Reynolds v Finnigan

[2020] NZHC 2389

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-002717

[2020] NZHC 2389

BETWEEN

GRANT BRUCE REYNOLDS, as liquidator for THE LEARNING LADDER LIMITED (IN LIQUIDATION)

First Plaintiff

JOANNE LEE YOUNG
Second Plaintiff

THE LEARNING LADDER LIMITED (IN LIQUIDATION)

Third Plaintiff

AND

PERI MICAELE FINNIGAN and BORIS VAN DELDEN

First Defendant

RED 9 LIMITED
Second Defendant

THE LEARNING LADDER (2018) LIMITED

Third Defendant

PEAT JOHNSON MURRAY LIMITED

Fourth Defendant

Hearing:	4 September 2020
Appearances:	K Robinson and A McCabe for Third Plaintiffs M J Fisher and J T Yoon for Second Defendant H K Mackenzie for Fourth Defendant
Judgment:	14 September 2020
Reissued:	12 October 2020

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

REYNOLDS & ORS v FINNIGAN & ORS [2020] NZHC 2389 [14 September 2020]

Introduction

[1]        Mr Grant Reynolds is a licensed insolvency practitioner and the liquidator of the third plaintiff, The Learning Ladder Limited (in liquidation) (TLLL).

[2]        In the substantive proceedings, TLLL sues the second defendant, Red 9 Limited (Red 9) for breach of contract. TLLL alleges Red 9 breached a loan agreement where TLLL was not in default, under either the loan or an associated general security agreement (GSA). Red 9, in reliance on the default, appointed the first defendants, Peri Miceale Finnigan and Boris van Delden, as receivers of TLLL.

[3]        In the present interlocutory application, Red 9 seeks security for costs against TLLL in the sum of $50,000. The threshold in r 5.45(1)(b) of the High Court Rules 2016 is indisputably met. That is, if TLL is unsuccessful, it will be unable to pay Red 9’s costs. The critical issue I must determine is whether I should order security for costs as a matter of discretion, or, whether Mr Reynolds’ offered undertaking, as liquidator, is the more appropriate and equivalent security.

Background facts

[4]        TLLL was incorporated in 2015 with two directors holding 50 of the 100 shares each. The two directors were:

(a)Dayle Yolande Walker (Mrs Walker), who is now the director of the third defendant, The Learning Ladder (2018) Limited (TLLL (2018)); and

(b)Joanne Lee Young (Mrs Young), the second plaintiff.

[5]        Mrs Walker and Mrs Young established TLLL to operate a licensed early childhood centre in Howick, Auckland (the business).

[6]        Mr Walker, Mrs Walker’s husband, is a chartered accountant who provided professional accounting services to TLLL and Red 9.

[7]        In June 2015, TLLL and Red 9 entered into a loan agreement to assist with the purchase of the business. In order to secure the loan under the general security

agreement dated 25 June 2015 (GSA), TLLL granted Red 9 a general security over all of its present and after-acquired personal property.

[8]        On 23 January 2018, Mrs Walker applied to the High Court for interim injunctive relief to restrain Mrs Young from drawing a director’s salary. Mrs Young opposed those proceedings, however the application did not proceed as a result of the appointment of receivers.

[9]        On 8 March 2018, Red 9 issued a default notice on TLLL pursuant to the GSA, demanding repayment of all indebtedness under the GSA. The default notice stated that:

(a)The director of Red 9 (Mr Walker) had been making decisions on its behalf, recognising the potential conflict of Mrs Walker.

(b)Recent draft management accounts showed that TLLL was insolvent:

(i)TLLL had made a trading loss of $49,356 for the past 11 months;

(ii)its total liabilities exceeded its total assets by more than

$21,000.

(c)TLLL was in default of the GSA due to a material adverse change in relation to the collateral secured by the GSA and in circumstances where there was:

1.  an irreconcilable break-down in the relationship between the directors and shareholders; and

2.  ensuing deadlock in the management.

[10]On 9 March 2018:

(a)Red 9 appointed the first defendants as receivers for TLLL (“receivers”);

(b)Mrs Young made a conditional offer to the receivers to purchase the business of TLLL for $426,800;

(c)Mrs Walker, via TLLL (2018) unconditionally offered the receivers

$470,000 to purchase the business of TLLL; and

(d)The receivers accepted Mrs Walker’s unconditional offer of $470,000 for TLLL (2018) to purchase the business.

[11]      On  14  September  2018,  the  High  Court  appointed  the  first  plaintiff,  Mr Reynolds, as liquidator of TLLL.

[12]      These proceedings were filed and served in December 2019. On 8 May 2020, TLLL was joined as the third plaintiff in the plaintiffs’ amended statement of claim.

[13]      In his affidavit sworn 10 July 2020, and filed in support of the opposition to the application by Red 9 for security for costs, Mr Reynolds states:

[4.1] TLL cannot pay costs itself because it was placed into receivership by Red 9 and the business subsequently sold to TLL 2018. That process is responsible for TLL being unable to pay costs now.

[4.1] Both the first plaintiff and the second plaintiff have offered to provide security for Red 9 in the form of an undertaking to pay a costs awarded by the Court in this proceeding in the event the third plaintiff [TLL] is unsuccessful in its claim against the second defendant [Red 9] and is ordered to pay costs by the Court against the third plaintiff and the third plaintiff fails to pay those costs.

The pleadings

[14]      The amended statement of claim of 8 May 2020 contains the following causes of action:

(a)A claim against the first defendant receivers for breach of s 18 of the Receiverships Act 1993 and exercising their powers other than in good faith and for a proper purpose.

(b)A claim against the first defendant receivers for breach of s 19 of the Receiverships Act 1993 in failing to obtain the best price reasonably obtainable for the sale of the business.

(c)A claim for breach of contract against Red 9 for issuing the 22 November 2017 letter of demand, serving the Statutory Demand, sending the 8 March 2018 default notice and appointing the receivers.

(d)A claim against the third defendant pursuant to s 298 of the Companies Act 1993.

(e)A claim against the fourth defendant (Peat Johnson Murray Limited) for breach of contract.

(f)A claim against Peat Johnson Murray Limited for breach of fiduciary duty.

[15]In relation to each of the causes of action, judgment is sought in the amount of

$290,000. This amount is said to be the difference between the sale price of the business and its true value (said by the plaintiffs to be $760,000).

Relevant legal principles

[16]Rule 5.45 of the High Court Rules 2016 provides:

5.45 Order for security of costs

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

(a)that a plaintiff –

(i)is resident out of New Zealand; or

(ii)is a corporation incorporated outside New Zealand; or

(iii)is a subsidiary (within the meaning of section 5 of the

Companies Act 1993) of a corporation incorporated outside New Zealand; or

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

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

(3)An order under subclause (2) –

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

(i)by paying that sum into court; or

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

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

…

[17]      Once the threshold in r 5.45(1) is met, whether to grant security and if so, the quantum, are discretionary matters. A broad overall assessment, having regard to the situation of the parties and the nature of the proceeding is required.1 The discretion is not to be fettered by “constructing principles” from the facts of previous cases.2

[18]      The general approach is to balance two competing interests – “the defendant’s interests in being protected from a barren costs order and the plaintiff’s right of access to the Court.”3

[19]      It is a factor in favour of ordering security where a prima facie case can be established that the plaintiff’s claim is unmeritorious. A security is more likely to be ordered, the less apparently meritorious a case is.4

[20]      In Highgate on Broadway v Devine, Kós J held, “access to justice is an essential human right.” 5 His Honour noted:6

The cost of exercising that right is the payment of costs in the event of failure. The right of a successful defendant to costs in that event is arguably subordinate to the plaintiff’s right to be heard. Strong social policy considerations favour the use of Courts as an accessible forum for the resolution of disputes and grievances of almost all kinds.

Analysis and decision

[21]      As Kós J observed in Highgate on Broadway Ltd, “it is not appropriate that a Court predetermine the question of the merits [of the plaintiff’s substantive claims] or form more than “an impression” [of those merits.]7 Those principles clearly apply in this case.

[22]      Mr Fisher submits that Red 9, has a tenable and credible defence in relation to both liability and quantum. and that prima facie it would be unjust for Red 9 to succeed

1      Hamilton v Papakura District Council (1997) 11 PRNZ 333 (HC) at 335.

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

3      Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837 at [4].

4      Highgate on Broadway Limited v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [22](c).

5      Highgate on Broadway Limited v Devine, above n 4, at [23](b).

6      Highgate on Broadway Limited v Devine, above n 4, at [23](b),

7      Highgate on Broadway Ltd, above n 4, at [22](c).

only to find a costs award not recoverable. I agree. This sentence is redacted and will be omitted from all copies of this decision, other than the original on the Court file and the copy delivered to counsel.

[23]      However, the issue of the merits is only one factor in determining the question of security for costs. The critical issue here, namely whether Mr Reynolds’ offered undertaking, as liquidator, is the more appropriate and equivalent security, falls to be determined as a matter of discretion. The situation of the parties and the nature of the proceedings are both relevant. As noted above, a broad, overall assessment is required.

[24]      TLLL, the party against whom security is sought, is of course in liquidation. The proceedings are under the control of the liquidator, Mr Reynolds, who is also a party to them. Those factors are an important part of the context or “situation of the parties” in this case.

[25]      As noted in McGechan on Procedure,8 there is a longstanding disinclination by the courts to order security for costs in cases brought by liquidators. This general rule has a twofold basis. First, that liquidators bring or support a proceeding to maximise returns for the benefit of all creditors and should not be inhibited in their statutory obligations by an order for security. Second, the court’s concern to ensure that people are not prevented by their impecuniosity from taking action. That concern, however, is preserved as a factor in exercising the discretion under r 5.45.9

[26]      This general rule is not absolute and there may be circumstances justifying an order for security.10 This includes where the claim is brought in the name of the company in liquidation, rather than by the liquidators personally, and where there are outside party funding arrangements.11

[27]      In Flatbush Property Litmited (in liquidation) v Chapman,12 Associate Judge Bell referred to the traditional approach where the courts are disinclined to require

8      AC Beck and others McGechan on Procedure (loose-leaf ed, Thomson Reuters) at [HRPt5.45.16(3)].

9      Matthew Casey and others The New Zealand Procedure Manual High Court (3rd ed, LexisNexis NZ Ltd, Wellington, 2015) at 179.

10     Cory-Wright & Salmon Ltd (in receivership and liquidation) v KPMG Peat Marwick (1992) 5 PRNZ 513 (HC) at 515; REA v Jordan Sandman Were Ltd (1992) 6 NZCLC 67,986 (HC) at 21

11     Re Condrens Parking Ltd (in rec) (in liq); Jordan v O’Sullivan HC Auckland CIV-2004-485-2611, 12 July 2006 at [44].

12     Flatbush Property Ltd (in liquidation) v Chapman [2012] NZHC 332.

liquidators to provide security for costs where proceedings are brought by a company in liquidation.13 His Honour then observed:

[31]   There has, however, been a trend to order liquidators and companies  in liquidation to put up security for costs. I note that increasingly the courts have drawn a distinction between claims brought by a company in liquidation alone, and a claim brought by liquidators. The relevance of the distinction is that a company in liquidation may only have its own assets available to meet any claim for costs, whereas a liquidator may be personally liable for costs and may have to look to his own assets if the assets of the company are insufficient. The courts will be less inclined to require a liquidator personally to provide security for costs on the basis that any order for costs would be made against him, which is more likely to provide better protection than a company in liquidation alone.

[28]      In that case, Mr Chapman, the liquidator and the second plaintiff was an insolvency practitioner and the company in liquidation was the first plaintiff. Associate Judge Bell held, “[o]rdinarily there would not be any question as to the ability of an insolvency practitioner to meet an order for costs if a claim brought by him as liquidator were unsuccessful.”14

[29]      Applying those principles, I find that Mr Reynolds’s offered undertaking, as liquidator, together with the undertaking offered by the second plaintiff, Mrs Young, is the more appropriate form of security and is equivalent to the payment of the sum of money into court or a solicitor’s trust account. Mr Reynolds may not be known to Red 9. However, in my view, there is no basis for the claim that there is any real risk he might fail to honour the undertaking, or that he might pursue unmeritorious claims against Red 9. The Court requires liquidators to act on the advice of solicitors and to bring only claims they believe to be bona fide. Mr Fisher challenged the independent expert valuation evidence obtained by the plaintiffs, but I am in no position to determine that issue. It is a trial matter.

[30]      Red 9 relied on Camelot Hotel Ltd v Square Holdings Ltd to argue in favour of a security for costs.15 However, I find that this case is distinguishable.

[31]In that case, Associate Judge Osborne held:16

13     Flatbush Property Ltd (in liquidation) v Chapman, above n 13, at [29] and [30].

14     Flatbush Property Ltd (in liquidation) v Chapman, above n 16, at [24].

15     Camelot Hotel Ltd v Square Holdings Ltd [2016] NZHC 82, 23 PRNZ 121

16     Camelot Hotel Ltd v Square Holdings Ltd, above n 16, at [55].

[t]his court will recognise, when a defendant today seeks to protect its legitimate interests by an order for security for costs, that there is a substantial difference in the “security” provided by a personal undertaking and that provided by more traditional forms of security such as stakeholdings.”

[32]      Camelot was not a liquidation case. In any event, Associate Judge Osborne held that the circumstances and evidence of the case did not provide a sense of assurance that the person offering to make the undertaking (Mr Sharma) would, at the time of any judgment, be in New Zealand to honour his personal undertaking. Although a current resident in New Zealand, Mr Sharma only provided limited outdated evidence as to his income. The Judge also observed that “by far” the bulk of his claimed assets were in the United States and that Mr Sharma had not offered any undertaking to not further charging his assets.17 The facts here are quite different.

[33]      I acknowledge that the sole cause of action against Red 9 is brought by the company, TLLL. However, that does not in any way give reason to doubt the value or validity of the undertaking offered both by Mr Reynolds and Mrs Young. They would be bound by any undertaking, even though not parties to the cause of action against Red 9.

[34]      Mr Fisher submits there is no real evidential basis for TLLL’s assertion that it could not pursue its claim if security for costs were ordered. However, Mr Reynolds, the liquidator and an officer of the Court,18 says in his affidavit that TLLL cannot pay costs itself because it was placed into receivership by Red 9 and the business subsequently sold to TLLL 2018. Mr Reynolds contends that process is responsible for TLLL being unable to pay costs now. In any event, this factor is not decisive of whether the undertaking offered is appropriate and an equivalent form of security.

[35]      I likewise reject Mr Fisher’s submission that the nature of the indemnity/undertaking offered would make it difficult for Red 9 to obtain its costs in the event it was successful. He suggests that, in this event, the liquidator might have to enforce the indemnity against himself and Ms Young.  This is not a valid concern. I have no doubt that, in the event Red 9is successful and it is necessary for the undertaking to be invoked, Mr Reynolds would promptly attend to his legal

17     Camelot Hotel Ltd v Square Holdings Ltd, above n 16, at [56].

18     ANZ National Bank Ltd v Sheahan & Lock [2012] NZHC 3037, [2013] 1 NZLR 674 at [137].

responsibilities. Mr Reynolds is a licensed insolvency practitioner19 and well known to the Court. I take judicial notice of the fact that he has been appointed a liquidator by this Court on many occasions and it is important to approach these issues in a pragmatic and realistic way. In Flynn v McCallum,20 it was noted that,21

[w]hen [liquidator] appointees are known by a Court to be independent and experienced … the Court is likely to have confidence in such people to abide by [the] ethical standards of any professional organisation to which they belong and to adhere to their obligations as officers of the High Court.

[36]      In the circumstances, it is not material that Mr Reynolds has not provided evidence of his personal financial situation.

[37]      As to determining the quantum of any undertaking, I accept Mr Robinson’s submission that, as a matter of principle, security for costs is “future looking”. This necessitates considering the costs that will be incurred in the future, rather than the costs already incurred.22

[38]      Mr Fisher helpfully provided a schedule 2B costs calculation based on an estimated five-day trial ($68,354) and that with expert fees of approximately $30,000 and other disbursements, total costs would be in the region of $101,000.

[39]      As noted above, there is only one cause of action against Red 9. Ultimately, determining the quantum of the security or an equivalent undertaking is discretionary. In this case, the first defendants (the receivers) and the fourth defendant (an accountancy firm) would likely share the burden of defending the allegation of selling the business for under-value.

[40]      In these circumstances, I find Mr Reynolds and Mrs Young should provide an undertaking accepting personal liability up to a maximum of $35,000 (plus GST, if any) for any costs awarded against TLLL, and in circumstances where TLLL fails to pay those costs.

19 See s 3 of the Insolvency Practitioners Regulation Act 2019 which provides, “the purpose of the  Act is to … establish an independent oversight system in order to promote – (a) quality, expertise, and integrity in the profession of insolvency practitioners”.

20     Flynn v McCallum [2013] 1 NZLR 207, [2013] NZCCLR 1.

21     Flynn v McCallum, above n 21, at [107].

22     Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 2504, [2018] NZAR 1699 at

[73] and [74].

[41]      The focus of the argument before me was on the undertaking proposed by  Mr Reynolds, as liquidator. Little attention was given to the position of Mrs Young. In any event, the undertaking proposed is intended to be a joint and severable one.

Result

[42]      I dismiss the application by the second defendant, Red 9, dated 14 May 2020, for an order that the third plaintiff, TLLL, pays security for costs in the sum of $50,000.

[43]      As a matter of discretion, I order that the first plaintiff, Mr Reynolds, and the second plaintiff, Mrs Young, are to file and serve a written undertaking within 14 days accepting personal liability and on a joint and severable basis for any costs awarded in favour of Red 9 against the third plaintiff, TLLL, up to a maximum of $35,000 (plus GST, if any), and should the third plaintiff fail to pay those costs.

[44]      In the event that the undertakings are not filed and served within 14 days, then the proceedings against the second defendant, Red 9, will be stayed pending further directions of the Court.

[45]      As to costs, I am of the preliminary view that the plaintiffs have, in substance, succeeded and Red 9 should pay costs to the plaintiffs on a 2B basis. If costs cannot be agreed, then memoranda (no more than three pages) are to be filed and served within 14 days.

Associate Judge P J Andrew

This judgment was delivered by Associate Judge Andrew

on 14 September 2020 at 3.30 pm and re-issued on 12 October 2020 at 4.00 pm pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar ………….………………………

Date …………………………….