Wallbank v Wallbank

[2012] NZHC 771

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-7194

CIV 2011-404-2540 [2012] NZHC 771

BETWEEN  ALLAN ROBERT WALLBANK Plaintiff

ANDDARREN JOHN WALLBANK First Defendant

ANDTHE PARTNERS OF BEECH LADD & CO

Second Defendants

ANDBEACH LADD & CO LIMITED Third Defendant

ANDANDREW KOLOSE LEMALU Fourth Defendant

Hearing:         23 April 2012

Counsel:         JG Krebs for plaintiff

SM Kilian for first, second and third defendants

Judgment:      26 April 2012

JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for security for costs]

Solicitors:           Davidson Armstrong & Campbell, PO Box 54, Waipukurau

Kilian & Associates, PO Box 300 845, Auckland 0752

DLA Phillips Fox, PO Box 160, Auckland 1140

WALLBANK V WALLBANK HC AK CIV 2010-404-7194 [26 April 2012]

Introduction

[1]      This proceeding file results from an order made on 5 October 2011 in which two files were consolidated.   The order required amended pleadings to be filed giving effect to the order of consolidation.

[2]      The pleadings that are relevant now are the following:

(a)       Consolidated statement of claim dated 14 October 2011;

(b)      Consolidated statement of defence and counterclaim dated 21 October

2011;

(c)      Reply   by   plaintiff   to   consolidated   statement   of   defence   and counterclaim dated 14 November 2011; and

(d)Fourth defendant’s statement of defence to consolidated statement of claim.

The application

[3]      The first, second and third defendants apply for an order that the plaintiff give security for the first, second and third defendants’ costs in the consolidated proceeding and that until such security is given, the proceeding be stayed.   The application is made in reliance on r 5.45 of the High Court Rules.

The opposition

[4]      Two specific grounds are pleading in opposition, namely:

(a)      There is no reason to believe that the plaintiff will be unable to pay the  costs  of  the  first  and  third  defendants  if  the  plaintiff  is unsuccessful in the proceeding; and

(b)      The orders sought are not appropriate.  The merits of the plaintiff’s

claim against the first and third defendants are strong.

The documents and compliance

[5]      There are a number of matters that are unsatisfactory.  The orders made on

8 February 2012 for a fixture for this application were not complied with.   The affidavits filed on behalf of the first, second and third defendants give a conflicting position as to whether the second defendant exists at all.  Counsel’s belief as advised to the court is that the second defendant does not exist. That, however, conflicts with the sworn evidence of the first defendant on 18 April 2012 wherein he describes himself as being the first defendant, a partner of the second defendant and a director of the third defendant.

[6]      The plaintiff’s position is also unsatisfactory.  He exhibits a statement which purports to be a statement of his financial position but which is in fact a statement of the combined positions of an entity known as Blazing Trails Ltd and a second entity known as Blazing Trails Trust.  The combined position of those two entities is said by him to have a surplus of $472,348.  The separate financial statement of Blazing Trails Ltd, however, shows a net excess of liabilities over assets of $200,893.  The position of the Blazing Trails Trust shows a surplus of assets over liabilities of

$22,929.  The position of the two entities is clearly inconsistent with the combined statement and perhaps is only explained by a reference to shareholders’ advance accounts.  I am left in a position of not knowing whether there are any specific assets in the plaintiff ’s name to which recourse could be had if an order for costs were made against him.  On the other hand, he deposes that:

There is no reason to believe I will not be able to pay costs if I am unsuccessful in these proceedings … I have privately funded my own litigation so far and am able to pay my current solicitor and counsel.

The court’s approach to security for costs applications

[7]      The application is made in reliance on r 5.45 of the High Court Rules.  The relevant parts of that rule for the purposes of this application are as follows:

5.45     Order for security of costs

(1)       Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

…

(b)       that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.

(2)       A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3)      An order under subclause (2)—

(a)       requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)       by paying that sum into court; or

(ii)      by giving,  to the satisfaction of the Judge or the

Registrar, security for that sum; and

(b)       may stay the proceeding until the sum is paid or the security given.

[8]      In  McLachlan  v  MEL  Network  Ltd  helpful  guidance  is  given  as  to  the approach  that  should  be  taken  on  applications  for  security  for  costs.[1]      For  the purposes of this application the Court’s comments at [13] – [16] are particularly helpful:

[1] McLachlan v MEL Network Ltd (2002) 16 PRNZ 747 (CA).

[13]     Rule 60(1)(b) High Court Rules provides that where the Court is satisfied, on the application of a defendant, that there is reason to believe that the plaintiff will be unable to pay costs if unsuccessful, “the Court may, if it thinks fit in all the circumstances, order the giving of security for costs”. Whether or not to order security and, if so, the quantum are discretionary. They are matters for the Judge if he or she thinks fit in all the circumstances. The discretion is not to be fettered by constructing “principles” from the facts of previous cases.

[14]      While  collections  of  authorities  such  as  that  in  the  judgment  of Master Williams in Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, can be of assistance, they cannot substitute for a careful assessment of the circumstances of the particular case. It is not a matter of going through a checklist of so-called principles. That creates a risk that a factor   accorded   weight   in   a   particular   case   will   be   given

disproportionate weight, or even treated as a requirement for the making or refusing of an order, in quite different circumstances.

[15]      The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the Courts for a genuine plaintiff is not lightly to be denied.

[16]     Of course, the interests of defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

[9]      The reference in the Court of Appeal decision to r 60(1)(b) is a reference to the predecessor of the current rule that I have set out.

[10]     The first part of the inquiry, often referred to  as the threshold test,  was summed up by Rodney Hansen J:[2]

[2] Keeys v Peterson HC Whangarei CIV-2003-488-145, 20 April 2004 at [12].

In considering whether the threshold issue of the ability of the plaintiff to pay  the  defendants’  costs  if  unsuccessful  has  been  reached,  it  is,  as Hammond J said in Hamilton v Papakura District Council (supra), necessary to make a broad overall assessment.  Something more than having difficulty in making payment is, however, required.  Some plaintiffs will not be able to meet costs without some financial rearrangement: NZ Kiwifruit Marketing Board v Maheatataka Coolpack Limited (1993) 7 PRNZ 209.   And if a plaintiff’s  financial  position  is  improving  and  is  likely  to  improve  still further,  there  may  not  be  reason  to  find  an  inability  to  pay  costs:  see Rivendell Mushrooms Limited v Horowhenua Electric Power Board (unreported,  High  Court, Wellington,  CP844/92,  13.11.98,  Master Thomson).

Background

[11]     I now set out a background which has been extracted from the pleadings and the affidavits and which I acknowledge is far from complete.

[12]     The plaintiff sues the first, second and third defendants in relation to matters that he alleges were under the control of the first defendant.  The first defendant is an accountant and has practised accountancy with others in either, or both, of the second

and third defendants.  The second defendant is pleaded to be a partnership.  The third

defendant is pleaded to be a limited liability company.   It carries on business as accountants. The first defendant is the nephew of the plaintiff.

[13]     The fourth defendant is a solicitor.  Although the cause of action against the fourth defendant arises out of the same transactions which are involved in the causes of  action  against  the  first,  second  and  third  defendants,  the  cause  of  action  is different.  Understandably, the fourth defendant takes no part in this application.

[14]     In 2004 the plaintiff was the registered proprietor of three adjoining titles between Napier and Wairoa which together were known as Chimney Creek Farm. For the purposes of this judgment the three titles will be referred to as Lot 1, Lot 3 and Lot 4.

[15]     By a written agreement  in 2005 the plaintiff agreed to sell Lot 1 to Kasmin Daniel, or his nominee.  The price was $863,000 plus GST, if any.  The agreement provided for the payment of a deposit and for possession and settlement to take place on 30 June 2005.   In April 2005 the first defendant wrote to the fourth defendant. The key points disclosed and which have been accepted by the defendants were as follows:

The farm will be purchased by Chimney Creek Farms Limited.  I am the director (corporate trustee) of this company.

The ASB will be providing $650,000.00 for the settlement.   Loan offer attached. They are working on the loan documents now.

The security for this purchase is the farm being purchased plus the previous farm purchased by Kasmin and Green Planet.   I believe there is a mortgage held by the ASB already on this farm.

Kasmin Daniel will be the guarantor.   He is in Queenstown next week so we will need to courier the documents to him for signature.

No deposit has been paid but will be paid on settlement.

The settlement is represented by Alan retaining 25% of Chimney

Creek Farm Limited.

$647,250.00 is to go through to Alan (the vendor) on settlement for the remaining 75%.

Alan will in turn lend back $550,000.00 of this to Chimney Creek Farm Limited as a shareholder’s loan.  Can we document this as a loan with interest rates per the FPT rates.

So a net $94,750 plus share of rates etc is to go through to Alan.

The balance of funds is to be deposited to the Beech Ladd Trust

Account.

[16]     The plaintiff claims that he did not give the first defendant authority to give the fourth defendant the instructions just referred to.   The plaintiff pleads that the instructions contained in the letter were dishonestly given by the first defendant to the fourth defendant.  He claims that he never agreed to lend back $550,000 to the nominated purchasing company.   He further claims that he did not authorise the balance of the funds to be deposited to the Beech Ladd trust account and he expected to receive the balance of the purchase price in clear funds on the settlement date.

[17]     He next pleads that the balance of the sale and purchase consideration of

$500,000 was transferred to the trust account of either the second or third defendants and that those parties have failed to account to him for it.  He claims an additional

$3,065 as a payment made without his specific authority.  He also claims the balance of the consideration to be paid under the sale and purchase contract, but does not say precisely why that is a matter that should be met by either the first, second or third defendant.   He seeks judgment against the first, second and third defendants for

$1,013,065.

[18]     A further and discrete transaction was entered into on a date not known to the plaintiff.   The terms, however, are recorded in a written agreement that is dated

27 April 2005, and which provide that the plaintiff, as vendor of Lot 3, sold to Chimney Creek Farms Ltd.  The plaintiff pleads that his signature on the agreement is a forgery.   He pleads that the first defendant knowingly provided the forged agreement for sale and purchase of Lot 3 to the solicitor acting on the transaction, namely the fourth defendant, and that he directly or indirectly represented that the signature on the sale and purchase agreement was a genuine one.   The agreement itself made no provision for actual payment of the purchase price of $297,000 by the purchaser.   Instead, it provided that the purchaser would execute a deed of acknowledgement  of  debt  in  favour  of  the  plaintiff  for  the  purchase  price  of

$297,000.   The deed of acknowledgement of debt is now worthless because the company purchaser, Chimney Creek Farms Ltd is insolvent.   The plaintiff seeks judgment against the first, second and third defendants for $297,000.

[19]     The factual analysis is complicated by yet a further matter that was  not touched on in counsel’s written submissions but was analysed when I raised it.  It is the fact that the first defendant counterclaims against the plaintiff for $210,000.  The first defendant pleads that the plaintiff, who was one of the shareholders in the company that purchased Lot 1, namely, Chimney Creek Farms Ltd, acted and made decisions and exercised control in a way normally exercised by a director and in so doing failed to exercise good faith.

[20]     I  invited  counsel  to  spell  out  the  precise  basis  for  the  counterclaim. Counsel’s response was to say that the claim was based on the Court of Appeal judgment in Trevor Ivory Ltd v Anderson.[3]    He did not expand on how that case could apply to the instant case.   That case is authority for the proposition that an officer or servant of a company might, in the course of activities on behalf of the company, come under a personal duty to a third party, which might entail the officer incurring personal liability.  It is difficult to see how the facts set out in the current counterclaim could justify the invocation of the principle referred to in that authority.

[3] Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA).

[21]     My initial reaction was that possibly what the pleading intended was that the cause of action arose out of s 169 of the Companies Act 1993 and the sections referred to therein.  If that is what is intended, the pleading is hopelessly deficient of particulars required.  The most that can be said is that the first defendant brings a counterclaim which purports to arise out of a series of transactions which followed the sale of Lot 1 and apparently Lot 3 and the involvement of the new company, Chimney Creek Farms Ltd.

[22]     The  claims  pleaded  by  the  plaintiff  against  the  first,  second  and  third defendants can be broken down, in the first part, to a claim for failing to account on behalf of a party who is holding funds in trust and, in the second part, to a claim

alleging fraud in relation to the execution of the sale and purchase agreement in

respect of Lot 3.  Mr Kilian was critical of the evidential foundation for the fraud claim.  He drew attention to a document examiner’s report which, although referring to the possibility that the signature had been a forgery, qualified the view expressed by saying that until the original documents were examined no final determination could be made.

[23]     In respect of the failing to account Mr Kilian acknowledged that there were documents provided by the defendants that were available to show what happened to the funds and who authorised their disposal.  There is, however, an admission in the pleadings that the funds were received.

[24]     Before summarising the position it is appropriate that I refer to quantum.

[25]     Mr Kilian adopted the first defendant’s summary that is contained in Exhibit D to his affidavit of 21 December 2011.  That assessment is based on the application of Category 2, Band B and a daily rate of $1,880.  When I reviewed this matter with counsel it was clear that Item 8 in the summary was over-stated and that the allowance, at most, based on a three-day trial should be for six days or $11,280.  The result is that the amount, in terms of the calculation that was provided of $46,436 was over-stated by $7,520.  The disbursements claim, however, was also over-stated because a claim was made for the setting down fee of $3,141.80 and a hearing fee of

$6,283.60, both of which are the obligation of the plaintiff to  pay and not the defendant.   When that adjustment is made the disbursements claimed of $10,368 must be reduced by $9,425.40.

[26]     The position, in summary, then becomes a potential cost exposure following a three-day  trial  based  on  Category  2,  Band B  of  $38,916  plus  disbursements  of

$942.60.

Summary of matters currently before the court relative to the exercise of discretion

[27]     In broad terms the matters that are available to me at this stage that bear directly on the exercise of discretion are the following:

(a)      There is no concrete evidence that this plaintiff had any assets in his own name that are available to meet costs;

(b)The plaintiff claims access to assets that he says are held by a trust and a limited liability company and that are substantial and certainly sufficient to meet the costs of any order that might be made against the plaintiff.   He does  not say how a successful defendant might enforce a cost order against the trust and the company without a clear direction from himself to do so;

(c)      Following from the above matters, I deduce that an order for security for costs would not prevent this plaintiff from prosecuting the claim;

(d)The defendants have chosen to plead a counterclaim, the cause of action of which is unclear, but would clearly involve some analysis and no doubt some interlocutory inquiry, particularly to determine its precise nature, that needs to be taken into account; and

(e)      The substantial monetary part of the plaintiff’s claim against the defendants involves a failure to account to him for trust funds admittedly received by one or other of the second or third defendants. Counsel confirmed to me that they anticipated that the trust account of a chartered accountant would be subject to some form of audit and that good practice would almost certainly require an  authorisation before funds are paid out of the trust account.   Without such documentation I conclude at this stage that the plaintiff has a sound foundation for that aspect of the claim that is pleaded.

[28]     I consider that a plaintiff who so positions himself by the use of trusts and companies that may have the effect of avoiding paying an adverse order for costs should, in fact, be ordered to provided security, particularly where that type of order would, on the material before the court, not prevent the plaintiff from pursuing the case.  This is so particularly where the form of the order that might ultimately be

approved by the court involves a charge over property with no great expense to the giver of the charge.

[29]     There is, however, the further complicated feature involved in this case that arises by virtue of the counterclaim.  It is difficult to determine, particularly when I consider the pleading of the counterclaim, just what effect it will have on the trial.  In Ansell v State Insurance Ltd I determined that as much as three-quarters of the trial time would be devoted to the defendant’s affirmative defences.[4]    That led me to a position  where  I  determined  that  to  award  security  was  not  appropriate  in  the exercise of the discretion.  In that case, however, there was not the combination of factors that I have earlier referred in my summary of this case.

[4] Ansell v State Insurance Ltd (1996) 10 PRNZ 133 (HC).

[30]     I conclude, however, that because the plaintiff has adopted the position he has in respect of the disclosure of his own asset that an order for security for costs is justified.   However,  there is  also  justification  for a substantial  discount,  having regard to the fact that there is a trust claim and that at this stage there is no documentation  disclosed  by the  defendants  justifying  the  disposal  of  the  funds. There is also a counterclaim, the effect of which, as I have mentioned, cannot be accurately assessed at this stage, but no doubt it will have some effect on the trial. Weighing all these factors up I start with a possible cost exposure of the plaintiff, if the plaintiff were to fail in this claim, of just under $40,000.  Bearing in mind that fixing quantum at an early stage is not an exact science and that I have determined that there should be a substantial discount in any event, I reach the conclusion that the amount of security that is justified is $16,000.

[31]     The plaintiff’s reference to assets of which he apparently may have some control indicates that the form of security that might be available could be something less than simply requiring a sum to be paid into court.   I am of the view that the plaintiff should be given the opportunity to provide affidavit evidence as to the possible type of security instead of an order that the sum be paid to the Registrar.  I

take that into account in the orders I now make.

Orders

[32]     Accordingly, I make the following orders:

(a)       The  defendants’ application  for  an  order  for  security  for  costs  is

granted in principle;

(b)      The appropriate amount of security to be given is $16,000;

(c)      The form of security is to be settled by the court on receipt of affidavit evidence which is to be filed and served, together with any memorandum to explain same, within 15 working days of the date of release of this decision.  Any response by the defendant shall be filed and served within a further 5 working days;

(d)The application is adjourned to the chambers list to be called before me at 2:15pm on 25 May 2012 so that I can check compliance with the orders made so far and with a view to making final orders.

Costs

[33]     Although  the  defendants  have  been  partially  successful  in  this  case, Mr Kilian did not press that I make an order for costs effective now.  That is clearly appropriate because of the deficiencies in the defendants’ case. Accordingly, without opposition from Mr Krebs, I record that the hearing of this application occupied half a day, that the appropriate quantum of costs would be that based on Category 2, Band B together with disbursements as fixed by the Registrar.  Who is responsible for those costs is to await the final determination of this proceeding.  On the above

basis, costs in relation to this application are reserved.

JA Faire

Associate Judge