Sealegs International Limited v Zhang

[2020] NZHC 912

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-2169

[2020] NZHC 912

UNDER

Section 290 of the Companies act 1993

BETWEEN

SEALEGS INTERNATIONAL LIMITED

Applicant

AND

YUN ZHANG

First Respondent

ORION LIMITED and ORION MARINE LIMITED

Second Respondents

SMUGGLER MARINE LIMITED

Third Respondent

Hearing:

On the papers

Appearances:

B Henry for the Plaintiff

PJK Spring for the Defendants

Judgment:

6 May 2020

JUDGMENT OF GAULT J

(Costs)

This judgment was delivered by me on 6 May 2020 at 3:00 pm pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

……………………………………

Solicitors / Counsel:

Mr B Henry, Barrister, Auckland

Ms M A Shanahan (applicant’s instructing solicitor), Shanahans Law Ltd, Auckland Mr PJK Spring, Keegan Alexander, Auckland

SEALEGS INTERNATIONAL LTD v ZHANG [2020] NZHC 912 [6 May 2020]

[1]                This application to set aside statutory demands has been resolved as a result of payment of the debt to which the application relates, subject to the issue of costs.

[2]                The respondents seek indemnity costs. After some dispute as to the need for a hearing, the Civil List Judge, Moore J, directed that the issue of costs be dealt with on the papers.

Factual background

[3]                The parties have been involved in an intellectual property dispute. Following costs orders made in that proceeding, the respondents issued two statutory demands to the applicant on 25 September 2019, one in respect of costs ordered by the High Court on 20 December 2018 and one in respect of costs ordered by the Court of Appeal on 17 September 2019.

[4]                The applicant filed its application to set aside the two statutory demands on   9 October 2019 on the grounds that it was filing an application to stay in the Court of Appeal, had applied for leave to appeal to the Supreme Court, the debt was secured by money in its solicitor’s trust account subject to an undertaking pending the decision of the Supreme Court, and it was just and equitable that the application for leave to appeal be determined before the respondents take action in relation to costs.

[5]                The respondents filed a notice of opposition on 22 October 2019. Memoranda were exchanged in advance of the first call in which the respondents pointed out that the applicant had not applied to stay execution and described the application as an egregious abuse of the processes of the Court. The respondents sought to have the application dismissed at the first call. Counsel for the applicant acknowledged that while he had drafted the stay application, due to oversight it had not been filed.

[6]                Associate Judge Bell declined to dispose of the application at the first call and timetabled the application to a hearing date on 11 March 2020.

[7]                On 13 December 2019 the Supreme Court declined leave to appeal. That triggered the undertaking of the applicant’s solicitor, and payment was made to the respondents on 16 December 2019.

[8]                On 20 December 2019 the respondents filed a memorandum indicating that the applicant had paid the judgment debt in full, that the 11 March 2020 fixture could be vacated and addressing costs. After some delay, on 26 February 2020 the applicant’s counsel also advised the Court that the matter would not be proceeding and that a memorandum regarding discontinuance and costs would be filed shortly. However, on 27 February 2020 the respondents requested, in an email to the registry, that the fixture be kept and the parties heard on the issue of costs. On 28 February 2020 counsel for the applicant filed a memorandum confirming that the proceeding should be discontinued and the hearing set down for 11 March 2020 should be vacated. Given the respondents’ email request and subsequent memoranda, the 11 March 2020 fixture was only vacated on 10 March 2020.

Submissions

[9]                The respondents seek indemnity costs in the sum of $15,518.68 inclusive of GST plus disbursements of $110 pursuant to r 14.6(4)(a) of the High Court Rules 2016. The respondents contend that the applicant, in bringing the application, acted vexatiously, frivolously, improperly and unnecessarily. Mr Spring submits that the application is an abuse of process for four reasons:

(a)the applicant could never establish a genuine dispute as to the existence of the judgment debt;

(b)the applicant could not avoid paying the judgment debt merely by proving that it could pay the judgment debt if it chose to;

(c)the application purported to rely upon an application to stay enforcement of the judgment of the Court of Appeal being filed, but no such application was ever filed (despite assurances being made to the Court to the contrary); and

(d)in any event, the contingency relied on to justify the application, that is, the existence of an application for leave to appeal to the Supreme Court, was insufficient to obtain a stay of enforcement of the judgment of the Court of Appeal.

[10]            The applicant submits that indemnity costs are not appropriate and that costs should be awarded on no more than a 2B basis.

Discussion

[11]Rule 14.6(4)(a) provides:

The court may order a party to pay indemnity costs if—

(a)the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; …

[12]            As the Court of Appeal said in Bradbury v Westpac Banking Corporation,1 “unnecessarily” in this context takes its meaning from the adverbs which precede it: “vexatiously, frivolously, improperly”. Indemnity costs may be ordered where a party has behaved either very badly or very unreasonably.2 The Court elaborated, saying that indemnity costs, which depart from the predictability of the Rules Committee’s regime, are exceptional and require exceptionally bad behaviour. That is why to justify an order for such costs the misconduct must be flagrant.3

[13]            The onus is on the respondents to persuade the Court that an award of indemnity costs is justified.

[14]            As to the respondents’ first ground, that there was no genuine dispute as to the existence of the judgment debt, I accept that in the absence of a stay there can be no dispute as to whether a judgment debt is owed.4 But the applicant’s grounds to set aside did not assert the judgment debt was disputed per se but rather that it was seeking a stay of the costs awarded pending leave to appeal the substantive judgment of the Court of Appeal.  I am not persuaded this ground of itself justifies indemnity costs.   I return to the issue of stay below.

1      Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400 at [26].

2 At [27].

3 At [28].

4      Cullen Group Ltd v Commissioner of Inland Revenue [2019] NZHC 3110, (2019) 24 PRNZ 703 at [22].

[15]            In relation to the respondents’ second ground, the respondents are referring to the placement of funds in a solicitor’s trust account rather than payment. Mr Spring relies on AMC Construction Ltd v Frews Contracting Ltd, where the Court of Appeal stated:5

We would not wish to rule out the possibility that the solvency of the company might constitute a stand alone ground for setting aside a notice under para (c). However, we consider that such cases are likely to be extremely rare. If there is no dispute as to the company’s liability, so that para (a) or (b) cannot be invoked, it is difficult to imagine circumstances in which the company should be able to avoid paying a debt, merely by proving that it is able to pay that debt. If the debt is indisputably owing, then it should be paid. If the company simply refuses to pay, without good reason, it should not be able to avoid the statutory demand process by proving, at the statutory demand stage, that it is solvent. The demand should be allowed to proceed…

[16]            While depositing funds into a solicitor’s trust account is common in relation to a disputed debt, Mr Spring is no doubt correct that, even if doing so indicates solvency, that is not a basis for resisting a statutory demand. But here placement of funds in a solicitor’s trust account was done in combination with reference to seeking a stay and leave to appeal.

[17]            The third ground is the applicant’s reliance on a stay application when none was made. As indicated, counsel for the applicant acknowledged that while he had drafted the stay application, due to oversight it had not been filed. This was identified on 31 October 2019 and counsel advised that it would be filed as soon as possible, correcting counsel’s mistake. Despite that, the respondents say it was never filed – which the applicant did not contest – and I should draw the inference that there was never any intention to do so. The applicant has given no explanation for not filing its stay application after 31 October 2019. On that same day the application to set aside was allocated a March fixture date. Whatever may have been intended at the outset,  I infer that at least from 31 October 2019 the application to set aside was used to obtain a de facto stay pending the application for leave to appeal.

5      AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].

[18]            As to the fourth ground, Mr Spring is undoubtedly correct that the existence of an application for leave to appeal to the Supreme Court was insufficient to operate as a stay of enforcement of the judgment of the Court of Appeal.6 A stay was required.

[19]            Looking at the position in the round, I consider the application to set aside the statutory demands was misconceived. As indicated,  at  least  from 31 October 2019 it was used to obtain a de facto stay pending the application  for leave  to appeal.  The proper course was for the applicant to seek a stay from the Court of Appeal.

[20]            However, I do not consider that this case falls easily into any of the recognised categories justifying indemnity costs referred to in Bradbury.7 The nearest are continuing proceedings for some ulterior purpose and doing so in wilful disregard of clearly established law. But the applicant did not take any particular step to continue the proceeding after 31 October 2019. Rather, it failed to advise that it would discontinue its application to set aside and/or apply for a stay. It took advantage of the March 2020 hearing date allocated for its application, at least until the Supreme Court declined leave to appeal on 13 December 2019. But the respondents were not put to additional cost in the meantime.8 Also, while I have indicated the application was misconceived, there is no real evidence on which to infer that the applicant continued the proceeding in wilful disregard of clearly established law.

[21]            Overall, I characterise the position in this way. In the context of what was clearly hard-fought litigation, the respondents issued statutory demands to enforce costs orders, the larger of which related to Court of Appeal costs ordered only eight days before the statutory demand. In circumstances where the applicant was seeking leave to appeal to the Supreme Court, it applied to set aside the demands. Once leave was declined the costs were paid. In order to resist payment of the costs orders in the meantime, it should have applied for a stay. But I do not characterise the course it took as flagrant misconduct justifying indemnity costs.

6      Rule 30(1) of the Supreme Court Rules 2004.

7      Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400 at [29]. See also Slater v Blomfield [2019] NZCA 664 at [13].

8      No actual costs were claimed between 1 November and 13 December 2019.

[22]            Instead of indemnity costs, I now address an award of increased costs. This requires scale costs to be considered as well as actual costs.9 Applying the time allocations for originating applications in costs schedule 3,10 the respondents’ 2B scale costs are two days for notice of opposition and supporting affidavits and 0.8 days for case management.11 That totals $6,692.

[23]            Taking or pursuing a proceeding that lacks merit can warrant increased costs under r 14.6(3)(b)(ii) but, if a proceeding is discontinued pre-judgment, only where the lack of merit is both obvious and incontrovertible.12 I have concluded the application to set aside was misconceived – but it was not pursued to a hearing. In the circumstances set out above in relation to indemnity costs, I consider the lack of merit was obvious and incontrovertible such that the applicant acted unreasonably in making the application. The conduct necessarily contributed to the expense of the proceeding. I am satisfied an award of increased costs is justified under r 14.6(3)(b)(ii). I consider there should be a 25 per cent uplift from the 2B scale costs.

[24]            Finally, the respondents’ claim included their costs from 16 December 2019 in relation to preparing their costs memorandum. Costs on costs are unusual and the Court is reluctant to award them.13

Result

[25]            The respondents are entitled to 2B scale costs, with an uplift of 25 per cent, plus disbursements of $110.

Gault J

9      Slater v Blomfield [2019] NZCA 664 at [18].

10     Rule 19.2(c).

11     Items 10, 11, 38 and 39.

12     N-Tech Ltd v Abooth Ltd [2012] NZHC 1167 at [108].

13     Jeffreys v Morgenstern [2013] NZHC 1361 at [40]; and Barry Park Investments Ltd v Body Corporate Number 95388 [2016] NZHC 1527 at [25].