Sharma v Craft Construction Limited (in liquidation)

[2023] NZHC 1294

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-118

[2023] NZHC 1294

BETWEEN

SUJENDRA SHARMA

Plaintiff

AND

CRAFT CONSTRUCTION LIMITED (IN LIQUIDATION)

First Defendant

AND

BEN HOLDICH

Second Defendant

Hearing:	On the papers
Counsel:	F B Q Collins for Plaintiff K K Kommu for Defendants
Judgment:	29 May 2023

JUDGMENT OF PAUL DAVISON J

[Re: Costs]

This judgment was delivered by me on 29 May 2023 at 3.30 pm pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:

Gibson Sheat, Wellington Glaister Ennor, Auckland

SHARMA v CRAFT CONSTRUCTION LIMITED (IN LIQUIDATION) [2023] NZHC 1294 [29 May 2023]

Introduction

[1]    Craft Construction Ltd (CCL) was placed into liquidation on 19 July 2021. By application dated 8 February 2022, Sujendra Sharma (the plaintiff) applied pursuant to s 248(1)(c) of the Companies Act 1993 for leave to commence proceedings against CCL. In his statement of claim filed with the application, the plaintiff seeks relief by way of: an inquiry into the value of the construction work and services provided by CCL pursuant to a construction contract; a declaration as to the value of CCL’s construction work and services; just and equitable relief pursuant to s 43 of the Fair Trading Act 1986; an award of damages for the cost of rectification of the work performed by CCL, together with consultants’ fees; interest and an award of legal costs and disbursements. CCL opposed the application for leave.

[2]    By judgment dated 22 December 2022, I granted the plaintiff’s application and made an order granting him leave to commence the proceeding.1 I observed that as the successful party the plaintiff is entitled to an award of costs, and I directed the parties to file and exchange costs memoranda, and said that upon receipt of their memoranda I would determine costs on the papers. 2

[3]    The plaintiff seeks 2B scale costs uplifted by 50 per cent totalling $13,623.00, and disbursements totalling $2,018.60. The plaintiff seeks an award costs against both CCL and against the liquidators of CCL in their personal capacity.

[4]    CCL says that costs should lie where they fall. In the alternative, CCL says that only 2B scale costs should be awarded against CCL, and not against the liquidators personally.

Background

[5]    The plaintiff is the owner of a residential property in Auckland. In December 2019 he obtained building consent for the construction of a significant extension to the house comprising a three bay car garage, dining room, prayer room, two bathrooms and a sleep-out (the extension project).

1      Sharma v Craft Construction Ltd (in liq) [2022] NZHC 3600 at [57].

2 At [58].

[6]    In early 2020 the plaintiff engaged Dynamic Renovations Ltd (Dynamic) to build the planned extension. After commencing the work Dynamic soon quit the site at the point where the foundations were incomplete. The plaintiff then entered into negotiations with CCL to take over and complete the project. Negotiations on behalf of CCL were undertaken by a director of the company, Mr Ben Holdich (the second defendant). And on 11 April 2020, the plaintiff and CCL entered into a written building contract regarding completion of the extension project.

[7]    The plaintiff says that CCL commenced construction of the extension project in May 2020. In late May and early June 2020 heavy rainfall caused some of the trenches dug for the foundations to collapse. As a result CCL carried out additional work to rectify the damage caused by the heavy rainfall. The plaintiff made an insurance claim resulting in approximately $52,000 being paid to CCL and $84,000 being paid to the plaintiff to reimburse him for the costs he incurred by arranging another contractor to carry out some of the required repair work. The plaintiff says that on or about 2 July 2020 CCL suspended work at the site on the grounds that its invoice number 1483 remained unpaid. A year later on 19 July 2021 CCL was placed into liquidation.

[8]    The plaintiff alleges that between 10 May 2020 and 11 August 2020 he paid CCL the sum of $389,310. He says that in addition to the CCL invoices he paid, CCL also issued further invoices totalling $571,415.99 which he did not pay. The plaintiff alleges that a reasonable price for the building work undertaken by CCL is approximately $91,400. He accordingly alleges that CCL claimed for more than it was entitled to and that as a result he has overpaid CCL approximately $297,000, and that he is not liable to pay any of the additional $571,415.99.

The Building Disputes Tribunal’s adjudications

[9]    On 31 August 2020 the plaintiff applied to the Building Disputes Tribunal (the Tribunal) for an adjudication upholding his claim to have overpaid CCL, and he sought a direction that CCL be required to return to complete the contracted works. On 11 December 2020 the Tribunal issued a determination in which it dismissed all of the plaintiff’s claims and awarded costs to CCL (the first adjudication).

[10]   On 12 October 2021 CCL obtained an adjudicator’s determination which found the plaintiff liable to pay CCL the sum of $140,023.38 inclusive of GST with costs and interest (the second adjudication). The plaintiff did not participate in this second adjudication, and it proceeded on a formal proof basis.

The plaintiff signals his claim to the liquidators

[11]   In correspondence dated 31 August 2021 the plaintiff’s solicitors requested CCL’s liquidators to consent to the plaintiff commencing this present proceeding. The request was declined. The plaintiff’s solicitors renewed their request on 29 September 2021. On 5 October 2021, through its solicitors, CCL declined the request and suggested that the plaintiff should submit his claim to the liquidators to consider and determine. The plaintiff rejected the liquidators’ proposal that he should submit a creditor’s claim to the CCL liquidation, and advised that he would seek leave of the court to file proceedings against the company in liquidation.

[12]   Following release of the second adjudication decision, CCL’s liquidators took steps to enforce the adjudication by applying to the District Court for the adjudicator’s award to be entered as a judgment. On 10 February 2022 the plaintiff filed his application in this Court seeking leave pursuant to s 248(1)(c) of the Companies Act to commence proceedings against CCL, in which he seeks relief by way of an order for an inquiry into the value of the construction work and services provided for the extension project, a declaration, damages, and costs.

Leave decision

[13]   On 22 December 2022 I granted the plaintiff leave to commence proceedings against CCL.3 I found that neither of the adjudications was determined on the basis of anything approaching complete and reliable evidence.4 And I found that neither of the adjudication decisions provides a complete and reliable basis on which to finally determine the merits of the plaintiff’s claim, or dispose of his claim as being clearly unsustainable.5

3 At [57].

4 At [48].

5 At [49].

[14]   I was accordingly satisfied that the plaintiff had shown sufficient evidence in support of his claim as set out in his statement of claim regarding the value of the work performed by CCL, to show that the merits of his claim should be determined by means of a claim in proceedings brought against CCL and the second defendant.6 I found that the fact that the plaintiff is also alleging breaches of the Fair Trading Act 1986, and alleging that the defendants engaged in misleading and deceptive conduct to be relevant to the grant of leave to commence proceedings in this Court.7

[15]   I also found that as the plaintiff had succeeded in his application for leave to commence proceedings was entitled to an award of costs.8

Submissions

The plaintiff ’s submissions

[16]   As I have said, the plaintiff seeks 2B scale costs with a 50 per cent uplift and disbursements.

[17]   Mr Collins for the plaintiff seeks increased costs on the grounds that without reasonable justification CCL, failed to:

(a)accept that there were critical unresolved issues with the invoices that neither adjudication determination could be treated as having been determined on the basis of anything approaching complete and reliable evidence, and failed to accept that an independent measured assessment had been provided by the plaintiff’s independent quantity surveyor which would need to be tested;

(b)accept the nature of the plaintiff’s claim which involves a factually complex building dispute involving allegations of serious overcharging and claims brought under the Fair Trading Act, made it inappropriate

6 At [49].

7 At [50].

8 At [58].

for the liquidators to submit that they could make an independent assessment of the plaintiff’s claim under ss 302–304 of the Act; and

(c)accept the offer made by the plaintiff’s solicitors for the quantum of the dispute to be resolved by an independent quantity surveyor, as neither adjudicators had any expertise in that field and they had no expert evidence available to them.

[18]   Mr Collins notes that the plaintiff’s actual legal costs exceed the scale costs uplifted by 50 per cent. He says that the plaintiff has a credible claim and the liquidators ignored the clear and expressly stated limitations of the first and second adjudications, and the adjudicators’ concerns regarding CCL’s invoicing that require a proper examination. Mr Collins says that the liquidators were provided with a detailed statement of claim supported by independent evidence from a quantity surveyor, as well as a number of letters setting out the issues taken with both adjudications, including the adjudicator’s concerns regarding the very limited information available to them and having to take CCL’s invoices at face value, when the accuracy of the invoices was being challenged.

[19]    He says setting aside the claim under the Fair Trading Act, it should have been clear to the liquidators from the outset that an assessment of the plaintiff’s claim required a full and detailed examination of CCL’s invoicing, and expert evidence as to what work was actually carried out, and as to the quality and value of that work.

[20]   Mr Collins says that the submissions made in support of an award for increased costs, summarised above, are equally applicable in respect of the liquidators’ impropriety which he says justifies an award of costs against the liquidators personally. Additionally, he says the liquidators have chosen to incur legal fees personally in defending the plaintiff’s application for leave, for their own benefit in circumstances where there are no assets available to pay these costs.

CCL’s submissions

[21]   CCL says that increased costs are not justified. Mr Kommu for CCL says that the liquidators were justified in relying on the determination obtained in the second

adjudication in which the plaintiff took no steps. He says the judgment debt was confirmed by an independent quantity surveyor, with further sums likely being owed by the plaintiff to CCL. Accordingly, he says the liquidators did not fail to admit facts, evidence or accept legal arguments without reasonable justification as the plaintiff alleges.

[22]   Mr Kommu submits that the liquidators had reasonable grounds to justify their proposal that the dispute be determined by the plaintiff submitting a claim in the liquidation. He notes that the liquidators even offered to ring fence funds and instruct any necessary experts. Therefore, he says the plaintiff cannot now assert the liquidators’ alleged denial of the complexity of his claim or a lack of independence. Mr Kommu points out that the plaintiff refused to accept any offers to ring fence funds owed under the second determination obtained by CCL, and as such, the liquidators were justified in denying the plaintiff’s offer to resolve the dispute by way of an independent quantity surveyor. Mr Kommu submits the liquidators have not adopted a position that lacks merit or failed to accept legal argument without justification.

[23]   Mr Kommu says that costs should not be awarded against the liquidators personally. He says that it is only in exceptional circumstances where there is evidence of bad faith that liquidators can be held personally liable for costs of a non-party and that  the  circumstances  in  this  case  do  not  warrant  costs  against  liquidators.  Mr Kommu says there is no suggestion, in the actions taken by the liquidators preceding the first and second adjudications or following them, which suggest bad faith, impropriety or unreasonable conduct by the liquidators warranting an award of personal costs against them. Further, Mr Kommu submits that the mere fact that the liquidators were unsuccessful in their opposition to the leave application does not warrant a judgment of costs against them personally. The liquidators had reasonably arguable grounds to oppose the leave application, as above summarised in regards to the opposition to increased costs. Mr Kommu submits that the liquidators were acting in the interests of CCL’s creditors and not their own in seeking to oppose the leave sought by the plaintiff.

[24]   Mr Kommu also challenges the plaintiff’s claim for travel disbursements for his Wellington based counsel. He submits that this disbursement should not be ordered

against CCL, as it was open to the plaintiff to choose Auckland based counsel to act for him in his leave application. Further, Mr Kommu submits that the plaintiff has claimed the filing fee disbursement for the statement of claim, alongside the fee for the interlocutory leave application. He says that as the statement of claim has not been determined, it is premature for the plaintiff to be claiming this cost.

Law

Increased costs

[25]   Rule 14.2(1) of the High Court Rules 2016 (the Rules) sets out the general principles applicable to the determination of costs, including that the party who fails with respect to a proceeding should pay costs to the party who succeeds.9

[26]   Rule 14.6 provides this Court will the power to award increased or indemnity costs. It relevantly provides:10

(3)The court may order a party to pay increased costs if—

…

(b)the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

(i)failing to comply with these rules or with a direction of the court; or

(ii)taking or pursuing an unnecessary step or an argument that lacks merit; or

(iii)failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or

(iv)failing, without reasonable justification, to comply with an order for discovery, a notice for further particulars, a notice for interrogatories, or other similar requirement under these rules; or

(v)failing, without reasonable justification, to accept an offer of settlement whether in the form of an offer under rule 14.10 or some other offer to settle or dispose of the proceeding; or

9      High Court Rules 2016, r 14.2(1)(a).

10     Rule 14.6(3)(b).

…

[27]   The Court of Appeal in Bradbury v Westpac Banking Corp has said in regards to the costs provisions in the Rules that:11

[27]      The distinction among our three broad approaches – standard scale costs, increased costs and indemnity costs – may be summarised broadly:

(a)   standard scale applies by default where cause is not shown to depart from it;

(b)  increased costs may be ordered where there is failure by the paying party to act reasonably; and

(c)   indemnity costs may be ordered where that party has behaved either badly or very unreasonably.

Costs against liquidators personally

[28]     While all matters are at the discretion of the Court if they relate to costs of a proceeding, costs are only awarded against liquidators personally in exceptional circumstances.12 This recognises that a liquidator is not acting in their personal interests, but rather on behalf of and in the interests of the company.

[29]     The Supreme Court discussed costs against liquidators personally in Mana Property Trustee Ltd v James Developments Ltd (No 2):13

[10]      A non-party like a director or liquidator is not at risk of a costs award in other than exceptional circumstances, that is, circumstances outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. In the case of a liquidator that is a principle of very long standing. There is certainly jurisdiction to order a liquidator as a non-party to pay costs personally but such an order will not be made unless there has been some relevant impropriety on the part of the liquidator. The courts recognise that the other party can protect its position, should it be successful, through its ability to seek in advance an order for payment of security for costs. In Metalloy Supplies Ltd v MA (UK) Ltd Millett LJ summarised the position:

The court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the

11     Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] NZLR 400.

12     High Court Rules, r 14.1(1).

13     Mana Property Trustee Ltd v James Developments Ltd (No 2) [2010] NZSC 124, [2011] 2 NZLR 25 (footnotes omitted).

suit. It may also be made where the third party has been responsible for bringing the proceedings and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

The position of a liquidation is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. If

he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do) is it necessarily unreasonable.

[11]      That passage has the approval of the Privy Council in what is now the leading case in this country on costs orders against a non-party, Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2). The Privy Council recognised that in some cases where a non-party may have both controlled the proceeding and funded it, or is to benefit from it, justice will require that if the proceeding fails, the non-party will pay the successful party’s costs:

The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes.

Such a person is the real party to the litigation. But that is not ordinarily the position of a liquidator, although it may be the position of a creditor or shareholder who funds a liquidator. As the Privy Council remarked, where the non-party is a liquidator, he or she can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his or her own interests. The reluctance of courts to make awards against liquidators who are non-parties is for the very good reason that otherwise they may not be prepared to take on the role and enter into litigation that may be beneficial for the company and thus for creditors.

Discussion

Should increased costs be awarded?

[30]     I am satisfied that an award of increased costs is appropriate in the circumstances here. In my view a claim such as the plaintiff’s which involves a complex and contested factual situation and detailed expert evidence regarding the construction work undertaken by CCL is quite unsuited to determination by liquidators pursuant to s 304 of the Act. The process by which liquidators decide whether to admit or reject a creditor’s claim pursuant to s 304 does not contemplate liquidators receiving and adjudicating on detailed and contested evidence as to the validity of the creditor’s claim or quantum. The s 304 process involves liquidators receiving and reviewing particulars of the creditor’s claim and any documents provided by the creditor that evidence or substantiate their claim, and on the basis of that information and documentation making a summary decision whether or not to admit the claim. That statutory process is quite unsuited to the determination of a dispute between a party claiming to be a creditor of the company in liquidation where their claim is based on a complex factual and legal foundation which requires the hearing of factual and expert witnesses, the production of documents, and the opportunity for parties to the dispute to make submissions to the decision maker.

[31]     In my view the position taken by the first defendant in opposition to the plaintiff’s application for leave to commence his proceeding in this Court involved the first defendant failing, without reasonable justification, to accept a cogent legal argument advanced by the plaintiff in support of his application for leave. Moreover, doing so on the basis that the appropriate means by which the plaintiff should have his claim determined would be a liquidator’s determination pursuant to s 304 of the Act shows the misconceived basis of the first defendant’s opposition.

[32]     I accordingly find that the criteria set out in Rule 14.6(3)(b)(iii) have been established to apply and as a result of the first defendant’s ill-founded opposition, the first defendant has contributed unnecessarily to the costs incurred by the plaintiff pursuing his application for leave under s 248(1)(c) of the Act. For these reasons I consider a 50 per cent uplift of the 2B scale of costs is appropriate.

Should costs be awarded against the liquidators personally?

[33]     The fact that the first defendant’s opposition to the plaintiff’s application failed is not enough to justify making an award of costs against the CCL liquidators personally. Such an order will only be appropriate in exceptional circumstances and I find that does not apply in this case.

[34]     I do not accept the plaintiff’s submission that the liquidators must have acted improperly or for any ulterior motive in opposing the plaintiff’s application simply because it appears that they have personally funded the legal costs involved in opposing the plaintiff’s application. That allegation is wholly speculative and there is no evidence to show that the liquidators have acted to oppose the application by reason of having some personal interest in the matter. I do not consider that CCL’s opposition was raised for any purpose other than for the legitimate purposes of the liquidation and in the interests of CCL’s creditors.

Can travel costs for out of town counsel be claimed?

[35]     The first defendant challenges the plaintiff’s claimed disbursement of travel expenses for counsel coming to Auckland from Wellington to attend the hearing and represent the plaintiff in relation to his application for leave. While the test is whether it was necessary to engage out of town counsel,14 the plaintiff is quite entitled to engage counsel of his choosing and I do not consider it unreasonable in the circumstances of this case for the plaintiff to have done so and to seek to recover his counsel’s travel expenses as a disbursement. Had the plaintiff elected to engage Auckland based counsel to represent him at the hearing, it would inevitably have involved the Auckland based counsel in spending additional time and thereby incurring additional legal fees as opposed to his Wellington based counsel already familiar with the factual background and the issues. Having regard to these circumstances I find that it was both reasonable and necessary for the plaintiff to engage his Wellington based counsel to represent him, and I approve his claimed disbursement for related travel expenses.

14     Currie v Gordon [2015] NZHC 2917 at [8]–[11].

[36]     The first defendant also disputes the plaintiff’s claim for the filing fee of $1350 for the statement of claim. The first defendant submits that this disbursement should be disallowed because it is premature for the plaintiff to claim for it when it has not yet been determined whether the application has been successful. The statement of claim was necessarily filed in order for the interlocutory application seeking leave for it to be filed and in order to set out the basis of the proposed claim so that the first defendant and the Court were aware of the basis upon which the claim would be brought if leave was granted. The statement of claim was therefore an essential step taken by the plaintiff on the proceeding, and I find that the plaintiff is entitled to recover the Court filing fees as claimed and set out in Schedule A attached to his counsel’s costs memorandum dated 24 January 2023.

Result

[37]     I make an order in favour of the plaintiff directing the first defendant to pay the plaintiff scale 2B costs ( uplifted by 50 percent ) in the sum of $13,623.00, together with disbursements as set out in Schedule A of the plaintiff’s costs memorandum dated 24 January 2023 totalling $2,018.60.

Paul Davison J