisfied that there is a considerable distance for this litigation still to travel and that there has not been any needless or undue delay by the defendants.

Existing available security

[36]     The acknowledgement by Mr Cogswell that the issues relating to the timing of the termination of the receivership need to be examined as part of the case is important.  Obviously such issues will turn on the facts.  The evidence adduced at trial will determine what duties were owed by the receivers to the relevant creditors, both secured and unsecured, at the relevant time.

[37]     Plainly in the absence of detailed consideration of the facts and extensive argument it is not possible for the Court to resolve such issues.  I cannot say at this stage that the point as such is to preclude the making of an order.  Rather, I propose to treat it as being relevant in a broad way to the exercise of the discretion that I have to exercise based on equity and fairness.

Cause of the loss

[38]     In terms of whether the defendants’ conduct caused the loss, I consider that any assessment of this factor needs to take into account the reason why the receivers were called in by GE in the first place.   Plainly, the plaintiff was in breach of its obligations under the security.  That led GE to appoint receivers.  I am satisfied that it is not appropriate simply to refer to events post-receivership when making an assessment of this factor.   Furthermore, it is difficult for the Court to make any definitive assessment at this stage in the absence of detailed consideration of the facts and legal argument.

Equity and fairness

[39]     In terms of equity and fairness, there are two important aspects to consider. The first is Mr Cogswell’s submission about the existence of a right to review the remuneration charged by receivers under s 34 of the Act.   He submitted that the grantor of a security, such as the plaintiff, should not be prevented from making such a challenge by having to meet an award of security for costs.   However, I am satisfied that there is no basis for the Court to conclude that the plaintiff would, if an award for security were made, necessarily be closed out or prevented from challenge. Rather,  it  would  be  incumbent  on  the  sole  shareholder,  Mr  Jessen,  to  put  the company in funds so that it could meet any security ordered.  After all, this is hardly inappropriate given Mr Jessen is the person who will benefit from the litigation. There is no evidence to suggest that Mr Jessen cannot meet an award of security against the plaintiff.

[40]     The second point was the suggestion that the defendants are likely to be indemnified by the debenture holder.   There was no evidence before me on this point.  But even if it is true, I do not consider it to be decisive against any award of security for costs.

[41]     Finally, in terms of fairness, I take into account the fact that it is Mr Jessen as the sole shareholder who will benefit from this litigation if it is pursued and if it is successful.

Amount of security

[42]     Turning now to the amount, I have noted that the amount of $31,520 was sought based on the likely scale costs of a two day hearing.   I am satisfied that a more accurate assessment is three or possibly four days, especially if expert evidence is to be called.   Accordingly, a realistic assessment of costs calculated against the scale would be an award in excess of $40,000.   It is that figure that I take into account when exercising my discretion, to which I now turn.

Discretion

[43]     Taking  into  account  the  applicable  principles  summarised  at  [9]  to  [13] above, and making a careful assessment of all of the circumstances of this case summarised above, I fix a figure by way of security for costs at the sum of $30,000. This amount is to be paid by the plaintiff to the Registrar and placed on interest bearing deposit pending further order of the Court.

[44]     I direct that the proceedings be stayed until the amount of security ordered has been paid.  If and when it is paid, counsel are to confer and must then by joint memorandum endeavour to agree a timetable for dealing with outstanding issues including the application for particular discovery.

Costs

[45]     The defendants are  entitled to costs.   Counsel have agreed that  I fix  an appropriate figure based approximately on the 2B scale.  Without disagreement of counsel, I fix a figure in the sum of $1,500 to be paid by the plaintiff to the solicitors for the defendants.

[46]     I direct that the stay referred to above remain in place until this amount is

actually paid.

Stevens J