Tomanovich Holdings Limited v Gibbston Community Water Company 2014 Limited

[2018] NZHC 1471

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CIV-2016-412-000155

[2018] NZHC 1471

BETWEEN

TOMANOVICH HOLDINGS LIMITED

Plaintiff

AND

GIBBSTON COMMUNITY WATER COMPANY 2014 LIMITED

Defendant

Hearing:	Determined on the papers
Counsel:	D J Ballantyne for Plaintiff A N Isac for Defendant
Judgment:	19 June 2018

JUDGMENT OF GENDALL J

TOMANOVICH HOLDINGS LTD v GIBBSTON COMMUNITY WATER COMPANY 2014 LTD [2018] NZHC 1471 [19 June 2018]

Introduction

[1]    On 22 December 2016, the plaintiff filed an originating application to set aside a transaction under s 348 of the Property Law Act 2007. The plaintiff alleged that the transfer of potable water assets from Gibbston Water Services Ltd (GWS) to the defendant was made with an intention to defeat GWS’s creditors, including the plaintiff. The defendant denied this claim.

[2]    On 8 May 2018, I issued a decision refusing the defendant’s application to strike out the proceeding but allowing its application for further security for costs.1 No submissions as to quantum on that latter application were before me at that point however. Counsel for the parties requested that I receive submissions by way of memoranda from them on that issue. I have now received those submissions and give my decision on the quantum of that further security for costs to be paid by the plaintiff here.

Submissions

[3]    Extensive submissions by way of memoranda on this issue have been received as follows:

(a)from the defendant – dated 22 May 2018 and 13 June 2018;

(b)from the plaintiff – dated 6 June 2018.

Defendant

[4]    In general submissions for the defendant, its counsel, Mr Isac, suggested that the following factors in this case are particularly relevant to fixing security:

(a)The merits of the plaintiff’s claim he says are at best doubtful and he claims this is supported by certain comments in the security for costs judgment itself;2

1      Tomanovich Holdings Ltd v Gibbston Community Water Company 2014 Ltd [2018] NZHC 990.

2      At [62] and [77] - [79].

(b)The case is complex, particularly given the number of interlocutory applications the plaintiff has signalled it intends to make;

(c)The case involves allegations from the plaintiff of moral turpitude by the defendant and related parties. According to the defendant, these are without any evidential basis. Serious imputations of this nature will commonly result in an award of indemnity costs against an unsuccessful plaintiff;

(d)The plaintiff rejected the defendant’s open offer to meet the entire value of claims by the plaintiff (and other Henderson interests, said to total

$41,589) if they are verified creditor claims approved by the liquidator, and to pay costs up to that date on a 2B basis. This, it is claimed, would have entirely dealt with the plaintiff’s legitimate interest in pursuing this proceeding;

(e)The defendant is community owned and does not run at a profit. The costs of this proceeding constitute a very substantial impost on its resources;

(f)There is no suggestion here that the plaintiff, by way of its related entities, is unable to pay security on an estimated indemnity basis. However, it does seem the plaintiff itself has no assets it can call on to meet any adverse costs judgment.

[5]    The defendant further submitted that the community should not have to suffer the risk of non-recovery of its costs when the proceeding it claims is only being used by the plaintiff and Mr Henderson as a vehicle to explore Mr Henderson’s allegations of conspiracy and impropriety. It notes, too, that the claim pursued by the plaintiff here effectively relates to a debt it says is outstanding to it from GWS of only a little over $14,000.

[6]    In light of all these factors, the defendant contended that future costs should be secured on an actual and reasonable costs basis. It submitted that this case is similar

to one where a plaintiff is funded by a litigation funder (where awards based on actual estimated costs are common). The defendant suggested these costs would amount here to approximately $126,000 (excluding GST).

[7]    The defendant also sought further and better security for past costs. It noted that security of $17,000 has already been paid by the plaintiff but it says this represents only a fraction of the actual costs incurred. Further security in the sum of $23,000 it submits is appropriate to address the existing interlocutory applications and all steps since the completion of discovery in December 2017.

[8]    Thus, the defendant initially sought in all a total of $149,000 by way of further security.

[9]    In reply submissions dated 13 June 2018, however, the defendant set out its estimation of scale costs on a category 2B basis for the remainder of the proceedings, on the basis that the Court may not be minded to order security on an indemnity basis. On this, the defendant estimates that 2B costs to date for steps prior to the interlocutory applications is $17,394. It suggests that the costs for the two interlocutory applications currently before the Court (for further and better discovery and for collateral use) will be $16,502. The costs for the substantive trial which it says will occupy three hearing days, plus preparation, it estimates at $23,415. In all, this totals $57,311. Disbursements of $9,360 for all future events (to include fees of an expert witness the defendant says it will call, and in addition assuming no further interlocutory applications are made), are also sought.

Plaintiff

[10]   The parties are a long way apart on the quantum issue. Counsel for the plaintiff submitted first, that the defendant’s claim for security on an indemnity costs basis lacks any cogent basis or precedent. He argues that the amount sought is excessive and wholly disproportionate to the general principles of security awards. The plaintiff’s position is that security for costs should be awarded here only on the basis of 75 per cent of reasonable category 2B costs. Counsel suggests that this discount of 25 per cent on scale costs is common practice and is appropriate in this case. This would ensure, too, that the plaintiff is able to continue pursuing its present claim. His

contention again is that it would be highly unusual for a sum comparable to actual or indemnity costs to be awarded, and there was no good reason in this case to depart from the usual and common approach of awarding discounted scale costs adopted generally by the courts.

[11]   Counsel for the plaintiff submitted, too, that the defendant’s assertions questioning the merits of the case are unfounded. He also argued that the claim is not complex and that the number of interlocutory applications required is partly due to the defendant’s actions.

[12] The plaintiff further argued that its rejection of the defendant’s offer, noted at [4](d) above, does not automatically justify an award of indemnity costs. Counsel contend that the plaintiff rejected the offer for principled reasons because, he says, it has a legitimate interest in pursuing these proceedings. The plaintiff argues, too, that the costs of this proceeding are not grossly out of proportion to the sum at stake. The potable water assets of GWS have significant value and the sale to the defendant, it says, was at a gross undervalue. The relief sought, the plaintiff suggests, is for the disposition of these assets to be set aside, and it is not directed solely at having its debt repaid.

[13]   The plaintiff contends, too, that the fact the defendant is community owned should not lead to an increased costs award or security sum. Counsel maintains that the defendant chose to be engaged in business affairs, and must be exposed to the consequences that ensue.

[14]   The plaintiff appears to accept a trial of three days will be required and on this basis its calculation of likely future costs on a 2B basis totals $22,300. With a 25 per cent discount, the amount due would total $16,725. The plaintiff suggests that the

$17,000 already paid should be deducted from that sum, meaning there should be no award of security for costs made now.

Legal principles

[15]   Determining the amount of security justified in a particular case requires the exercise of a discretion rather than a strict mathematical approach.3 It does not need to be fixed by reference to a likely costs award but can be what the Court thinks fit in all the circumstances.4 The circumstances to be taken into account include:5

(a)The amount or nature of the relief claimed;

(b)The nature of the proceeding, including the complexity and novelty of the issues;

(c)The estimated duration of the trial; and

(d)The probable costs payable if the plaintiff is unsuccessful and/or the defendant’s estimated actual costs.

[16]   It is generally inappropriate to make an order for security for costs that have already been incurred, but there is no absolute bar.6

Quantum of security

[17]   A factor I need to consider when setting quantum is the probable costs payable if the plaintiff is unsuccessful. The difference between a probable costs order here, which the plaintiff says might well be calculated on the usual category 2B basis and indemnity costs is substantial. It is not clear that the plaintiff, if unsuccessful in its claim, would be ordered necessarily to pay indemnity costs, even though the defendant has signalled that in these circumstances it would intend to seek them. The defendant contends that information to justify the debts claimed by the plaintiff and the other Henderson interests from GWS has never been properly provided. Throughout, the defendant suggests too that it has clearly stated its intention to apply for indemnity costs ultimately on the basis of its open offer to pay the proven claims of both the

3      Sharp v Pillay [2017] NZHC 647.

4      A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747.

5      McGechan on Procedure (Thomson Reuters, online looseleaf ed) at [HR5.45.07].

6      Ambrose v Pickard [2009] NZCA 502; Sisson v IAG New Zealand Ltd [2014] NZHC 616 at [71].

plaintiff and the Henderson interests in the liquidation of GWS plus appropriate costs. Given also that the plaintiff in this case is effectively pursuing a debt claim for a little over $14,000 only, repayment of which on terms has been offered but rejected, the defendant perhaps properly is questioning the motives of the plaintiff and those who control it in bringing this proceeding. The potable water assets now owned by the defendant are acknowledged as being in community ownership held for the benefit of landowners in the Gibbston Valley, including the Henderson interests. On the defendant’s overall suggestion that questions must be raised over the motives of the plaintiff and the Henderson interests in bringing this particular proceeding, it is useful to note the defendant’s claim outlined at [37] of my 8 May 2018 judgment in this proceeding:

…the plaintiff has actually taken these proceedings in order for an entity associated with it and the Henderson interests to regain control over the water scheme which was transferred. The defendant maintains that the conduct of Mr Henderson, Ms Buxton, and others directly associated with them here has been dubious in the extreme.

Counsel for the plaintiff, however, takes issue with this claim and strongly denies it.

[18]   Notwithstanding this and, whilst in my view, there may well be some strength in the arguments advanced for the defendant I have noted above, for present purposes I am prepared to give the plaintiff the benefit of the doubt and by a rather fine margin I find that the justice of the present situation does not favour an award of security for costs at full indemnity solicitor/client value. I am of the view that some protection is required for the defendant here but, like the situation which prevailed in Clear White Investments Ltd v Otis Trustee Ltd,7 it is not intended that the bar should be set too high on the plaintiff's access to the Court.

[19]   Therefore, I do not consider it appropriate to make an order for security of costs by reference to the indemnity costs standard. I note on this too that, insofar as past awards of security are a legitimate guide, McGechan on Procedure at HR5.45.07 states that they generally represent some discount on the likely award of costs as calculated under Schedule 3 of the scale.

7      Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837.

[20]   In making those decisions, I take into account other factors, such as the complexity of the proceeding and the estimated duration of the trial. While there are a number of interlocutory applications lengthening this proceeding, I do not consider that the core issue of the case is particularly complex. I note the defendant’s submissions regarding it being a community owned non-profit entity, but I do not consider that sufficient to justify ordering security for costs based on an estimate of its actual costs.

[21]   A further factor I take into account is the amount or nature of the relief claimed. That is not straightforward here because the relief sought is the setting aside of the disposition of the potable water assets to the defendant. The value of these may well turn out to be substantial, but the plaintiff itself only has a limited interest (being simply a debtor to the extent of a little over $14,000) in GSW.

[22]   Given my conclusion that security should be awarded here on a category 2B scale basis, I now turn to consider a calculation of the proper quantum to be awarded.

[23]   In light of all the particular circumstances of this case, I find that the defendant’s estimate as to likely total 2B costs and disbursements in its submissions to me are a reasonable starting point. The calculations advanced by counsel for the plaintiff, in my view, are considerably awry, particularly given the further signalled interlocutory applications yet to be heard.

[24]   The defendant’s calculated category 2B costs, both for steps to date and known future steps in this proceeding, totals some $57,511 plus $9,360 for disbursements. No valid challenge to these figures has been made by the plaintiff and I accept them. I consider that although this might be seen as somewhat generous to the plaintiff, the broad interests of justice in this case suggest that the discount of 25 per cent to these costs amounts often seen in cases of this type is appropriate here. Applying this discount to the $57,511 leaves a balance of $43,183.  The plaintiff has already paid

$17,000 by way of security. This leaves a balance by way of further security to be paid now amounting to $26,183 plus $9,360 for disbursements. As to the disbursements amount, it includes an amount for the cost of experts to be called by the

defendant. No real issue appeared to be taken over the defendant’s disbursements claim.

[25]   An order is to follow, therefore, for payment by the plaintiff of further security for costs and disbursements amounting to a total of $35,543.

[26]   I consider that the plaintiff, by its related entities, will be able to meet such an order.

Orders

[27]   I order that the plaintiff provide further security for the defendant’s costs of this proceeding in the sum of $26,183 plus $9,360 for disbursements, making in all a total for security of $35,543. (This takes into account the $17,000 for initial security for costs already paid by the plaintiff.)

[28]   In my judgment of 8 May 2018, I stayed the proceeding pending payment of security under r 5.45(3). This stay will continue until the plaintiff makes payment in accordance with this judgment.

Costs

[29]   As to costs first, on the earlier 11 April 2018 hearing of the strike out and security for costs applications and secondly, on the matters the subject of the present judgment, counsel for the parties have agreed that success has been mixed and that costs should lie where they fall. I agree.

[30] There is to be no order made as to costs on the matters referred to at [29] above. Costs are to lie where they fall.

...................................................

Gendall J

Solicitors:

Canterbury Legal, Christchurch Andru Isac, Barrister, Wellington