Krishnayya v Forest Owner Marketing Services Limited HC Napier CIV-2011-441-17 [2011] NZHC 1373 (17 August 2011)

[1] This is an application by the defendant pursuant to r 5.45 High Court Rules seeking an order for security for costs against the plaintiff.

[3] The plaintiff ’s substantive claim in this proceeding relates to a mature pine forestry development on a 177.59 hectares block of land (the land) he owns at Tarawera. This pine forest was the subject of a written Harvesting and Marketing Agreement (the Agreement) entered into with the defendant on 15 January 2009. Under the Agreement, the plaintiff appointed the defendant as exclusive manager and agent to harvest and market the pine forest which had matured on the land. This appointment was to continue until 14 January 2012 or until all marketable standing trees on the land agreed by the defendant had been harvested and marketed, whichever was the latest.

[4] In May 2009, the defendant commenced harvesting the plaintiff’s forest, it says in accordance with the plaintiff’s instructions. This included taking the necessary steps to complete harvesting such as preparing roads and skids, engaging sub-contractors and the like.

[5] Throughout this period of 2009, it is acknowledged that in response to repeated requests from the plaintiff, the defendant made a number of advance payments to the plaintiff totalling some $465,000 against income to be derived from the future sale of timber from the forest. The defendant says it made these payments gratuitously and simply to help the plaintiff who seemed to have some financial difficulties, as there was no right to call for advance payments under the Agreement.

[6] Then, on 29 January 2010 the plaintiff purported to cancel the Agreement citing a number of ―breaches‖ he alleged had been committed by the defendant. Broadly speaking, the plaintiff alleged that the defendant breached its obligations

pursuant to the Agreement in that it failed to employ the same degree of care and skill a reasonable manager with expertise in large-scale commercial forestry harvesting and marketing would have used in carrying out equivalent obligations.

[7] A brief summary of these claims made by the plaintiff, all of which are strenuously disputed by the defendant, is as follows:

(a) The defendant allegedly failed to adequately update its financial projections for the project or to report back to the plaintiff on changes in foreign exchange rates and log prices affecting profitability between November 2008 and May 2009. It is said this resulted in the plaintiff being deprived of the opportunity to suspend harvesting operations until log prices improved, which he maintains caused him to suffer losses of around $540,000 due to lower than expected returns on his logs. The defendant strenuously denies this allegation and contends that in fact during the period in question it provided several updated reports to the plaintiff. Also, the defendant notes that throughout all of 2009, the plaintiff was perfectly happy to make repeated requests for advance payments under the Agreement so presumably he was happy with progress at that time.

(b) The plaintiff says the defendant also failed to prepare an appropriate (or any) forest plan, resulting in a haphazard approach to the harvesting that caused him to suffer further losses due to inefficiencies in the harvesting process. The defendant steadfastly denies this allegation and says that a harvest plan was produced, it was used as the basis of the creation of the budget, and it was followed.

(c) The plaintiff also claims that the defendant approached the construction of roading on the land in an illogical and unnecessary manner, resulting in roading costs increasing beyond initial estimates. It is alleged that parts of the roading construction were completed to a

(d) The defendant, its employees or agents are said to have felled and improperly removed from the land native timber belonging to the plaintiff, being Matai valued at $7,500 and at least eight Rimu trees valued at $80,000. The defendant denies these allegations.

(e) The plaintiff also contends that the defendant took an inefficient approach to harvesting and failed to process or remove a number of pine trees within an appropriate period of time, resulting in a loss of value to the plaintiff that has yet to be particularised.

(f) Further, the defendant is alleged to have deposited and failed to remove slash from water courses in two areas on the property, in breach of the Resource Management Act 1991 and below the standard required of a reasonable and careful harvest manager. It is said that costs to clear the water courses, as yet unknown, will be incurred.

(g) The defendant it is claimed improperly excavated shingle from the plaintiff’s property and used the shingle for purposes unrelated to the plaintiff, resulting in a further loss of value to the plaintiff yet to be particularised. Again, the defendant denies this allegation.

[8] As a result of all of this, the plaintiff says he purported to cancel the Agreement on 29 January 2010, pursuant to both the terms of the Agreement and the Contractual Remedies Act 1979. The defendant denies that the plaintiff was entitled to cancel the Agreement.

[9] In addition, the defendant has made a counter-claim against the plaintiff for the sum of $91,742.04, which it says is owed by the plaintiff for unpaid work completed in accordance with the Agreement.

[10] The application before me was filed on 12 May 2011. It is supported by an affidavit of Mr Michael Peter Bartells (Mr Bartells) sworn 23 May 2011 and filed on

[11] The plaintiff filed a notice of opposition to the application on 19 May 2011 but, right up to the commencement of this week, no affidavit in support had been provided. It was not until 9 August 2011 that the plaintiff filed and served his supporting affidavit, an affidavit which was affirmed on that date.

[12] Initially at the hearing before me, Mr Castle for the defendant raised an objection to the late filing of the plaintiff’s affidavit, which he indicated significantly prejudiced the defendant. In particular, he noted that its late filing precluded the defendant providing any reply affidavit in time for that hearing on 11 August 2011. That is acknowledged.

[13] Notwithstanding this, I took the view that little prejudice had occurred here and, in order that this Court might have all the necessary information before it to properly consider the present application, I granted leave to the late filing of the plaintiff’s affidavit. In doing so, I noted, however, that the failure of the plaintiff to provide his supporting affidavit until the very last minute ultimately might well be a matter which could sound in costs.

[14] Turning now to the present application before me, r 5.45 of the High Court Rules deals with security for costs applications. It provides that a judge may order the giving of security if there is reason to believe that a plaintiff will be unable to pay the costs of the defendant, assuming the plaintiff is unsuccessful, and if the judge thinks that an order is ―just in all the circumstances‖. Rule 5.45 provides in part:

(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.

(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—

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[15] In A S McLachlan Ltd v MEL Network Ltd,[1] the Court of Appeal provided the following summary of the general approach to be taken in applications for security for costs. In doing so, the Court emphasised that the ordering of security is a discretionary exercise, not to be fettered by constructing principles, but that it is necessary to weigh up all the relevant factors in each particular case:

[13] ...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

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 check list 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 the defendants must also be weighed. They must be protected against being drawn into unjustified litigation, particularly where it is over-complicated and unnecessarily protracted.

[16] Rule 5.45 provides for a threshold requirement, which is to the effect that the plaintiff is impecunious. In the absence of a concession as to impecuniosity, the defendant is required to adduce credible evidence of surrounding circumstances from which it may reasonably be inferred that the plaintiff, if unsuccessful, will not be able to pay the defendant’s costs.

[17] In the present case, in the affidavit of Mr Bartells, the defendant has placed before the Court a number of significant concerns as to the financial position of the plaintiff. The fact alone that during the 2009 year the plaintiff made repeated requests of the defendant for advance payments under the Agreement (to which he was not entitled) and various payments totalling $465,000 against future income were made, in itself must raise some issues concerning the plaintiff ’s financial position.

[18] In this case, however, there is no concession by the plaintiff as to impecuniosity. Instead, in his affidavit sworn 9 August 2011, the plaintiff purports to set out certain details of his financial situation and, in response to the claim that he will not be able to meet the costs of this proceeding if unsuccessful, he deposes specifically:

[19] The plaintiff, in this affidavit, goes on to list his assets and liabilities as follows:

(a) The 173 hectare forestry block property, which he says has a land value alone of between $800,000 and $1 million.

(b) Carbon credits on the forest block from which the plaintiff claims he can expect to receive between $170,000 and $230,000 approximately.

(d) An unencumbered house property at 8 Tait Drive, Greenmeadows, Napier, which he says is worth approximately $250,000.

(f) A hospital property at Kennedy Road, Napier, which the plaintiff claims to be worth an estimated $7 million ―although I am trying to sell it at that price and offers I have received have been significantly lower than that‖. (But, as to the value of this particular property, see [22] below.)

(h) A residential property at 516 Kennedy Road, Napier (which the plaintiff states is currently rented for commercial purposes returning

(i) A residential site at 156 York Avenue, Greenmeadows, Napier, on which there are three houses. The plaintiff estimates the value of this property at approximately $650,000.

[20] As to liabilities, although it is somewhat difficult to identify all of these from

the plaintiff’s affidavit, as best I can tell his disclosed liabilities appear to be:

(a) A mortgage over his home property at Poraiti, Napier, under which the plaintiff says he owes $830,000.

(b) A mortgage from the Public Trust over the Kennedy Road, Napier hospital property, under which the plaintiff says he owes $2.9 million.

(d) A mortgage over the three houses at 156 York Avenue, Greenmeadows, Napier, which the plaintiff says secures $560,000.

[21] At the outset, I need to record that none of the property values noted above and no asset and liability information contained in the plaintiff’s affidavit, although clearly affirmed by him, were in any way verified by independent evidence. In particular, no government or registered valuation details for the named properties or mortgage statements for liabilities were provided.

[22] And, as to the plaintiff’s claim that his substantial asset, the hospital property at Kennedy Road, Napier, had a value estimated at $7 million, before me Mr Castle for the defendant noted Mr Bartells’ uncontradicted evidence at [5] and [7] of his affidavit that:

[5] ...Dr Krishnayya told me that he was in discussion with Southern Cross Medical Society which he hoped would purchase the hospital for what he told me was approximately $7 million.

[7] At a later time of our ongoing discussions, Dr Krishnayya told me that unfortunately the offer that had come in from Southern Cross was significantly less than what he was looking for.

[23] On this, before me Mr Castle indicated that he understood from Mr Bartells that the Southern Cross offer for the hospital, which had not been operating as such

for some time, was at a maximum of $3.5 million. No contrary view or exception to this was expressed before me by Mr Krebs for the plaintiff.

[24] Notwithstanding all these matters, from the plaintiff’s own evidence, as best I

can tell his claimed assets, liabilities and net equity would total more or less:

Greenmeadows, Napier with three houses	650,000
Shares	200,000
Total	$8,000,000

(b)	Liabilities Mortgage over property at Poraiti, Napier	$ 830,000
	Mortgage over Kennedy Road, Napier hospital site	2,900,000
	Mortgage over 514 Kennedy Road	400,000
	Mortgage over 156 York Avenue, Greenmeadows,
	Napier	560,000
	Total	$4,690,000

[25] On the strength of these assertions by the plaintiff as to the value of his assets and liabilities, there is therefore the net equity in these assets shown above of some

$3,310,000. On that basis, at the very least it would seem the plaintiff should be able to raise sufficient funds or sell assets to meet a costs award against him if he is unsuccessful in this litigation.

[26] That is not the end of the matter, however. Clearly the plaintiff here has substantial indebtedness by way of mortgage liabilities, which on his own acknowledgement totalled $4,690,000. An issue must clearly arise here concerning servicing of those mortgages.

[27] On this aspect, the plaintiff’s 9 August 2011 affidavit is significantly lacking in information.

[28] At paragraph 8 of Mr Bartells’ 19 May 2011 affidavit, he deposes to his understanding after discussion with the plaintiff that he had monthly interest payments on his mortgages in the vicinity of $30,000. These payments alone would total $360,000 on an annual basis.

(a) Paragraph 6 – ―The income stream from my forestry harvesting operation has, since I have retained a new forestry harvesting consultant, been steady and has allowed me to advance my financial position.‖

(b) Paragraph 7(2) and (3). The plaintiff deposes to receiving total rent for these properties, being the residential apartment on The Terrace, Wellington and the house at 8 Tait Drive, Greenmeadows, Napier, of

$645 per week. No detail is given of rates, insurance, maintenance and collection costs, which are likely to be in the total vicinity of $120 per week, giving a net income from these properties of $525 per week or $27,300 per annum.

(c) The plaintiff states the Kennedy Road, Napier hospital property provides annual rental of $120,000 per annum from a group of

doctors, and $110,000 per annum from a building establishment area. Again, no detail is given as to whether rates, insurance, maintenance and collection costs should properly be deducted from these figures. At this point, I make no such deduction.

(d) At paragraph 7(6) of his affidavit, according to the plaintiff, the property at 514 Kennedy Road, Napier has annual lease rental of

$10,000 per annum remains). The plaintiff indicates that a second dwelling on this property is rented at $300 per week, which might return net $250 per week or $12,500 per annum.

516 Kennedy Road, Napier is currently rented for commercial purposes, returning $320 per week. Again, after a small deduction for outgoings, this would amount to some $15,000 per annum as income.

(f) In paragraph 7(8) of his affidavit, the plaintiff indicates the three houses at 156 York Avenue, Greenmeadows, Napier return $920 per week, and again after making a deduction for rates, insurance, maintenance and other outgoings of $250 per week, this leaves a net income per week of $670 or $34,800 per annum.

(g) Next, at paragraph 7(10) of his affidavit, the plaintiff claims that his share portfolio provides dividend income of between $9,000 and

[30] Totalling these net income figures, given the information provided by the plaintiff in his affidavit, reaches a total net rental and dividend income per year of

$347,600. This is as against uncontested annual mortgage payments noted above at [28] of $360,000. This leaves a shortfall of $12,400 per annum. This is notwithstanding the claim made at paragraph 7(9) of the plaintiff’s affidavit that:

I have geared the [rental] properties with the intention that the rental income from them will completely cover all outgoings in relation to the properties

and leave at least $10,000 income from each. Although not all of the properties have reached that stage most have.

[31] In the plaintiff’s affidavit, he makes no other mention of additional income he may have. At paragraph 19 of his affidavit, he indicates that he has spent the last two and a half months living with his adult children in Sydney and there is no suggestion that he is employed or earns any other income.

[32] If, as I have noted above, the plaintiff’s mortgage payments alone exceed rental and dividend income he receives (and making no allowance for personal living costs), the plaintiff, although purporting to be asset-rich, would potentially have serious cash-flow problems. This is properly raised here by the defendant and must be a matter of concern. As I see it, this is also reinforced by the undisputed evidence before me that during the 2009 year the plaintiff made numerous requests of the defendant for advance income payments under the Agreement, resulting in some

$465,000 in payments being made to him. These were made, according to Mr Bartells in his affidavit, because of the precarious financial position the plaintiff found himself in.

[33] Weighing up all these matters, and given the sketchy, disjointed and unsubstantiated evidence as to his financial position provided by the plaintiff at the very last minute before the hearing of the present application, in my view the defendant has done enough here to show that the threshold requirement of impecuniosity on the part of the plaintiff has been established.

[34] The next factor to be considered in applications of this type relates to the merits of the plaintiff’s claim against the defendant. Here, both parties contend that they have a strong claim against the other.

plaintiff’s claim, it must be acknowledged in cases of this type that there is a very

real limit as to how far such an inquiry can be made, particularly at this early stage of the proceeding – Meates v Taylor.[2]

[36] Here, the plaintiff ’s claims against the defendant as set out at [7] above are substantial and serious. In this case, however, there are substantial evidential disputes between the parties on virtually all matters which have occurred in relation to both harvesting and marketing of the plaintiff’s forest under the Agreement. That said, I say nothing more on this merits point. No reasonable conclusion on merits can be reached here.

[37] The next issue for consideration is whether the plaintiff’s impecuniosity may

[38] There is nothing before the Court to suggest in any realistic way that any conduct of the defendant in this case has caused or contributed to the impecuniosity of the plaintiff. Essentially, the plaintiff does not claim this to be the case. This aspect does not assist the plaintiff in this case.

[39] Again, delay in bringing the present application is not claimed by the plaintiff here and I am satisfied there was no undue delay on the part of the defendant in doing so.

[40] There is no suggestion that any element of public interest arises in this case. This is a simple dispute between the parties concerning the Agreement and alleged

[41] Finally, in considering applications such as the present one, the Court, in exercising its discretion, is required to balance the interests of the plaintiff and the defendant – A S McLachlan Ltd v MEL Network Ltd.

[42] It is, of course, relevant if an order for substantial security made at this point in the current proceeding might be likely to result in the plaintiff being prevented from pursuing his claim against the defendant. As the authorities note, however, this must be balanced against the interests of the defendant who is to be protected against being drawn into unjustified litigation at considerable expense, with little or no likelihood of recovering costs in the event that the defendant is successful – Orakei

[43] In the present case, and given particularly the plaintiff’s claim to have a number of substantial unencumbered properties (which might be available by way of security at least, even if the plaintiff experienced difficulty in providing funds for security in cash), I conclude that the proper balancing of the interests of the parties must fall on the side of the defendant. The defendant should not be out of pocket because of what may turn out to be the relative impecuniosity of the plaintiff in facing the present claim.

[44] I conclude therefore that the defendant’s present application for security for

[45] As to the quantum of security sought, Mr Castle for the defendant sought a security sum of $60,000. He stated that this was appropriate given that this proceeding is to be the subject of a five day trial.

[46] Mr Krebs for the plaintiff agreed that a trial of up to five days was appropriate here, but he contested that security in the amount of $60,000 was appropriate.

[47] As to the amount of security to be ordered, McGechan on Procedure states:[4]

The amount of security is equally in the Court’s discretion. It is not necessarily to be fixed by reference to likely costs awards. Rather, it is to be what the Court thinks fit in all the circumstances: A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA).

(b) Nature of the proceeding, including the complexity and novelty of the issues, and therefore the likely extent of interlocutories;

Insofar as past awards of security are a legitimate guide, they generally represent some discount on the likely award of costs as calculated under Schedule 3.

[48] Taking all these factors into account, in my view security for costs in this case should be fixed against a probable award of category 2B scale costs to the defendant if successful in the vicinity of at least $50,000.

[49] On the basis that some discount on the likely award of costs is usually provided in cases of this type, in my view the appropriate amount for security here is

$40,000. Although this discount from actual category 2B costs is not major, as I see it, under all the circumstances here, it is appropriate.

[51] An order is made now that the plaintiff, within 20 working days of today, is to give security for costs to the defendant in the total sum of $40,000 by paying this sum into Court or by giving, to the satisfaction of the Registrar, proper security for this amount. (In this regard, a proper first mortgage security over one of the plaintiff’s unencumbered freehold properties may well be appropriate here.)

[52] A further order is now made staying the present proceeding until such time as security for costs as outlined above has been properly given by the plaintiff.

[53] As to the costs on the present application, Mr Krebs for the plaintiff requested that these be reserved as no real submissions on costs were made to me at the hearing of this matter.

[54] Costs are reserved and I direct that the parties are to file memoranda on the issue of costs as follows:

(a) The defendant, who has succeeded and is entitled to an order for costs, is to file and serve its memorandum as to costs within

(b) The plaintiff is then to have a further 15 working days to file and serve his memorandum on costs.

(c) Those memoranda are then to be referred to me and, in the absence of either party indicating they wish to be heard on the issue, I will decide the question of costs on the present application on the basis of the

[1] A S McLachlan Ltd v MEL Network Ltd [2002] NZCA 215; (2002) 16 PRNZ 747 (CA).

[3] Orakei Technologies Ltd v Geostel Vision Ltd HC Hamilton CIV-2005-419-809, 13 December 2007.

[4] Andrew Beck and others McGechan on Procedure (looseleaf ed, Brookers, updated to 5 July

High Court of New Zealand Decisions

Krishnayya v Forest Owner Marketing Services Limited HC Napier CIV-2011-441-17 [2011] NZHC 1373 (17 August 2011)