Porter v Porter
[2015] NZHC 3258
•16 December 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000207 [2015] NZHC 3258
IN THE MATTER OF Section 347, Property Law Act 2007 BETWEEN
PAUL VICTOR PORTER Plaintiff
AND
CHARLES WILLIAM PORTER AND ROXANNE DADSWELL
First Defendants
AND
PWA GRIFFIN LIMITED Second Defendant
Hearing: 29 September 2015 Appearances:
G M Brodie for Plaintiff
G K Riach for First Defendant
G Cooper for Second DefendantJudgment:
16 December 2015
JUDGMENT OF ASSOCIATE JUDGE OSBORNE AS TO SECURITY FOR COSTS
The application
[1] The defendants seek security for costs. They each seek an order of $20,000.
The background
[2] The plaintiff, Paul Porter (Paul), and the first-named defendant, Charles Porter (Charles), are brothers. Charles and Roxanne Dadswell (the second-named first defendant) were de facto partners but have since separated.
[3] Paul’s claim flows from investments Paul, Charles and Roxanne made in printing businesses through a series of companies.
PORTER v PORTER [2015] NZHC 3258 [16 December 2015]
[4] Before 2006 Charles and Roxanne owned a small printing business, as did
Paul (a separate business).
[5] Purse Willis Aitken Limited was acquired for approximately $650,000. Working capital was provided by Copycraft Limited. The company name was changed to PWA Print Limited (PWA Print). Paul, Charles and Roxanne each took one-third shareholdings and became directors.
[6] Paul, Charles and Roxanne each contributed by borrowings (Paul borrowing
$250,000 from the Paul Porter Trust (Paul’s Trust), secured over his home).
[7] From 2009 PWA Print experienced (as did other printing businesses) difficult trading conditions.
[8] 2009 PWA Print negotiated an agreement with Griffin Press Limited (Griffin Press) to form a joint venture company, PWA Griffin Limited (PWA Griffin). PWA Griffin is the second defendant in these proceedings.
[9] PWA Print and Griffin Press each took 50 percent shareholdings in PWA Griffin.
[10] PWA Griffin purchased the PWA Print business for $970,000. The full purchase price was advanced by way of vendor finance by PWA Print to PWA Griffin. PWA Griffin also borrowed approximately $300,000 for working capital from Kiwi Finance. PWA Print’s debts to Paul’s Trust and to Charles and Roxanne remained owing.
[11] The directors of PWA Griffin were Charles, Roxanne and Graeme Dods. Charles, Roxanne and Paul were all initially employed in the business.
[12] From 1 January 2010 PWA Griffin informally had possession of the assets it was purchasing, with formal settlement of the purchase completed subsequently.
[13] On 4 September 2010 the first earthquake in the Canterbury Earthquake
Sequence occurred.
[14] After September 2010 the loan repayments of PWA Print to Paul’s Trust
become sporadic. Paul’s Trust issued a statutory demand for repayment on 27
November 2011, resulting in a compromise agreement in December 2011 by which
PWA Print was to pay Paul $2542 per month.
[15] From December 2011 to March 2013, PWA Print made its instalment payments, but the payments ceased in March 2013.
[16] On 10 April 2014, Paul obtained an order putting PWA Print into liquidation.
[17] In July 2015 the liquidators of PWA Print, by their final report, advised that there would be no recoveries. PWA Print has since been struck off the register.
[18] In the meantime Paul issued this proceeding.
The nature of the plaintiff ’s claims
[19] The litigation is at an early stage. Security for costs was sought at the earliest point. Discovery has not taken place. Some salient features of the dealings between the parties in various companies are evident but some of the relevant detail is not. These matters reinforce the fact that, on a security application such as this, the Court must frequently proceed on an impression of the viability and strength of a plaintiff’s case.
[20] Paul’s second cause of action, against PWA Griffin alone, is first chronologically. Paul pleads the terms of the $970,000 sale of PWA Print assets to PWA Griffin. As a commercial deal the sale terms appear, on their face, less than advantageous to PWA Print. The $970,000 loan representing the agreed value of its assets was effectively locked into PWA Griffin, requiring the agreement of Griffin Press to payment. (There was a parallel provision in the other agreement by which Griffin Press transferred its assets to PWA Griffin, thereby effectively locking in Griffin Press.) It is common ground that neither PWA Print nor Griffin Press demanded interest so none became owing or due.
[21] Mr Brodie submits that the pleaded facts constitute a well arguable cause of action against PWA Griffin under s 345 Property Law Act 2007 because:
(a) the 13 June 2010 agreement was on the terms pleaded by the plaintiff;
(b) both the terms of the agreement and PWA Print’s decision to forego
interests involve dispositions under s 345(2) of the Act;
(c) at all material times PWA Print was insolvent (or became insolvent);
and
(d)the dispositions were made with intent to prejudice Paul (as a creditor of PWA Print) or were made without receiving reasonably equivalent value.
[22] The significant feature of the PWA Print/PWA Griffin transaction which is not referred to in Paul’s Statement of Claim is his participation in the sale of the PWA Print assets. Surprisingly, and unsatisfactorily, Paul, in his affidavit filed in opposition, deposed that he was not involved in the transaction. He stated:
The agreement whereby the assets of PWA Print Limited were transferred to PWA Griffin Limited without my knowledge, authorisation or consent, is on unsatisfactory terms.
[23] The copy agreement which Paul exhibited was indeed signed for PWA Print by only Charles and Roxanne. But as a transaction it required both a resolution of directors and (because it was a major transaction) the agreement of all three shareholders.
[24] The defendants have produced the relevant documentation. Two documents
contradict Paul’s evidence. First, by a written directors’ resolution dated 21 May
2010 the three directors of PWA Print (including Paul) resolved to approve the sale agreement and confirmed that:
(a) PWA Print was thereby receiving fair value in the transaction;
(b)the transaction was in the best interests and for the commercial benefit of PWA Print; and
(c) PWA Print, after entering the sale agreement, would be able to pay its due debts in the normal course of business and the value of its assets would be greater than that of its liabilities.
Secondly, by a written shareholders’ resolution dated 21 May 2010, the shareholders (including Paul) approved and ratified the sale to PWA Print on the terms of the sale agreement.
[25] As a consequence of these resolutions the sale agreement was executed and the sale was completed. Against this background Paul’s statements that the agreement was entered into without his knowledge, authorisation or consent appears to be without foundation. Paul’s making of those statements appears inexplicable given that they were made after Charles and Roxanne had filed their evidence, and at the same time produced the records summarised at [24] above.
[26] Paul’s participation in and support of the sale arrangements is likely to represent a very substantial, if not insuperable obstacle to success on the first cause of action. This would be so whether or not Paul were able to establish other elements required under s 346(2) of the Act (such as PWA Print’s insolvency). But even in relation to insolvency, on which there is evidence provided by Paul, the statements joined in by Paul in the PWA Print resolutions are likely to prejudice the possibility that a Court will exercise any discretion in relation to relief in favour of Paul. The joint venture represented in the formation of the defendant, PWA Griffin, involving Mr Dod’s company Griffin Press, was on entering into the transactions entitled to put weight on the evidence provided by PWA Print. By the resolutions Paul joined in the statements contained in the resolution in order to see a corporate enterprise go forward. But now, when that enterprise has failed, he seeks to resile from the statements of fact which he agreed to in the resolutions. Paul’s conduct at the time weakens his prospects of success on the first cause of action at trial.
[27] Paul’s first cause of action – against Charles and Roxanne as first defendants
– stems from Paul’s guarantee liability over the debt owed by PWA Print to Westpac. I summarise the basic points of Paul’s claim (in the second cause of action) –
The compromise agreement of 2 December 2011 required PWA Print, Charles and Roxanne, to distribute all loan repayments which PWA Print received from PWA Griffin (net of tax and other costs) pro rata for:
(i) reduction of the debt owed to Paul’s Trust (at present pleaded
as “to Paul”);
(ii)reduction of the debt owed to Westpac for lending guaranteed by Charles and Roxanne; and
(iii) reduction of the Westpac overdraft.
[28] It is common ground that a debt owed to Westpac, guaranteed by Paul, Charles and Roxanne jointly and severally, remained outstanding at the time of PWA Print’s liquidation. Charles and Roxanne then personally paid $91,415 to Westpac and, by right of subrogation, stepped into the shoes of Westpac. They then gave notice to Paul under the Property Law Act and subsequently exercised rights as secured creditor to sell the shares in PWA Griffin (to Mr Dods) in part repayment of the amount they had paid to Westpac.
[29] Paul asserts that Charles and Roxanne unlawfully acquired the rights of Westpac as a secured creditor. He asserts that they acted in breach of the compromise agreement by not applying all monies received from PWA Griffin in the way required by the compromise agreement (and in particular by payment to Westpac).
[30] Paul particularises that allegation by setting out details of payments totalling
$183,000 which he says that Charles and Roxanne applied either to themselves or otherwise in accordance with the compromise agreement.
[31] Paul’s calculations began with an error in that, as submitted by Mr Riach, they self-evidently included payments which had preceded the compromise agreement and are not covered by it. The payments in fact made in the period after the compromise agreement were $118,000. To this extent at least Paul’s claim is overstated.
[32] Paul’s affidavit evidence, in opposition to the security application, did not include any detailed analysis of all payments made after the compromise agreement. He did not specifically identify inadequacies in what were required to be the three sets of pro rata payments.
[33] On the other hand, Charles produced a ledger showing the total amount paid by PWA Griffin to PWA Print and distributed to the parties (after meeting tax and other agreed costs). He also produced a separate summary from the date of the compromise agreement until liquidation. The balance distributed in terms of those schedules appears to have been distributed in accordance with the agreed ratios.
[34] I deliberately use the terminology of “appearance” as the nature of arrangements was that Charles and Roxanne have had significant access to records compared to Paul. But the records as they are appear do cast significant doubt on Paul’s analysis of disproportionate distribution. I recognise that it may be, that as this litigation develops, further discovery and/or expert analysis might elicit clearer evidence to support Paul’s allegations of breach of the compromise agreement. As matters stand, however, the underlying factual allegations are not cogently supported.
[35] Mr Riach, for Charles and Roxanne, has identified a further matter which weakens Paul’s claim, particularly in relation to quantum. The claim at present assumes that had Charles and Roxanne directed more payments to Charles from the date of the compromise agreement, PWA Griffin would have continued to receive and distribute funds for the same period and at the same total level as occurred. Paul as plaintiff would have to undertake a damages analysis of some complexity to establish as a probability the loss which was in fact caused.
Security for costs – the regime
[36] The regime under the High Court Rules for security for costs has two main elements. There is a threshold test under r 5.45(1). The Court then has a discretion under r 5.45(2).
[37] The threshold is satisfied in this case for two reasons. First, the plaintiff is resident out of New Zealand.1 Secondly, the plaintiff is, by his own admission, insolvent. There is, accordingly, reason to believe that he will be unable to pay the defendant’s costs if he is unsuccessful in the proceeding.2
[38] I turn then to the discretion to award security for costs which arises under r 5.45(2) High Court Rules. The Court of Appeal in McLachlan v MEL Network Ltd recognised that whether or not to award a security and, if so, the quantum are discretionary.3 The Court also noted that the discretion is not to be fettered by constructing “principles” from the facts of previous cases.4 There is a balancing of
interests to be undertaken.
Considerations in this case
[39] It is convenient to refer to the same considerations as guided Kós J in
Highgate on Broadway Ltd v Devine.5
A nominal plaintiff?
[40] Paul at present sues in his personal capacity as if the rights sued on are his personal rights. He alleges he was a creditor of PWA Print.
[41] The defendants, by their defences, say the correct creditors are Paul and
Heritage Trustee Company Limited as trustees of Paul’s Trust.
1 High Court Rules, r 5.45(1)(a)(i).
2 Rule 5.45(1)(b).
3 McLachlan v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
4 At [13].
5 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017.
[42] Mr Brodie conceded in the course of submissions that Paul will either need to take an assignment (so that he can sue personally) or will need to join the other trustee as co-plaintiff.
[43] While this situation does not of itself drive a finding that there is a nominal plaintiff involved in this case, the situation has some of the characteristics of another person avoiding exposure.
Disposal of assets to avoid adverse costs?
[44] There is no suggestion in this case that Paul has disposed of assets to avoid meeting an adverse costs order. In fact Paul’s affidavit eloquently identifies his parlous financial circumstances and identifies the extent to which his finances had deteriorated well before any litigation was in contemplation.
Prima facie unmeritorious claims?
[45] The claims must be regarded as weak. In my judgment that is the appropriate description of the claim which founds the second cause of action against Charles and Roxanne. In relation to the first cause of action (against PWA Griffin) I consider that the claim is prima facie unmeritorious and not merely weak.
Access to third party funding?
[46] I am satisfied on the basis of Paul’s affidavit evidence that he has no realistic access to third party funding.
Oppression to the defendants’ reasonable interests?
[47] There will be an oppressive element (vis-á-vis the defendants’ reasonable
interests) if security is not provided in this case.
Causation of plaintiff ’s impecuniosity
[48] The evidence (from all parties) is not of a single recent event or set of events, said to be unlawful, which have caused a sudden change in Paul’s financial circumstances. The history of the extended Porter family investments from 2006
indicates a very serious deterioration in financial circumstances had occurred, after significant borrowing to introduce capital, well before the final collapse of PWA Print. The compromise agreement from which Paul’s second cause of action proceeds arose in the context of existing financial problems which were already serious. Paul’s evidence does not satisfy me that his insolvency was caused by conduct of any of the defendants (assuming for the present purpose that their conduct might later be found to be unlawful). Rather, the state of insolvency flows from a fundamental lack of equity (compounded by borrowing for capital introduction) when adverse trading conditions were experienced. Essentially, Paul’s claims involve the assertion that the defendants have either failed to honour a salvage arrangement or took advantage of a salvage arrangement in relation to a business which was already financially failing.
Denial of access to justice?
[49] It is recognised that the Court, in relation to a prima facie meritorious claim, should be reluctant to order security if it will deprive the plaintiff of the capacity to advance that claim.
[50] Such an analysis cannot apply to the first cause of action (PWA Griffin)
because I find it to be prima facie unmeritorious.
[51] In relation to the second cause of action (against Charles and Roxanne), however, I take into account the fact that any significant award of security will effectively deprive Paul of an opportunity to advance his claim (albeit a weak claim). On my analysis this factor in relation to the claim against Charles and Roxanne militates in favour of awarding any security at a modest level.
Promptness of defendants’ application?
[52] The plaintiffs applied promptly for security.
Other relevant conduct or considerations
[53] I do not identify any other relevant conduct or considerations on the part of the parties.
Balancing of the respective interests of the parties
[54] PWA Griffin is entitled to a measure of protection through substantial security. Most importantly, the claim against it prima facie lacks merit. The dealings between the Porters and PWA Griffin were commercial dealings. PWA Griffin is able to point to documents executed by the plaintiff which not only contradict statements made in the plaintiff’s affidavit evidence but also go to the heart of the allegations in his Statement of Claim.
[55] For the purposes of the plaintiff’s claim against Charles and Roxanne, which I have assessed to be weak, it is just that the plaintiff (having regard to his foreign residence and his impecuniosity) provide some security but at a very modest level which will reflect the Court’s expectation that he will find some resources to provide such security if he has confidence in his litigation.
Amount of security
[56] Counsel all recognised that, if there is to be an award of security, the appropriate points of reference for calculating costs are Category 2 and Band B. Counsel for the defendants assumed (in my view optimistically) a one day trial. On that basis, a realistic assessment of 2B costs, together with disbursements, would result in a figure of approximately $40,000.
[57] The submission for both sets of defendants was that an award of security in the sum of $20,000 (approximately 50 per cent) would be appropriate.
[58] Mr Brodie’s submission did not contain an attack on that approach as being something that would be inappropriate in the general run of cases. His submission as to quantum was fundamentally that any quantum will deprive the plaintiff of the opportunity to pursue his claims.
[59] The view I have reached, including having regard to the plaintiff’s own evidence, is that an order of security in the sum of $20,000 in favour of the second defendant is appropriate (notwithstanding the fact that the proceeding against the
second defendant will almost inevitably be stayed through the plaintiff’s inability to
provide the security).
[60] As against the first defendants, the appropriate amount of security must be very modest so as to permit the plaintiff a reasonable opportunity to have access to justice in relation to this claim. An appropriate sum is $5,000.
[61] Given that the sum is modest, it is inappropriate to direct the payment in tranches. It should be paid as a single tranche but with a reasonable further time allowed for payment.
Costs
[62] Costs must follow the event and I will be so ordering.
[63] In relation to the second defendant it is appropriate (having regard to the submissions on categorisation already made) that the award be on a Category 2A basis and I will be so ordering.
[64] In relation to the first defendants I will be reserving costs. Although the first defendants have had a substantial measure of success, they have failed to obtain security in the sum of $20,000 as they sought. The amount of security ordered reflects a recognition of the entitlement of the plaintiff in relation to access to justice, and represents a measure of success for the plaintiff.
Order:
[65] I order:
(a) In relation to the plaintiff ’s claim against the first defendants:
(i)The plaintiff shall on or before 15 February 2016 provide to the satisfaction of the Registrar security for costs and disbursements in the sum of $5,000.
(ii)In the event such security is not provided, the plaintiff’s second cause of action shall be stayed until further order of the Court.
(iii)The costs of the first defendants’ interlocutory application are reserved.
(b) In relation to the plaintiff ’s claim against the second defendant:
(i)The plaintiff shall on or before 15 February 2016 provide to the satisfaction of the Registrar security for costs and disbursements in the sum of $20,000.
(ii) In the event such security is not provided, the plaintiff’s first
cause of action shall be stayed until further order of the Court.
(iii)The plaintiff shall, in any event, pay to the second defendant the costs of the second defendant’s interlocutory application on a 2A basis together with disbursements to be fixed by the Registrar.
Next case management conference
[66] For case management purposes I adjourn the proceeding to a case management conference at 12 noon, 9 March 2016 by telephone (Associate Judge Osborne). That conference is to be vacated if both causes of action have been stayed by reason of non-payment of security. In the event that at least one cause of action remains unstayed, counsel for the active parties are to confer no later than 22
February 2016 and to file and serve by 26 February 2016 preferably a joint
memorandum as to all directions required for pleadings and interlocutory steps.
Solicitors:
Godfreys Law, Christchurch
Counsel: G M Brodie, Barrister, Christchurch
Harmans Lawyers, Christchurch
Cavell Leitch, Christchurch
Associate Judge Osborne
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