Palmerston North Cosmopolitan Club v Palmerston North Squash Club Incorporated
[2012] NZHC 1462
•27 June 2012
IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY
CIV-2011-454-370 [2012] NZHC 1462
BETWEEN PALMERSTON NORTH COSMOPOLITAN CLUB Plaintiff
ANDPALMERSTON NORTH SQUASH CLUB INCORPORATED
First Defendant
ANDPALMERSTON NORTH BOWLS CLUB INCORPORATED
Second Defendant
ANDDAVID PETTERSON Third Defendant
ANDLINDSAY PETTERSON Fourth Defendant
ANDSTEVE TOMS Fifth Defendant
ANDGRANT SMITH Sixth Defendant
ANDBRIAN LITTLE Seventh Defendant
ANDFITZHERBERT ROWE Eighth Defendant
Hearing: 15 June 2012
(Heard at Palmerston North)
Counsel: J.W. Maassen & A. Kirk - Counsel for Plaintiff
D.M. Hughes - Counsel for First to Seventh Defendants
Judgment: 27 June 2012
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment of Associate Judge Gendall was delivered by the Registrar on 27 June
2012 at 3.30 pm under r 11.5 of the High Court Rules.
Solicitors: Cooper Rapley, Lawyers, PO Box 1945, Palmerston North
Kensington Swan, Solicitors, Private Bag 92101, Auckland 1142
PALMERSTON NORTH COSMOPOLITAN CLUB V PALMERSTON NORTH SQUASH CLUB INCORPORATED & ORS HC PMN CIV-2011-454-370 [27 June 2012]
Introduction
[1] This is an application by the first to seventh defendants (the defendants)
seeking an order for security for costs in this proceeding against the plaintiff.
[2] The application is opposed by the plaintiff which is a not-for-profit Friendly
Society I understand originally formed in 1888.
Background Facts
[3] The substantive dispute relates to a multi-function facility (the “Club Palmerston Facility”) located on land owned by the first respondent, the Palmerston North Squash Club Incorporated (PNSC) and the second respondent, the Palmerston North Bowls Club Incoporated (PNBC). The Club Palmerston Facility is subject to a lease (and previously a licence) from PNSC and PNBC to the plaintiff, the Palmerston North Cosmopolitan Club. The plaintiff in operating presently from the leased premises, says it provides social, leisure, bar, gaming machine and restaurant services from the facility, for its membership which comprises about 1370 members and for the wider community.
[4] The Club Palmerston Facility was constructed following an agreement between the parties in or about 2005 to effect a ‘merger of interests’. Unfortunately, it would appear that the legal arrangements between the parties as to this merger process were rather spartan and not well constructed – hence the present disputes which have arisen.
[5] Prior to the ‘merger of interests’, the plaintiff operated from its own premises, but it is suggested by the defendants that the plaintiff may have been struggling financially for a number of years. It is said that because of the plaintiff’s poor financial performance, the Bank of New Zealand (BNZ) was considering a mortgagee sale of the plaintiff’s previous premises to re-pay its loans.
[6] As part of the ‘merger’ and the defendants say to assist the plaintiff it appears that the parties agreed that the plaintiff would:
(i) sell its premises; and
(ii) build an extension onto PNSC’s existing facility (located on land
owned by PNSC and PNBC) and take a lease for the same.
[7] To effect the arrangements, PNSC and PNBC say they agreed to assist the plaintiff with procuring further funding from the BNZ. That further funding was ultimately provided to the plaintiff in a total amount of $850,000.00. Those loans to the plaintiff are secured by way of guarantees given by PNSC and PNBC and mortgages over the land in question. There are, however, questions about the legality of these loans from the BNZ to the plaintiff because of the plaintiff’s status as a Friendly Society. For present purposes PNSC and PNBC now contend that they have offered to re-finance and repay the balance loan owing to the BNZ in exchange for the plaintiff vacating the Club Palmerston Facility.
[8] The lease for the plaintiff’s portion of the Club Palmerston Facility noted at [6](ii) above was executed around 1 March 2006. It purported to be for a term of 20 years expiring 28 February 2026 at a token initial annual rental (plus outgoings) of
$100.00 per year (which rental was subject to review at any time to the then market rental, on the landlord giving 6 months written notice). In addition, the plaintiff also licensed certain car parks from PNSC. The car park licence it is said by the defendants expired in 2010.
[9] Subsequent to 2005, disputes arose between the parties about how the proposed merger was intended to work. Because the parties were unable to resolve their differences, the present substantive claim was issued by the plaintiff. In this claim, the plaintiff seeks various remedies, including monetary compensation, an order for security of tenure, and personal claims against the named defendants for alleged contractual interference.
[10] BNZ has recently made demand on the plaintiff for the amount of
$140,023.78 (being a portion of the BNZ loan which it appears became due and owing in July 2011 and which remains unpaid).
[11] BNZ has also made demand on PNSC and PNBC for repayment of this
$140,023.78 pursuant to their guarantees.
[12] As to this aspect, the plaintiff maintains the BNZ simply as a normal machinery matter required this part of the loan facility to be “rolled over” in July
2011, and for the guarantors, PNSC and PNBC to consent to the roll over. It says, however, that PNSC and PNBC refused to consent to the roll-over of the facility and it is this which has directly led to the BNZ making demand on the plaintiff, PNSC and PNBC for the amount outstanding under the facility, $140,285.37.
[13] As a result of what the defendants now say was the plaintiff’s failure to meet BNZ’s recent demand and what is said to be the plaintiff’s “declining financial position”, PNSC and PNBC maintain they issued a notice under the Property Law Act 2007 in April 2012, giving notice to the plaintiff that they intended to cancel its lease on the basis that the plaintiff was insolvent. The plaintiff has now issued separate related proceedings (CIV-2012-454-180) seeking relief against cancellation (the PLA proceeding). The PLA proceeding was scheduled for hearing on 21 June
2012 and as I understand it the hearing did take place on that date. A decision on that proceeding has been reserved.
[14] The plaintiff’s position here essentially seems to be that a central question in deciding the present application before me is whether security for costs should be ordered in a situation such as the instant one where there is a claim to recover what it says is an incontrovertible and substantial benefit that has been acknowledged by the defendants. In particular the plaintiff contends that the present situation is one where:
(a) PNSC and PNBC are landowners upon whom the plaintiff has spent at least $500,000.00 and they received that benefit on the basis of a common expectation/purpose; and
(b) PNSC and PNBC as landowners have refused to fulfil that purpose.
[15] The plaintiff says that in a case such as this, it offends justice to require security for costs to be paid, as in any event security does exist here in the form of the existing benefit already conferred on the landowners PNSC and PNBC.
[16] On this aspect, the plaintiff refers to a quote from a recent open settlement offer letter sent from the defendants’ solicitors to the plaintiff’s solicitors dated 5
June 2012, requesting that the plaintiff vacate its premises. This states:
If the Clubs take an assignment of PNCC’s debt, the only issue remaining to be litigated, is any equity stake PNCC may have in the new building and the interest repaid. As you will be aware, PNCC’s only other contribution to the new building was its original capital contribution of $500,000. There are, of course, underlying issues to be resolved surrounding that contribution in light of the fact that your client has had the benefit of the use of the new building since the commencement of the lease at a nominal rent of $100.00 per annum, and the benefit of all the income derived through the bar, restaurant and gaming machines. In addition to this, we are advised that PNCC have the benefit of new chattels and as such it may not have any equity in the premises at all. However, in our view, this issue can be separated and resolved by way of ordinary litigation without the need for interim relief (which we still maintain your client has failed to seek).
[17] That letter according to the plaintiff, tends to acknowledge:
(a) That at least $500,000.00 has been paid for improvements to the
defendants’ property by the plaintiff; and
(b)That payment (at least) creates an entitlement to recompense in favour of the plaintiff, whether on grounds of restitution or proprietary estoppel.
[18] In response, as I understand it, the defendants appear to contend that any entitlement of the plaintiff here may be extinguished or diminished because:
(a) The plaintiff has for several years received the benefit of the lease, with a purely nominal rental. (Quite how the Court can ignore or amend that written contract and the past arrangements between the parties however is unclear); and
(b)A proper basis exists for the Court to reduce the amount because the plaintiff has had the benefit of certain chattels, and in any event the
defendants also have a counterclaim for other unspecified amounts including what they say are bar and gaming machine proceeds which the parties agreed to split.
Counsels’ Arguments and My Decision
[19] The legal position on the defendants’ application for security for costs is clear. The power to make such an order is contained in r 5.45 of the High Court Rules. This provides in part:
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.
[20] The Court of Appeal provided a useful summary of the general approach to be applied in such applications in A S McLachlan Ltd v MEL Network Ltd (2002) 16
PRNZ 747:
[13] Rule 60(1)(b) High Court rules (now r 5.45(1)(b)) provides that where the court is satisfied, on the application of the defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.
[14] While collections of authorities such as that in the judgment of Master
Williams in Nikau Holdings Ltd v Bank of New Zealand (1992) 5 PRNZ
430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a check list of so-called principles. That creates a risk that a factor accorded weight in a particular case will be given disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which he claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.
[16] Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.
Threshold Requirement - Impecuniosity
[21] As noted above, r 5.45 provides for a threshold requirement on applications of this type. This is to the effect that for the application to succeed the plaintiff generally must be shown to be impecunious. In the absence of a concession as to impecuniosity, the defendants are required to identify credible evidence of surrounding circumstances from which may be reasonably inferred that the plaintiff, if unsuccessful, will not be able to pay the defendants’ costs.
[22] In the present case, the plaintiff is a Society registered under the Friendly Societies and Credit Unions Act 1982. It has placed before the Court its financial accounts to 31 December 2011. These accounts appear to show that the plaintiff traded at a modest operating profit over the last two years and as at 31 December
2011 the plaintiff had an excess of current assets over current liabilities totalling
$601,868.00. In addition the accounts also appear to show a net surplus of
$208,732.00 for the year ending 31 December 2011.
[23] The accounts to 31 December 2011 have been audited and an independent auditor’s report has been issued in accordance with the International Standards on Auditing (New Zealand).
[24] Questions have been raised however regarding the 31 December 2011 accounts and various entries which have been made in the financial statements. The defendants have obtained (no doubt at some not insignificant cost) substantial reports from other accountants commenting on the plaintiff’s accounts and its financial position.
[25] Notwithstanding this, it is clear that the present application before me seeks only an amount of $20,000.00 by way of security for costs. This in essence provides what is really a token amount by way of security, given the likely steps required if this matter proceeds to trial, the number of parties involved and the length of hearing which will most probably be required.
[26] On the evidence before the Court, there seems to be little doubt that the plaintiff has a significant cash flow from its operations and would be able to meet an award of costs to this level if it was unsuccessful in this proceeding. (And it certainly has major assets which would be likely in any event to pass to the defendants if its claims here were unsuccessful).
[27] Under all these circumstances, I am satisfied that the threshold requirement that the plaintiff is impecunious has not been satisfied.
[28] That effectively disposes of this application which must fail.
[29] Nevertheless, if I may be wrong in this conclusion and for the sake of completeness, I will now turn to consider the other requirements to be satisfied on an application of this type.
Merit
[30] The next factor a Court is required to consider relates to the merits of the
plaintiff’s claim against the defendants.
[31] It is always difficult to assess the merits of a claim at an early stage of the proceeding such as we have reached at present – Meates v Taylor (1992) 5 PRNZ
524 (CA).
[32] Notwithstanding this, and although there was only very limited discussion before me as to the merits of the plaintiff’s claim here, as an initial starting point in the present case, there would appear to me to be some merit in the case advanced for the plaintiff at least in so far as it seeks to recover a significant portion of the monies acknowledged as provided by it for the Club Palmerston Facility. This is on the basis outlined at paras [14], [15], [16] and [17] of this judgment. Certainly it could be that the defendants may prove in time to have some set-off or counterclaim against the plaintiff ’s contribution to the development, but at this early point in my view there would seem to be some merit in this aspect of the plaintiff ’s claim.
[33] Subject to these comments I express no real view, however, as to the merits
of the plaintiff’s claim here.
Plaintiff ’s Impecuniosity Caused by the Actions of the Defendants
[34] Here, there is a possible argument open to the plaintiff it seems to me that if indeed the plaintiff is impecunious that has in some way at least been caused by the actions of the defendants. What is clear to me is that the plaintiffs have contributed a substantial amount to the construction and fitting out of the Club Palmerston Facility buildings (of which their current premises form a part). It is undisputed that approximately $500,000.00 by way of a cash contribution (representing the net sale proceeds of the plaintiff ’s previous building premises) has been contributed to these construction costs.
[35] In addition, it appears that the plaintiff entered into the loan arrangement with the BNZ for some $850,000.00 to contribute at least some of this money to construction of the Club Palmerston Facility, and something less than this amount is still owing to the bank. I leave aside at this point any question as to whether the plaintiff as a Friendly Society was legally empowered to enter into such a loan arrangement - as to this aspect, see s 51 Friendly Societies and Credit Unions Act
1982. What is clear, however, is that the plaintiff itself has been making loan repayments under this advance from the BNZ and thus, in the absence of any evidence to the contrary, it seems it may have effectively contributed a portion of these additional loan monies as advances towards construction of the Club Palmerston Facility.
[36] If indeed the plaintiff may be considered impecunious here (and I have found otherwise earlier in this judgment) as I see it there is a possible argument that this impecuniosity may have in some way been caused or contributed to by the actions of the defendants. These actions would include the failure on the part of PNSC and PNBC to “repay” the plaintiff’s contributions to the Club Palmerston Facility or alternatively the actions of PNSC and PNBC with the BNZ over renewal of the plaintiff’s $140,000.00 (approx) loan, and their endeavours to terminate the
plaintiff’s lease of its current premises, (including their alleged challenges to access and car park arrangements and taking Property Law Act steps to have them vacate).
Delay
[37] Applications for security for costs made at a very late stage in a proceeding are often unsuccessful – Oceania Furniture Limited v Debonaire Products Limited HC, Wellington, CIV-2008-485-1701, 24 April 2009.
[38] In the present case, the plaintiff’s initial statement of claim against the
defendants was filed on 8 June 2011.
[39] The present application for security for costs was filed nearly two months later on 3 August 2011.
[40] Under these circumstances there cannot be said to have been any needless delay in bringing this application on behalf of the defendants.
[41] There is nothing in this delay point which might assist the plaintiff here.
Balancing Interests of the Parties
[42] Finally, in considering applications such as the present one, the Court in exercising its discretion is required to balance the interests of the plaintiff and the defendants – A S McLachlan Ltd v MEL Network Ltd.
[43] As I have noted above, the security sought by the defendants here is little more than a token gesture in this proceeding. This $20,000.00 sought as I see it would only go some way towards meeting the defendants’ costs given the complex nature of this proceeding and the range of parties involved. That said the motives of the defendants in bringing this application might possibly be questioned.
[44] As the authorities clearly note, however, the interests of the plaintiff in pursuing this proceeding must be balanced here against the interests of the defendants who are to be protected against being drawn into unjustified litigation at
considerable expense in situations where there is no or little likelihood of recovering those costs in the event the defendants are successful – Orakei Technologies Limited v Geostel Vision Limited HC, Hamilton, CIV-2005-419-809, Associate Judge Faire,
13 December 2007.
[45] In the present case, however, the plaintiffs are not, as I see it, seeking to be protected by way of a substantial security for costs order. The order they seek as I have already noted must be seen largely as a simple gesture.
[46] Weighing up these additional matters, I also conclude that the proper balancing of the interests of the parties here falls on the side of the plaintiff.
[47] The defendants’ present application for security for costs must fail and is dismissed. There is to be no order made.
Costs
[48] As to costs, the plaintiff has been successful in opposing the present application and I see no reason why costs should not follow the event in the usual way.
[49] An order is now made that the first to seventh defendants are to pay costs to the plaintiff on this application on a category 2B basis together with disbursements as fixed by the Registrar. As to these costs, I certify only for one counsel for the plaintiff however.
Post Script
[50] On 15 June 2012, at the hearing of this matter before me, I raised with counsel for the parties at some length the issue whether this dispute which appears to have been rather acrimonious and long-running between these clubs, has been the subject of any detailed negotiation or mediation effort. It does seem earlier that the parties have attended a mediation but this was unsuccessful. Time has marched on however and costly and substantial internecine fighting between the parties
occasioned by this and other proceedings which have been issued has developed and it seems may even have intensified.
[51] That cannot continue, more particularly as I see it given that the principal parties here are not-for-profit clubs all carrying on activities for the benefit of their members (some of whom may belong to both the plaintiff and defendant organisations) and the wider Palmerston North community. That said, I urge the parties now to consider carefully the desirability of this matter proceeding to some further form of mediation or a possible Judicial Settlement Conference pursuant to r
7.79 High Court Rules. It is appropriate in my view that this be seriously explored now.
[52] In this regard I direct the Registrar to arrange a directions telephone conference of counsel for the parties in this matter with me at an early opportunity in order that these matters may be fully and properly discussed.
‘Associate Judge D.I. Gendall’
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