Red 9 Limited v The Learning Ladder Limited (in liquidation) [2021] NZCA 284 (30 June 2021)

Last Updated: 6 July 2021

IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA

CA702/2020 [2021] NZCA 284

	BETWEEN	RED 9 LIMITED Appellant
	AND	THE LEARNING LADDER LIMITED (IN LIQUIDATION) Respondent

Hearing:	13 May 2021
Court:	Clifford, Simon France and Edwards JJ
Counsel:	M J Fisher and T J Yoon for Appellant K J M Robinson and A A McCabe for Respondent
Judgment:	30 June 2021 at 11. 30 pm

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Clifford J)

Introduction

• [1] This is an appeal against a decision of the High Court declining an application by the appellant, Red 9 Ltd, for security for costs in High Court proceedings (the High Court proceedings) brought against it by the respondent, The Learning Ladder Limited (in liquidation) (TLL).^[1]

Background

• [2] TLL is the third plaintiff and Red 9 Ltd is second defendant in the High Court proceedings. The other parties are:

(a) as first plaintiff, Grant Reynolds, the liquidator of TLL;

(b) as second plaintiff, Joanne Young, one 50 per cent shareholder in TLL;

(c) as first defendants, Peri Micaele Finnigan and Boris Van Delden, as directors of McDonald Vague and Partners Ltd, the receivers of TLL immediately prior to its liquidation;

(d) as third defendant, The Learning Ladder (2018) Ltd (TLL 2018), a company in which Dayle Walker (the other 50 per cent shareholder in TLL) and her husband Kevin each own 50 per cent of the shares and are its two directors; and

(e) as fourth defendants, Peat Johnson Murray Ltd, an incorporated firm of accountants of which Mr Walker is one of four directors and through which Mr Walker provided accounting services to TLL and Red 9.

• [3] The High Court proceedings arise out of the circumstances in which Red 9, as a creditor of TLL, appointed McDonald Vague as TLL’s receiver and in which McDonald Vague sold the business of TLL to TLL (2018) Ltd. Those proceedings reflect a dispute over the control and ownership of TLL and its business between its two shareholders, Mrs Young and Mrs Walker.
• [4] Mrs Young and Mrs Walker incorporated TLL in 2015. TLL was established to purchase and operate a licensed early childhood centre in Howick, Auckland. Red 9 provided funding to TLL, which Red 9 had borrowed from its bank and which Red 9 secured by a General Security Agreement (GSA) from TLL. The TLL business would appear to have operated successfully for a number of years, but subsequently got into difficulties. By early 2018 the relationship between Mrs Young and Mrs Walker had broken down.
• [5] Against the background of the dispute between Mrs Walker and Mrs Young, Red 9 — as creditor and advised by Mr Walker and Peat Johnson Murray Ltd — determined TLL was insolvent and made demand on 8 March 2018. The next day, they appointed McDonald Vague receiver, and thereafter:

(a) Mrs Young made a conditional offer to McDonald Vague to purchase the TLL business for $426,800.

(b) Mrs Walker (via the third defendant TLL (2018)) made an unconditional offer to McDonald Vague to purchase the TLL business for $470,000.

(c) McDonald Vague obtained an independent market appraisal which valued the TLL business at $388,000.

(d) McDonald Vague accepted the unconditional offer from TLL (2018) for the TLL business.

• [6] On 14 September 2018, and on the application of Mrs Young, the High Court appointed Mr Reynolds as liquidator of TLL.
• [7] In December 2019, Mr Reynolds (in his capacity as liquidator of TLL) and Mrs Young (in her capacity as a shareholder in TLL) commenced the High Court proceedings. They claimed the TLL business had been sold by McDonald Vague for $290,000 less than its market value and sought, under various causes of action, to recover the alleged loss from McDonald Vague, Red 9, TLL (2018) and/or Peat Johnson Murray Ltd.
• [8] Following a court direction on 8 May 2020, TLL was joined as third plaintiff and was substituted for Mr Reynolds in some of the causes of action, including a cause of action in contract brought against Red 9 alleging a breach of its GSA.
• [9] Red 9 then sought security for costs from TLL, on the basis of TLL’s insolvency, in the sum of $50,000.
• [10] Associate Judge Andrew declined that application^[2] but in his discretion, ordered that Mr Reynolds and Mrs Young were each to provide, as they had offered, a formal undertaking accepting personal liability on a joint and several basis for costs awarded to Red 9 against TLL up to a maximum amount of $35,000 (plus GST).^[3]
• [11] Red 9, with Associate Judge Andrew’s leave,^[4] now appeals that interlocutory judgment.

The challenged decision

• [12] Security for costs in High Court proceedings is governed by r 5.45 of the High Court Rules 2016:

5.45 Order for security of costs

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

(a) that a plaintiff—

(i) is resident out of New Zealand; or

(ii) is a corporation incorporated outside New Zealand; or

(iii) is a subsidiary (within the meaning of section 5 of the Companies Act 1993) of a corporation incorporated outside New Zealand; or

(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.

...

• [13] The Associate Judge was satisfied, in terms of r 5.45(1), there was reason to believe TLL would be unable to pay costs to Red 9 if unsuccessful. He also accepted that Red 9 had a tenable and credible defence in relation to both liability and quantum.^[5] But that assessment of merits was only one factor in determining whether security should be ordered. The critical issue, namely whether the liquidator’s offered undertaking was the more appropriate and equivalent security, fell to be determined as a matter of discretion.^[6]
• [14] The Associate Judge acknowledged there was a long-standing disinclination by the courts to order security for costs in cases brought by liquidators.^[7] But that general rule was not absolute. Where, for example, the claim was brought in the name of the company in liquidation, rather than by the liquidators personally, or there were outside party funding arrangements, an order for security could be justified.^[8] The Associate Judge referred to the decision in Flatbush Property Ltd (in liquidation) v Polglase.^[9] There, Associate Judge Bell, referring to the distinction between proceedings brought in the name of the company in liquidation and that of the liquidator personally, noted that security would rarely be required in the latter case, there ordinarily being no question as to the ability of an insolvency practitioner to meet an order for costs.^[10]
• [15] Applying those principles, the Associate Judge was satisfied Mr Reynolds’s offered undertaking, together with the equivalent undertaking offered by Mrs Young, was the more appropriate form of security and was equivalent to the payment of the sum of money into court or a solicitor’s trust account. Mr Reynolds might not be known to Red 9. But the undertaking of a liquidator, an officer of the court and accountable as such, responded to Red 9’s concern as to Mr Reynolds’s ability to honour his undertaking.^[11]

Leave decision

• [16] In applying for leave, Red 9 submitted there were certain constraints on the discretionary power of a judge or registrar to make an order for the giving of security as an alternative to the payment of a money into court. Essentially, the Judge needed to be satisfied on reasonable grounds that the security offered was satisfactory security for that sum of money.
• [17] The Associate Judge did not consider those propositions controversial, except as to the submission that without evidence of the adequacy of the security the Judge had no jurisdiction but to make an order for the payment of a sum of money into court.
• [18] But, the Judge concluded, the real issue here was the application of the principles where the security at issue was an undertaking by a liquidator and another of the parties. On that issue, Mr Fisher had submitted for Red 9 that Mr Reynolds’s status as a licensed insolvency practitioner and court appointed liquidator was not evidence as to the adequacy of his personal undertakings.
• [19] The Associate Judge accepted the questions raised by Red 9 as regards the status of a liquidator reached the threshold of arguable error and had a wider significance than the particular case.^[12] He granted leave accordingly.^[13]

Appeal

• [20] In his leave judgment the Associate Judge helpfully summarised Red 9’s interpretation of r 5.45(3)(a)(ii)^[14] and, accordingly, Red 9’s contentions as to the errors the Associate Judge had fallen into. The appeal as argued reflected that analysis. We adopt it in large part accordingly as the basis for our summary of Red 9’s arguments before us.
• [21] Red 9 argued the Associate Judge had made the following errors:^[15]

(a) An error of law in placing an onus on Red 9 as applicant to adduce evidence to demonstrate a real risk that Mr Reynolds, the liquidator, might not be able to honour his personal undertaking ([29] of the judgment);

(b) An error of law in finding, in the absence of any evidence, that personal undertakings from Mr Reynolds and Mrs Young were the more appropriate form of security and equivalent to the payment of a sum of money into court ([29] of the judgment);

(c) An error [of] law in affixing a sum for the purposes of rr 5.45(2) and (3)(i) of the High Court Rules 2016, without taking into account costs incurred in taking steps after the date of filing of the application for security for costs and before the hearing of the application ([37] of the judgment); and

(d) A failure to take into account a relevant consideration in the assessment of the merits of the claim in defence, that consideration being [TLL’s] omission to respond to the expert evidence on behalf of Red 9 to the effect that [TLL’s] valuation report has a fatal flaw ([29] of the judgment).

• [22] For TLL, Mr Robinson submitted Red 9’s propositions were wrong in principle, as reflected by the fact, acknowledged by Red 9, they were without precedential support. The basis upon which the Associate Judge had assessed the appropriateness of Mr Reynolds’s undertaking was orthodox and reflected well established aspects of the Court’s insolvency jurisdiction and its role of supervising liquidators’ conduct.

Analysis

• [23] We deal first with the challenge to the basis upon which the Judge exercised his discretion. We then consider Red 9’s separate arguments based on the asserted significance of (i) costs incurred after the filing of the application for security and (ii) TLL’s failure to respond to Red 9’s valuation report.
• [24] The commentary in McGechan on Procedure emphasises the discretionary nature of an assessment under r 5.45(2), and the courts’ reluctance to fetter that discretion by creating rules or principles of general application:^[16]

Whether or not to order security and, if so, the quantum, are discretionary matters. The discretion is not to be fettered by constructing “principles” from the facts of previous cases: A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA), at [13] and [14].

The general approach taken by the court, discussed in more detail below, is to balance two competing interests — the defendant’s interest in being protected from a barren costs order and the plaintiff’s right of access to the court: Clear White Investments Ltd v Otis Trustee Ltd [2016] NZHC 2837 at [4].

• [25] The general rules as to onus and evidence Red 9 would have us recognise run counter to that approach.
• [26] Moreover, the special position of official liquidators as regards provision of security for costs, as acknowledged by the Associate Judge, has long been recognised.
• [27] Again, the commentary in McGechan on Procedure usefully summarises the position:^[17]

The Court’s longstanding disinclination to order security for costs in cases brought by liquidators has a twofold basis. First, that liquidators bring or support a proceeding to maximise returns for the benefit of all creditors and should not be inhibited in their statutory obligations by an order for security. Secondly, the Court’s concern to ensure that people are not prevented by their impecuniosity from taking action. That concern, however, is preserved as a factor in exercising the discretion under r 5.45.

...

Only in an exceptional case will the official liquidator be ordered to give security. That follows from the fact that he or she is a public officer carrying out a public function. Nevertheless, there is no absolute bar, and an order for security will be made where it is necessary to do justice between the parties.

• [28] Here the liquidator’s undertaking puts Red 9 in the position it would have been, albeit we recognise to the limit of $35,000, if TLL’s claim against Red 9 was brought in the liquidator’s own name. There is simply no basis for Red 9’s assertion of error by the Associate Judge on the issues of onus and evidence. That is especially so as Red 9 itself advanced no factual basis for its challenge to the value of Mr Reynolds’s undertaking. Given the traditional recognition of liquidators’ status as officers of the court, and the more recent legislative developments which strengthen regulatory oversight of insolvency practitioners, much more than mere assertion would be required to raise such an issue in a particular case.
• [29] There is also here, as Mr Robinson noted, the possible significance of Red 9’s role in the receivership of TLL and of the multiple roles played by Mr Walker in the circumstances which led to Red 9’s demand and TLL’s receivership.^[18]
• [30] Red 9 argued further that the Judge erred by failing to take into account costs incurred between the filing of the application for security for costs and before the hearing of that application. We disagree. The setting of security for costs calls for an assessment in the round. The degree of precision Mr Fisher argued for, as regards subsequent costs, is not called for.
• [31] Finally, Red 9 also argued the Judge had erred by failing to take into account a relevant consideration, namely TLL’s “omission” to respond to Red 9’s expert valuation evidence that TLL’s valuation report, by reference to which its claim for damages had been quantified, had a fatal flaw. Again, we disagree. That Red 9 and TLL have competing valuation advice is hardly surprising. The upcoming trial will determine which prevails.
• [32] Accordingly, we see no error in the Associate Judge’s decision.

Result

• [33] The appeal is dismissed.
• [34] The appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Claymore Partners Ltd, Auckland for Appellant
Shine Lawyers NZ Ltd, Auckland for Respondent

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^[1] Reynolds v Finnigan [2020] NZHC 2389 [High Court judgment].

^[2] At [42].

^[3] At [43].

^[4] Reynolds v Finnigan [2020] NZHC 3170 [Leave judgment].

^[5] High Court judgment, above n 1, at [22].

^[6] At [23].

^[7] At [25].

^[8] At [26].

^[9] Flatbush Property Ltd (in liq) v Polglase [2012] NZHC 332.

^[10] At [31].

^[11] High Court judgment, above n 1, at [29].

^[12] At [9].

^[13] At [11].

^[14] Leave judgment, above n 4, at [7].

^[15] At [6].

^[16] Andrew Beck and others McGechan on Procedure (looseleaf ed, Brookers, Wellington, updated to 22 March 2021) at [HR5.45.01].

^[17] At [HR5.45.16(3)].

^[18] See further at [HR5.45.03(3)].