Registrar of Companies v Feeney HC Auckland CRI-2011-404-000014

[2011] NZHC 863

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CRI-2011-404-000014

BETWEEN  THE REGISTRAR OF COMPANIES Appellant

ANDJOHN MICHAEL FEENEY, PETER DAVID HUNTER, PETER THOMAS, JOHN CARLAW HAGEN AND TIMOTHY ERNST SAUNDERS Respondents

Hearing:         19 April 2011

Counsel:         SJE Moore SC and BH Dickie for Appellant

AR Galbraith QC and DJ Cooper for Respondents

Judgment:      21 June 2011

JUDGMENT OF ASHER J

This judgment was delivered by me on Tuesday, 21 June 2011 at 10am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors/Counsel:
Meredith Connell, DX CP24063, Shortland Street, Auckland 1140.
Email: [email protected] and  [email protected]

Bell Gully, DX CP20509, Shortland Street, Auckland 1140. Email:  [email protected]

AR Galbraith QC, DX CX10258, Auckland. Email:  [email protected]

THE REGISTRAR OF COMPANIES V FEENEY& ORS HC AK CRI-2011-404-000014 21 June 2011

Table of Contents

Para No

Introduction  [1] Background  [4] The costs decision  [7] Approach to the appeal  [12] The respective positions  [15] The legislative provisions relating to costs  [18] Background to these legislative provisions  [24] Relevant factors in the assessment of quantum  [27] Should costs in excess of the scale have been awarded?  [38] Application of the s 5(2) factors  [40] Proper steps to investigate?  [42]

Other alleged errors  [53]

Conclusions as to s 5(2) factors  [57] The actual costs incurred  [59] The costs incurred by the Crown and comparisons to other costs                   [60] Cost levels if it were a civil trial  [61] Other costs awards  [64] Overview  [65] Result  [70]

Introduction

[1]      The five respondents were former directors of Feltex Carpets Ltd.   Each faced  two  charges  under  s  36A(3)  of  the  Financial  Reporting Act  1993.    The Registrar of Companies alleged a statement prepared by the reporting entity of which they were directors did not comply with an applicable financial reporting standard. The hearing took place before Judge Doogue.  It lasted three weeks and half a day and  the  judgment  was  reserved.    The  judgment,  delivered  on  2  August  2010,

concluded that each of the directors was not guilty in relation to all the charges.1  The

Judge firmly exonerated them of any misconduct and observed that the directors were all honest men who had conducted themselves at all times with unimpeachable integrity.2

[2]      Following the judgment the respondents (―the directors‖) sought costs under

the Costs in Criminal Cases Act 1967 (―the CCCA‖). There was a hearing before

Judge Doogue and in a judgment of 22 December 2010 costs were ordered in their

1      Ministry of Economic Development v Feeney (2010) 10 NZCLC 264,715 (DC).

favour.3   The Judge found that the Registrar of Companies (―the Registrar‖) should pay the directors 70 per cent of their actual costs and disbursements being a total of

$952,111. This comprised legal fees of $848,020 and disbursements of $104,091.

[3]      This is the appeal against that costs judgment.  The Registrar accepts that this was a case where the Judge in her discretion could properly make a costs order in favour of the directors under the CCCA.   The challenge is to the quantum of the order.  It is submitted for the Registrar that the amount ordered was clearly excessive and wrong.

Background

[4]      Feltex  Carpets  Ltd  (―Feltex‖)  was  listed  on  the  New  Zealand  Stock Exchange.  On 20 February 2006 it issued a statement containing interim financial information for the half year ended 31 December 2005.  The board of directors had approved the statement on 19 February 2006.  Ultimately at the trial the directors all accepted that the statement had failed to comply with the applicable financial reporting standards.   Those standards were the New Zealand equivalent to International Financial Reporting Standards (―the NZIFRS‖).

[5]      Section 36A(3) of the Financial Reporting Act (―the FRA‖) created strict liability offences, and on conviction a director was liable to a fine not exceeding

$100,000.  A director could only be proceeded against summarily and there was no provision for any penalty other than a fine.  The trial in the District Court turned on whether the directors could establish defences under s 40.  Section 40 provided that it was  a defence if  the  director  proved  that  the directors  of the entity took  all reasonable and proper steps to comply.

[6]      The Judge took the view that s 138 of the Companies Act 1993 which allows a director to rely on professional or expert advice in certain  circumstances was relevant.    She  decided  by  reference  to  s  138  that  the  directors  had  taken  all

reasonable and proper steps to comply.  She found that the directors had established

3      Feeney v Ministry of Economic Development DC Auckland CRI-2008-004-29199, 22 December

2010.

a comprehensive programme to manage the transition to the new standards.  They were  justified  in  placing  reliance  on  their  internal  management  team  and  had engaged Ernst & Young, a highly reputable accounting firm, to provide competent professional advice on the financial statements.   She found that the directors were entitled to rely on their internal and external advisors and took all reasonable and proper steps to comply with the company‘s obligations.  She did not accept that the directors should themselves have engaged in a study of the new standards.   She found that the NZIFRS were complex, arcane and written for persons with an understanding of accounting principles.

The costs decision

[7]      The directors had sought costs of $1,360,506 being their total costs.  They had retained one leading firm of solicitors to act for all of them, but retained to represent the audit and non-audit directors two senior counsel with juniors.  The total legal fees were $1,211,804 and the disbursements $148,701.79.

[8]      The Judge noted that the case was the first defended prosecution under s 36A of the FRA and the first time that a court had considered the defence of ―reasonable and proper steps‖ under s 40.  She noted:4

The case raised the important issue of the extent to which directors who are informed as to the affairs of the company and the proper systems and processes in place can rely on the advice of qualified professional advisers.

[9]      She considered the discretion to award costs in s 5 of the CCCA and the principles to be  taken  into account  in the exercise of the discretion.   She then considered the seven factors listed in s 5(2) as relevant to the exercise of the discretion.  She found that the prosecution had acted in good faith, and that at the commencement of the proceedings it had sufficient evidence to prove the failure to comply with the applicable financial reporting standards.  She found that ―Subject to the directors‘ claim that the prosecution did not take proper steps to investigate whether they had taken all reasonable and proper steps the investigation into the offence was conducted in a proper manner.‖   She found that the informations were

not dismissed on a technical point.   They were dismissed  because the directors established that they were not guilty.

[10]     She went on to find that the prosecution chose to proceed to put the directors on trial without giving fair and adequate consideration to the steps the directors took to  ensure that  the  standards  would  be  complied  with.    She  considered  that  the prosecution  was  probably  under  a  misapprehension  that  the  directors  were  not entitled to rely on advice and assistance from management and professional advisors. She observed that if fair and adequate consideration had been given to the steps the directors took with a proper appreciation of the legal position the prosecution ―may well not have proceeded‖.    She stated that the prosecution advanced unnecessary material.  She considered that the directors had been fully co-operative throughout and that this was relevant to an award of costs in their favour.   In relation to the liability to pay costs she summed up as follows:

[47]   I consider it to be of importance in this case that the prosecution is acting in the public interest.   It is manifestly in the public  interest that company directors should ensure that financial reporting requirements are complied with.  Feltex‘s financial statements did not comply.  I do not think that the prosecution should be required to be the judge of whether the directors had discharged the onus on them even where it was or may have been apparent that they had a basis for claiming that they had taken all reasonable and proper steps.   Therefore it could not be proper to consider awarding full indemnity costs.  But it was incumbent upon the prosecution to give fair consideration to the directors‘ defence of which Bell Gully‘s letter made  them  well  aware.    They  did  not  do  so.    They  appear  to  have approached the case with misconceptions which are reflected in the inadequacy of the identification of the additional steps they submit the directors should have taken.  The prosecution should have realised there was a high probability the directors‘ defence would succeed.  Having chosen to proceed the prosecution must accept an obligation to pay costs.

[48]  I consider it is ―just and reasonable‖ to award costs which reflect the prosecution‘s choice to proceed in a way which put the defendants to unnecessary  expense  when  there  was  a  high  probability  the  directors‘ defence would succeed and succeed in a way which put the defendants to unnecessary expense.

[11]     She then turned to the level of costs.  It is this part of her judgment that is subject  to  specific  challenge.     She  noted  that  the  Costs  in  Criminal  Cases Regulations 1987 set out a scale of costs that has remained unchanged since 1987 and she reviewed the terms of s 13(3) of the CCCA relating to costs awards in excess of scale.  She considered the Law Commission report on s 13(3) and several cases

where the level of costs had been discussed.  She concluded in a brief paragraph that the authorities showed that the level of costs was ―incapable of being determined in other than a broad brush fashion‖.5   She asked herself the question of what sum the Court thought was just and reasonable and found that the Registrar should pay 70 per cent of the total costs, being legal fees of $848,020 and disbursements of $104,091.

Approach to the appeal

[12]     This  is  an  appeal  against  the  exercise  of  a  discretion.    It  is  now  well established that the threshold for a successful appeal is much higher where it is an appeal against the exercise of a discretion, rather than an appeal by way of rehearing. This was recognised recently by the Supreme Court in K v B:6

… a general appeal is to be distinguished from an appeal against a decision made in the exercise of a discretion. In that kind of case the criteria for a successful appeal are stricter: (1) error of law or principle; (2) taking account of irrelevant considerations; (3) failing to take account of a relevant consideration; or (4) the decision is plainly wrong.

[13]     This approach has been affirmed particularly in the area of criminal costs appeals.  In the Supreme Court decision on applying the CCCA of R v Reid it was observed:7

… an appellate court cannot hope to capture the ephemeral but significant impressions which inform the assessments and discretions of the trial judge. That is why, of course, a challenge to the exercise of discretion must demonstrate what would be termed, generally, an error of principle.

[14]     This approach is reflected in a number of High Court decisions: see Rohloff v Fulton Hogan Ltd8 and Edwards v Toime.9   The appellate court will not substitute its own impression of what is a fair award for that of the Judge.   It is necessary to

demonstrate error or to show that the result was clearly wrong.

5 At [61].

6      K v B [2010] NZSC 112, [2011] 2 NZLR 1 at [32].

7      R v Reid [2007] 1 NZSC 90, [2008] 1 NZLR 575 at [23].

8      Rohloff v Fulton Hogan Ltd HC Wellington AP 67/99, 2 June 1999 at [10].

9      Edwards v Toime HC Wellington CRI-2006-485-118, 7 December 2006 at [16].

The respective positions

[15]     Mr Moore SC for the Registrar submitted that the costs award was plainly wrong and was reversible for any or all of the following reasons:

(a)       The  Judge  appears  to  have  found  that  the  prosecution  was  not reasonably  and  properly  brought  and  pursued  when  in  fact  the process underlying the decision to prosecute was exemplary;

(b)       The Judge effectively failed to consider the robustness and propriety of the ‗decision to prosecute‘ process including and Mr Rennie‘s advice and ongoing involvement;

(c)       The  Judge‘s  finding  that  the  prosecution  advanced  unnecessary

material at the ‗liability‘ phase was wrong;

(d)       The Judge was wrong to find that the behaviour of the respondents in relation to the acts or omissions was such that costs should be awarded;

(e)       The Judge made no finding as to reasonableness and failed to apply proportionality when determining the quantum of the costs award;

(f)       The costs award offends the principle of public policy enunciated in D v R10  that a prosecutor brings proceedings in the public interest and thus should be treated more tenderly than a civil litigant;

(g)       The costs award fails to apply the principle enunciated in Connolly11 that ―the existing Crown rate is the maximum rate absent special circumstances‖, the award being many times the actual Crown costs;

(h)      The costs award will have a significant inhibiting effect in that regulators will be deterred from taking proper cases in the face of well-resourced  putative  defendants  who  appear  to  have  breached strict liability offence provisions.

[16]     Mr Galbraith QC in a vigorous response submitted that appellate courts had been particularly reluctant to interfere with the exercise of a discretion as to costs. He submitted that the Judge‘s criticisms of the prosecution were justified and said that the Judge‘s findings as to whether the prosecution was reasonably and properly brought could not be shown to be wrong and that Mr Rennie QC‘s advice and ongoing involvement did not exonerate the Registrar.   He supported the Judge‘s finding that the behaviour of the directors in relation to the acts or omission were

such that costs should be awarded to them.

10     D v R [1995] 3 NZLR 366 (HC).

11     R v Connolly (2006) 22 NZTC 19,844 (HC).

[17]     Mr Galbraith challenged a proposition that the prosecution should be treated more ―tenderly‖ than a civil litigant and that the investigation process was thorough. He submitted that the directors‘ position had been consistent throughout, and that the directors had proved their evidence and were entitled to rely on that factor in a costs hearing.  He submitted that the rate set out in the CCCA and indeed actual Crown costs were out of date and not in touch with reality.  He submitted that the alleged

―illegitimate deterrent effect on prosecuting agencies‖ of a significant award was not a relevant consideration.

The legislative provisions relating to costs

[18]     In the absence of the sort of scale that exists in the High Court Rules, it is difficult for a trial Judge in a criminal trial to assess the quantum of costs in a principled way. This was the problem faced by the trial Judge in this case.

[19]     Section 5 of the CCCA provides:

5     Costs of successful defendant

(1)   Where  any  defendant  is  acquitted  of  an  offence  or  where  the information charging him with an offence is dismissed or withdrawn, whether upon the merits or otherwise, or where he is discharged under [section 184F] of the Summary Proceedings Act 1957 the Court may, subject to any regulations made under this Act, order that he be paid such  sum as  it  thinks  just  and  reasonable  towards  the  costs  of  his defence.

(2)   Without limiting or affecting the Court's discretion under subsection (1) of this section, it is hereby declared that the Court, in deciding whether to grant costs and the amount of any costs granted, shall have regard to all relevant circumstances and in particular (where appropriate) to—

(a) Whether the prosecution acted in good faith in bringing and continuing the proceedings:

(b)   Whether at the commencement of the proceedings the prosecution had sufficient evidence to support the conviction of the defendant in the absence of contrary evidence:

(c)   Whether  the  prosecution  took  proper  steps  to  investigate  any matter coming into its hands which suggested that the defendant might not be guilty:

(d)   Whether generally the investigation into the offence was conducted in a reasonable and proper manner:

(e)   Whether the evidence as a whole would support a finding of guilt but the information was dismissed on a technical point:

(f)  Whether the information was dismissed because the defendant established (either by the evidence of witnesses called by him or by the   cross-examination   of   witnesses   for   the   prosecution   or otherwise) that he was not guilty:

(g)   Whether the behaviour of the defendant in relation to the acts or omissions on which the charge was based and to the investigation and proceedings was such that a sum should be paid towards the costs of his defence.

(3)   There shall be no presumption for or against the granting of costs in any case.

(4)   No defendant shall be granted costs under this section by reason only of the fact that he has been acquitted or discharged or that any information charging him with an offence has been dismissed or withdrawn.

(5)   No defendant shall be refused costs under this section by reason only of the fact that the proceedings were properly brought and continued.

[20]     Section 13 of the CCCA provides that the Governor-General may from time to time, by order in Council, make regulations prescribing the maximum scales of costs that may be ordered to be paid.  It is provided at s 13(3):

13   Regulations

…

(3)   Where any maximum scale of costs is prescribed by regulation, the Court may nevertheless make an order for the payment of costs in excess of that scale if it is satisfied that, having regard to the special difficulty, complexity, or importance of the case, the payment of greater costs is desirable.

[21]     Regulations were made in 1987,12 with the maximum fees payable being last fixed (in 1988) at $226 per half day occupied in court.   On the basis of those regulations the maximum fees payable would be approximately $21,018 for two senior counsel with a junior each for 31 half days.

[22]     Thus, the CCCA sets out in detail particular circumstances that are relevant to the issue of whether to grant costs to a successful defendant.  It is on the face of s 13

prescriptive as to the maximum scales of costs that may be ordered, and exact as to

12     Costs in Criminal Cases Regulations 1987.

the circumstances in which that scale can be exceeded; the Court must be satisfied having regard to the ―special difficulty, complexity, or importance of the case‖ that the payment of greater costs is desirable.

[23]     As was pointed out in Shirley v Wairarapa District Health Board in a civil proceeding,  while  the  costs  jurisdiction  is  discretionary it  is  not  unprincipled.13

Otherwise  it  would  be  unacceptably  arbitrary.    The  Court  held  there  that  the discretion had to be exercised generally in accordance with the principles set out in the costs rules.14

Background to these legislative provisions

[24]     The background to the legislative provisions was discussed by the Court of Appeal in R v Connolly (―the Digitech case‖).15    The origin of the CCCA was an unpublished report entitled Report of Committee on Costs in Criminal Cases dated

12 September 1966.16   The committee identified issues and made recommendations

for reform.  It considered various policy factors and concluded:

38.  It is our view that the law and practice with regard to the award of costs to successful defendants in criminal cases should be based on the principle that ordinarily costs should be granted where in one way or another the defendant has shown his innocence, and of course in cases where the prosecution has for one reason or another been brought improperly or negligently. The most difficult part of our task however has been to suggest a way in which this principle can be accorded legal effect without making the award of costs an almost general consequence of acquittal. As we have said we think this would be undesirable.

…

40.  What we recommend is that there should be written into the legislation some principles to guide Judges or Magistrates in determining applications for costs, and to encourage them to use their discretion more liberally.

[25]     The Committee‘s recommendation was adopted in the legislation in respect of s  5.   Then in  a 2000  report  the  Law Commission  attempted to  identify the

13     Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [16].

14 At [17].

15     R v Connolly (2007) 23 NZTC 21,172 (CA). The decision was ultimately overturned by the

Supreme Court, but the Supreme Court did not criticise this part of the judgment.

16     ―Report of Committee on Costs in Criminal Cases‖ (Wellington, 12 September 1966).

underlying reasons justifying an order for costs under the CCCA, whether following conviction  or  acquittal.    A number  of  factors  relevant  to  costs  applications  by successful defendants, linked to the criteria in s 5(2) of the CCCA, were discussed.17

The Court of Appeal in the Digitech case summarised these as follows:18

(a)   People  accused  of  criminal  offences  can  be  put  to  a  great  deal  of expense in defending themselves. Unlike defendants in civil actions, they cannot simply compromise their positions because their liberty, reputation and pocket may all be at risk: see Acuthan v Coates (1986) 6

NSWLR 472 at 480.

(b)   If a prosecution has been brought for a malicious or improper reason, the defendant should receive costs.

(c)   It is reasonable that, if a prosecution has been conducted in a negligent manner (for example if the facts have not been properly investigated) that the defendant should receive costs.

(d)   Costs should  not  be  awarded  simply because a  defendant  has  been acquitted. This arises because of the ―lucky to get off factor‖ as well as because the verdict is expressed negatively as ―not guilty‖.

(e)   In cases where the prosecution has been reasonably conducted, but the defendant has been able to show he or she is definitely or probably innocent by showing a deficiency in the prosecution case or bringing credible witnesses to shed a more favourable light on the circumstances, it  will  be  reasonable for a  costs  award  to  be  made  in  favour  of  a defendant.

[26]     Most of the reported decisions deal with the issue of whether costs should be awarded. They do not analyse the basis upon which quantum is to be calculated.

Relevant factors in the assessment of quantum

[27]     The reality is that the maximum scale of costs set out in the Regulations has not been regularly revised, and is hopelessly out of date.   It bears no relation to reality.  The scale was described as ―obsolete‖ in Pawson v Heavylift Cargo Airlines

Pty Ltd.19    This inevitably colours the views of Judges as to the circumstances in

17     Law Commission Costs in Criminal Cases (NZLC R60, 2000) at [24].

18 At [22].

19     Pawson v Heavylift Cargo Airlines Pty Ltd HC Auckland CRI-2005-404-278, 1 March 2006 at [12].

which the maximum scale of costs set out in the Regulations is to be exceeded. Nevertheless, it cannot be ignored and on occasions (not recent) has been applied.20

[28]     Once the s 13(3) threshold is crossed the Court is not, in my view, bound solely by the considerations of special difficulty, complexity or importance in assessing quantum, although those factors remain of importance.  There is a general discretion given to the Court by s 5(1) to order a payment of such sum as it ―thinks just and reasonable‖ towards the cost of the defence.  That sets the general test.  The considerations  set  out  in  s  5(2)  apply  specifically to  the  ―amount  of  any costs granted‖ as well as whether to grant costs. As Tipping J observed in T v Collector of

Customs:21

The amount to be ordered may be influenced by the grounds which existed for making an order in the first place.  For example, if, under s.5(2)(a) the Court is of the view that the prosecution had not acted in good faith that might be a strong pointer to awarding costs at or towards an indemnity level.

[29]     The amount of costs actually incurred is undoubtedly a relevant factor in considering the quantum to be awarded.   It is always a factor that is taken into account  if  the  decision  has  been  made  to  go  above  the  scale:  see  for  instance R v Rada  Corporation  Ltd.22      Nevertheless,  as  Mahon  J  said  in  R  v Reed  after comparing the legal expenses paid or incurred by the defendant for two trials ($22,000) and the maximum fees payable to Crown counsel ($2,200):23

However, whilst recognising the clear right of the defendant to retain in both trials leading counsel from the top rank of the New Zealand criminal Bar, the expense so incurred must necessarily have limited relevance to an award of costs in favour of a defendant under the Costs in Criminal Cases Act. That statute limits the jurisdiction of the Court to ordering payment to an acquitted defendant of such an amount towards the costs of his defence which is ―just and reasonable‖. The latter phrase thus qualifies the extent to which public funds are to subsidise the legal costs of an acquittal where the circumstances justify an order in favour of a successful defendant. It is not a matter of indemnifying a defendant for the costs which he has incurred in his defence. He may only be awarded an amount which, having regard to all the circumstances, is ―just and reasonable‖.

20     See R v T [1992] 3 NZLR 215 (HC).

21     T v Collector of Customs HC Christchurch AP 167/94, 28 February 1995 at 4.

22     R v Rada Corporation Ltd [1991] 2 NZLR 122 (HC).

23     R v Reed [1980] 1 NZLR 758 (HC) at 767–768.

[30]     These comments were quoted by Barker ACJ in D v R24 and are still apposite today.   There is a lottery element in the amount of costs actually incurred in a defence.   That amount can turn on the defendant‘s means and how much that defendant is prepared to spend on counsel and experts.  It can therefore vary wildly. A defence conducted by some of New Zealand‘s leading barristers, as here, will of course cost far more than if conducted by barristers on legal aid, or barristers in their mid-career.  So too if a defendant chooses to employ a number of barristers rather than just one or two.

[31]     It is not fair or rational for the unsuccessful party‘s costs burden to depend on such  vagaries.   A more  settled  and  predictable  approach  is  necessary.    This  is accepted in the New Zealand approach to the quantum of costs awarded to the successful party in civil litigation.  The English concept of indemnity costs has been eschewed, except for extreme cases.   The United States approach to let costs lie where they fall also has not been adopted.   The approach in New Zealand as it evolved, and as it was ultimately regularised and recognised by a set scale in the High  Court  Rules,  has  been  to  award  costs  that  will  provide  a  significant contribution to notional actual costs.  This is sometimes known as the ―proportion of costs‖ approach.  The costs are presumptively a proportion of actual and reasonable

costs,  but  subject  to  an  overriding  discretion  to  determine  otherwise.25    That

presumptive proportion of actual and reasonable costs is now assessed under the current rules on a notional average basis of reasonable costs and quite specifically not as  a percentage of  actual  costs.   The  High  Court  Rules  now prescriptively categorise proceedings by complexity, the appropriate skill level of counsel, and the

sort of time reasonably required for the proceeding.26  The tests are objective.

[32]     Obviously it would be wrong to simply apply the High Court scale to assess the appropriate level of costs.  Nevertheless in a trial such as this, which involved issues of fact and law, the costs that would have been awarded on the scale if it was a

civil trial can be a useful check in assessing what is just and reasonable.

24     D v R [1995] 3 NZLR 366 (HC) at 367–368.

25     Rules Committee invitation for comment on High Court costs proposals (1997) at 1.

26     High Court Rules, rr 14.3–14.5.

[33]     So also, the actual prosecution costs are a relevant consideration.  The Crown Solicitor was paid at set Crown rates which are well below market for the quality of lawyer who appeared.  This is a feature of the present prosecution system.  Such low rates  are  accepted  by  Crown  Solicitors‘ offices.    However,  those  offices  while charging such low rates, run successful commercial businesses.  The rates cannot be treated as divorced from commercial reality.  I am informed that in this case, based on the standard Crown rate of $192 per hour, the Crown charges came to a total of

$144,000.  There were only two counsel for the Registrar against a total of five for the various defendants.  There was some difference in seniority.  These Crown costs cannot and should not be ignored in the assessment process.  They are of assistance in assessing the just and reasonable legal costs involved in a prosecution such as this.

Fogarty J in R v Connolly27  awarded costs on the basis of the Crown rates.   This

decision was ultimately upheld by the Supreme Court.28   Fogarty J took the view that Parliament did not intend counsel for the accused to be remunerated at a higher rate than the Crown, at least not in most cases.29

[34]   Finally, costs awarded in other comparable cases can provide a helpful indication of the fair range.  However, each case must turn on its own facts.  Here the trial Judge summarised a number of recent costs awards, most of which involved less than $100,000.

[35]   The Crown also relied on Lord Devlin‘s general comment that because prosecutors bring proceedings in the public interest they should be treated ―more tenderly‖ from a costs point of view.30     I accept Mr Galbraith‘s observation that caution  must  be  exercised  in  accepting  this  proposition  as  applicable  to  New Zealand, given that there is an indemnity costs regime that applies to civil litigation in  England.    I also  accept  that  there  is  a  particular  public  policy concern  that

regulators should not be unduly inhibited by the dangers of very high costs awards, when they wish to bring a claim in good faith and on apparently good advice.   In R v Reid the Supreme Court did not accept the view of the Court of Appeal that an

award of costs could deter regulators, but that was in the context of an erroneous

27     R v Connolly (2006) 22 NZTC 19,844.

28     R v Reid [2007] NZSC 90, [2008] 1 NZLR 575.

29 At [87].

30     Berry v British Transport Commission [1962] 1 QB 306 (CA) at 327.

apprehension of where the costs would fall in that case.  Here there is no doubt that the costs will come from general public funds.  The sums involved are much greater than in R v Reid.   Undoubtedly an obligation to pay costs approaching a million dollars  will  have  an  impact  and  be  remembered  when  it  comes  to  future prosecutions.  Just as the inhibiting effect of very high costs awards was a factor in the introduction of the present civil scale, it is a factor to be recognised in assessing the correct approach.  So too is the difficult position that persons accused of criminal offending take in defending themselves, when their liberty (albeit not in this case),

reputation and pocket are, or may be, at risk.31   However, I treat these general factors

as no more than background considerations in assessing the correct approach.  They are not matters to be specifically addressed in assessing the final quantum.

[36]     Taking all those factors into account, in my view, certain factors are relevant and can be considered to assist in assessing a ―just and reasonable‖ amount:

(a)       The  special  difficulty,  complexity,  or  importance  of  the  case  (the factors that are specifically relevant in s 13);

(b)The seven factors set out as relevant circumstances in s 5(2), if they arise;

(c)       The actual costs incurred;

(d)      The costs incurred by the Crown;

(e)       The costs that would have been incurred if the civil scale in the High

Court Rules had applied; and

(f)       Other costs awards.

[37]     The Judge in her judgment as to costs, while setting out her reasons in detail for deciding to award costs, did not set out her reasons for reaching the actual

amount, save for referring to a number of cases, and observing that she was doing so

31     Law Commission Costs in Criminal Cases (NZLC R60, 2000) at [24] citing Acuthan v Coates

in a broad brush fashion standing back and asking the question what is just and reasonable.   This was a very high award, close to four times more than the next highest.32   In the absence of fuller reasons, I proceed to consider these factors.

Should costs in excess of the scale have been awarded?

[38]     Despite the absurdity of the scale, a figure of $226 per half day fixed in 1988, it is necessary to examine whether the test in s 13(3) for exceeding the scale has been met.  Under s 13(3) costs in excess of the scale will only be ordered if the case is one of special difficulty, complexity, or importance when compared with the general run of criminal cases.

[39]     The case was described  by Judge Doogue as raising an  important issue, namely whether s 138 of the Companies Act allowing a director to rely on information and advice applied to a prosecution under s 36A of the FRA.   It was common ground that s 13(3) applied.  I am satisfied that the case was of sufficient importance to warrant a departure from the scale of costs.

Application of the s 5(2) factors

[40]     The  Judge  specifically  asked  the  question,  what  costs  were  just  and reasonable under s 5(1)?  Although the Judge did not say she was doing so, it seems from the way in which she reached her conclusion that the factors which influenced her  in  deciding  to  award  costs  under  s  5(2)  were  also  considered  relevant  in assessing what was a just and reasonable quantum.  This was the correct approach. The question still remains whether it has been shown that she made an error or was clearly wrong in awarding total legal fees and disbursements of $952,111.

[41]     The s 5(2) factors are not a code in relation to the awarding of costs, and do not need to be considered seriatim.33    As Judge Doogue observed, the Court has a broad discretion as to whether to fix costs.   In the end she specifically considered

three s 5(2) factors as supporting the costs claim.  It was her analysis of these factors,

32     Maruha (NZ) Corporation Ltd v Ministry of Fisheries DC Christchurch CRN 3000511913,

21 December 2005.

33     Solicitor-General v Moore [2000] 1 NZLR 533 (CA) at [32]–[33].

in  particular  s 5(2)(c),  that  was  the  focus  of  much  of  the  detailed  criticism  in

Mr Moore‘s submissions.

Proper steps to investigate?

[42]     Section 5(2)(c) states that a relevant circumstance is whether the prosecution

―took proper steps to investigate any matter coming into its hands which suggested that the defendant might not be guilty‖.  Judge Doogue concluded:34

I conclude, in summary, that the prosecution chose to proceed to put the directors on trial without giving fair and adequate consideration to the steps the directors took to ensure that the standard would be complied with and were probably under a misapprehension that the directors were not entitled to rely on advice and assistance from management and professional advisers. Had the prosecution given fair and adequate consideration to the steps the directors took with a proper appreciation of the legal position the prosecution may well have not proceeded.

(Emphasis added.)

[43]     Her consideration of this issue focussed on a letter sent by Bell Gully to the prosecution‘s investigator on 3 March 2008 setting out why the directors had a compelling defence to any prosecution.  She appended a copy of that letter to her judgment and observed that the findings of law and fact in her judgment were not different in any significant way from the arguments set out in the letter.  She did not accept the prosecution submission that until the Court had resolved some disputed factual  matters  it  was  not  possible  to  be  sure  that  the  directors  had  taken  all reasonable and proper steps and therefore had a s 40 defence.   She held that the prosecution failed to have proper regard to the information provided to it by the directors.  She analysed in some detail a letter of advice sent by independent counsel appointed by the Director of Legal Services Ministry of Economic Development and observed that the prosecution failed to consult with an auditor as to the advice which the directors could reasonably have expected to receive from Ernst & Young.  She considered that the prosecution took no proper steps to ascertain from a Mr Holland who was a witness for the prosecution the true nature of the relationship between Feltex and the ANZ Bank which had the relevant security.   She analysed in some

detail the advice given by counsel noting he did not say in his advice whether or not

he was given Bell Gully‘s letter dated 3 March 2008.

[44]     Mr Moore made detailed criticisms of this part of her Honour‘s judgment.  I am mindful of the difficulty that an appellate court has in considering such detailed matters of fact and impression.   What I do observe, however, is that some of her commentary amounted to a criticism of counsel‘s advice.  She observed that counsel did  not  address  a  relevant  change  for  disclosing  covenant  breaches  in  interim

financial statements.35    She observed that he referred to a judgment which does not

address financial reporting.36  To blame the Registrar for these matters was severe.

[45]     Mr Moore referred to the detailed steps that were taken before it was decided that charges should be laid.   The prosecution had its origin in a Securities Commission inquiry.  The Securities Commission panel and senior employers which had  investigated  the  matter,  which  included  a  number  of  very experienced  and nationally recognised figures in the financial markets sector, had concluded that there  were  errors  in  the  interim  financial  statements  and  referred  these  to  the Registrar for possible prosecution action.   That initial report had noted that there might be defences available to the directors on the grounds that they took all reasonable and proper steps to comply, but the Commission was nevertheless of the view that the Feltex board had failed to pay sufficient attention to the breach and whether they had met their obligations.

[46]     There was then an investigation conducted by the National Enforcement Unit of the Ministry of Economic Development on behalf of the Registrar, and advice was received from Meredith Connell that provided detailed material in relation to the charges and sufficiency of evidence.  That advice was not disclosed, but presumably it was sufficiently positive to warrant further steps.

[47]     On receipt of that legal advice from Meredith Connell, a Mr H Rennie QC, a recognised and experienced commercial barrister, was engaged.  Mr Rennie was also an experienced director of public companies and public corporations and trusts.  He

was ultimately asked to review the material that was submitted to the Registrar for his decision whether to prosecute.  He considered whether statutory defences were likely to be made out by any of the directors.  He reviewed the material in detail and provided written advice.   He concluded that the directors would have difficulty in establishing statutory defences.   He considered that the two matters alleged in the then proposed charges were basic to a director‘s role and that the breaches and any answer to them should be determined by the Court.  The decision to prosecute was then made by the Deputy Registrar of Companies who was highly experienced in economic matters, together with the assistance of another senior member of the Companies Office.

[48]     The decision to prosecute was made in a strict liability context. As the Judge herself observed, the case was important and was to be the first time the Court considered the defence of reasonable and proper steps under s 40 of the FRA. As she herself commented, the case raised an important issue as to the extent to which directors who are informed of the affairs of the company and have proper systems and processes in place can rely on the advice of qualified professional advisors.

[49]     It is perhaps all these factors which prompted her, despite her criticisms, to say that the prosecution ―may well have not proceeded‖ rather than to observe that it should not have proceeded.   This remark was consistent with later observations about there being a ―high probability‖ that the directors‘ defence would succeed, rather than that it would succeed.

[50]     Considering her judgment on an overview, she accepts that it was open to the prosecution to pursue the charges.  That being so her judgment, while a criticism of some of the specific actions and conclusions reached by the prosecution, was not and could  not  be a  general  condemnation  of the prosecution  process.    Indeed,  it  is difficult  to  see  a  way  in  which  the  general  process  of  the  prosecution  can  be criticised, given the number of steps taken which led to a prosecution, the number of senior persons who after investigation supported the prosecution, and the specific advice of senior independent counsel.

[51]     In  his  affidavit  filed  on  behalf  of  the  Registrar  in  relation  to  the  costs application, Mr Rennie confirmed his very broad experience as a chairman and director of public companies, including his membership of the audit committees of significant institutions including the Bank of New Zealand.  He had indeed been the Chair of the Audit Committee of the Bank of New Zealand from 2008 to 2010.  He confirmed that he had advised the Registrar that offences were disclosed and in his assessment  the  directors  would  have  difficulty  in  establishing  a  defence.    He reiterated in that affidavit that in his broad experience directors would not rely on a review statement of the kind relied on by the directors from external accountants as

definitive or final.37   He noted that, in the event, the directors satisfied the Court that

it was reasonable for them to place reliance on such a statement such that they met the onus on them under s 40.  He observed that he did not consider a submission to the alternative to be untenable.  He made a number of other comments explaining why he thought the prosecution tenable.  I appreciate that the Judge considered that Mr Rennie  was  not  given  all  the  information  he  might  have  been  given.     I acknowledge a question arose as to whether counsel had been provided with Bell Gully‘s letter as I have noted above.  However, Mr Rennie clearly considered in his affidavit that he had sufficient information.  It is clear that he thought and still thinks that there was a tenable basis for the prosecution.  Although there are differences in degree, the Judge accepted this in observing that there was a ―high probability‖ that the defence would succeed, rather than a certainty, and that it ―may well‖ not have proceeded rather than should not.  The defence of ―reasonable and proper steps‖ had not  been  tested  and  just  what  was  reasonable  and  proper  was,  as  the  Judge recognised, far from settled.

[52]     Having considered Mr Moore‘s criticisms, I do not find the Judge wrong in her conclusion that there were failures by the Registrar in the investigation process. Her  criticism  at  its  strongest  was  about  the  details  of  the  specific  information provided to third parties, and the issues examined and the conclusions reached in the course of the investigation process.  It was open to her to find these failures.  She was also clearly right in accepting that this was a prosecution open to the Crown to

bring.

37 At [12].

Other alleged errors

[53]     The Judge found that the prosecution was not reasonably pursued in the sense that unnecessary material was advanced.  She stated that:38

At all material times the prosecution knew the directors accepted that the standard had not been complied with.  Despite this the prosecution chose to devote significant evidence, time and effort to providing that the standard had not been complied with.

[54]     I was informed by Mr Moore for the Registrar that there was no specific concession made at the outset of the hearing in the District Court by the directors accepting liability for the breaches that had occurred.   There were specific concessions made in the District Court in the respective openings of defence counsel but not before.   I am satisfied that this was so.   Therefore the Crown cannot be criticised for fully proving that the standards had not been complied with.

[55]     The Judge suggested that the prosecution should have sought an opinion from an auditor as to the advice which the directors could have reasonably expected to receive from Ernst & Young had that firm performed its review engagement to a professional standard.  I accept Mr Moore‘s point that a Mr O‘Connor, a senior audit partner of BDO Spicers, was in fact called by the prosecution.  He made it clear in his evidence that in his view the financial statements were the ultimate responsibility of the directors, and not auditors.   The Judge did not note Mr Rennie‘s extensive audit  experience,  and  his  investigation  of  the  Ernst  &  Young  advice  and  this provided the basis of his evidence-in-chief.  Her criticism therefore appears to have been unwarranted.

[56]     These factors, the calling of excessive evidence and the failure to obtain audit advice matters, did not feature in the Judge‘s overall conclusion on liability to pay costs.39      She  did  not  refer  specifically  to  the  conduct  of  trial  or  behaviour  of directors‘ issues.   Her primary concern was the lack of a fair consideration of the directors‘ defences as set out in Bell Gully‘s letter.  She also took into account the

co-operation of the directors with the prosecution under s 5(2)(g) of the CCCA.  I

38 At [45].

39 Set out at [10].

accept that a defendant‘s co-operation and full disclosure can be a relevant factor in favour of a significant award of costs to a defendant.   So also, the complete exoneration of the directors after they had given full disclosure and evidence was relevant under s 5(2)(e).

Conclusion as to s 5(2) factors

[57]     I have not accepted that the Judge erred significantly in her criticism of the Registrar‘s investigation.  However, accepting the thrust of that criticism, there were a number of discretionary circumstances which could be seen as being against the award of a large sum of costs.   These were noted by the Judge in relation to her initial assessment of whether costs should be ordered.  The prosecution had acted in good faith in bringing and continuing the proceedings in terms of s 5(2)(a).  It did have at the commencement of the proceedings sufficient evidence to support the conviction  of  the  defendants  in  the  absence  of  contrary  evidence  in  terms  of s 5(2)(b).  Subject to the finding that there were defects in the process of information gathering  and  assimilation,  the  prosecution  took  proper  steps  to  investigate  the matter in terms of s 5(2)(c).

[58]     There are some criticisms of the Registrar that I have found unwarranted in the Judge‘s reasoning.  While they do not put her decision to award costs in doubt, they are relevant in terms of her broad brush assessment of the level of costs.  On the one hand she is critical of the level of consideration given to the Bell Gully letter. On the other hand  she  has  accepted  that  this  was  the first  time the  Court  had considered the defence of reasonable and proper steps, and that the case raised an important issue as to the extent of directors‘ duties.  She also recognised correctly that the prosecution should not be required to be the judge of whether the directors had discharged the onus on them, even when it might have been apparent that they might have had a basis for claiming that they had taken all reasonable and proper steps.   In those circumstances it is not surprising that she does not say that the prosecution should not have been brought.   This, and unwarranted criticisms of aspects of the prosecution in the judgment, are relevant when it comes to assessing the submission for the Registrar that the quantum awarded was clearly too high.

The actual costs incurred

[59]     These have already been set out.   The decisions of the directors to obtain representation at a top level is not criticised by the Crown.  But they needed to be recognised for what they were; costs arising from a no-expenses spared approach to the defence.   For the reasons already set out, those costs are just a factor to be considered, and should not drive the amount actually awarded.   It was an error to award two-thirds of those actual costs rather than to treat them as a factor to be weighed and balanced with other factors.

The costs incurred by the Crown and comparisons to other costs

[60]     The directors‘ costs were far more than those incurred by the Crown.  The Crown‘s solicitor/counsel costs came to $144,000 as against the $1,211,804 for the directors, some eight times more.   This disparity was put to the Judge but not commented on by her in her decision.   The level of Crown costs was a factor of as much relevance as the actual defence costs when it came to the assessment.   The costs awarded in the Digitech case were based on the Crown costs.   These costs should have been taken into account in the assessment process.

Cost levels if it were a civil trial

[61]     If this had been a civil trial in the High Court with two lots of solicitors and barristers, the costs would have been $198,560 on a 2A basis, $206,880 on a 2B basis, $293,984 on a 3A basis and $369,350 on a 3C basis, the highest possible basis. Here there was just one firm of solicitors.  These costs are relevant as a comparison, although I note that this was not a matter put to the Judge.  There is, of course, a considerable difference  between  criminal  and civil  proceedings, not the least of which is the difference in the damage to reputation and career, and often the loss of liberty, that can come from a criminal conviction.  Nevertheless, the rates give some indication of what is acceptable as costs to be paid to a successful party to litigation.

[62]     As was observed in McGechan on Procedure40  the daily recovery rates are intended broadly to approximate two-thirds of the rates that New Zealand practitioners in the relevant category currently charge to clients.   The Rules Committee fixes the rates in consultation with the New Zealand Law Society, the New Zealand Bar Association and the Legal Services Agency.  The rates therefore can  be  seen  as  creating  a  presumption  as  to  what  is  a  reasonable  return  for  a successful litigant, at least in civil proceedings.

[63]     Even on the most generous comparison, the costs ultimately awarded by the Judge, exclusive of disbursements, come to more than twice the award the directors would have received if costs in a civil trial on a 3C basis had been awarded.

Other costs awards

[64]      Although there was no comparison of costs levels done by the Judge, she did consider awards in other cases.   The majority of awards have been less than

$100,000.  By far the greatest award which up to the date of this hearing had been made  in  New  Zealand  was  in  Maruha  (NZ)  Corporation  Ltd  v  Ministry  of Fisheries.41   The applicants in that case, who were involved in a commercial fishing operation, had successfully defended charges entailing allegations of making false statements in returns required to be provided under the Fisheries Act 1996.   The hearing lasted two weeks.   The applicants sought full indemnity for legal fees of

$629,000, expert witness fees of $114,000 and disbursements of $30,000.   Costs payable to the Crown were $34,994.  The Judge considered an amount of $225,000 was a just and reasonable sum to be paid towards the applicants‘ defence of the charges, in addition to the full amount of the expert witness fees and disbursements. The Judge was firmly of the view that while the respondent was not negligent in commencing the prosecution, its decision to pursue the matter to trial involved a significant  lack  of  care.    There  was  a  question  as  to  the  prosecution‘s  even

handedness.42    The evidence as a whole did not support a finding of guilt.43    There

40     McGechan on Procedure (online looseleaf ed, Brookers) at [HR 14.4.01].

41     Maruha (NZ) Corporation Ltd v Ministry of Fisheries DC Christchurch CRN 3000511913,

21 December 2005.

42 At [46].

43 At [51].

were various failures to adequately assess the strength of the applicants‘ case, in particular in relation to its expert evidence.   It is difficult to see why an award in percentage of actual costs terms, almost twice as high as in Maruha, should have been ordered in this case.

Overview

[65]     Given the factors I have set out, this award was clearly too high.  This was an important case, but in terms of what was at stake and the difficulty of the issues, far from the most important.  In comparison to, say, the Digitech litigation, the stakes were not as high.  It must be accepted that there was a failure to adequately consider the Bell Gully letter and investigate the claimed defences.  However, advice from a number of proper sources was obtained before the decision to prosecute was made. The Judge found that there was no bad faith or serious error shown by the Registrar in deciding to prosecute.  The charges were pursued competently in Court, and the elements were proved.   Affirmative defences of the nature of the s 40  defence sometimes succeed, and did in this case.

[66]     The  Crown  costs  would  indicate  that  an  appropriate  award  would  be somewhere about $150,000, the civil costs at somewhere between $250,000 and

$350,000.   An award in this range would have been in line with the award in Maruha.   The correct award needed to remain connected to the more objective comparators of the actual Crown costs and what would have been obtained in serious civil litigation.  The costs award of in excess of $800,000 pivoted on the actual costs incurred (two-thirds).  That amount turned on the vagary of the directors‘ resources and choice of the number and seniority of the counsel briefed. It should have been assessed taking into account all the mentioned factors, in particular actual Crown costs.     The two-thirds of full costs involved an inadequate recognition of the fact that this was a prosecution that the Judge found it was open for the Registrar to bring.  There were none of the factors that would justify an exceptionally high award like bad faith, the bringing of a case that clearly could not succeed, or misconduct at trial.

[67]     I acknowledge the deference that I must show to the careful costs judgment of Judge Doogue, and her closely reasoned primary judgment which was not appealed.   But the amount of costs awarded was clearly too high, and therefore clearly wrong.   Given the factors discussed, I consider $325,000 to be a just and reasonable sum to be paid towards the costs of the directors‘ defence in all the circumstances.  This is more than twice the Crown costs, but Crown rates are under market.  It is more than the civil scale at the standard 2B basis and approaches the maximum on the civil scale.   The civil scale is, however, only a factor to be considered.

[68]     A figure any less than $325,000 fails to adequately recognise the actual costs incurred, the complete exoneration of the directors, their co-operation, and the clear notice given and inadequate consideration of the proposed and ultimately successful defence.  But a figure that is any greater fails to recognise the good faith shown by the Registrar, the proving of the key elements at the trial, the proper conduct of the trial, and the fact that this was a prosecution that on the facts and law it was open to him to bring.  It also fails to recognise the touchstones referred to of Crown costs, civil costs and other costs awards.

[69]     Disbursements, which tend to turn less on the unpredictability of individual choices of representation, will remain at the 70 per cent figure set by the District Court Judge of $104,091.

Result

[70]     The appeal is  allowed.   The costs award of $848,020 is quashed.   It  is substituted by an award of costs of $325,000, plus disbursements as originally ordered, being:

Legal costs                 $325,000.00

Disbursements            $104,091.00

Total  $429,091.00

[71]     It there is any issue as to costs on this hearing, the respondents should file submissions within 14 days, and the appellant within a further 14 days.

……………………………..

Asher J