The Dunes Cafe and Bar Limited v 623 Rocks Road Limited (in liq) HC Nelson CIV 2009 442 481
[2010] NZHC 147
•22 February 2010
IN THE HIGH COURT OF NEW ZEALAND
NELSON REGISTRY
CIV 2006 442 000481
BETWEEN THE DUNES CAFÉ AND BAR LIMITED
Plaintiff
AND623 ROCKS ROAD LIMITED (IN LIQUIDATION)
Defendant
Hearing: 15 February 2010
Counsel: Mrs Danielle Hampson and Mr Steven Hampson (by leave)
for plaintiff
Simon E England for Defendant
Judgment: 22 February 2010 at 2:00pm
RESERVED JUDGMENT OF HUGH WILLIAMS J
[Companies Act 1993 s 248(1)(c)(i)]
This judgment was delivered by
The Hon. Justice Hugh Williams
On
22 February 2010 at 2:00pm
pursuant to Rule 11.5 of the High Court Rules
……………………………………………..
Registrar/Deputy Registrar
A The plaintiff’s application for leave to continue proceeding against the
defendant company (in liquidation) is granted.
B There will be no award of costs for its lay representation but the plaintiff
is entitled to recover its disbursements.
DUNES CAFÉ AND BAR LTD V 623 ROCKS ROAD LTD (IN LIQUIDATION) HC NEL CIV 2006 442
000481 22 February 2010
Issue
[1] Following extensive hearings in April and October 2008, the Court delivered
a reserved judgment on 25 February 2009 (the “liability judgment”) holding that the plaintiff, the Dunes Café and Bar Limited (“Dunes”) was entitled to judgment against the defendant, 623 Rocks Road Limited (in liq) (“Rocks”) and dismissed Rocks’ counterclaim. Certain observations were made in that judgment concerning items of quantum claimed by Dunes but the parties were directed to confer to try and agree on those issues. In default of agreement a further hearing to determine quantum was forecast.
[2] Agreement proved elusive – indeed Dunes claims Rocks did not participate fully in endeavouring to reach agreement – so a quantum hearing was required. For various reasons, that could not eventuate until 15 February 2010.
[3] When the judgment of 25 February 2009 was delivered, Rocks was not in liquidation. However, on 25 March 2009 Dr Donald, Rocks’ sole director, passed a shareholders’ special resolution to place Rocks in liquidation and appointed a Mr Meltzer and a Ms Mason joint and several liquidators. Dr Donald ascribed the company’s financial decline to a worsening of the property market and the default interest of 30 per cent payable to the company’s main secured creditor, Bridgecorp.
[4] Section 248(1)(c)(i) of the Companies Act 1993 requires liquidator agreement or a Court order for a person to continue legal proceedings against a company in liquidation. On 27 March 2009 Rocks’ liquidators advised they would not agree to these proceedings continuing against the company.
[5] When the necessity for a Court order for Dunes to be able to continue with its claim against Rocks was pointed out to Mr and Mrs Hampson – Mr Hampson is Dunes’ sole director and Mrs Hampson has appeared for it since before the October
2008 hearing – Dunes applied on 8 July 2009 for an order under s 248(1)(c)(i)
seeking such an order on the grounds that Dunes wished to obtain a money judgment
against Rocks in order to qualify as an unsecured creditor in the liquidation and with
a view to issuing proceedings against Dr Donald, including for reckless trading.
[6] Despite being in liquidation, Rocks opposed the making of any order under
s 248(1)(c)(i) on the grounds that any judgment obtained by Dunes would be “entirely fruitless”, continuation of the proceedings would result in dissipation of Rocks’ assets through ongoing cost and Dunes’ stated purpose in seeking continuation was ancillary to the proceeding itself and was unnecessary to enable Dunes to take the action it sought against Dr Donald.
[7] This judgment deals with Dunes’ application under s 248(1)(c)(i).
Background facts
[8] In view of the full discussion of the background facts appearing in the liability judgment, no more than bare recital of the pertinent facts is needed.
[9] Dunes ran a café bar and casino in leased premises at 643 Rocks Road, Tahunanui, Nelson for a number of years up to mid-2004. It had a lease which, with rights of renewal, potentially ran to 2010.
[10] Dr Donald, a person who was engaged in and ran several property developments over a number of years, wanted to undertake a significant development involving numerous apartments, shops and carparks at 643 Rocks Road and the adjoining property. To do so, one of the obstacles he had to surmount was Dunes’ rights of occupancy of part of the total site stretching a number of years into the future.
[11] Ultimately the parties entered into a Heads of Agreement (“HoA”) dated 17
June 2004, pursuant to which Dunes would surrender its lease, Rocks would compensate it and Mr and Mrs Hampson by, in broad terms, paying them much the same sort of money as they would have received had their existing business continued and Dunes would lease Rocks a new café bar and casino on the same site in the new development.
[12] The HoA was drafted without input from lawyers or other advisers and unfortunately, as detailed in the liability judgment, the parties did not deal comprehensively with their respective rights and obligations concerning what was to
be included in the new premises or at whose cost. This litigation was the result.
[13] In particular, during the period May-April 2006 when the development was nearing completion, there were significant differences between the parties as to responsibility for, and the cost of, the fitout for the new premises. That resulted in
an exchange of correspondence between the parties’ respective solicitors, principally during August 2006, as a result of which on 28 August Rocks’ solicitors purported to cancel the HoA and it leased the new premises to another buyer. Dunes applied for
an interim injunction to restrain Rocks from leasing the premises to another company but that application was dismissed by Gendall J in an oral judgment delivered on 6
November 2006. On 5 December Dunes cancelled the HoA on the basis of Rocks’ repudiatory conduct in refusing to permit Dunes to occupy the new premises and giving its 28 August purported notice of cancellation.
[14] The liability judgment held Rocks’ purported cancellation on 28 August invalid as Rocks had not completed its HoA obligations at that date, but Dunes was entitled to cancel the HoA on 5 December by virtue of Rocks’ repudiatory conduct.
[15] As the liability judgment recorded, virtually the whole of the development still owned by Rocks was sold by mortgagee sale on 29 August 2008. Sales on the open market had realised only 68 per cent of the original valuations to that point.
[16] Evidence from the liquidators filed in opposition to this application showed that, both at the time of liquidation and hearing, Rocks’ deficiencies as regards unsecured creditors and shareholders was nearly $19.8m, largely arising because
$18.8m was owed to the secured creditor. By the time of the hearing the liquidators had sold Rocks’ last shop and public carpark, the proceeds going to the secured creditor as a “condition of the discharge of its mortgage” and Rocks still owed about
$18m to the secured creditor, plus nearly $500,000 for GST. It had a total indebtedness – not including the quantum of this claim – of nearly $18.7m.
Evidence on application
[17] Mr Hampson said the main reason Dunes was anxious to bring its claim to completion was because it believed most of Rocks’ legal fees and disbursements utilised in the proceeding were expended after it was known Rocks was insolvent. It was selling its apartments for only a fraction of their forecast worth, Rocks gave no details of its securities and accordingly Mr Hampson did not accept it was paying default interest at 30 per cent to Bridgecorp. He said it made little or no effort to comply with the Court’s direction to try and agree on issues of quantum and its stance – arguably prior to 25 February 2009 but certainly since that date – had been at odds with Rocks’ assertion any judgment Dunes obtained against it would be “fruitless”. Mr Hampson particularly relied on Rocks’ assurance to Gendall J – an assurance which the Judge accepted – that it was able to meet any award of damages against it. Its ability so to do was a factor counting against the grant of any interim injunction.
[18] He said at para [19] of his affidavit:
“[19] It is my observation that Mr Donald has utilised to its full extreme the delays in the justice system of New Zealand. From the time this case began in December 2006, until the time the case was completed in October
2008, his company has managed to dispose of almost all of its assets and is now attempting to escape any accountability for the wrongs that have been committed. ... The Plaintiff Company will continue to fight until justice is seen to be served.
[19] On another tack, Mr Hampson said that nearly all of the correspondence received by Dunes from Dr Donald’s interests were from a company called Donald Design Limited, another company of which Dr Donald was the sole director and shareholder, not from Rocks. Indeed, much of it did not even purport to be written
on Rocks’ behalf. That might lead, Mr Hampson asserted, to Dr Donald or Donald
Design also being liable to Dunes.
[20] Mr Hampson suggested Dr Donald must have known Rocks was insolvent from an early date - perhaps as early as May 2004 – and referred to correspondence suggesting both doubt as to Rocks’ financial security at that stage and blurring any distinction between Rocks and other aspects of Dr Donald’s interests. That extended
up to August 2006. This led to his view that Dunes “must chance its day in court to achieve justice”.
[21] Dr Donald refuted those assertions, at least to the extent of saying that Dunes had:
“... expected to make a substantial profit from the Rocks Road development
[but] the combination of the property market crash in 2007 combined with penalty interest provisions in the defendant company’s financing contracts resulted in the defendant company incurring a very substantial loss.”
[22] He said that it was only between late 2006 and late 2007 that Rocks’ “equity position in respect of secured creditors moved from being substantially positive to being substantially negative” and that Dunes and Mr and Mrs Hampson should have been aware of that by late 2007. He supported that later proposition by reference to directions, memoranda and minutes filed during the history of this case from October/November 2007 onwards. He said:
[18] ... I also do not see how [Dunes] can claim that it would have avoided incurring the legal expenses relevant to the substantive hearings of April and October 2008 had it (or Mr & Mrs Hampson) been aware, prior to April 2008, that the defendant was “so grossly insolvent”.
[19] The truth of the matter is that [Dunes] and Mr and Mrs Hampson knowingly chose to continue with the proceedings and incur additional legal costs in full knowledge of the defendant’s poor financial position and in full knowledge that any judgment obtained by [them] as a result of those proceedings would be a fruitless “paper” judgment only.
[23] Dr Donald said Rocks refused to engage in discussions over quantum because
he “did not wish to discuss matters directly with the plaintiff company’s representative as I did not believe that such direct discussion without the use of an intermediary (counsel) would be likely to advance matters or would remain cordially [sic].”
[24] Dr Donald also met assertions about the blurring of his corporate interests by saying Rocks was the only company which contracted with Dunes. Donald Design was the project architect. But he acknowledged that “correspondence which arguably or ought properly to have been presented on [Rocks] letterhead was however issued on Donald Design Limited letterhead from time to time”. He
asserted some of that correspondence was expressly on behalf of the defendant and any payments made by Donald Design only occurred when the financiers were late
in providing money.
Law
[25] Though s 248(1)(c)(i) contains no criteria applicable to applications such as this, factors relevantly to be taken into account are well defined by authority. As summarized in Brookers Company and Securities Law (looseleaf ed) para CA248.03(2) p 1-1732:
The leading recent authority concerning the granting of leave under s 248 is Fisher v Isbey (1999) 13 PRNZ 182 ... His Honour’s conclusions on the relevant principles to be applied were as follows:
(a) The Court has a discretion whether to grant leave. It is a cardinal principle that there must be equality among various creditors, and the bringing of proceedings should not produce a comparative advantage to any particular creditor: ...
(b) The assets of a company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim. The onus is on the party seeking leave to satisfy the Court that leave should be given: ...
(c) The Court must determine whether it is appropriate for the creditor’s claims to be proved in the litigation, or whether leave should be given to allow the claims to be established by way of civil proceedings: ...
(d) The appropriate test is that the Court be satisfied that the proposed claim
is not clearly unsustainable. The Court should not examine the merits of the case: ...
(e) Leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless: ...
(f) Delay by the applicant: ...
[26] The following observations on those factors may be germane:
a) Where the application is, as here, one to continue proceedings not to commence them, a litigant who wishes to continue and complete a claim should, in the normal course of events, be able to do so. Citizens have a constitutional right of access to the Courts for the initiation and completion of their right to have their disputes resolved,
and although the Courts can intervene in ways authorised by the High Court Rules to prevent that happening – eg by striking-out or staying claims – Courts should not be active to deny litigants their constitutional rights in that regard.
b)Though numerous cases speak of leave being declined in proceedings are likely to be “fruitless”, the term “fruitless” should not be confined
to an inability for a plaintiff ultimately to receive the amount of any money judgment or satisfaction of any other judgment given against the defendant. To read down the term “fruitless” merely to connote satisfaction of a judgment overlooks a number of relevant factors including the satisfaction for a defendant to defeat a claim by a plaintiff company in liquidation and legitimate wishes by parties to utilise the successful completion of their claims against or by companies in liquidation for other proper purposes. Such litigants will not regard achievement of those purposes as ”fruitless”.
Submissions
[27] Mrs Hampson, who again represented Dunes without opposition from Mr England, counsel for Rocks, submitted the principal issue was who should be responsible to Dunes having regard to the liability judgment, and pointed to the width of the remedies available to the Court under s 9 of the Contractual Remedies Act 1979.
[28] She submitted Dunes should be permitted to proceed to the entry of a money judgment against Rocks to give it undoubted status as an unsecured creditor and thus have the status to urge the liquidators to consider taking action against Rocks or Dr Donald, including under ss 297-304 and 307 of the Companies Act 1993.
[29] In relation to the criteria applicable to an application under s 248, Mrs Hampson pointed to a number being uncontested by Rocks. Of those which were in contention, particularly the sustainability of Dunes’ claim, she pointed to what she submitted was the blurring of corporate identity to which reference was
earlier made between Rocks and Dr Donald and Dr Donald’s other interests. That, she said should be investigated by the liquidators, something that did not appear to have occurred to date.
[30] She similarly submitted leave should be granted because to Dunes, the judgment obtained would not be “fruitless”. Other avenues would be available to the plaintiff as quantified but unsecured creditors under the sections mentioned, including potential reversal of some of Rocks’ transactions which occurred prior to liquidation and a possible direction that the proceeds so reversed might be paid direct to Dunes.
[31] Other avenues which might, after investigation, be invoked included the personal liability for which s 25 of the Companies Act 1993 provides and the various forms of order under penalty provisions such as ss 382 and 383. She also directed attention to equitable and tortious principles, prospectus requirements and the statutory provisions discussed in cases such as Marshall Futures Ltd v Marshall [1992] 1 NZLR 316.
[32] Mr England properly acknowledged, first, that Rocks took no issue with the fact that the further avenues of action outlined by Dunes were not formally pleaded and, secondly, accepted that no issue could be taken by Rocks that Dunes’ application for equality amongst creditors did not dissipate the assets of the company and that there was no delay. He also accepted Dunes’ claim against Rocks was sustainable.
[33] He submitted, however, that it would be “fruitless” to permit this claim to proceed and that ancillary proceedings, even were they to be successful, would be similarly “fruitless”.
[34] In relation to that, he submitted Dr Donald’s evidence made clear that neither
he nor Donald Design might have any personal liability to Dunes. The possibility of any action under any appropriate section of the Companies Act 1993 was, as yet, uninvestigated by the liquidators and, having regard to Rocks’ financial circumstances, unlikely to be investigated even if Dunes pressed the liquidators to
consider such proceedings. He submitted that, having regard to the identity of the secured and unsecured creditors and the amounts still owed to Bridgecorp and others, it was highly likely that the investigation proposed by Mrs Hampson had already been undertaken.
[35] With respect to counsel, however, that submission had no evidential basis derivable from the liquidators’ affidavits.
Discussion and decision
[36] Despite the number of issues raised in the evidence relating to this application, it is not one which requires a wealth of discussion.
[37] Prior to Rocks’ liquidation, it had a judgment against it in Dunes’ favour on the issue of liability and, had it not been for difficulties in the evidential detail on some aspects of the quantum claim, it would have had a judgment against it on quantum, well before the liquidators were appointed. Indeed, the liability judgment included indications of the Court’s thinking on a number of aspects of quantum, but judgment was not formally entered on those issues as it was preferable one judgment be entered against Rocks for the total amount it owed Dunes.
[38] Thus, it was only lack of evidential detail and further explanation on some aspects of the quantum claim that prevented a judgment on both liability and quantum being issued against Rocks prior to its liquidation and it was virtually inevitable that, following the process directed by the Court to finalize quantum, a final judgment in this Court on both liability and quantum would be entered. Therefore, whilst it is acknowledged that liquidators’ duties include preserving assets
of companies in liquidation, had Rocks’ position been correctly addressed in the ways just set out, it must at least be doubtful whether the liquidators would have authorised the expenditure of Rocks’ resources in opposing Dunes’ application for leave to continue the claim.
[39] A further factor is that – as has already been mentioned – subject to statutory
or regulatory impediments, litigants have a right to have their claims brought to
completion. Other than by the means set out in the Rules, Courts should not intervene to prevent that completion process being accomplished. True, in cases such as this, there is a statutory bar to claims being issued or continued involving companies in liquidation without agreement or leave. But that must mean – at least in the circumstances of this claim – that Parliament has created an opportunity for liquidators or the court to reconsider whether such claims should be allowed to be brought or continued having regard to all the circumstances, including financial position of the company in liquidation.
[40] All of that points strongly to Dunes being granted leave to continue this claim against Rocks. It had a judgment against Rocks on liability which was issued before Rocks’ liquidation. It was largely by chance alone that led to Dunes not having a judgment on liability and quantum against it before Rocks’ liquidation. Dunes wishes now to continue and complete the process and obtain judgment against Rockson quantum. Though there may be significant doubt whether Dunes is likely to receive payment from Rocks in this claim of anything in satisfaction of its money judgment, it sees advantages to itself in finalizing this claim. Those advantages may turn out to be of benefit to Dunes and it should not be prevented from exploring those opportunities by a refusal of leave for it to continue and complete its claim in this court.
[41] In addition to the factors earlier mentioned impacting on the question whether leave should be granted is the fact that, until this claim reaches the entry of judgment
on both liability and quantum in this Court, neither party – if dissatisfied – can appeal.
[42] The final point is that, as the authorities show, in a liquidation there must be equality between creditors of the same rank and until judgment on quantum is given
for Dunes, it is unable to be admitted to the ranks of unsecured creditors in Rocks’
liquidation.
Result
[43] In the result, the plaintiff’s application for leave to continue this proceeding against the defendant is granted.
[44] On the issue of costs, as has been remarked on several occasions, since before the October 2008 hearing Dunes has been unable to afford legal representation and has been represented by Mrs Hampson, the wife of its sole director. Though, understandably enough, some of her legal references were not wholly up to date, her representation of Dunes has been thoroughly competent and helpful to the Court in isolating and deciding the issues.
[45] It would therefore be appropriate for Dunes to be awarded costs against Rocks on the latter’s unsuccessful opposition to this application, were it not for the fact that the established rule of practice in New Zealand has been not to award costs
to a litigant in person other than, perhaps, in exceptional circumstances. The leading case where that rule of practice was adhered to is the Court of Appeal decision in
Re Collier (A Bankrupt) [1996] 2 NZLR 438 which followed London Scottish Benefit Society v Chorley (1884) 13 QBD 872, 875 and Lysnar v National Bank of New Zealand Ltd (No 2) [1935] NZLR 557, 562. However, Collier contains a review of overseas authority – especially the decision of the High Court of Australia
in Cachia v Hanes (1994) 179 CLR 403, 415-416 where the judgment of the majority contains the following passage (appearing in Collier at 441):
"Whilst the right of a litigant to appear in person is fundamental, it would be disregarding the obvious to fail to recognize that the presence of litigants in person in increasing numbers is creating a problem for the courts. It would
be mere pretence to regard the work done by most litigants in person in the preparation and conduct of their cases as the equivalent of work done by qualified legal representatives. All too frequently, the burden of ensuring that the necessary work of a litigant in person is done falls on the court administration or the court itself. Even so, litigation involving a litigant in person is usually less efficiently conducted and tends to be prolonged. The costs of legal representation for the opposing litigant are increased and the drain upon court resources is considerable. On the other hand, there is no doubt that the inability of a litigant in person to obtain recompense for time spent in the conduct of successful litigation must on occasions be a significant deterrent to the exercise of his right to come to court in person.
[46] Mrs Hampson’s representation on Dunes’ behalf might justifiably be regarded as the “equivalent of work done by qualified legal representatives” and it would be wrong to suggest her presentation of Dunes’ case was “less efficiently conducted” or “prolonged”. Her appearances for Dunes certainly did not result in Rocks’ costs being increased. Indeed, it was Rocks’ opposition which necessitated this and other conferences and hearings since 25 February 2009.
[47] It is also interesting to note that the decisions in Elliott v Burke (1886)
5 NZLR SC 197, 198 and Hanna v Rainger (1912) 14 GLR 440, 441 do not appear
to have been cited in Collier. In the former, a co-defendant who utilised the services
of his other co-defendant’s counsel at trial was held entitled to recover the fee he paid that counsel as a gratuity (there being a breach of the intervention rule) and in the latter, a solicitor who acted in person was held entitled to the same costs as if he had retained and paid counsel.
[48] In light of those authorities and the fact that denying costs to a lay litigant is
no more than a rule of practice – however well established – and not a rule of law, it may have been open to make a modest award of costs to Dunes for its representation
by Mrs Hampson. However, no figure for her costs nor any estimate of the time taken by her in preparing submissions was suggested and in those circumstances the conclusion must be that no award should be made.
[49] The plaintiff is, however, entitled to recover its disbursements of and incidental to this application. They are to be fixed by the Registrar.
.................................................................
HUGH WILLIAMS J.
Solicitors: Hunter Ralfe Lawyers (Simon England), Nelson, for defendant
Copy for: Mr and Mrs Hampson, 26 Monaco View, Stoke, Nelson
Meltzer Mason Heath, P O Box 6302 Wellesley Street, Auckland 1141 (Liquidators)
Case Officer: Russell Arnst, High Court, Nelson Email: russe[email protected]
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