McLachlan v Geotherm Energy Limited and Ors [2006] NZCA 13 (28 February 2006)

Last Updated: 25 March 2006

IN THE COURT OF APPEAL OF NEW ZEALAND

CA158/05

BETWEEN ALISTAIR STUART MCLACHLAN AND AVA MARIE MCLACHLAN
First Appellants

AND GEOTHERM ENERGY LIMITED
Second Appellant

AND GEOTHERM GROUP LIMITED
Third Appellant

AND GEOTHERMAL PRODUCE NEW ZEALAND LIMITED
Fourth Appellant

AND GEOTHERM TRANSMISSION LIMITED
Fifth Appellant

AND MCLACHLAN INVESTMENTS LIMITED
Sixth Appellant

AND MEL NETWORK LIMITED
First Respondent

AND MERCURY GEOTHERM LIMITED (IN RECEIVERSHIP)
Second Respondent

AND POIHIPI LAND LIMITED (IN RECEIVERSHIP)
Third Respondent

Hearing: 2 February 2006

Court: William Young P, Hammond and O'Regan JJ

Counsel: S P Bryers and D A Towle for Appellants
P W David and J A Browne for First Respondent

Judgment: 28 February 2006

JUDGMENT OF THE COURT

The appeal is dismissed. There is no order as to costs.

REASONS

(Given by William Young P)

[1]	This judgment should be read in conjunction with our judgment in McLachlan & Ors v Vector Ltd CA157/05 28 February 2006 which is delivered herewith. The present appeal concerns what is referred to in that judgment as "the Network proceedings" and is against a judgment delivered by Potter J on 7 July 2005 in which she ordered the appellants ("the McLachlans") to provide $200,000 as security for costs in favour of MEL Network Ltd ("Network"). This security ($200,000) was in addition to $50,000 which had earlier been provided by the McLachlans in circumstances discussed below in [4].
[2]	As this judgment can be read with our other judgment, we need not discuss the factual background to the appeal.
[3]	Rule 60(1)(b) of the High Court Rules provides:

60 Power to make order for security for costs--
(1) Where the Court 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,--

the Court may, if it thinks fit in all the circumstances, order the giving of security for costs.

[4]	On 1 February 2002 the High Court, on the application of Network, required the McLachlans to provide security for costs in the sum of $250,000 which was to be paid in stages. In August 2002, this Court, on appeal, varied the quantum of the order to $50,000, see McLachlan v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747. The Court, however, left it open to Network to seek further security for costs before trial. The security ordered was promptly paid by the McLachlans.
[5]	It is common ground that as at February and August 2002 there was "reason to believe" that the McLachlans would be unable to pay the costs of Network if unsuccessful at trial.
[6]	In its application which led to the judgment presently under appeal, Network sought a further $200,000 by way of security for costs (making the total $250,000 in all). This was opposed by the McLachlans on the basis that the r 60 threshold "reason to believe that a plaintiff will be unable to pay the costs of the defendant" was not satisfied. Mr Bryers for the McLachlans accepted that the security as sought was appropriate if the threshold test was satisfied.
[7]	The McLachlans’ position as advanced before Potter J was that, notwithstanding their impecuniosity in 2002, they were in a position to meet an order for costs if unsuccessful in the proceedings. They propose to develop on a 22.5 hectare property which they own a 60 Megawatt power station for which they obtained, in December 2004, all necessary resource consents and water rights. They produced an affidavit from a Taupo valuer (Mr David McAlley) who valued the land at $2,218,000 and the underlying geothermal resource at $152,000,000. This latter figure represents Mr McAlley’s assessment of the gross value of the geothermal energy resource (at $415,000,000) less projected construction costs ($263,000,000). The McLachlans also produced an affidavit from Dr Subir Sanyal who assessed the after tax present value of the project at NZ$149,700,000. It appears from other affidavit evidence that the McLachlans have incurred debts of approximately $24,000,000 which are secured against the assets of the project. So the McLachlans claimed to have net assets worth approximately $125,000,000. On the evidence before Potter J, the anticipated commissioning date for the power station is 2008.
[8]	In her judgment under appeal the Judge said:

[16] ... On the basis of the information provided the venture, objectively viewed, is high risk if not speculative. In addition, it is long-term. The anticipated date of commissioning for the proposed new power station is 2008. Even if the fruits of the venture prove to be in the ball-park estimated by the plaintiffs, commissioning of the power station is at best three years away on the plaintiffs’ own projection. In the meantime the venture will have significant costs to fund - $248m/$263m for the construction of the power station alone. No cash flow analysis has been provided. ... There is nothing in the plaintiffs’ evidence to provide any assurance that the project will be producing revenue or providing equity to enable the plaintiffs to meet in a timely way any liability for costs which may be awarded against them if unsuccessful by judgment of this Court.
[17] I note further, that the plaintiffs’ evidence provides no explanation as to how or why the 22.5 hectare property which Mr McLachlan says is owned by the third and fourth plaintiffs and himself, had no net worth during the period of the previous application for security for costs when the plaintiffs conceded they were impecunious, and now has a value of $2,218,000 according to Mr McAlley. The explanation does not lie in any value added by the power station project because Mr McAlley states that the value of the land is "as indicated by sales of comparable properties", and he then adds a further $152m for the "geothermal resource".
[18] While the Court will give due weight to a plaintiff’s sworn assertion that it will be able to meet costs awarded, that will not be decisive: Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430 at 436. In my view the evidence provided to support the assertion of Mr McLachlan as to the plaintiffs’ ability to pay costs plainly fails to give adequate support for the assertion. Accordingly I am unable on any objective analysis to accept the assertion made by Mr McLachlan.

[9]	Potter J required the additional $200,000 by way of security to be paid in instalments, $65,000 to be paid within 28 days of the judgment, another $65,000 to be paid within a further period of 28 days and the balance ($70,000) to be paid not later then 21 days before the fixture for the trial (which was then set down for 1 November 2005). We were told by Mr Bryers that the security as ordered has now been paid in full and that the appeal against the order made by the Judge has been prosecuted primarily as a matter of principle.
[10]	For the McLachlans, Mr Bryers challenged the approach taken by the Judge. He contended that the Judge had in effect presumed present impecuniosity by reason of concessions as to the McLachlans’ financial position in 2002 and in this way had ignored the onus on Network "to prove inability to pay costs". Mr Bryers was very critical of Network’s failure to produce evidence in response to the expert evidence tendered by the McLachlans and he argued that there was no basis upon which the Judge could properly reject that evidence.
[11]	The point raised by the appeal is a short one, as Mr Bryers recognised. August 2002 provided a sensible starting point for evaluation of Network’s application. The McLachlans’ asserted rapid transition from admitted impecuniosity then to the comparative comfort of a net asset position of $125,000,000 invited some scepticism. The affidavits relied on by the McLachlans were conclusory and thus not easy for Network to respond to. In that context, it would be unrealistic to expect Network to have engaged in a lengthy and detailed valuation dispute with the McLachlans in relation to their current project. Interestingly, there was no evidence to show the actual existence (or extent) of the underlying geothermal resource. In that context the Judge was not obliged to take at face value the evidence adduced on behalf of the McLachlans as to their wealth. She was also entitled to conclude that the McLachlans’ power station project necessarily involves significant risks. In the present case, the crystallisation of such risks would carry the corollary of the McLachlans being unable to meet an award of costs against them should they fail in the proceedings against Network.
[12]	It would not be right to regard a decision to order security for costs as simply a matter of case management; this given that such an order may have the effect of stifling proceedings. Appeals against such orders are, in fact, not uncommon. Nonetheless, the particular assessment which the Judge was required to make in the present case was necessarily evaluative and one which, given her management role in this and related litigation, she was particularly well placed to make. Mr Bryers was not able to persuade us that her approach was wrong.
[13]	Accordingly, the appeal is dismissed. The McLachlans have failed in this appeal but have succeeded in the other appeal. For practical purposes, Network and Vector Ltd (the respondent in the other appeal) can be treated as a single party. Given the mixed success in the two appeals, we make no order for costs.

Solicitors:
Martelli McKegg Wells & Cormack, Auckland for Appellants
Wilson Harle, Auckland for First Respondent