Trends Publishing International Limited (in rec and liq) v Callaghan Innovation
[2020] NZHC 1626
•10 July 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-1274
[2020] NZHC 1626
BETWEEN TRENDS PUBLISHING
INTERNATIONAL LIMITED (IN
RECEIVERSHIP AND LIQUIDATION)
Counterclaim PlaintiffAND
CALLAGHAN INNOVATION
Counterclaim Defendant
On the papers: At Auckland Appearances:
No appearance by or on behalf of the Counterclaim Plaintiff D H McLellan QC and A E Ferguson for the Counterclaim Defendant
R B Hucker for non-parties - David Johnson and TheCircle.co.nz Limited
Judgment:
10 July 2020
JUDGMENT OF POWELL J
[Costs]
This judgment was delivered by me on 10 July 2020 at 3.30 pm pursuant to R 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
TRENDS PUBLISHING INTERNATIONAL LIMITED (IN RECEIVERSHIP AND LIQUIDATION) v CALLAGHAN INNOVATION [2020] NZHC 1626 [10 July 2020]
[1] On 30 April 2019 I dismissed the claims of the counterclaim plaintiff, Trends Publishing International Ltd (“Trends”) against the counterclaim defendant, Callaghan Innovation (“Callaghan”).1 Trends’ claims, ultimately totalling $61 million, arose out of a funding agreement for a growth grant entered into by Trends and Callaghan on 2 April 2014 (“the Funding Agreement”).2
[2] At the conclusion of the substantive judgment I found Callaghan was entitled to costs and if these could not be agreed I would determine the issue after the filing of memoranda.3
[3] Callaghan has now requested that costs be fixed, not only against Trends, but against two non-parties; TheCircle.co.nz Ltd (“The Circle”), a related company which is alleged to have funded Trends’ claims against Callaghan, and David Johnson, the sole director and ultimate beneficial owner of both Trends and The Circle.
[4]In particular, Callaghan seeks costs on an indemnity basis in the sum of
$1,020,445.02, together with disbursements of $434,212.37, a total of $1,454,657.39, which after the deduction of $50,000 security for costs paid by Trends already released to Callaghan, leaves a total of $1,404,657.39 for costs and disbursements currently claimed by Callaghan.
[5] Since the substantive judgment Trends has entered liquidation. The liquidators of Trends abide the decision of the Court with regard to costs and Trends has therefore taken no steps with regard to Callaghan’s costs application. In opposing Callaghan’s costs application against them the non-parties have however taken issue with the amount of costs claimed against Trends, as well as arguing that any costs order against them is inappropriate.
[6] With regard to the submissions made by both Callaghan and the non-parties it is apparent that to determine Callaghan’s costs application the following issues must be considered:
1 Trends Publishing International Ltd v Callaghan Innovation [2019] NZHC 907 (“the substantive judgment”).
2 At [2].
3 At [235].
(a)Is leave necessary in order to fix costs?
(b)Should there be an order for indemnity costs against Trends?
(c)What is the appropriate quantum of costs?
(d)What is the appropriate quantum of disbursements?
(e)Should either or both of the non-parties be liable for all or any of the costs and disbursements imposed on Trends?
Issue One – is leave required to bring the costs application against Trends?
[7] Mr Hucker, on behalf of the non-parties, submits that s 248(1)(c) of the Companies Act 1993 is applicable, albeit without elaborating as to whether it provides a substantive barrier to fixing costs in this case. The section provides:
248 Effect of commencement of liquidation
…
(c)unless the liquidator agrees or the court orders otherwise, a person must not—
(i)commence or continue legal proceedings against the company or in relation to its property; or
(ii)exercise or enforce, or continue to exercise or enforce, a right or remedy over or against property of the company.
Discussion – Issue One
[8] The limited case law on s 248(1)(c) of the Companies Act suggests that although leave is required to commence or continue legal proceedings against a company in liquidation, where judgment in substantive proceedings has been given prior to a liquidation, as neither the company nor a liquidator can at that point file a notice of discontinuance s 248(1)(c) does not prevent a Court from making an order
as to costs.4 I therefore accept Mr McLellan’s submission on behalf of Callaghan that leave is not required in order to proceed to determine Callaghan’s costs application.
[9] Even if this were not the position there could be no substantive basis for declining leave in the present case. As Mr McLellan noted:
(a)The proceeding has been running since August 2015 and significantly pre-dates the liquidation.
(b)Costs are the only outstanding matter in the proceeding and Trends has no further steps to take. The proceeding would be concluded quickly and with little, or no, further expense to Trends.
(c)Your Honour has held that Callaghan is entitled to costs. The only outstanding matters are the nature and quantum of this cost entitlement and whether David Johnson and theCircle.co.nz ("Circle") should be jointly and severally liable for this amount.
(d)A decision not to grant leave would effectively defeat Callaghan's entitlement to costs. This would be manifestly unjust. It would allow Trends, David Johnson, and the Circle, to avoid any costs consequences as a result of the failure of the counterclaim.
(citations omitted)
[10]I therefore turn to consider the costs and disbursements claimed by Callaghan.
Issue Two – should there be an order for indemnity costs?
[11] Rule 14.6(1)(b) of the High Court Rules 2016 defines indemnity costs as the “actual costs, disbursements and witness expenses reasonably incurred by a party”. Rule 14.6(4) gives a Court a discretion to 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; or
(b)the party has ignored or disobeyed an order or direction of the court or breached an undertaking given to the court or another party; or
(c)costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or
4 Orakei Group (2007) Ltd v Doherty [2008] ERNZ 505(EC) at [35]–[36] applied in
Condor International Ltd v Steelhaus 2014 Ltd [2019] NZHC 875 at [4].
(d)the person in whose favour the order of costs is made was not a party to the proceeding and has acted reasonably in relation to it; or
(e)the party claiming costs is entitled to indemnity costs under a contract or deed; or
(f)some other reason exists which justifies the court making an order for indemnity costs despite the principle that the determination of costs should be predictable and expeditious.
[12] The leading authority on indemnity costs is the decision of the Court of Appeal in Bradbury v Westpac Banking Corporation.5 In particular the Court noted:6
(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.
[13] With regard to indemnity costs the Court recognised the categories in respect of which the discretion to order indemnity costs were not closed but identified a number of circumstances in which indemnity costs have been ordered:7
(a)the making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud;
(b)particular misconduct that causes loss of time to the court and to other parties;
(c)commencing or continuing proceedings for some ulterior motive;
(d)doing so in wilful disregard of known facts or clearly established law; or
(e)making allegations which ought never to have been made or unduly prolonging a case by groundless contentions, summarised in French J's “hopeless case” test.
5 Bradbury v Westpac Banking Corporation [2009] NZCA 234, [2009] 3 NZLR 400.
6 At [27].
7 At [29].
[14] The Court noted that in Bradbury v Westpac the High Court had applied the test of hopelessness and misconduct and observed that “if sustained on the evidence each was a proper basis for indemnity costs”.8
The non-parties’ position
[15] The non-parties submit that indemnity costs are not appropriate in this case. In particular, Mr Hucker submits the case brought by Trends against Callaghan was not hopeless from its inception, nor was there flagrant misconduct in terms of Bradbury v Westpac. Instead he submits:
(a)there was no intention by Trends to mislead;
(b)Trends did not know at the time that the claims it made to Callaghan were false;
(c)Trends (and its counsel) did not knowingly put forward false evidence to the Court;
(d)Trends had done its best to be transparent about the true nature of the costs it incurred and genuinely believed that the costs were recoverable;
(e)it was not put to the Trends’ witnesses at trial that they were attempting to mislead the Court;
(f)there is otherwise no misconduct in the proceeding that would justify the imposition of indemnity costs; and
(g)neither the Court of Appeal9 nor the Supreme Court seized of the substantive proceedings involving Trends and Callaghan suggested that
8 At [33].
9 Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2018] NZCCLR 7 (“Trends Court of Appeal judgment”).
the pursuit of the counterclaim was an abuse of process or one that ought not to be pursued.10
[16]In Mr Hucker’s submission:
Conversely, Trends had a legitimate and reasonable claim against Callaghan in regards to the funding agreement. It is not enough to declare an unfavourable judgment as proof the impugned party has wasted the Court’s time and resources. There must be some other conduct in the proceedings that justifies such an award.
[17]Mr Hucker indeed went on to state:
The question must also be raised as to why, if the case was groundless and hopeless as opposing counsel suggests from inception, Callaghan did not apply for summary judgment or indeed to strike out the claim in the first instance.
Discussion – Indemnity costs
[18] Contrary to the submissions of Mr Hucker, it is in fact apparent from the face of my judgment that Trends’ claim was fundamentally misconceived or otherwise hopeless from conception. In addition, correspondence between the parties made available for the purposes of the costs application raises issues of inappropriate motives of a similar type, albeit not to the same extent, as was present in Bradbury v Westpac, although as noted it is not necessary for both to be demonstrated to warrant indemnity costs being awarded.11
[19] First, it is clear from the substantive judgment that from the first quarterly claim to Callaghan until the end of the hearing Trends had a fundamental misconception of the terms of the Funding Agreement and, in particular, for what it was entitled to be reimbursed by Callaghan.12 The Funding Agreement is in fact clear that Trends was only able to seek reimbursement of 20 per cent of eligible research and development expenditure (“Eligible R&D Expenditure”).13 Despite this, it was clear from the evidence that Trends never undertook a formal calculation as to what
10 Trends Publishing International Ltd v Advicewise People Ltd [2018] NZSC 62, [2018] 1 NZLR 903 (“Trends Supreme Court judgment”).
11 See [14] above.
12 Substantive judgment at [197].
13 At [40].
portion of its expenditure was Eligible R&D Expenditure entitled to be claimed under the Funding Agreement. It is telling that while each of the quarterly claims was certified by Trends’ Chief Financial Officer, Simon Groves, as being Eligible R&D Expenditure, it was only after all three quarterly claims had been made by Trends and after the Deloitte investigation had begun that Mr Groves requested a copy of the Funding Agreement.14
[20] More fundamentally, the evidence, both contemporary and that produced at trial by Trends, provided no basis for concluding that any of the expenditure claimed by Trends was in fact Eligible R&D Expenditure for the purposes of the Funding Agreement. For example, Mr Groves’ evidence as to how he had calculated the Q1 claim15 was not supported by either the documentary evidence nor the evidence of the other Trends’ witnesses, and in any event it was clear Mr Groves never considered whether the amounts being claimed were in fact 20 per cent of the Eligible R&D Expenditure as defined in the Funding Agreement. Mr Groves did not even pretend to undertake any analysis of Eligible R&D Expenditure with regard to the Trends Q2 claim on 30 June 2014, as he simply replicated the Q1 claim,16 and no detail was ever provided by Mr Groves for how the Q3 claim on 3 October 2014 was calculated.17 It was only after Callaghan first raised issues with the Trends’ claims that Mr Groves provided any supporting calculation for the labour component of the three Trends’ quarterly claims – Trends’ October reconciliation.18 As the judgment notes, Mr Groves provided no explanation as to how he ultimately determined the labour committed to the project in the Q2 and Q3 claims or how it constituted Eligible R&D Expenditure, noting that it purported to show all but four of the employees listed were working 100 per cent on Eligible R&D Expenditure.
14 At [160].
15 At [63]–[64].
16 At [66].
17 At [68].
18 At [69].
[21] In any event, within a short time the October reconciliation was superceded by Trends’ November reconciliation19 and then Appendix B in March 2015,20 with the judgment making it clear that:21
None of these documents nor the figures within can be verified or reconciled with each other. Instead, the documents only confirm the latent inaccuracy of the quarterly claims prepared by Trends.
[22] The fundamental inadequacy of Trends’ record and its inability to substantiate any of its claims for reimbursement as Eligible R&D Expenditure was at the very least evident to Trends by the 11 March 2015 meeting when:22
Trends accepted that the percentages allocated to staff, and in particular those still recorded as being 100 per cent involved in the project in Trends’ November reconciliation/Appendix A, and not referred to in Appendix B, would have to be reviewed.
[23] On that basis Trends invoices were not accurate, a point also accepted by Trends’ counsel in closing submissions.23
[24] The lack of any contemporaneous figures to support the labour component of the amounts claimed by Trends were never addressed, up to and including by the evidence called by Trends at trial. Instead, at trial Trends prepared a spreadsheet similar to but not identical to Appendix B which was relied upon by Jai Basrur in giving expert cost allocation evidence on behalf of Trends (“the Basrur spreadsheet”).24 Trends own evidence was not able to establish the provenance of the Basrur spreadsheet. Not only did no-one from Trends ultimately claim responsibility for creating this document but:25
… a number of salary inputs and apportionments detailed in the Basrur spreadsheet could not be reconciled with any of the other reconciliations of labour costs provided by Trends in the October and November reconciliations, and/or Appendix B [as a result] the Basrur spreadsheet simply cannot be relied upon.
19 At [105].
20 At [170].
21 At [210].
22 At [178].
23 At [178].
24 At [213].
25 At [215].
[25] Similar issues were apparent with every other aspect of Trends’ claims in respect to work purportedly undertaken as research and development.26
[26] The amounts claimed by Trends for overheads also could not be substantiated.27 For example, in relation to Trends’ Q1 claim, Mr Groves’ evidence that he had confirmed that 67 per cent of the expenses were properly attributable to research and development activities not only suffered from the same issues as the rest of Trends’ claims given the definition of Eligible R&D Expenditure, but was in any event false, given that 70 per cent of the costs were claimed on the Q1 claim.28
[27] Likewise, Mr Groves failed to provide any explanation as to why the percentage of costs attributable to research and development (although not necessarily Eligible R&D Expenditure) rose from 70 per cent to 74 and 77 per cent in the Q2 and Q3 claims, particularly given the Q2 claim was ostensibly identical to the Q1 claim.
[28] The lack of any documentary support for the amounts claimed by Trends under the Funding Agreement, let alone that such claims were Eligible R&D Expenditure for the purposes of the Funding Agreement should have been blindingly obvious to Trends from the start of the Deloitte investigation and certainly well before the present proceedings were filed. By pursuing the claim, in terms of Bradbury v Westpac, Trends misconduct was flagrant.29 As it never addressed these fundamental issues Trends was unable to show that Callaghan breached its obligations to Trends when it first suspended and then terminated the Funding Agreement, noting instead by the time closing submissions were presented Trends in fact accepted inaccurate information had been provided to Callaghan in breach of clause 10.4(b) of the Funding Agreement.30 This was in fact the inevitable result of Trends failure to keep sufficient records and led to it claiming monies to which it was not entitled – the other two breaches of the Funding Agreement (clauses 5.1 and 10.4(c) respectively) for which Callaghan had terminated the Funding Agreement.31
26 At [312].
27 At [216].
28 See [62]-[69].
29 Bradbury v Westpac Banking Corporation, above n 5, at [80].
30 At [226](b).
31 At [226](a) and (c).
[29] The foregoing summary also shows clearly that it was not just that Trends claimed monies to which it was not entitled but also that its claim was maintained until the end of the trial despite it being obvious there was no contemporaneous support that any of the claims made by Trends were in relation to genuine research and development, let alone that the amounts claimed constituted Eligible R&D Expenditure it was actually entitled to claim in terms of the Funding Agreement.
[30] The decision by Trends to proceed was made despite the issues around Eligible R&D Expenditure being repeatedly pointed out by Callaghan. Even the initial Statement of Defence to Counterclaim dated 17 September 2015 made it clear that the amounts claimed by Trends were for expenditure that was not Eligible R&D Expenditure as defined in the Funding Agreement; further details were provided in the Amended Statement of Defence dated 3 February 2017, and in correspondence made on a “without prejudice save as to costs basis” in July 2018, yet Trends continued to pursue the counterclaim on the basis of reconstructed figures of doubtful provenance,32 while never articulating how those figures could be Eligible R&D Expenditure.
[31] It is likewise no answer to these fundamental flaws in the Trends’ case for Mr Hucker to suggest that as neither the Court of Appeal nor the Supreme Court identified any issue with Trends’ counterclaim it was not therefore hopeless. The detail of Trends’ counterclaim was simply not before either of those courts. Similarly, there is no merit in the submission made on behalf of the non-parties that Callaghan should have either applied to strike out or seek summary judgment on Trends’ counterclaim.33 As Mr McLellan pointed out neither strike out nor summary judgment was appropriate to deal with the type of factual matters at issue in this trial.
[32] In the circumstances, where the lack of any merit to Trends’ claims should have been apparent at the outset but the claims were pursued anyway, I have no hesitation in concluding that on this basis alone indemnity costs are appropriate.
[33] Although I have already found indemnity costs appropriate on account of hopelessness, for the sake of completeness I also note the final issue of misconduct.
32 See [21] above.
33 See Bradbury v Westpac Banking Corporation, above n 5, at [79].
The matter of concern arises in the context of a response by Trends’ solicitors to a without prejudice offer to settle by Callaghan in March 2018. After initially dismissing an offer made by Callaghan on 16 March 2016, Trends’ solicitor Phil Creagh, wrote what can only be described as an aggressive letter on 5 June 2018. In addition to writing disparagingly of Callaghan and its procedures Mr Creagh pointed out the advantages to Callaghan in saved costs and avoiding the risks of a “significant adverse judgment if a negotiated settlement could be reached”. He then stated:
There also is of course the embarrassment Callaghan will almost certainly suffer as its (and Deloitte’s) operating methods and competency are put under close scrutiny in cross examination and reported, and further embarrassment as Callaghan’s repeated, highly unsavoury (for a public body) to have Trends liquidated to avoid this claim receive the antiseptic light of public scrutiny.
[34] On this basis Mr Creagh made it clear that Trends would settle on the basis of a $7.4 million (plus GST, if any) payment plus a joint public statement, saying that Callaghan “accepted the decision of the Serious Fraud Office not to take any charges against Trends or its management”.
[35] Mr Creagh’s comments, although not obviously as offensive as the correspondence in Bradbury v Westpac were nonetheless, at the very least, inappropriate and, without making a final determination on this issue, reinforce that an award of indemnity costs is warranted in this case.
Conclusion – Indemnity costs
[36]Callaghan is entitled to indemnity costs against Trends.
Issue three – what is the appropriate quantum of costs?
[37] Bradbury v Westpac also provides the most assistance in determining what reasonable indemnity costs may be. The analysis of Harrison J, endorsed by the Court of Appeal, commenced by confirming that indemnity costs does not simply mean all
costs incurred, but rather “the phrase ‘reasonably incurred’ envisages a degree of judicial oversight of awards of indemnity costs”.34
[38] In proceeding to fix indemnity costs, Harrison J analysed a number of documents provided by the successful party in that case including a “schedule of scale costs, a breakdown and analysis of actual costs and witnesses’ expenses and a thorough chronology of steps taken”.35 From these documents Harrison J ultimately reduced Westpac’s costs from the $1,683,571.15 claimed to $996,712.00. His Honour also significantly reduced the disbursements claimed by Westpac from $136,865.15 to
$60,979.25, including ruling out claims for payment of individual legal advice to witnesses.
[39] In this case Callaghan has provided to the Court a schedule of scale costs which are not disputed, and a document entitled “time and cost breakdown” giving a summary of individual legal provider time against a number of general categories, although no detailed chronology of the counterclaim was provided. In summary form Callaghan seeks costs as follows:
Callaghan Category
Description
Callaghan actual costs
1
Drafting statement of defence to
counterclaim and amended statement of defence to counterclaim
$3,404.00
2 and 3
Discovery and further discovery
$39,717.24
4 and 5
Inspection and inspection of further discovery
$5,396.57
6
Drafting memoranda
$15,465.50
7
Attendance and preparation at case management conferences
$2,446.50
34 Bradbury v Westpac Banking Corporation (2008) 18 PRN 859 (HC) at [205]. Harrison J was dealing with the previous r 48C of the High Court Rules but this was cast in substantially the same terms as the present r 14(6) of the High Court Rules 2016.
35 At [210].
8 Statement of defence to amended counterclaim $12,449.50
9 and 10
Witness briefing and reviewing of briefs
$182,259.00
11
Common bundle preparation
$13,747.00
12
Drafting agreed statement of facts
$9,725.50
13
Trial preparation
$410,351.00
14
Attendance at trial
$164,620.50
15
Miscellaneous research
$31,557.50
16
Correspondence with Callaghan and witnesses, and internal
correspondence between solicitors and/or counsel
$120,009.51
17
Correspondence with Trends solicitors
$9295.50
$1,020,445.02
The non-parties’ position to the costs claimed
[40] At the outset Mr Hucker took no issue with the charge out rates of either counsel or the solicitors acting for Callaghan. Likewise he did not dispute Items 1 or 7 and accepted that trial time (Item 14) appeared appropriate but otherwise submitted:
(a)For Items 2 to 5 there was no explanation for the number of solicitors engaged in relation to discovery and inadequate detail to assess what attendances were in fact carried out. Mr Hucker noted there was no explanation as to why eight lawyers are engaged in the discovery process in addition to Deloitte and SDS Litigation support.
(b)Mr Hucker submitted Item 6 can only relate to six memoranda that have been filed given that there are only six memoranda outlined in Callaghan’s calculation of costs, and therefore appeared excessive.
(c)In Mr Hucker’s submission Items 8 to 12 represented significant duplication of time in the drafting of briefs of evidence, pleadings and trial preparation. For example, Mr Hucker submitted Item 11 represented just under two weeks of solicitor time for reviewing the common bundle, noting the number of solicitors engaged without explanation.
(d)In Item 13, Mr Hucker noted 1231 solicitor hours were claimed for trial preparation. Assuming a 20-day trial Mr Hucker calculated that would allow a week and a half per day of trial (60 hours) solely dedicated to trial preparation, which in his submission was excessive.
(e)Mr Hucker noted Items 15, 16 and 17 did not appear to refer to any specific step in the proceeding and submitted there was a high degree of duplication with the number of solicitors involved and there is no correlation to what each of the attendances relates to on the invoices or in the table.
(f)The amounts claimed otherwise bore no proportionality to the costs.
Discussion – what are the reasonable actual costs?
[41] I commence my analysis by noting that Mr Hucker’s complaint that the amounts claimed by Callaghan have “no proportionality to the cost scale” is of no moment. As Harrison J noted in Bradbury v Westpac the scale is simply not relevant to an award of indemnity costs.36 It also follows that to the extent that Mr Hucker’s concerns are based upon the fact that the scale restricts the costs that can be recovered, that in itself is not a valid objection to the costs claimed on behalf of Callaghan.
36 At [209].
[42] The remainder of Mr Hucker’s comments are necessarily imprecise given he was not involved in the substantive proceedings at any time. More generally, his criticisms overlooked the accepted rationale for having a wider team involved in a case; that the presence of a team does not necessarily indicate duplication but enables matters to be dealt with at an appropriate level. Likewise his suggestion that 40 hours amounts to a week in the context of trial preparation time appears wildly unrealistic, particularly given the complexity of the case.
[43] Overall, and notwithstanding the lack of a detailed chronology prepared by Callaghan, I am satisfied that there is sufficient information on the Court file, together with my own observations from the beginning of the trial itself to form an accurate view on whether the legal costs claimed by Callaghan are reasonable. The original proceedings were brought by five plaintiffs, including Callaghan, challenging a compromise under Part 14 of the Companies Act 1993 which had purportedly been approved in May 2015 (“the Trends Compromise claim”). The counter-claim by Trends against Callaghan was filed by Trends at the same time as it filed its statement of defence in August 2015. Following a judgment of Associate Judge J P Doogue in December 2015,37 the Trends Compromise claim and the counterclaim were split and thereafter proceeded separately to hearing. The Trends Compromise claim was determined first. After the compromise was set aside by Heath J in the High Court38 Trends’ appeals on the Compromise were subsequently dismissed by both the Court of Appeal39 and the Supreme Court.40
[44] Apart from the initial Statement of Defence to Counterclaim in September 2015 there was little progress on the counterclaim until after the Trends Compromise claim had been determined in the High Court. Thereafter matters proceeded relatively smoothly with the only interlocutory dispute involving an opposed application for an adjournment of the original fixture set down for November 2016, although despite rejecting Callaghan’s request for an adjournment, the adjournment sought was later
37 Accident Compensation Corporation v Trends Publishing International Ltd [2015] NZHC 3316.
38 Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119.
39 Trends Publishing International Ltd v Advicewise People Ltd [2017] NZCA 365, [2018] NZCCLR 7.
40 Trends Publishing International Ltd v Advicewise People Ltd [2018] NZSC 62, [2018] 1 NZLR 903.
granted by consent and the counterclaim was subsequently set down for a 10-day fixture in November 2017. By the time Trends’ evidence was filed both parties agreed that 10 days would be insufficient, with a result that the November 2017 fixture was vacated by consent and a four-week hearing allocated to commence on 31 July 2018.
[45] Notwithstanding reasonably smooth process towards a fixture it is clear that Trends’ counterclaim was, as noted, a complex piece of civil litigation. In particular:
(a)The counterclaim as originally formulated in August 2015 included four causes of action for breach of contract and a cause of action in defamation. This formulation was substantially recast in November 2016 when the defamation cause of action was dropped and the claim redrafted to include a single breach of contract cause of action together with causes of action based on breach of statutory obligations and breach of implied terms, with the amended counterclaim running to some 51 pages.
(b)Discovery was required to be comprehensive. Ultimately the index to the common bundle tabled at the trial ran to 53 pages, with the common bundle itself containing some 9865 pages of documents.
(c)Trends’ filed eight briefs of evidence totalling some 416 pages and Callaghan ten briefs of evidence totalling 306 pages. The cross- examination transcript of the eleven witnesses who gave evidence in person41 ran to 1091 pages. Although in the end only two of the Callaghan witnesses gave their evidence in full, one in part, and one by consent, this did not mean that the witnesses briefed by Callaghan were unnecessary. First, the seven factual witnesses briefed by Callaghan were all appropriately part of the factual matrix, focused on the Deloitte audit and the internal Callaghan processes, and were only not required to be called following the presentation of the Trends’ evidence. With limited exceptions the Callaghan expert briefs were not required to be
41 The eight Trends’ witnesses and three from Callaghan (Richard Perry, Aloysius Teh and Mark Bewley). The brief of Grant Graham was admitted by consent.
presented following the issue of my Ruling (No. 1). This excluded Part 7 of the brief of evidence of Dr Murray Milner, an expert called by Trends, and resulted in a subsequent decision recorded in my Minute (No. 1) at the beginning of the third week of the hearing that the trial would henceforth be split between liability and quantum, making expert evidence on quantum therefore unnecessary by the time Callaghan’s evidence was presented.
(d)Trends’ opening submissions totalled 60 pages and closing submissions 111, with the transcript of counsel’s oral closing submissions totalling a further 102 pages. Callaghan presented an opening statement of six pages, opening submissions of 20, closing submissions of 90 pages and the transcript of counsel’s closing submissions a further 90 pages.
(e)Even following the decision to complete the trial on liability issues it was only just completed within the four weeks allocated, ultimately occupying 16 sitting days.
[46] Against this background and having considered carefully the comments made by Mr Hucker, I am unable to identify any principled basis for reducing the actual costs incurred by Callaghan. Instead, having taken into account the amount claimed by Trends ($61 million), the serious challenge to Callaghan’s reputation presented by the claim, and the fact that the charge out rates are not challenged leads me to the conclusion that the amounts sought by Callaghan are reasonable in the circumstances.
[47] I am fortified in reaching this conclusion by two other factors. The first is that some 11 years ago Harrison J concluded in Bradbury v Westpac that indemnity costs in a similar amount were appropriate in a case that ultimately only occupied six days of hearing time and in which the plaintiffs abandoned their claims in the course of presentation of closing submissions. Even more significantly the amount claimed by Callaghan is significantly less than Trends’ own estimate of the costs it considered Callaghan would incur. The Trends’ estimate of Callaghan’s likely legal costs was set out by Trends’ legal counsel in the course of the “without prejudice save as to costs”,
correspondence noted previously.42 In his letter of 5 June 2018 Trends’ solicitor, Mr Creagh, advised:
… our assessment of the likely scope of your client’s all up costs from here to the end of trial, including expert witness costs, could be as high as $1,500,000.
[48] In particular Mr Creagh estimated that the costs of three counsel between June and August 2018 would have been likely to total $1,366,400. While some gamesmanship can reasonably be expected, it is however difficult to see on what basis Trends could complain when Callaghan’s total legal costs for defending the counterclaim were approximately 25 per cent less than what Trends’ own counsel had estimated Callaghan would incur in the final two months of preparation and attendance at the trial.
Conclusion – Reasonable actual costs
[49] I therefore conclude that the costs claimed in the sum of $1,020,445.02 are appropriately payable by Trends to Callaghan.
Issue four - what is the appropriate quantum of disbursements?
[50] In general, r 14.12(1)(a) of the High Court Rules 2016 (“the Rules”) identifies a disbursement as “an expense paid or incurred for the purposes of the proceeding that would ordinarily be charged separately from legal professional services in a solicitor’s bill of costs”. Rule 14.12(2) specifies that a disbursement will be recoverable where it is claimed and verified, and is specific to the conduct of the proceeding; reasonably necessary for the conduct of the proceeding; and reasonable in amount. Where a disbursement satisfies these requirements, the party claiming the disbursement will be entitled to recover the actual fee or expense (not just the deemed two thirds of them, as for costs).43
42 See [33] above.
43 Air New Zealand Ltd v Commerce Commission [2007] 2 NZLR 494, (2007) 18 PRNZ 406 (CA) at [47]-[48] and [62]; Scandle v Far North District Council HC Whangarei CIV-2008-488-203, 31 March 2011 at [34].
[51]The disbursements claimed by Callaghan are made up as follows:
Item
Disbursement
Cost (excluding GST)
1
Streamlined Litigation Services (e-discovery support)
$4,646.79
2
Deloitte (witness fees and e-discovery support)
$111,524.34
3
Clare Capital (witness fees)
$70,542.61
4
BDO (witness fees)
$108,789.37
5
Richard Perry (witness fees)
$14,916.61
6
Liz Garvie (witness fees)
$3,380.00
7
Anderson Lloyd (witness fees for James Cowan)
$3,256.45
8
Kordamentha (witness fees)
$115,088.08
9
Yallop & Co (e-discovery support)
$341.28
10
Conference call fees
$103.92
11
Travel expenses
$1,622.92
Total disbursements claimed
$434,212.37
[52] Callaghan’s claims for disbursements can be split into unopposed disbursements, and opposed disbursements, the latter of which includes expenses relating to litigation support; expert witness fees; and factual witness expenses. Each category will be addressed in turn.
Unopposed disbursements
[53] This category includes the items at 9, 10, and 11 of the table, the fee claimed by Yallop & Co (a company offering e-discovery support), conference call fees and travel expenses. Mr Hucker does not take issue with this category of disbursements on account of the fact that the amounts claimed are de minimis. Having looked at these items, I can see no reason why such claims should not be allowed. I therefore allow these disbursements in the total sum of $2,067.40.
Litigation support
[54]The litigation support invoices, Items 1 and part of Item 2 of the table comprise
$4,646.79 from Streamlined Litigation Support for which invoices have been provided totalling $4,516.25, a discovery agent who created an electronic platform for document management, and e-discovery support services provided by Deloitte totalling $18,101.06.
[55] Mr Hucker opposes recovery of these sums on the basis that Cooke J, in Mainzeal Property and Construction Ltd (In Liq) v Yan (No 2), declined to allow recovery for all external litigation support relating to production of the case book, rather, His Honour only allowed recovery of printing and binding costs.44 Cooke J adopted a cautious approach to the recovery of such sums, noting that:
… care needs to be exercised when a party seeks to claim a third party cost as a disbursement when the tasks that third party undertakes are covered by the time allowances set out in the schedule [to the High Court Rules]. Allowing the disbursement in full would allow a party to get 100 per cent of their costs for this activity, rather than approximately two thirds of reasonable legal expenditure the [High Court Rules] contemplate.
[56] In this case, Mr Hucker’s concerns appear to fundamentally misunderstand the nature of the reimbursement sought in this case. Although Cooke J in Mainzeal No2 did decline to allow full recovery for litigation support relating to production of the case book, that is not what Callaghan is claiming. Callaghan seeks recovery of sums related to the creation of an electronic document management platform and the subsequent use and management of that platform, a cost distinct from that identified
44 Mainzeal Property and Construction Ltd (In Liq) v Yan (No 2) [2019] NZHC 1637 at [105].
by Mr Hucker, and a cost that Cooke J expressly found to be fully recoverable in Mainzeal No2. Moreover, where the Court has awarded indemnity costs, as opposed to scale, there is not the same need to avoid full recovery for tasks that are covered by the scale as the point of indemnity costs is that a party is entitled to full recovery of costs and disbursements reasonably incurred, subject to ensuring that third party disbursements do not overlap with the costs claimed.
[57] On this basis I am satisfied the amount invoiced for Streamlined Litigation Support is a disbursement that was reasonably necessary, reasonable in quantum and does not appear to overlap with discovery costs already claimed for. This is also the type of case that falls into the category identified by Dobson J in Todd Pohokura Ltd v Shell Exploration where due to its size and complexity, efficiency in the management of litigation is to be encouraged.45 In these circumstances I am satisfied that Callaghan is entitled to recovery of $4,516.35 for the services rendered by Streamlined Litigation Support.
[58] I also find it appropriate to order recovery of the $18,101.06 claimed for e-discovery support services provided by Deloitte. Although Deloitte’s fee was substantially larger than that of Streamlined Litigation Support, having regard to the size of discovery given the ultimate scale of the common bundle, as well as the overall costs of litigation support claimed relative to the $61 million claim brought by Trends, I am satisfied there is no basis on which to question the reasonableness of this particular disbursement. Accordingly, Callaghan is also entitled to recovery of this disbursement.
Expert witnesses
[59] The expert witnesses’ disbursements are Items 3, 4, and 8 being the fees charged by the following expert witnesses: Mark Clare, managing director of Clare Capital ($70,542.61); Mark Bewley, managing partner of BDO ($108,729.37); and Grant Graham, a partner at KordaMentha ($115,082.08).
45 Todd Pohokura Ltd v Shell Exploration HC Wellington CIV-2006-485-1600, 1 July 2011 at [64]
– [66] adopted by Cooke J in Mainzeal Property and Construction Ltd (In Liq) v Yan (No 2) [2019] NZHC 1637 at [102].
[60] An expert’s fee will be recoverable as a disbursement where it meets the criteria set out in r 14.12(2). Mr Hucker raises questions as to whether the relevant expert witnesses’ fees are, in the case of Mr Clare, reasonably necessary to the proceeding given that as the trial was split Mr Clare’s evidence relating to quantum issues was no longer necessary, and in regard to all the expert witnesses, whether their fees are reasonable in amount. The former can be quickly disposed of, but the latter raises some genuine concerns.
[61] Mr Hucker is correct that quantum was not ultimately required to be addressed at trial. The reason for that is set out at [45](c) above. As noted, the trial was initially set down to address all aspects of Trends’ claim against Callaghan, however, after two weeks of hearing it became necessary to split Trends’ claims between liability and quantum, and only matters of liability were considered in the substantive judgment.46 As a result, Callaghan’s expert evidence dealing with quantum was not required to be presented. However, this did not render that evidence irrelevant to the proceeding, as at the time it was filed Callaghan was required to address the entirety of Trends’ claim, which included the need to prepare and brief the various expert witnesses on quantum issues, noting those briefs were in fact filed in 2017. On this basis, Callaghan’s expert evidence relating to quantum, and in particular that of Mr Clare, was reasonably necessary to the proceeding.
[62] Despite this, it remains to be determined whether the experts’ fees are reasonable. Although Callaghan has provided copies of the invoices for the work carried out by each of the experts, the invoices are as Mr Hucker has noted, bereft of meaningful detail.
[63] The first invoice provided by BDO for the work of Mr Bewley at times provides for a single lump sum fee ($30,000) with no indication as to the time recorded or the hourly rate charged. Subsequent invoices record rates and hours, not only for work completed by Mr Bewley but also work carried out by an auditor, a partner and PA support with no narration as to what tasks each individual carried out or how their attendances related to Mr Bewley’s expert evidence. Similar difficulties arise with the invoices provided by Clare Capital for Mr Clare’s fees. These invoices although
46 Substantive judgment at [14].
providing an hourly rate ($500.00) and a quantity of hours worked, otherwise simply record the work as relating to ‘preparation of expert witness evidence’. Likewise, the invoices from KordaMentha relating to Mr Graham’s fees indicate the number of hours worked by both a partner and a director (without even specifying which one was Mr Graham), and then sets out the resulting “fee for professional services rendered”. On this basis none of the invoices provides sufficient information to gauge the reasonableness of the fees charged by any of the experts to Callaghan.
[64] In Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited Katz J faced similar circumstances when dealing with disbursements claims totalling over $800,000.47 Her Honour, noting the need for a structured assessment of reasonableness but lacking the information to carry it out, elected to take a pragmatic approach to ensure that justice was done between the parties and reduced the total expert fees sought by 30 per cent to take account of the potential presence of “inefficiencies, duplication, charge out rates at the high end of industry norms, or unjustified uplifts…”.48 Her Honour noted that “indeed a 30 per cent reduction is possibly on the high side” but it was “appropriate to err on the side of caution” as the claiming party carried the burden of proving reasonableness.49 A similar approach was adopted by Gordon J in Sullivan v Wellsford Properties Ltd where Her Honour awarded 80 per cent of the disbursements sought.50
[65] In the current case, in the absence of any meaningful narration on the invoices themselves or explanation by counsel, it is not possible to conclude that the amounts claimed are reasonable for the purposes of requiring Trends to pay those sums. Given this position it is necessary to follow a similar approach to Katz and Gordon JJ noted above in order to take account of the possibility of inefficiencies, duplication, high charge out rates and unjustified uplifts. As a result, I reduce the amount claimed for expert witnesses by 30 per cent in each case.
47 Auckland Waterfront Development Agency Limited v Mobil Oil New Zealand Limited [2015] NZHC 470.
48 At [54].
49 At [54].
50 Sullivan v Wellsford properties Ltd [2018] NZHC 129.
[66] This results in a total of $193,599.05 payable in respect of Items 3, 4 and 8 made up as follows:
(a)Clare Capital: $49,379.83
(b) BDO: $63,657.56
(c) KordaMentha: $80,561.66
Witnesses of fact
[67] Callaghan seeks to claim as disbursements fees paid to various witnesses of fact, including part of Item 2, being Deloitte invoices for various Deloitte witnesses involved in the audit (including Aloysius Teh, James Cowan and Liz Garvie), a separate claim for an invoice from Anderson Lloyd solicitors apparently relating to the evidence of James Cowan after he left Deloitte; an invoice from Liz Garvie personally after she left Deloitte, and an invoice from Richard Perry, the former Callaghan CFO. Callaghan claims for meeting those witnesses’ expenses for the time taken to be briefed, to review their evidence and to prepare for trial.
[68] Mr Hucker opposes the claim for these fees on the basis they were not expert witnesses and as such their costs are not properly recoverable as disbursements.51 Indeed Mr Hucker goes so far as to suggest Mr Perry is only entitled to remuneration in accordance with the Witnesses and Interpreters Fees Regulations 1974. However, the Court of Appeal in Air New Zealand Ltd v Commerce Commission clearly stated that “in the area of civil costs recovery, the [Witness and Interpreters Fees Regulations] have no current relevance”.52
[69] More broadly r 14.12 does not restrict disbursement claims for witnesses’ expenses to those of expert witnesses.53 In Body Corporate 396711 v Sentinel
51 Mr Hucker opposed the claim for Mr Cowan’s fees on the basis that these fees related to Mr Cowan receiving advice from Anderson Lloyd. Although no invoices have been provided to verify this expense or clarify what it related to, it appears that the expense actually relates to the costs incurred by Mr Cowan, after he left Deloitte.
52 Air New Zealand Ltd v Commerce Commission [2007] NZCA 27; [2007] 2 NZLR 494 at [49].
53 Trustpower v Commissioner of Inland Revenue [2014] NZHC 3072 at [69].
Management Ltd Woolford J held that although not an expert, the witness was “a professional person entitled to charge … for his time”.54 His Honour allowed disbursement claims for a witness in that case reviewing his brief of evidence prior to the hearing, his attendance at the hearing and his giving of evidence at the hearing. This now appears to be standard practice where a professional is required to give evidence as a witness of fact.55 On this basis I cannot see any reason to disallow the Deloitte invoices, nor those of Ms Garvie, Mr Cowan and Mr Perry, on the basis the costs incurred were not reasonably necessary. The question then turns to whether those invoices were reasonable in amount. On this point, the same issue applicable to the expert witnesses is also relevant; the lack of information or any basis to identify whether the amounts claimed are reasonable.
[70] For example, the later Deloitte invoices include at least six people other than the witnesses themselves listed as being involved in “witness preparation” who did not give evidence and for whom their role was not at all clear. Likewise, no invoice has ever been provided for the Anderson Lloyd claim, on behalf of Mr Cowan. However, taking into account the amounts at issue in the overall proceeding and recognising that the nature of the claim made proceeding by way of subpoena impractical and risky, the payments for which reimbursement are now sought were almost certainly necessary to ensure the witnesses of fact were properly briefed and that the resulting briefs were filed as directed. I therefore conclude the amounts other than the Deloitte invoices claimed should be approved in full, a total of $21,542.06 subject to a copy of Mr Cowan’s invoice being provided to the Court within seven days. The amounts invoiced by Deloitte for witness briefing and preparation ($91,408.60) are approved less 30 per cent for the same reasons as the deductions made to the invoices for the expert witnesses, making the total recoverable $63,986.02.
54 Body Corporate 396711 v Sentinel Management Ltd, HC Auckland, CIV-2010-404-007754, 3 October 2012 at [30].
55 See Trustpower v Commissioner of Inland Revenue [2014] NZHC 3072; Harper v Beamish HC Napier, CIV-2009-441-000636, 27 March 2012; Linden Estate Ltd v Jans HC Auckland, CIV- 2007-441-000877, 21 September 2009; Houghton v Saunders [2015] NZHC 548.
Conclusion – Reasonable actual disbursements
[71] In sum, Callaghan is entitled to disbursements totalling $303,823.66, the final breakdown of which is set out in the Appendix to this judgment.
Issue five – should either or both of the non-parties be liable for all or any of the costs and disbursements imposed on Trends?
[72] The principles applicable to claims for costs against non-parties are well established, having been set out by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No. 2).56 In that case the Privy Council started from the position that other than where non-parties act in concert, a non-party could not ordinarily be liable for costs if the costs would have been incurred even without the non-parties involvement.57
[73] From that starting point the Privy Council set out the principles by which a non-party could be held liable for costs as follows:58
Costs orders against non-parties are exceptional, but only to the extent that they are outside the ordinary run of cases where parties pursue claims at their own expense. The ultimate question is whether it is just to make the order.
The discretion will not generally be exercised against “pure funders”, being those with no personal interest in the litigation, and not standing to benefit from it or control its course.
Where a non-party not only funds, but substantially controls or stands to benefit from the proceeding, justice will ordinarily require that the non-party pay the successful party’s costs.
Where a non-party promotes and funds proceedings by an insolvent company substantially for its own financial benefit, that non-party should ordinarily be liable for costs if the claim fails. Such orders may not be appropriate where the non-party can realistically be regarded as acting in the interests of the company rather than in its own interests.
[74] After considering a number of cases providing texture to these principles, the Privy Council stated:59
56 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145.
57 At [20].
58 At [25].
59 At [29].
In the light of these authorities Their Lordships would hold that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.
[75] Applying these principles subsequent New Zealand cases have confirmed that simply because a non-party was the “guiding mind” of an unsuccessful litigant that subsequently becomes insolvent is not enough, “something more” is required.60 As Downs J commented in Minister of Education v H Construction North Island Ltd:61
New Zealand cases emphasise the need for “something more” by the non- party, otherwise the rule could be overbroad in an economy populated by smaller, closely held companies, especially when a director (and owner) uses her or his own capital to fund litigation their insolvent company could not otherwise conduct. The “something other” element is not closed. Impropriety suffices but is unnecessary.
(footnotes omitted).
The non-parties’ position
[76] Opposing any order for costs against the non-parties, Mr Hucker warned against conflating the ability of a corporation to raise funding through related party advances and the principle that a non-party funder that funds a proceeding and controls the outcome of the case should be regarded as the real party to that proceeding.
[77] Mr Hucker likewise suggested that whether proceedings were instigated and pursued in the best interests of a company were better considered in terms of proceedings under s 301 of the Companies Act 1993. In Mr Hucker’s submission:
There should not be a double jeopardy or indeed a liability imposed where the pursuit of the proceedings would have been of benefit to the company even though the pursuit of the proceedings may not have been in the best interests of the creditor party that was the subject of the proceedings.
Here the interest of Trends was to recover for the benefit of its creditors and the corpus the monies that it considered were owed to it by Callaghan
60 For example, see Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [15]-[16].
61 Minister of Education v H Construction North Island Ltd [2019] NZHC 1459 at [43].
(included related party creditors). Here the interests of Trends went no further than recovery of monies to be applied for creditors and shareholders generally. [The Circle] was a creditor for outstanding rental and loan funding it provided to Trends and had been for some time.
[78]Likewise:
Non-party costs awards should only be considered where there is no corporate benefit to the party pursuing the proceedings independently of the interests of the non-party. Whether there is a concurrence of those interests and there is sufficient corporate benefit in the pursuit or defence of the claim to the named party, non-party costs ought not be ordered.
[79] Mr Hucker went on to submit variously that whether Trends was insolvent was immaterial where it was seeking to ensure that there were sufficient funds recovered to enable the creditors of Trends to be paid, and it was those interests that required the claim to be prosecuted. In this regard Mr Hucker sought to argue that the prosecution of the substantive proceedings against Callaghan place the non-parties in the same type of position as a liquidator, and thereby the non-parties came within the exception recognised in the case law.62 Mr Hucker also questioned the extent to which the non- parties could be said to have had control of the proceedings. Overall Mr Hucker submitted:
Where there is (as is here) no interest in the litigation being pursued other than the company pursuing the claims to recover funds for the benefit of creditors (related or otherwise) or shareholders, non-party costs ought not to be awarded. The beneficiary of the proceedings is the corpus of the company (the counter-claim plaintiff) and its assets are then distributed in accordance with the provisions of The Companies Act 1993.
…
Unlike in Dymocks where the business had already been sold and all that was left was a damages claim for past conduct, here the business of Trends was continuing and the pursuit of the claim was designed to ensure the continuation of the Trends’ business and the payment of bona fide creditors of Trends that already been incurred.
Discussion – Liability of non-parties
[80] As with his submissions in relation to whether indemnity costs were appropriate, Mr Hucker’s submissions on whether costs against the non-parties should
62 See for example Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805.
be imposed, however attractive in the abstract, fail to provide any analysis as to what actually occurred and in particular the relationship of Mr Johnson and The Circle with Trends, and their role in the proceedings.
[81] It is clear that in the circumstances of this case, Mr Johnson and The Circle promoted and funded proceedings by an already insolvent company substantially for their own financial benefit and in consequence are liable for the costs of the claim, which as I have already determined should be on an indemnity basis.
[82] This was not a simple case of related party advances, nor was the litigation simply to recover monies to be applied for creditors and shareholders generally. Likewise, by no conceivable stretch of the imagination could the actions of either Trends or the non-parties be considered as falling within the liquidator’s exception identified by the Privy Council in Dymocks. In particular:
(a)Until its recent liquidation Trends was under the control of Mr Johnson, who by the time the substantive claim against Callaghan was heard was Trends’ sole director, that Trends was “a 100 per cent owned by [Mr Johnson], controlled by [him] and his interests”.63
(b)The Circle is likewise under the control and ownership of Mr Johnson.64
(c)Trends was likely insolvent from some time in 2013 and certainly by early 2015.65
(d)The Circle is and has been for a considerable period the largest creditor of Trends. As of May 2015, at the time the Trends compromise was
63 Trends Supreme Court judgment at [7] and cross-examination of David Johnson transcript page 25, lines 1-3.
64 Trends Supreme Court judgment at [7].
65 Trends Supreme Court judgment at [8]. Trends insolvency was confirmed by the evidence heard including cross-examination of David Johnson and cross-examination of Simon Groves which confirmed Trends’ inability to meet its banking commitments and/or pay creditors on time including the payment of rent to The Circle. See also summary of Trends’ position provided by David Johnson to Trends’ advisory board on 30 April 2014, Trends substantive judgment at [65]. Trends’ insolvency was further confirmed by the Trends compromise proposal on 12 May 2015 under Part 14 of the Companies Act 1993.
proposed, the Supreme Court noted The Circle was owed
$3,080,381.80 out of total creditors (including Callaghan and “insider creditors”) of $4,343,843.23.66 Trends’ creditors (excluding Callaghan and “insider creditors”) amounted to $716,660.33.67
(e)As early as December 2016, Mr Johnson confirmed that Trends was not paying for the legal costs in pursuing its counterclaim against Callaghan:68
Trends sister company [The Circle] is meeting all the costs. So pursuing the counterclaim does not have any effect on Trends’ fund available …
[83] As even this brief summary demonstrates, the suggestion that The Circle was a mere funder cannot be sustained, nor the argument that pursuit of the counterclaim against Callaghan was substantially for the benefit of creditors of Trends, let alone that Mr Johnson and/or The Circle were in any way acting in a similar manner to liquidators.
[84] On the contrary, it is clear that the approach taken by Mr Johnson and together with The Circle stands in marked contrast to the situation considered by the Court of Appeal in Kidd v Equity Realty in which a non-party costs order was found to be inappropriate simply because the director controlled the company and the company subsequently became insolvent. Instead, it is abundantly clear that in this case the principal potential beneficiaries of the counterclaim given the quantum sought ($61 million) and the lack of creditors other than The Circle, were clearly Mr Johnson and The Circle and it is artificial to attempt to draw a distinction between the two. Mr Johnson through his ability to control both Trends and The Circle controlled both
66 Trends Supreme Court judgment at [18].
67 At [18].
68 As Heath J noted in Advicewise People Ltd v Trends Publishing International Ltd (No 2) [2016] NZHC 2999 at [33], at a point where Callaghan had sought a stay of the counterclaim pending Trends’ appeal on the Trends compromise application to the Court of Appeal on the grounds it would deplete assets otherwise available for costs in the event Callaghan successfully defended the counterclaim:
I do not consider that factor is sufficient to delay preparation of the counterclaim for hearing. Trends, through affidavit evidence filed by Mr Johnson and Mr Groves, acknowledges that the counterclaim is being funded by an associated company, The Circle. The way in which the point has been put by those witnesses makes it likely that Callaghan could make a successful claim for any costs directly against The Circle as a non-party. The assets of the circle are significant, based on the evidence before me.
the direction of the litigation and the funding of it, with The Circle willingly providing the funds to enable the counterclaim to proceed. This clearly took them into the category identified by the Privy Council in Dymocks as non-parties who “promote and fund proceedings by an insolvent company solely or substantially for [their] own financial benefit” and who “should be liable for the costs if [their claim] fails”.69
[85] In the circumstances I have no hesitation in concluding the “something more” required by Kidd has been established in this case and conclude that both Mr Johnson and The Circle should be required to pay costs and disbursements on Trends’ failed litigation. With regard to the quantum that should be paid I see no reason why this should be discounted from the amounts I have concluded it is reasonable for Trends to pay as set out in the analysis of issues three and four above.
Decision
[86] Trends Publishing International Ltd (in liquidation), David Alan Johnson, and TheCircle.co.nz Ltd are jointly and severally liable to pay Callaghan Innovation:
(a)Costs in the sum of $1,020,445.02; and
(b)Disbursements in the sum of $303,823.66.
[87] After deduction of the $50,000 security for costs already paid to Callaghan, this leaves a balance of $1,274,268.68 for which judgment is given.
Powell J
69 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [29].
Appendix
Item Disbursement
Amount claimed
Amount approved
1
Streamlined Litigation Services (e-discovery support)
$4,646.79
$4,516.35
2
Deloitte (witness fees and e-discovery support)
$111,524.34
$82,087.08
3
Clare Capital (witness fees)
$70,542.61
$49,379.83
4
BDO (witness fees)
$108,789.37
$63,657.56
5
Richard Perry (witness fees)
$14,916.61
$14,916.61
6
Liz Garvie (witness fees)
$3,380.00
$3,380.00
7
Anderson Lloyd (witness fees for James Cowan)
$3,256.45
$3,256.45
8
Kordamentha (witness fees)
$115,088.08
$80,561.66
9
Yallop & Co (e-discovery support)
$341.28
$341.28
10
Conference call fees
$103.92
$103.92
11
Travel expenses
$1,622.92
$1,622.92
Total
$434,212.37
$303,823.66
16
0