Reserve Bank of New Zealand v CBL Insurance Ltd

[2019] NZHC 737

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-000306

[2019] NZHC 737

BETWEEN

RESERVE BANK OF NEW ZEALAND

Plaintiff

AND

CBL INSURANCE LIMITED

Defendant

Hearing:

On the papers

Appearances:

N S G Gedye QC and S A Barker for Reserve Bank

J S Cooper QC and A E Murray for Interim Liquidators A S R Ross QC and J E M Lethbridge for Elite Insurance M Kersey for LBC Holdings

J F Anderson QC and J A MacGillivray for Alpha D A Salmon and J P Cundy for CBLI

H L Quinlan for Supporting Creditor

Judgment:

8 April 2019 at 4 pm

JUDGMENT OF COURTNEY J

[Costs]

This judgment was delivered by Justice Courtney on 8 April 2019 .at 4 pm pursuant to r 11.5 of the High Court Rules – Registrar / Deputy Registrar – Date……………………

RESERVE BANK OF NEW ZEALAND v CBL INSURANCE LIMITED [2019] NZHC 737 [8 April 2019]

Introduction

[1]    On 12 November 2018, I made an order placing CBL Insurance Ltd (in interim liquidation) (CBLI) in liquidation on the application of the Reserve Bank of New Zealand (RBNZ).1 Although the application ultimately proceeded unopposed, the opposition to it from CBLI itself (by its directors, Messrs Harris and Hutchison) and its shareholder, LBC Holdings Ltd (Administrators Appointed) (LBC) was only withdrawn at the last minute.

[2]    At the conclusion of the hearing I made an order for costs in favour of RBNZ against CBLI.2 RBNZ signalled its intention to apply for costs against LBC also, which it has done. LBC opposes the application.

Background

[3]    RBNZ advanced the liquidation application on three grounds; breach of the solvency margin (which CBLI admitted), breach of directions regarding payments to third parties (which CBLI admitted) and the just and equitable ground, specifically, that CBLI was balance sheet insolvent and misconduct by the directors.

[4]    LBC filed a notice of appearance in the proceeding on 2 March 2018. It was served with the statement of claim on 17 April 2018 and subsequently with a notice of appearance by two directors of CBLI, Messrs Harris and Hutchison, who opposed the application. LBC’s Administrators did not oppose the liquidation application at that stage; they considered it appropriate for there to be full argument and evidence as to whether there were grounds for liquidation and so reserved their decision pending consideration of evidence from Messrs Harris and Hutchison.

[5]    LBC changed its position in May 2018. Its statement of defence dated 15 May 2018 denied that there was any basis for winding up on the just and equitable ground

1      Acting in its capacity as regulator under s 151(2) of the Insurance (Prudential Supervision) Act 2010.

2      As LBC’s counsel noted in submissions, this order was not included in the sealed order but my note and that of counsel are consistent as to the order made.

and asserted that where insolvency was relied upon as a basis for liquidation, the Companies Act 1993 required that to be cashflow rather than balance sheet insolvency. It also identified factors that ought to be taken into account in the exercise of the Court’s discretion, including that the interests of CBLI’s creditors and its own interests as shareholder would be better met by voluntary administration than liquidation.

[6]    By that stage, the Court had allocated two days, 5 and 6 June 2018, for the hearing of the substantive liquidation claim. The week before the scheduled fixture, RBNZ applied for an adjournment. Despite LBC’s opposition the fixture was adjourned and re-scheduled for three days from 30 July 2018. Also extant by that stage was CBLI’s cross-application to remove the interim liquidators, which I directed would be heard together with the substantive liquidation application. LBC did not take a position on that application which, ultimately, was never argued.

[7]    The next fixture date was also adjourned, this time on CBLI’s application, triggered by RBNZ’s third amended statement of claim filed on 9 July 2018 and by a proposed commutation agreement between CBLI and Elite. Ultimately, all parties agreed that it was not feasible to proceed with the fixture in light of the proposed commutation agreement, which was acknowledged to be likely to affect CBLI’s solvency position. The interim liquidators had signalled an application for directions regarding the commutation agreement and it was agreed that that issue needed to be resolved before the substantive liquidation application could proceed further.

[8]    In my minute of 6 August 2018, I recorded LBC’s position as being that consideration was being given to a deed of company arrangement (DoCA) and, depending on the outcome of that process, the Administrators might not oppose RBNZ’s application for liquidation.

[9]    Substantial time and effort by all parties was directed towards the interim liquidators’ application for approval of the proposed commutation agreement, which I ultimately refused.3 Although that application took up a good deal of the parties’ attention during the year, it was determined in the context of a separate proceeding and is therefore not relevant to present costs application.

3      Re CBL Insurance Ltd (in liquidation) [2018] NZHC 2547.

[10]   The  substantive  liquidation  application  was  set  down  for  hearing   on   12 November 2018. Up until the week before the hearing CBLI (by Messrs Harris and Hutchison) and LBC were still promoting voluntary administration pursuant to a DoCA as preferable to liquidation. However, no viable draft DoCA had ever been finalised and by then it was clear that none would eventuate. LBC withdrew its opposition to the liquidation application two days before the hearing and CBLI on the morning of the hearing.

[11]   CBLI’s largest creditor, Elite Insurance Co Ltd (Elite) appeared in support of the liquidation application. The other parties who appeared - LBC, Alpha Insurance A/S (in bankruptcy) and Curmi & Partners Ltd - abided the Court’s decision.

[12]   The interim liquidators appeared to assist the Court and abided the Court’s decision.

Application

[13]   RBNZ says that LBC’s opposition lent credibility to the directors’ opposition and exacerbated the delays in the case and that its late withdrawal of opposition meant that preparation for the defended liquidation application had already been completed. Its costs application rests on the principles that costs should follow the event and should be predictable and expeditious.4

[14]   LBC opposes costs on the grounds that (1) in liquidation proceedings the principle that costs follow the event is satisfied by the award of costs against the company in liquidation (2) RBNZ settled with other parties who had a greater involvement in the case on a no-costs basis (3) the work that LBC did to explore a potential restructuring of the CBL group was to have been for the benefit of all creditors and it should not be penalised for that work.

[15]   I do not accept any of these arguments. Costs on a defended liquidation fall to be determined under r 14 of the High Court Rules 2016 in the same way as other proceedings. There is no reason to take a different approach where the liquidation is

4      High Court Rules 2016, r 14.2(1)(a) and (g); Shirley v Wairarapa District Health Board [2006] NZSC 63, [2006] 3 NZLR 523 at [19].

at the suit of a regulator such as in this case. RBNZ is entitled to costs against one or more of the unsuccessful parties.5

[16]   The fact that settlement has been reached on a no-costs basis with one party does not preclude an application for costs against another party. That does not mean, however, that the defendant against whom costs are sought ought to bear the whole of the scale costs applicable.6 The default position is that costs are joint and several7 but the Court may depart from this where the circumstances of a case are out of the ordinary.8 One such circumstance may be that a party abided the decision of the court, thereby reducing the cost of trial. The extent of that party’s contribution to costs may therefore be less that a party who has taken an active role in the proceeding.9

[17]   In this regard, LBC makes the point that, when it became apparent that a restructuring would not be possible, it responsibly withdrew its opposition and abided the decision of the Court. But the extent of such contribution in those circumstances must reflect the Court’s assessment of the justice of the case; where, as here, the decision to abide was made very close to the substantive hearing, it is unlikely to make a significant difference.

[18]   Finally, I do not consider it relevant that LBC’s efforts at achieving an overall restructuring of the CBL group were for the benefit of all creditors. Although LBC maintained throughout that a DoCA would be a better outcome than liquidation and opposed the liquidation on that ground, this alternative never developed to the point of being able to place a DoCA before the Court. In addition, LBC argued (wrongly) that balance sheet insolvency could not justify winding up on the just and equitable ground. Further, one of the Administrators, Mr Gibson, provided evidence that CBLI was only marginally balance sheet insolvent.

5      Because LBC filed a statement of defence it is properly treated as a defendant for costs purposes and LBC does not suggest otherwise.

6      Hong v Deliu [2016] NZCA 75, [2016] NZAR 667 at [25].

7      High Court Rules 2016, r 14.14.

8      Hong v Deliu at [24].

9      Kawarau Jet Services Holdings Ltd v Queenstown Lakes District Council HC Invercargill CIV- 2008-425-518, 19 May 2009.

[19]   It is not for the Court to inquire into the motivations and potential benefits that might have resulted from LBC’s efforts to negotiate a restructuring. Ultimately, the position that LBC took was not vindicated and the principle that costs follow the event means that costs are properly determined on the basis of what did happen rather than what might have happened.

[20]   LBC also maintained that the delays caused by the adjournments of the application were not the result of its involvement and that it had taken no position on the grounds for liquidation advanced by RBNZ, merely arguing that the Court should not exercise its discretion against liquidation. It is true that, apart from taking a position on the issue of balance sheet insolvency as a ground justifying winding up, LBC’s focus was on persuading the court that voluntary administration would be preferable for the creditors overall so that the discretion should be exercised against liquidation. However, I accept RBNZ’s claim that LBC’s involvement also had the effect of bolstering the directors’ efforts to stave off liquidation by means of a proposed restructuring. The Administrators enjoyed a level of credibility that the directors might otherwise have lacked and CBLI relied on Mr Gibson’s evidence to a significant extent.

[21]    Even allowing for the fact that LBC cannot be said to have actually caused the adjournments of the application, it is fair to say that, had LBC not become involved to the extent it did in promoting the prospects of a restructuring the liquidation application would very likely have proceeded more swiftly. In these circumstances I find that it is appropriate that LBC contributes to the costs awarded against CBLI.

[22]   Given that I find it reasonable for LBC to contribute to the costs because of its general involvement in the case, I do not accept that fixing that contribution by reference to specific steps to be appropriate, beyond the exclusion acknowledged by RBNZ of the costs associated with CBLI’s discovery application and application to remove the interim liquidators. In my view a contribution of 20% of costs calculated on a 3C basis is an appropriate contribution.

[23]   RBNZ categorised the steps in the proceeding as mostly Band C, or Band B if they took comparatively less time. I do not accept LBC’s arguments against the

categorisation of certain steps as Band C, as the proceedings were properly viewed as complex and the time required reflected that.

[24]   Nor do I accept LBC’s arguments that they should not contribute to the cost relating to LBC’s opposition of RBNZ’s application for an adjournment, because LBC materially contributed to this step. I also consider that LBC should not contribute to the costs for the 27 April 2018 conference.

[25]   LBC should also contribute to the costs RBNZ’s second counsel, which will rarely be disallowed in a category 3 case.10

[26]The costs sought total $104,673.11 LBC’s allocation is $20,934.60.

[27]   A contribution to disbursements (court scheduling and hearing fees of $640 each and the sealing fee) are sought. I allow these. RBNZ also seeks to recover 20% of the Finity costs relating to Mr Atkin’s first affidavit on the basis that it was directed entirely to the issue of balance sheet solvency (although it does not specifically address Mr Gibson’s affidavit). I accept that the 20% contribution that this is appropriate.

[28]   In addition, RBNZ seeks full reimbursement from LBC of the cost of Finity’s further work, recorded in Mr Atkin’s second affidavit on the basis that it related to the RBNZ’s counterfactual analysis needed to respond to the claim that voluntary administration would provide a better outcome for creditors. I do not consider that LBC should bear the entire cost of the second affidavit. LBC was not the only party advancing that contention and there is no reason to require a higher contribution that that 20% contribution to disbursement.

P Courtney J

10     Andrew Beck and others McGechan on Procedure (online loose-leaf ed, Thomson Reuters) at [HR14.3.01].

11     The amount shown in RBNZ’s calculation of $101,323 was the result of incorrect addition. This is the correct figure.