West v Cowley
[2013] NZHC 2356
•10 September 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2012-404-2352 [2013] NZHC 2356
UNDER the Companies Act 1993 section 174 IN THE MATTER OF
SHAFTSPRY LIMITED (In Liquidation)
BETWEEN
CALVIN BLAKLEY WEST Plaintiff
AND
BRIAN PATRICK COWLEY First Defendant
SHIRLEY DENISE van der KLEY Second Defendant
On thepapers: Appearances:
R S Pidgeon for Plaintiff
D E Smyth for DefendantsJudgment:
10 September 2013
COSTS JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 10 September 2013 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
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Registrar/Deputy Registrar
Solicitors:
Pidgeon Law, Auckland, for Plaintiff
Simpson Dowsett Mackie, Auckland, for Defendants
Counsel:
D E Smyth, Auckland
WEST v COWLEY [2013] NZHC 2356 [10 September 2013]
category 2 band B basis and oppose the plaintiff’s application for an order otherwise
to allow costs to lie where they fall.
[2] Rule 15.23 applies:
15.23Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to an including the discontinuance.
[3] In FM Custodians Ltd v Pati1 Associate Judge Abbott summarised the principles under r 15.23:
[10] The presumption may be displaced if the Court finds there are circumstances which make it just and equitable that it should not apply.2
[11] The Court is not limited in the factors that can be taken into account when considering whether the presumption is displaced, but the following are matters which are taken into consideration:
[a] As a general rule the Court will not consider the merits of the respective cases (unless they are so obvious that they should influence the costs issue).3
[b] The Court will consider the reasonableness of the stance of both parties in the proceeding (whether it was reasonable for the plaintiff to bring and continue the proceeding, and for the defendant to oppose and continue to oppose it, up to the point of discontinuance).4
[c] Conduct prior to the commencement of the proceeding may be relevant (for example, if any conduct by a defendant has precipitated the litigation), as may be the reason for discontinuing (for example, where a change of circumstances has made the proceedings unnecessary).5
1 FM Custodians ltd v Pati [2012] NZHC 1902.
2 North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 (HC) at 188;
Kroma Colour Prints Ltd v Tridonicato NZ Ltd [2008] NZCA 150, (2008) 18 PRNZ 973 at [12].
3 North Shore City Council, above n 1, at 186; Kroma Colour Prints Ltd op cit.
4 North Shore City Council, above n 1, at 187; Kroma Colour Prints Ltd op cit.
5 Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194, quoted in North Shore City Council, above n 1, at 187. See also McGechan on Procedure (looseleaf ed, Brookers) at [HR15.23.01], cited in Vector Gas Ltd v Todd Petroleum Mining Co Ltd HC Wellington CIV-2004-485-1753, 7 December 2010.
[12] The Court’s general discretion in relation to costs6 can also override the general principles in relation to discontinuance.7
[4] The principal ground on which Mr West relies is that the defendants took an unreasonable stance when he tried to negotiate a settlement.
[5] In this proceeding Mr West sought relief under s 174 of the Companies Act
1993. He was a shareholder of Shaftspry Ltd. At the outset Mr West, Mr Cowley and Ms van der Kley were equal shareholders and also directors of the company. Mr West and Mr Cowley fell out. Ms van der Kley ceased to have any active involvement in the company. Mr Cowley purported to buy out her shares.
[6] Mr West’s allegations in his statement of claim are typical of those that may
be found in a claim under s 174. They include the following: (a) He was unlawfully removed as a director.
(b)He was unjustifiably dismissed and has not been paid remuneration due to him.
(c) Mr Cowley made unfounded allegations of mismanagement against him.
(d)Mr Cowley in particular, but assisted by Ms van der Kley, controlled the company in his own interests and to the detriment of Mr West.
(e) Mr Cowley bought the company’s major asset, the property at Paddy Road, Te Kauwhata in circumstances which favoured Mr Cowley and were to the disadvantage of the company.
[7] The orders sought by Mr West were:
(a) That Mr Cowley pay him compensation under s 174(2)(b); and
6 High Court Rules 14.1.
7 Oggi Advertising Ltd v McKenzie (1998) 12 PRNZ 535 (HC) at 536; Kroma Colour Prints Ltd
op cit.
based on the allegation that Ms van der Kley had surrendered her shares).
[8] This case is not the only proceeding involving these parties and Shaftspry
Ltd.
[9] Shaftspry Ltd v West CIV-2007-404-6518 was an application under s 290 of the Companies Act to set aside a statutory demand by Mr West seeking repayment of advances made by him. That proceeding was withdrawn after the parties entered into a special resolution on 8 May 2008. That resolution was intended to resolve differences not only between Mr West and Shaftspry, but also between Mr West and Mr Cowley. The resolution provided for the company to sell the land on Paddy Road and to pay out shareholder advances.
[10] West v Shaftspry Ltd CIV-2008-404-921 was a liquidation proceeding started by NZ Customs. Following the 8 May 2008 resolution, Mr Cowley had provided the funds to pay out NZ Customs. However, contrary to the spirit of the resolution of
8 May 2008, if not the letter, Mr West had himself substituted as plaintiff. Mr Cowley arranged for Shaftspry Ltd to oppose the liquidation application. The matter went to a defended hearing. Associate Judge Sargisson made a liquidation order on 3 April 2009. By that date it was inevitable that the company would go into liquidation, because of its insolvency problems and because of the complete breakdown in relations between Mr Cowley and Mr West.
[11] Horton v Cowley and West CIV-2012-404-5022 was a voidable transaction proceeding brought by the liquidator of Shaftspry Ltd to set aside voidable transactions and charges. Mr West supported the liquidator’s case, the Cowley interests opposed. I gave an interim decision on 23 November 2012 ([2012] NZHC
3089). That case was heard on 26 June, 23 October and 6 November 2012. That case and this one have a common background. There is some overlap in the issues in both cases, but in CIV-2012-404-5022 I was not required to decide and did not
sale of the Paddy Road property to an entity associated with Mr Cowley. I held that the sale price was above the value given to the liquidator by a registered valuer.9
[12] This proceeding was started on 1 May 2012. By then the company had been in liquidation for three years. The liquidators’ voidable transaction proceeding was soon to have its first date of hearing.
[13] In Horton v Cowley and West, I made provisional findings as to the creditors of Shaftspry Ltd. Mr West had made a claim in the liquidation for $150,000 but I noted that the liquidators said that this had still to be confirmed. Various concerns about Mr West’s claim had been recorded. I said:10
It is not certain that an enquiry into all these matters is required, as Mr West now seems to accept that regardless of the outcome of this proceeding, he would not receive anything as an unsecured creditor of the company. Instead, he has started a separate proceeding under s 174 of the Companies Act. The company is not a defendant, but he has sued Mr Cowley.
In that passage I was referring to the present proceeding.
[14] Mr West’s claim in this proceeding needs to be seen against the background that he had started this proceeding when the company had already been in liquidation for three years, and it was clear that there would be a shortfall for unsecured creditors, including Mr West. As creditors would take a shortfall, there would be no surplus available for shareholders.
[15] This proceeding can be seen as Mr West’s response to the fact that, while he was a secured creditor of Shaftspry Ltd (under a second mortgage), he would receive at best only a part payment of his claim as unsecured creditor and nothing for his claim as shareholder. He looked to Mr Cowley to make up for his shortfall.
[16] In a case management conference minute of 11 December 2012 I recorded my concerns as to the purpose of the current proceeding:
8 Para [10] of decision.
9 Para [10][b] of decision.
10 Para [50] of decision.
Even if there are no other creditors, Mr West and the Cowley
interests are going to take a shortfall. There is a background of disharmony between Mr West and Mr Cowley. Given the failure of the company, both will have lost on their investments in the company. I have asked Mr Pidgeon what Mr West hopes to gain from the proceeding. Mr West hopes to have his shareholding valued at the time he was removed as director. Apparently it will be his case that any decline in the value of shares in the company, attributable to the change in the property market, is irrelevant to Mr West’s claim for compensation.
[3] In seeking compensation, Mr West is apparently asking the court to apportion blame between himself and Mr Cowley for the failure of the company. In July 2008, Mr Cowley entered into term loan agreements with the company. Those agreements were not necessarily valid. However, they do record that Mr Cowley and his surveying company had made advances and met expenses of about
$400,000. It seems unlikely that Mr Cowley will recover these
advances. I understand Mr West’s case to be that he has also made
contributions to the company, for which he also has not been rewarded. In effect, by his proceeding, Mr West is asking for the liquidation of the company to be adjusted so that other shareholders have to pay him out to protect him against the losses he made from investing in the company, and that the other shareholders should carry not only their own losses but also his losses.
[4] Mr Pidgeon says that part of Mr West’s case against Mr Cowley relates to post-liquidation conduct. On liquidation, control of the company passes to the liquidator. The parties’ rights are normally governed by the liquidation provisions of the Companies Act. Those include provisions under which steps taken by related persons who prefer their own interests may be struck out. This part of Mr West’s case may be new.
[17] Those matters I recorded in my minute would have been apparent to Mr West when he started this proceeding.
[18] For completeness, I also add that during the telephone conference, Mr Smyth had referred to the possibility of a strike-out application I gave him an informal indication that in my view a strike-out application was unlikely to succeed. That was because I considered that the case could not be decided purely on the pleadings.
[19] Another matter that was also plain when Mr West started the proceeding was that the company’s main asset – the land on Paddy Road, Te Kauwhata – had depreciated in value significantly. Indeed, the price paid on the exercise of the mortgagee’s sale, was higher than that given in a report by a registered valuer for the
Mr Cowley.
[20] I regard Mr West’s expectation that he would be able to recover any relief in this proceeding as unrealistic. I assume, without deciding, for the purpose of this decision that Mr West may have been able to make good on his allegations of misconduct on the part of Mr Cowley and that Mr Cowley’s complaints against him were ill-founded. He may have shown that Mr Cowley exercised control over the affairs of Shaftspry Ltd so as to serve his personal interests and to the disadvantage of Mr West. Mr West may have established a claim against the company as an unsecured creditor in addition to his claim as a secured creditor. I also accept that the earlier proceedings would not have stood in the way of his taking this proceeding. In particular, I cannot see how his liquidation application against the company gives rise to any form of res judicata to stop him claiming under s 174 against other directors or shareholders: the proceedings involve different parties. Even so, Mr West would not be able to get past the fact that the Cowley interests had also made significant financial contributions to the company and that the Cowley interests would also face significant losses under the liquidation of the company.
[21] At the end of the day, arguments as to the rights and wrongs of the way that Mr West and Mr Cowley ran the company and the way they fell out would not have made any difference because they were going to suffer losses anyway. In particular, Mr West made sure of that by pressing for the company to be put into liquidation. While that took the company out of the control of Mr Cowley, it imposed the costs of liquidation on the company. In these circumstances, I find that Mr West was on a hiding into nothing in launching this proceeding. There was no value left in the company to be distributed between Mr West and Mr Cowley as shareholders.
[22] The settlement negotiations can be considered against that background. In February this year, Mr West began negotiations to see if the proceeding could be resolved on the basis of a discontinuance with costs to lie where they fell. The correspondence between lawyers has been disclosed and both sides have relied on it. The defendants made counter-proposals. They were interested in a full and final settlement. Their concern was that a discontinuance with each party to pay their own
costs would leave it open to Mr West to start a fresh proceeding.11 In addition they added other terms that were unacceptable to Mr West. Mr West made a further proposal, which the defendants did not accept. The correspondence shows that the parties did not reach agreement. After it became clear that there would not a settlement, Mr West discontinued without costs having been resolved.
[23] Mr West invites me to review the negotiations and to find that the defendants were unreasonable in not accepting his initial proposal. In support, he cites r 14.10 and this dictum from the Court of Appeal in Moore v McNabb:12
In summary, it is a requirement of fairness that litigants – particularly defendants – have some economic means of limiting their exposure to the risk of costs; and secondly the Court itself must ensure that a procedure of this character operates as an effective encouragement to settle.
[24] An earlier passage in that judgment is also relevant:13
Costs can outstrip the value of the subject matter in dispute and for a losing party, the costs of losing a case can be ruinous. It follows that litigants should have some means of limiting their exposure to this risk. A claimant may avoid this risk by abstaining from taking legal proceedings; but a party who is sued has no such alternative. It follows that, in fairness, defendants must have the means of gaining some protection from costs by making offers to settle by in some way meeting the claim. Plaintiffs should also have protection where defendants decline reasonable settlement offers.
[25] The last sentence offers some support for Mr West’s submission. The context is to be noted, however. In cases under r 14.10 written offers are made without prejudice as to costs. Under r 14.11, the court has a discretion as to costs. As Moore v McNabb illustrates, a defendant who has made an offer under r 14.10 which is for more than the plaintiff obtains after a defended hearing may obtain an order for costs against the plaintiff. The Court of Appeal did not specify what would count as a reasonable offer or an unreasonable offer declined by a defendant. Costs decisions under r 14.11 usually arise after a substantive hearing and a decision on the merits. In those cases it is possible to assess the reasonableness of an offer against the
outcome of the proceeding. In a case under r 15.23 the parties and the court do not
11 High Court Rules, r 15.24.
12 Moore v McNab (2005) 18 PRNZ 127 (CA) at [58].
13 At [56].
have the benefit of a judgment on the merits on which to assess how reasonable the parties were in negotiating a settlement on a without prejudice basis.
[26] In this case I have come to a firm view as to the merits of Mr West’s case. Even so, I decline to hold that either side was relevantly at fault in not concluding a settlement on terms proposed by the other side. It was instead a case of the parties negotiating in good faith to reach a deal but not getting there. In hindsight it can be seen that each side overplayed their hand. The defendants had a proper interest in bringing all disputes between them and Mr West to an end and to that end proposed that the discontinuance be in full and final settlement. On the other hand they also proposed that Mr West abandon his claim for preferential status for his order for costs on the liquidation application. For his part Mr West wanted to keep alive not only his rights in the proceeding brought by the liquidator but also sought an indemnity for any claim brought against him by any third party, including the Commissioner of Inland Revenue. Given that Mr Cowley had clearly expressed his view that Mr West had exposed Shaftspry Ltd to added excise duties because he had not kept stock in bonded storage, that was hardly likely to be acceptable to the defendants. The parties’ failure to reach agreement was a missed opportunity, but both sides share responsibility for that. This is not a case where one side can claim to have acted with reason and common sense and the other side had not.
[27] I summarise. As a result of having decided Horton v West, I know enough to find that even if Mr West could make out his complaints against Mr Cowley in this proceeding, there would not be any substantial benefit to Mr West, because under the liquidation there was nothing available to either Mr West or the Cowley interests as shareholders. The proceeding would not have served any useful purpose. In the negotiations to resolve this proceeding, I do not find that the failure to reach agreement lies entirely or mostly with the defendants. Mr West has not made out his case that he should not pay costs on the discontinuance. Nor has he shown an unjustified failure to accept a settlement offer under r 14.7(f)(v) so as to reduce his liability for costs.
[28] The defendants are entitled to costs on the discontinuance under r 15.23. They have provided a schedule setting out a calculation under category 2 band B.
Mr West does not take issue with that basis. I allow costs for all the steps taken in
2012, but do not allow costs for steps in 2013. In 2013 the parties were negotiating settlement. No steps were taken to advance the proceeding. Instead the parties agreed to matters staying on hold. On those steps the parties should pay their own costs. The defendants also sought costs on their costs submissions. It is not the practice to award costs on costs. The rules do not allow for it. I fix costs for the steps taken in 2012 at $12,317 plus disbursements of $108.80, a total of $12,425.80.
[29] Mr West proposed that payment of costs should be deferred until the funds that would be payable to him in the liquidation of Shaftspry Ltd could be made available. He proposed that an order could be made under s 51G(2) of the Judicature Act 1908. There is no basis for deferring payment of costs. Costs should be paid once they are fixed. Funds may be payable to Mr West from the proceeds of sale of the Paddy Road property or the liquidation of Shaftspry Ltd, and the defendants may find that a convenient way to enforce the order for costs, but I do not see that I should tie the defendants’ hands on how they should enforce the costs order.
[30] For the above reasons, I order Mr West to pay the defendants costs in the sum of $12,425.80, including disbursements.
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Associate Judge R M Bell
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