The Complete Garden (NZ) Limited v Akitio Holdings Limited HC Napier CIV-2009-441-887
[2011] NZHC 2011
•15 December 2011
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2009-441-887
BETWEEN THE COMPLETE GARDEN (NZ) LIMITED
First Plaintiff
ANDGARDENERS GIFT IMPORTS (NZ) LIMITED
Second Plaintiff
ANDAKITIO HOLDINGS LIMITED First Defendant
ANDC W BENGE AND D H BENGE Second Defendants
ANDCARGO INVESTMENTS LIMITED Third Defendant
ANDB G WILLIAMS, V A WILLIAMS AND PAH LYALL IN THEIR CAPACITIES AS TRUSTEES OF THE ST HELIER'S TRUST AND M J SMITH AND B G WILLIAMS A V A WILLIAMS
Fourth Defendant
ANDTHE COMPLETE GARDEN HOLDINGS PTY LIMITED
Fith Defendants
ANDI J DUNCAN Counterclaim Defendant
Hearing: 2 December 2011
(Heard at Palmerston North)
Counsel: D. Nilsson - Counsel for Plaintiff
P. Drummond - Counsel for Defendant
Judgment: 15 December 2011 at 3:30 PM
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
THE COMPLETE GARDEN (NZ) LIMITED V AKITIO HOLDINGS LIMITED HC NAP CIV-2009-441-887
15 December 2011
This judgment of Associate Judge Gendall was delivered on 15 December 2011 at
3.30 pm under r 11.5 of the High Court Rules.
Solicitors: Lee Salmon Long, Solicitors, PO Box 2026, Shortland Street, Auckland
Powell Lyall, Solicitors, PO Box 2016, Palmerston North
Introduction
[1] The defendants in these proceedings seek security for costs from the plaintiffs in the order of about $60,000.00 for part of what they say will be a nine day trial. They say that the plaintiffs will be unable to meet an order for costs if they are unsuccessful, and that I should exercise my discretion to order security. The plaintiffs oppose the application. They deny that they will be unable to meet an order for costs, and also say that various factors, including the long delay in bringing this application, mean that no order should be made here.
[2] Significantly, these proceedings were brought by the plaintiffs on 18
December 2009, but the defendants’ security for costs application was not filed until
19 October 2011. It is clear also that some time ago this proceeding was set down for a nine day trial commencing some four months away in April 2012.
Background
[3] The defendants purchased from the first plaintiff the franchises for the Complete Garden Stores at Napier, Hastings and Palmerston North. The second plaintiff is the supplier of stock to Complete Garden Store franchisees. In these proceedings, the plaintiffs claim for unlawful termination of the franchise agreements in question, unpaid franchise fees and to recover losses on consignment goods. The plaintiffs also claim that the defendants have breached the restraint of trade provisions contained in the franchise agreements. As against that, the defendants counterclaim and contend that the plaintiffs misrepresented, deceived and misled them as to the profitability of the franchise model, and also as to the financial status of a major driving force in the whole franchise arrangement, the counterclaim defendant Ian James Duncan (Mr Duncan) who is a director of the first and second plaintiffs.
Counsels’ Submissions and My Decision
[4] The defendants allege that both the first and second plaintiffs will be unable to meet an order for costs here if their claims are unsuccessful. With respect to the first plaintiff, the defendants rely on the fact that its income comes solely from the sale of franchises and the payment of franchise fees. The defendants argue that only one, and at the most three, of the other franchised Complete Garden stores are currently paying franchise fees. There is therefore limited income upon which the first plaintiff can rely in order to meet a costs order. With regard to the second plaintiff, the defendants again rely on what they say are the small number of franchisees which are still operating, and the fact that the second plaintiff derives a significant part of its income from supplying goods to franchisees. The defendants concede that their present application is not so strong in relation to the second plaintiff, as it also supplies goods at wholesale to other persons and retailers and not just the franchisees. On that basis, the defendants apply for security for costs for the part of the hearing that they expect to be taken up with the plaintiffs claims (as opposed to the defendants’ counterclaims), which they put at two thirds of the total expected hearing time.
[5] In response, the plaintiffs submit that it has not been shown here that there is good reason to believe that they will be unable to meet an order for costs. With respect to the first plaintiff, the plaintiffs maintain that there are in fact six franchise stores still operating, and that all are obliged to pay franchise fees. In reply to a particular allegation relating to two Complete Garden stores which the defendants say were run by Mr Duncan, the plaintiffs confirmed that those stores are actually run by an independent company, and that they do pay franchise fees. The plaintiffs position therefore is that the income stream of the first plaintiff is not as small as alleged by the defendants, and it cannot therefore be inferred that the plaintiffs will struggle to meet an order for costs, as they have sufficient cash available to them on an ongoing basis to do so.
[6] With regard to the second plaintiff, the plaintiffs say that its position is even stronger. Not only are there six franchise stores still operating, from which income for the second plaintiff is derived, but that company it seems also supplies goods to independent businesses and retailers outside the Complete Garden store network, giving it additional sources of income. There is therefore no basis upon which it
could be said that there is good reason to believe that the second plaintiff will be unable to meet an order for costs.
[7] Before me, counsel for the plaintiffs also made a number of points relating to the exercise of my discretion, should there be jurisdiction to make an order for security for costs. The plaintiffs’ position is that their claim against the defendants is strong. They also say that some of the impact upon their business, relied on by the defendants in this application to allege impecuniosity on their part, was caused by the actions of the defendants and that this actually forms the basis for the plaintiffs claim here. The plaintiffs also point to the defendants’ delay in bringing this application, a delay of some 20 months from the date of filing their statement of defence. On those grounds, the plaintiffs contend that, even if there is jurisdiction to make an order here, the Court should decline to do so. Finally, if the Court is to contemplate making an order for security for costs, on the issue of quantum, the plaintiffs submit that the amount sought is excessive as the allocation of time between their claims and the defendants’ counterclaims is incorrect.
[8] Rule 5.45 of the High Court Rules governs the making of an order for security of costs. That rule 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.
…
[9] The first step in any application under r 5.45 is to consider whether there is good reason to believe that the plaintiffs will be unable to meet an order for costs if their claim is unsuccessful. This is the threshold test of impecuniosity. If I find that there is reason to believe that the plaintiffs will be unable to meet an order for costs, I must then balance their interests as plaintiffs in that they should not lightly be prevented from pursuing their claim, with the interests of the defendants in that they should be protected against being drawn into unjustified litigation, in deciding whether to exercise my discretion to make an order for security of costs. That balancing test was summarised by the Court of Appeal in A S McLaughlin Ltd v MEL Networks Ltd (2002) 16 PRNZ 747 (CA) at [15]-[16]:
The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.
Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over- complicated and unnecessarily protracted.
[10] The merits of a plaintiff’s case are a proper matter for consideration in the context of security for costs: see Ambrose v Pickard [2009] NZCA 502. Other matters which may be assessed in undertaking that balancing exercise include:
(a) Whether the impecuniosity was caused by the defendants’ actions;
(b) The means of anyone associated with the proceeding which may be able to assist the plaintiff;
(c) Delay on the part of the defendants in bringing the application; and
(d) Whether the making of an order might prevent the plaintiffs from proceeding with a bona fide claim.
[11] In AS McLachlan Ltd, the Court of Appeal made it clear at [14] that there is no checklist or simple formula for decisions on the quantum of security for costs. Further, the amount of security is not necessarily to be fixed by reference to the scale (at [27]). What the court must do is make an assessment of what is just in the particular circumstances of the case.
[12] I now turn first to consider the threshold test of impecuniosity under r
5.45(1)(b) – that is whether the defendants have shown that there is good reason to believe that the plaintiffs if unsuccessful will be unable to meet an order for costs. With respect to both plaintiffs, the defendants in suggesting impecuniosity on their part essentially rely on a suggestion of plummeting income based on what they say is the substantially reduced number of stores franchised from the first plaintiff which still operate and pay franchise fees. The defendants say that only one store is currently paying franchise fees, or at the most three (the extra two being those that the defendants say are run by the directly associated party, Mr Duncan). As a result, the defendants say the plaintiffs must now be presumed to be impecunious. In reply, as I have noted above, the plaintiffs maintain however that six stores are currently operating, and that all six are required to pay franchise fees.
[13] I accept that, since the first plaintiff’s income seems to depend largely on the payment of franchise fees, there is a logical connection between the number of stores currently paying those fees and the first plaintiff’s ability to meet an order for costs. However, the evidence adduced on this application is both contradictory and also extremely thin and superficial to say the least. In my view it is not sufficient to show here that there is good reason to believe that the first plaintiff will not be able to meet an order for costs for the reasons I outline at [15] below.
[14] As McGechan on Procedure in addressing this threshold test notes at HR
5.45.02:
What is contemplated is that ―there should be credible (that is, believable) evidence of surrounding circumstances from which it may reasonably be inferred that the [party] will be unable to pay the costs. This does not, of course, amount to proof that the [party] will, in fact, be unable to pay them.‖: Concorde Enterprises Limited v Anthony Motors (Hutt) Ltd (No 2) [1977] 1 NZLR 516 at 519. Something more than silence by a party as to its financial position is required to establish ―reason to believe‖ that a plaintiff will be unable to pay a successful defendant’s costs: NZ Kiwifruit Marketing Board v Maheatataka Coolpack Ltd (1993) 7 PRNZ 209. An applicant does not have to prove inability to pay in the normal civil sense. In the
absence of direct evidence, it can be sufficient to adduce evidence of surrounding circumstances from which an inference of inability to pay can reasonably be drawn: Totara Investments v Abooth Ltd HC Auckland CIV-2007-404-990, 4 March 2009 at [28].
[15] The defendants allege that only one store is currently paying franchise fees. As to two other stores, the defendants also say they may not be paying franchise fees as they are operated by Mr Duncan. No evidence has been given to support that statement however, and Mr Duncan denies on oath first, that he runs those stores (he saying instead they are run by another company) and secondly, that they do not pay franchise fees. Of three other stores which are still operating, Mr Williams for the defendants deposes in his affidavit that he is aware that those stores are not currently paying franchise fees. He does not however set out the basis for that belief. Mr Williams also says that a Complete Garden store in Hornby is not currently paying consignment or franchise fees, again not stating the basis for this belief. No evidence, however, has been filed to support Mr Williams’ claims relating to the payment of franchise fees by those other stores.
[16] In my view, what evidence there is before the Court does not establish good reason to believe that the first plaintiff if unsuccessful would be unable to meet an order for costs. It is insufficient for Mr Williams to state that he ―knows‖ that franchise fees are not being paid by most of the stores currently operating, without providing any evidence as to the basis for his knowledge. These are matters which are disputed by the first plaintiff, and the defendants carry the initial burden of proof. Also, I do not consider that the evidence relating to Mr Duncan’s previous debt issues assists the defendants. While evidence of general impecuniosity by a director may help support a case for impecuniosity of the company, it cannot aid the defendants in this case when the other evidence is relatively weak. I am unable to hold, on the evidence put before me, that there is good reason to believe that the first plaintiff would be unable to meet an order for costs.
[17] The position with respect to the second plaintiff in my view is even clearer. If six Complete Garden stores are still operating, and there is insufficient evidence to establish that this may not be the case here, then the second plaintiff has the business of supplying stock to those six stores. In addition, on the evidence before me it
seems the second plaintiff also supplies goods to independent businesses, giving it a second source of income. And, there is no evidence put forward about the likely profit from either or both of these sources of income. I am unable to conclude here that, simply because the number of franchised stores to which the second plaintiff supplies may have dropped, that the second plaintiff would therefore be unable to meet an order for costs.
[18] Overall, therefore, I conclude that the evidence put forward by the defendants does not establish good reason to believe that the plaintiffs will be unable to meet an order for security for costs. The threshold test has not been met. There is therefore no jurisdiction under r 5.45 to make the order sought. The defendants’ application accordingly is dismissed.
[19] Even if I had found that there was such jurisdiction, the delay by the defendants in bringing this application would have weighed heavily against the making of such an order. These proceedings were filed in late 2009. Discovery has been completed. Briefs of evidence and a trial bundle have been prepared. A judicial settlement conference has taken place. One trial date has already been vacated. The current trial date set down for April 2012 is only some four months away. In Oceania Furniture Ltd v Debonaire Products Ltd HC Wellington CIV-
2008-485-1801, 22 April 2009, the High Court noted that applications for security for costs made at a late stage in the proceedings are often refused on timing and delay grounds.
[20] The reason given by the defendants for their delay in bringing the present application is their claim that the financial position of the plaintiffs has deteriorated over the course of these proceedings and they say it is only now that impecuniosity has become a real issue. This is not further elaborated on however. In response, the plaintiffs contend that this is an inadequate reason, given also that the failure of other franchise stores is in part relied on specifically by the defendants in their counterclaims, filed some 20 months ago. I agree. Without further explanation from the defendants as to what change in the plaintiffs’ positions has led to this application, the delay as I see it essentially remains unexplained. That delay, this late in the proceedings, also in my view seriously weighs against the making of an order for security for costs.
Conclusion
[21] To conclude, I do not consider that the evidence filed by the defendants here establishes good reason to believe that either of the plaintiffs would be unable to meet an order for costs, should their claim be unsuccessful. In addition, the delay in this case in bringing the present application, which is essentially unexplained, would have seriously weighed against making any order for security for costs, had there been jurisdiction to make such an order. These conclusions necessarily mean that it is not required for me to consider here the matters relevant to the exercise of my discretion to grant an order for security.
[22] The defendants’ application for security for costs is dismissed.
[23] As to costs, I see no reason here why costs should not follow the event in the usual way. Costs are therefore awarded to the plaintiffs on their successful opposition to the present application on a 2B basis together with disbursements as fixed by the Registrar.
‘Associate Judge D.I. Gendall’
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