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High Court of New Zealand Decisions |
IN THE HIGH COURT OF NEW ZEALAND
HAMILTON REGISTRY
CIV 2006-419-001824
IN THE MATTER OF the Companies Act 1993
BETWEEN ENERGY PLUS (NZ)
LLIMITED
Plaintiff
AND ROSS RAYMOND CHIPLIN
Defendant
CIV 2006-419-001823
AND
IN THE MATTER OF the Companies Act 1993
BETWEEN
E.CAPITAL LIMITED
Plaintiff
AND ROSS RAYMOND
CHIPLIN
Defendant
Hearing: 3 April 2007
Counsel: P Mills for plaintiffs
R Robertson for defendant
Judgment: 5 April 2007 at 1415
JUDGMENT OF ASSOCIATE JUDGE FAIRE
[on application for costs]
Solicitors: Fraser Powrie, PO Box 108 132, Auckland for plaintiffs
Carter & Partners, PO Box 2137, Auckland for defendant
ENERGY PLUS (NZ) LTD V CHIPLIN HC HAM CIV 2006-419-001824 5
April 2007
[1] The plaintiffs seek an order for costs in relation to their applications to set
aside two statutory demands issued
by the defendant. The statutory demands were
withdrawn after the filing of the applications to set aside but before their first call.
[2] The defendant is a shareholder and, at least at some time, was a director of
both plaintiff companies.
[3] The defendant
issued statutory demands dated 8 December 2006 against each
plaintiff company. The statutory demand issued against Energy Plus (NZ)
Limited
demanded $19,389.18 which the demand described as being:
· $1,888.00 for payment as recorded in the financial statements
of the
company as at 31st March 2006;
· $5,440.00 for preparation of brochures and creation of the Energy Plus
catalogue. All publication rights remain the property of R Chiplin and
do not transfer until payment is received
in full. Unauthorised use of
these publications is not permitted;
· $4,220.00 for R410A Water Source Heating
Unit; and
· $7,871.18 for expenses to date
payment for which is now overdue.
[4] The statutory demand issued
against E.Capital Limited demanded $20,000
which is described as being:
For payment as recorded in the financial statements
of the company as at 31st
March 2006 payment for which is now overdue.
[5] Both statutory demands were sent by facsimile
and post to the firm of
accountants who were acting for both plaintiffs at the time. The method of service,
therefore, did not comply
with section 387 of the Companies Act 1993. At the time,
it is doubtful that the directors of the plaintiffs would have been in position
to
ascertain the position with respect to service because, at the time of service, the
registered office of companies was at the
home of the defendant. Understandably,
they might have apprehended that service in accordance with s 387 had occurred and
that the
forwarding of the documents to the companies' accountants was simply a
courtesy to indicate that the step had been taken. Be that
as it may, on the evidence
before me, it is doubtful, that reliance could have been placed on service of the
demand had any application
to appoint a liquidator been subsequently filed. The
reasons for that conclusion are set out in my judgment in Delta Installations
Ltd v
Hamilton Joinery Ltd (2003) 16 PRNZ 814.
[6] In Jones Odell Motor Bodies Ltd v Hard Core Limited 17 PRNZ 809 I
considered a situation where a statutory demand was effectively withdrawn after the
filing and service of the application to set
it aside. I adopt and set out the comments
I made at [4], [5], [6], [7], 17 and [20] of that judgment as follows:
[4]
In fixing costs it is appropriate that I refer briefly to the approach,
which the Court must take on an application
for costs. Rule 46
provides that costs are to be in the discretion of the Court. In
Mansfield Drycleaners
Ltd v Quinny's Drycleaning (Dentice
Drycleaning Upper Hutt) Ltd CA 296/01 29 September 2002 the
Court
of Appeal, in noting the Court's over-riding discretion
pursuant to r 46 said:
There is a
strong implication that a Court is to apply the regime in
the absence of some reason to the contrary: Body
Corporate
97010 v Auckland City Council. We do not think that a Court
should hesitate
to depart from the regime where appropriate but
we agree that some articulation of the reason for doing so
is to be
expected, however succinct. If no reason is given it will expose
the award
to close appellate scrutiny.
[5] The general principles to be applied in the exercise of that discretion
are those contained r 47. Subrule (a) provides that:
The party who fails with respect to a proceeding
... should pay
costs of the party who succeeds.
[6] In Commerce Commission v Southern Cross Medical
Care Society
[2004] 1 NZLR 491 the Court of Appeal, referring to the authorities
said in relation to costs:
In the interests
of predictability and expedition, Courts will be less
inclined to depart from the prescribed approach. The
prescribed
approach includes the presumption that costs follow the event.
However,
we do not think that the Court should hesitate to depart
from that approach where clear reason for it is shown.
[7] In Glaister & Ors v Amalgamated Dairies Ltd & Anor [2004]
2 NZLR 606 the Court of Appeal endorsed the proposition it made
in the earlier decision in Mansfield Drycleaners Ltd v Quinny's
Drycleaning (Dentice Drycleaning Upper Hutt) Ltd. It noted that if
there was any departure from the
costs regime as set out by the High
Court Rules that could only be done on a particularised and
principled
way.
[17] I repeat what I said in relation to statutory demand applications in
International Airline Trading (NZ) Ltd
v Rohlig NZ Ltd HC AK
CIV-2003-404-3464 23 February 2004:
[13] There is developing a trend where debt collectors
use statutory
demands as the first step in a process to recover a debt. The
statutory demand procedure
is not intended as a debt collection
device. Its purpose is to provide the evidential foundation to
support an application to appoint a liquidator in respect of a
company. That follows from s 287 of the Companies
Act 1993.
One of the persons authorised to apply to appoint a liquidator, by
virtue of s 241 of the
Companies Act 1993, is a creditor of the
company. A creditor, in terms of s 241 of the Companies Act
1993, includes both contingent and prospective creditors. A
creditor will be successful if the creditor can show
that the
company is unable to pay its debts. It is for that purpose that the
statutory demand is used.
The reason that it is used is because non-
compliance, in terms of s 287, presumes that the company is
unable to pay its debts. Precise proof of the quantum of debt where
a liquidator is appointed is a matter that
will ultimately have to be
determined by the liquidator of the company. The liquidator's
principal
duties are defined in the Companies Act 1993 starting at
s 253.
[14] I emphasise these matters because
there is a common
misconception that the statutory demand procedure is in some way
analogous to the
summary judgment regime which relates to
ordinary proceedings. A summary judgment application is, of
course, [813]an interlocutory application. An application made to
set aside a statutory demand, as I have already
said, is an
originating application. In short, it is a discrete, stand-alone,
application.
[15] Because of its special nature, an order on the application concludes
the specific application to the Court.
Generally it will not be
appropriate to reserve costs pending some other event. However,
because the
Court is required to exercise the discretion, each case
will be determined on the facts before the Court. Nevertheless,
there needs to be good reason for departing from the general
principle that the party who fails should
pay costs to the party who
succeeds.
[16] If the above points are observed, statutory demands should only
be
issued in cases which are appropriate, that is, where there is a
genuine basis for establishing
the evidential foundation so that an
application can ultimately be made to appoint a liquidator. It is
quite improper for the procedure to be used as a debt collection
device or as a device to embarrass a party in
a situation where
there is a contest as to liability for a given debt.
[20] The judgments of Heath J, in Keystone
Ridge Ltd v City Sales Ltd
19/7/02, Heath J, HC Auckland M549im02, and Master Lang, in
Insolare Investments Ltd v Fetherston
17/10/02, Master Lang, HC
Auckland M1042im02, emphasise the need for creditors to take care
before issuing statutory demands that there is in fact no dispute as to
the debt. Service
of the statutory demand on a company requires it to
work within a very tight timetable imposed by s 290 of the
Companies
Act 1993. If it fails to so act, then the presumption
created by s 287 applies.
[7] Normally, if a statutory demand is
withdrawn before the actual hearing of the
application to set aside the statutory demand the Court will apply, by analogy, the
position
that arises on a notice of discontinuance. That, of course, is set out in r 476
of the High Court Rules. There is a presumption that
a discontinuing party will be
liable for costs: North Shore City Council v Local Government Commission 9 PRNZ
182. Generally, the Court will not inquire into the merits of the case unless the
answer is clear and obvious.
[8] The Third Schedule
to the High Court Rules, as a result of r 23(5) of the High
Court Amendment Rules 2006 (SR 2006/98) has a specific section dealing
with
originating applications, in particular those dealing with applications to set aside
statutory demands and which are provided
for in Items 26 through to 31. That
section of Schedule 3 provides the three alternative Bands in respect of the
appropriate Category
for the proceeding, for each of the steps which are referred to
in Items 26 to 31. I will return later, in this judgment, to the
application of each of
those items to this case.
[9] The plaintiffs seek indemnity costs. The jurisdiction for an order
for
indemnity costs is conferred by r 48C(4) of the High Court Rules:
48C Increased costs and indemnity costs
...
(4) The Court may 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 to the proceeding;
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
(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 the proceeding; 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.
[10] In Hedley
& Ors v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694
Goddard J examined the circumstances where indemnity costs are justified and said:
[8] Such authorities as there are indicate
that indemnity costs are
awarded where truly exceptional circumstances exist. In Hawkins
Construction
Ltd v Chan (2002) NZTC 17,669, Williams J ordered
indemnity costs pursuant to r 48C(4)(a) on the basis that although
Hawkins Construction
and its advisors had not acted frivolously in
commencing and continuing a proceeding after the Court of Appeal
had determined a strike out order in their favour, the proceedings
they had commenced and continued up to
the point of the Court of
Appeal's judgment were vexatious and frivolous. Although the fact
situation
in Hawkins Construction is different to the present case it
has some similarities, in that a number of warning shots
had been
fired over the bow of Hawkins Construction and its advisors in
relation to the basis of their
deceit allegations and their pleadings in
relation to these. The two statements of claim issued by Hawkins
Construction prior to the Court of Appeal's decision were based in
fraud but had no evidential foundation. Nevertheless
they were
persisted in. The whole proceeding had put the defendants to
significant wasted cost.
[9] Another rare and exceptional case in which solicitor and client costs
were found to be justified was that
of Toronto-Dominion Bank v
Leigh Instruments Ltd (trustee of) 178 DLR (4th) 634. That case had
been advanced on the basis of numerous allegations of fraud and
deceit on the part of the
defendants. The trial Judge awarding
indemnity costs noted that these allegations had been "pursued
unrelentingly
through to the conclusion of trial". He found that "All
of these allegations of fraud and deceit were wholly unsupported
by
the evidence". His decision to award indemnity costs was upheld on
appeal.
[10] Another
decision concerning the award of indemnity costs arising
from unsuccessful fraud allegations was White Industries (Qld)
Pty
Ltd v Flower & Hart (a firm) (1998) 156 ALR 169. In that decision
Goldberg J, delivering the judgment of the Federal Court of
Australia, referred to "the
significance and seriousness attached by
the law to the making of the allegation of fraud" (Oldfield v Keogh
(1941) 41 SR (NSW) 206). Although no distinct similarity between
the fact situation in White Industries and the present case exists, the
judgment is instructive for its collection of the principles relating to
the obligations involved in pleading
fraud, including the obligations
on counsel and advisors.
[11] The most instructive exposition of the principles
relating to the
award of indemnity costs is found in Colgate Palmolive Co v
Cussons Pty Ltd [1993] FCA 536; (1993) 118 ALR 248. In the judgment of Sheppard
J on behalf of the Federal Court of Australia, the following
principles (summarised in
the headnote) are applicable:
"(iv) The power of the court to order costs . . . on one or other of
the
bases . . . than the party and party basis is not
circumscribed in any way.
...
"(vi) The ordinary
rule is that, where the court orders the costs of
one party to litigation to be paid by another, the order is for
payment of those costs on a party and party basis.
"(vii) The court ought not usually make an order
for the payment
of costs on some basis other than the party and party basis
unless the circumstances
of the case warrant the court in
departing from the usual course.
"(viii) The tests for such departure
include:
"(a) "as and when the justice of the case might so
require"; Andrews v Barnes
(1887) 39 Ch D 133,
followed.
"(b) "some special or unusual feature in the case to justify
the court in departing from the ordinary practice";
Preston v Preston [1982] 1 All ER 41, followed.
...
"(ix) The categories in which the discretion may be exercised are
not
closed.
"(x) Judges are not necessarily obliged to exercise their
discretion to make an order for indemnity
costs.
...
"(xii) The question must always be whether the particular facts and
circumstances
of the case warrant the making of an order for
payment of costs other than on party and party basis.
Circumstances warranting the exercise of the discretion to
award indemnity costs include:
"(a) the making of allegations of fraud knowing them to
be false, and the making of irrelevant allegations
of
fraud;
"(b) evidence of particular misconduct that causes loss of
time to the court and other parties;
"(c) the fact that the proceedings were commenced for
some ulterior motive;
"(d) the fact that the proceedings were commenced
in
wilful disregard of known facts or clearly
established law;
"(e) the making of allegations that ought never to have
been made or the
undue prolongation of a case by
groundless contentions;
"(f) an imprudent
refusal of an offer to compromise;"
[11] No basis was advanced by Ms Mills for an order for increased costs. Having
regard to
r 48C(3) it is understandable that a case was not advanced under that
provision for increased costs. The result is that I do not
analyse the case with a view
to any order for increased costs being made.
[12] There are two applications and two separate files.
One might be tempted to
the position, therefore, that, in terms of the steps that are set out in Items 26 to 31 of
the Third Schedule
to the High Court Rules, that the two applications should, in
essence, be regarded as one for cost purposes. I do not consider
that that is
appropriate in this case. My reason for that conclusion is that when one considers
the nature of the two statutory demand
which I have set out in [3] and [4] of this
judgment, it is immediately apparent that the debts claimed are based on quite
different
circumstances. In the case of the statutory demand against E.Capital
Limited the claim is a claim for the return of capital
contributed to the company. In
the case of Energy Plus (NZ) Limited the claim is essentially for either goods and
services supplied,
or for expenses incurred on behalf of the company. Each demand
therefore requires separate consideration. It will become evident
as I further discuss
the applications that the time records of counsel and the instructing solicitor for both
plaintiffs are what
one would expect in relation to a Band B designation for two
distinct and separate applications.
[13] Mr Powrie, a solicitor
for the plaintiff companies, has sworn an affidavit
which comments on the specific position at the time of incorporation of both
plaintiff
companies. The defendant and a Mr Innes were the joint applicants in forming the
company, Energy Plus (NZ) Limited. The
defendant and Mr Smyth were the joint
applicants in forming E.Capital Limited. The registered office of E.Capital Limited
was at
the defendant's home at 12 Farmer Street, Te Aroha until 22 December 2006
when it was changed to the accountant's offices. The address
for service of Energy
Plus (NZ) Limited was at 12 Farmer Street, Te Aroha until 22 December 2006 when
it also was changed to the
accountant's offices. That position is the reason for the
comment that I have made in the earlier paragraph in this judgment concerning
the
directors of the two plaintiff companies not being in a position of knowing with any
certainty whether service of the statutory demands in fact complied with s 387 of the
Companies Act 1993 at the time it was effected.
[14] A further problem for the plaintiffs occurred in that the directors who
were in
a position to give instructions relating to the statutory demands did not receive them
until approximately 13 December 2006.
They were therefore faced with the normal
tight timeframe for taking action where a statutory demand is served, that I have
earlier
referred to, but possibly with the reduced time available because of their late
notification of the document, coupled with the further
fact that all of this occurred
shortly before the Christmas vacation. Counsel was instructed. Strenuous efforts
were made in an effort
to have the statutory demands withdrawn. The contact was
made with the solicitor for the defendant, who had signed both demands on
the
defendant's behalf. That solicitor, initially, was not able or refused, to take the calls.
That state of affairs left the plaintiffs'
solicitors with no alternative but to file the
application. Fortunately, the defendant's solicitors did undertake that no application
would be made seeking the appointment of liquidators in respect of the plaintiff
companies pending the hearing of the applications
to set aside the demand. Why
they did not go one step further, and withdraw the demands at that time is not clear.
The demands, however,
were subsequently withdrawn on 18 February 2007 and
before the first call of the applications which were scheduled for 10:45am on
26 February 2007.
[15] When the applications were called on 26 February 2007 I made orders in
terms of counsel's joint memorandum.
What is significant is that, at the time of the
first call of the applications, it was appreciated that no substantive orders on
the
applications were required and that, as far as the specific applications were
concerned, the only issue was one of costs.
[16]
Counsel for the plaintiffs referred to the background which indicates that
there is a shareholder dispute between the parties to
this case. The object of that
examination was intended to show that there was no basis for the issue of the
statutory demands. I
do not find it helpful, in a situation where the statutory demand
has been withdrawn before the first call of the application, to
go on to look at that
position. It does involve a determination of precisely what the terms of an oral
shareholders' agreement were.
To go into that issue and resolve it satisfactorily
takes one straight into the merits of the application, which is the very matter
that I
have referred to in [7] of this judgment, as usually not being appropriate in this type
of situation. The reasons are many
but include the fact that to do so simply involves
the hearing of an application as if the statutory demand had not been withdrawn
with
a consequent complete waste of everybody's time.
[17] However, there are specific matters which, as counsel's submissions
were
made, that should be noted. In summary they are:
a) An opportunity was given to the defendant to withdraw the
statutory
demands before the applications were filed and he did not take it;
b) The method of service
adopted, combined with the fact that the
critical time for filing of the application to set aside the statutory
demands arose right on the commencement of the Christmas vacation,
may be viewed in one light as part
of an attempt to maximise the
embarrassment and inconvenience to the plaintiffs that the service of a
statutory demand would cause;
c) The invoices, the subject of the demand, had been met with a
settlement
proposal. I was invited to infer, therefore, that the
defendant's actions in proceeding on with the service of
the statutory
demands does evidence an abuse of process in that circumstance; and
d) Because the underlying dispute between the parties is really
a
shareholders' dispute, the issue of the invoices in the first place was
improper and evidenced, also,
an abuse of process.
[18] I have considered the above matters. I do not accept that they fall within the
category of conduct
which would justify indemnity costs as was examined by
Goddard J in Hedley & Ors v Kiwi Co-operative Dairies Ltd and which could
be said
to amount to actions which are covered by r 48C(4)(a) of the High Court Rules.
There was certainly quite irritating steps
taken on the defendant's part and a
discourtesy shown to the plaintiffs' legal advisers at the critical time prior to the
filing
of the application to set aside the statutory demand. Those matters, however,
do not reach the level required for an order for indemnity
costs.
[19] The bills actually rendered by the barrister are for $8,595 gross, which
includes a GST figure of $955 and, the instructing
solicitor $1,864.12, which
includes a GST figure of $207.12. In addition, further costs which, at a gross figure,
are estimated at
$3,375, with a GST content of $375, are claimed. Based on those
costs Ms Mills submitted the plaintiffs' claim of indemnity costs
in the sum of
$13,834.12. The bills are addressed on a joint basis to both plaintiffs. I was
informed that at least one of
the plaintiffs is registered for GST purposes and is
therefore entitled to a GST input credit of $1,537.12. The plaintiffs' net costs
for
legal services is therefore $12,297 plus disbursements.
[20] The breakdown of time which was supplied by the plaintiffs'
barrister and the
instructing solicitor, was not the subject of any challenge. It discloses time spent by
the barrister of seventeen
hours, a legal executive of some twelve minutes, and the
instructing solicitor of just under three hours and small attendances of
approximately
twelve minutes by a legal executive. That analysis shows that something in excess
of twenty hours has been spent in
the preparation of the documents. That does
provide some assistance to me. When I consider the documents themselves I am not
surprised
that no issue is taken with counsel's record of time taken. It does appear
reasonable. I remind myself that the allowance for preparation
that is made under a
Band B designation pursuant to Item 26 of the Third Schedule is 1.6 days for each
application. A twenty-hour
time span, I would accept and certainly counsel did not
suggest otherwise, represents on a chargeable basis something slightly in
excess of
three days. That analysis leads one to the conclusion that the allowance for both
applications for preparation in terms
of Item 26 under Band B is appropriate. I
repeat that I am reinforced in that view by own consideration of the documents and
the
fact that there was no specific challenge to the rate or the time spent in the
preparation of the documents made on the defendant's
behalf.
[21] The balance of the attendances of the plaintiffs' solicitor and counsel are joint
for both applications and do not
require allowance on an individual basis. They are
relatively straightforward and justify a Band B designation in terms of r 48B(2)(b)
of
the High Court Rules.
[22] Category 2 in terms of r 48(1) is the appropriate category for both
applications. They involve
matters of average complexity requiring counsel of skill
and experience considered average in the High Court.
[23] The result
of the above analysis broken down into the items specified in the
Third Schedule to the High Court Rules is as follows:
1.6 x 2 applications
Preparation and filing of
$5,120.00
Item 26
application and supporting x $1,600
affidavits
Memoranda
for mention hearing .4 x 1.6
Item 4.10 640.00
Preparation for hearing of opposed .5
x $1,600 800.00
Item 4.14
application in relation to costs
which, in this case has involved
two memoranda allow .5 of a day
_______
Total
$6560.00
=====
[24] The next question that should
briefly be commented upon is whether any
costs should be allowed for the hearing on the argument for costs itself. I do not
regard
the hearing as having been necessary. These matters routinely are resolved by
the filing of memoranda in support, opposition and
reply and there was certainly
nothing in this case that justified the additional time that was taken at the oral
hearing. That fact,
together with the fact that the conclusion I have reached is less
than half what was claimed by way of indemnity costs, leads me
to the position that I
should make no specific additional allowance for the attendance when the costs issue
was argued. It will
be appreciated that I have already made allowance for the
preparation of the memoranda in the analysis that is set out above.
Disbursements
[25] The plaintiffs are entitled to disbursements which should be fixed by the
Registrar in the normal way.
Order
[26]
I order that the defendant pay a total sum for the costs of both plaintiffs of
$6,560.00 which may be expressed as $3,280 in respect
of each application, plus
disbursements as fixed by the Registrar.
_____________________
JA Faire
Associate Judge
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