Finitor Limited v Logan HC Napier CIV-2010-441-646 [2011] NZHC 636 (30 May 2011)

Last Updated: 9 July 2011

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

_{CIV-2010-441-646}

UNDER the Companies Act 1993

IN THE MATTER OF an application pursuant to section 174

Companies Act 1993

BETWEEN FINITOR LIMITED First Applicant

AND TONY JOHN JOHNSON AND KATHERINE FRANCES JOHNSON Second Applicants

AND GERARD JOSEPH LOGAN AND STELLA PAMELA MCLEOD

First Respondents

AND GERARD JOSEPH LOGAN, STELLA PAMELA MCLEOD AND GRAHAM HUNTER THROP AS TRUSTEES OF THE EAST LINKS TRUST

Second Respondents

Counsel: J. Bates - Counsel for Applicants

M. MacFarlane - Counsel for Respondents

Judgment: 30 May 2011 at 11:00 AM

_{JUDGMENT AS TO COSTS OF ASSOCIATE JUDGE D.I. GENDALL}

This judgment was delivered by Associate Judge Gendall on 30 May 2011 at 11.00 am under r 11.5 of the High Court Rules.

Solicitors: Gresson, Grayson, Solicitors, PO Box 1045, Hastings

_{Sainsbury Logan & Williams, Solicitors, PO Box 41, Napier}

FINITOR LIMITED V GJ LOGAN AND SP MCLEOD HC NAP CIV-2010-441-646 30 May 2011

[1] This judgment deals with the question of costs on a discontinuance of an Application to Stay a Liquidation Proceeding which was seeking to place Finitor Limited (the Company) into liquidation. That liquidation application was brought by the respondents herein, Joseph Logan and Stella Pamela McLeod as first plaintiffs and Gerard Joseph Logan, Stella Pamela McLeod and Graham Hunter Throp as trustees of the East Links Trust as second plaintiffs, (together called the Logan Interests). The proceedings by the Logan Interests under s 174 Companies Act 1993 seeking liquidation of the company and certain other orders were filed in this Court on 13 October 2010.

[2] On 29 October 2010, the applicants on the stay application, the Company as first applicant and Tony John Johnson and Katherine Frances Johnson as second applicants (the Johnsons) responded. On that date they filed an Interlocutory Application Seeking Orders to Restrain Publication of Advertising of the Liquidation and for a Stay of the Proceeding. That Application was supported by a lengthy affidavit of Mr Tony Johnson also filed 29 October 2010.

[3] On 16 November 2010 the Logan Interests filed a Notice of Opposition to the

Stay Application together with an affidavit in support.

[4] Mr Tony Johnson then filed a seven page affidavit in reply on behalf of the company and the Johnsons.

[5] The Application for Stay was then set down for hearing, with a firm fixture being set for 21 April 2011.

[6] Then, on 23 March 2011 the company and the Johnsons filed a Notice of

Discontinuance of the Application for Stay.

[7] On 24 March 2011, leave to discontinue the Application for Stay was granted by this Court. Subsequently, it appeared that the Logan Interests as respondents were seeking costs with respect to the discontinued application and on 12 April 2011 directions were made for the sequential filing by counsel for the parties of memoranda on the costs issue.

[8] Counsel for the Logan Interests as respondents has now filed a memorandum on the costs question dated 18 April 2011 and a reply memorandum dated 3 May

2011. In addition, an affidavit of Mr Gerard Logan in support of the costs application was filed on 19 April 2011.

[9] In response, counsel for the Company and the Johnsons has filed a memorandum on costs dated 2 May 2011.

[10] From the memoranda it appears that the Logan Interests now seek costs on the discontinuance against the Johnsons alone (given the contention from Mr Macfarlane counsel for the Logans that any order for costs against the Company would be a barren one) on a Category 2B basis. The costs sought total $3,008.00.

[11] This is opposed by the Company and the Johnsons who contend that any costs award in favour of the Logans is unjustified here.

Counsels’ Arguments and My Decision

[12] The starting point on the present costs consideration must be r 15.23 High

Court Rules which provides:

15.23 Costs

Unless 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 and including the discontinuance.

[13] In the present case the Company and the Johnsons are effectively in the position of plaintiffs with regard to the discontinued stay application.

[14] The principles to be applied by the Court in considering costs on a discontinuance are set out in McGechan on Procedure at para HR15.23.01.

HR15.23.01 Principles

The following principles emerge from the cases, in particular the Court of Appeal’s review

in Kroma Colour Prints v Tridonicatco New Zealand Ltd [2008] NZCA 150; (2008) 18 PRNZ 973 at 975:

• The presumption contained in r 15.23 may be displaced if the circumstances make a different costs outcome just and equitable. Such was the position in Coromandel

Heritage Protection Society Inc v Thams Coromandel Defendant Company HC Hamilton

CIV-2007-419-1649, 11 February 2008. Scale costs were awarded to a plaintiff which

discontinued after the defendant Council eventually made proper disclosure relating to resource consent applications and associated litigation.

• The general costs discretion in r 14.1 can also override r 15.23.

• The Court will not speculate on the merits of a case it never heard; only in the exceptional case where the merits are clear would they influence the Court’s costs decision upon a discontinuance.
  
• However, the reasonableness of the stance of both/all parties has to be considered: Did the plaintiff act reasonably in commencing the proceeding, and the defendant in defending it? Thus, where the discontinuing plaintiff has achieved all it set out to achieve in issuing the proceeding, it is prima facie entitled to costs as successful party: Small v A Judicial Committee HC Christchurch CIV-2009-409-2622, 20 April 2010. Another

example is where the defendant acted reasonably in taking a step negating the point of the proceeding, and the plaintiff then discontinued. In that situation costs are likely to lie where they fall as in Olive Francis Retirement Home Ltd v Director-General of Health HC Auckland CIV-2005-404-1367, 13 July 2005.

[15] In the present case it appears that the Company owned and developed two residential properties. I understand these were effectively part of a joint venture arrangement between the Johnsons and the Logan Interests as equal shareholders in the Company.

[16] As I understand the position, both properties were sold by the Company subsequent to the present Stay Application being brought and as a result the application has now been discontinued.

[17] In the material before the Court it is clear there are major factual disputes between the parties over what happened around the joint venture of the properties, their sale and ultimate disposal of the proceeds. As I understand it, bank mortgages on the properties may have been only partially repaid on sale and the bank may well be looking to at least certain of the Logan Interests parties (if not others) for the shortfall under personal guarantees.

[18] Counsel for the Logan Interests contends that throughout the Company has clearly been insolvent and that in addition here there is effectively a deadlock between the parties.

[19] There does not seem to be any genuine dispute regarding this claim to insolvency on the part of the company, although counsel for the Johnsons goes on to contend that there was no “deadlock” here.

[20] The Johnsons’ position is that the s 174 Companies Act 1993 proceeding brought against the Company by the Logan Interests was entirely strategic, it lacked sense and was simply advanced as a means of pressuring the Johnsons into providing favourable exit terms for the Logan Interest shareholders without any ongoing liability on their part to the Company’s bankers or otherwise.

[21] I am unable to make any comment regarding these claims. There is no real evidence before the Court to support the contentions.

[22] A further argument advanced here on behalf of the Johnsons is that a Shareholders’ Agreement entered into between them and the Logan Interests contained binding dispute resolution clauses (dispute resolution regarding the agreement via mediation then arbitration) which have simply been ignored by the Logan Interests. In response, counsel for the Logan Interests takes issue with the interpretation of the relevant clauses in the Shareholders’ Agreement, he contends that none of this is mandatory and that in any event mediation attempts were refuted by the Johnsons. In addition, he argues that the just and equitable/deadlock-breaking proceeding which was commenced in this Court was entirely appropriate under all the circumstances.

[23] On all of this, counsel for the Company and the Johnsons has referred the

Court to the decision in McDonald & Ors v Wing & Ors, HC, Christchurch, CIV-

2009-409-2263, 22 March 2010, Associate Judge Doogue and drawn certain parallels. This contention, of course, is prefaced on the assumptions that any dispute resolution mechanism in the Shareholders’ Agreement between the parties here would apply, that it is binding and mandatory, and that it has not been thwarted by the actions of one party or the other. On a costs consideration such as the matter which is before me now, it goes without saying that it is difficult to resolve ultimate issue questions of fact such as this.

[24] Suffice to say that in this case, there is and has been for some time a major dispute between the various shareholding interests, a substantial breakdown in any relationship between them and a company which on its face appears to be significantly insolvent.

[25] Given these matters, I am satisfied that under the circumstances in this case the presumption in r 15.23 that a discontinuing party is to pay the other party’s costs has not been displaced and should apply. And effectively here it is the Johnsons who opposed the liquidation application, sought to stay it and then discontinued their application.

[26] An order is now made therefore that the second applicants, Tony John Johnson and Katherine Frances Johnson are to pay to the Logan Interests, the first and second respondents, costs on their discontinued stay application totalling

$3,008.00. No objection was taken by the Johnsons to that quantum of costs which was the 2B category costs sought by the Logan Interests. An order is now made accordingly.

‘Associate Judge D.I. Gendall’