McWilliam Consulting Group v Keith Ussher Architecture Services Limited [2012] NZHC 33 (26 January 2012)

Last Updated: 1 February 2012

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-002007 [2012] NZHC 33

IN THE MATTER OF Section 290 of the Companies Act 1993

BETWEEN MCWILLIAM CONSULTING GROUP LIMITED

Applicant

AND KEITH USSHER ARCHITECTURE SERVICES LIMITED

Respondent

Hearing: 25 January 2012 (On the Papers) Counsel: B R Green for Applicant

A N Riches for Respondent

Judgment: 26 January 2012

_{JUDGMENT OF ASSOCIATE JUDGE MATTHEWS ON COSTS}

[1] On 2 December 2011 the Court set aside a statutory demand issued by the respondent to the applicant under s 290 of the Companies Act 1993. Costs were reserved. The applicant (McWilliam) has applied for an increase from normal scale costs. The respondent (Ussher) opposes the application, maintaining costs should lie where they fall.

[2] Rule 14.6 of the High Court Rules provides that the Court may order a party to pay increased costs in certain circumstances. Paragraph 3(d) provides that increased costs may be ordered if “some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of

_{costs should be predictable and expeditious”.}

MCWILLIAM CONSULTING GROUP LIMITED V KEITH USSHER ARCHITECTURE SERVICES LIMITED HC CHCH CIV-2011-409-002007 26 January 2012

[3] I refer first to Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd.[1] At paragraphs [37] and [38] Master Lang said:

[37] The issuing of a statutory demand is a very serious matter. As this Court has often pointed out, the recipient of a statutory demand must act quickly in order to avoid the statutory consequences of failing to comply with the demand: see for example Keystone Ridge Ltd v City Sales Ltd (Unreported, High Court, Auckland, M549/02, 9 July 2002, Heath J) and Isolare Investments Ltd v Fetherston (Unreported, High Court, Auckland, M1042/02, 17 October 2002, Master Lang).

[38] One of the most significant potential consequences is the establishment of jurisdiction to immediately place the company in liquidation. If a company wishes to avoid those consequences it must either persuade the issuer of the statutory demand to withdraw it or, alternatively, apply to the Court for an order setting the demand aside. The timeframe for the filing of such an application is very tight. There is no room for error, because the Court has no power to extend the time within which an application to set aside a statutory demand may be filed. In those circumstances, it is obviously encumbent on the issuer of a statutory demand to ensure that the demand is being issued on a proper basis. In particular, it must take care to ensure that the debt which is claimed in the statutory demand is not the subject of a genuine dispute: see First Light Construction Ltd v Glenn’s Glass & Aluminium Ltd (Unreported, High Court, Rotorua, M33/02, 15

August 2002, Master Lang).

[4] In Gateway Cargo Systems Ltd v Airborne Freight Ltd,[2] Master Faire stated, at paragraph [7]:

[7] In a judgment I delivered on 23 February 2004 International Air Training (NZ) Ltd v Rohlig New Zealand Limited (High Court, Auckland, CIV 2003-404-3464) I made the following observations in relation to statutory demands and the following originating applications:

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 r46 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 Counsel. 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.

The general principles to be applied in the exercise of that discretion are those contained in r47. The first general principle there stated is that the

party who fails with respect to a proceeding should pay the costs to the party who succeeds.

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 s287 of the Companies Act 1993. One of the persons authorised to apply to appoint a liquidator, by virtue of s241 of the Companies Act 1993, is a creditor of the company. A creditor, in terms of s241 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 noncompliance, in terms of s287, 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 s253.

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, 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.

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.

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.

[5] In the judgment issued on 2 December 2011 I identified four disputes between the parties in relation to liability for payment of the sum claimed in the statutory demand. In a letter written by the solicitors for McWilliam on 27 May

2011, four months before the issue of the statutory demand by Ussher on

20 September 2011, five grounds disputing liability for payment of the sum claimed were set out. Although not following precisely the analysis of grounds of dispute contained in paragraphs [25] to [28] inclusive of the judgment of 2 December, these grounds broadly covered the same issues.

[6] On 20 June 2011 the solicitors for Ussher wrote to the solicitors for

McWilliam setting out their client’s response to the issues raised in the letter of

27 May. After 23 paragraphs setting out their client’s position on the issues raised by McWilliam, Ussher’s solicitors expressed the view that unless the parties were able to meet and discuss the issues face to face, with counsel present, and negotiate a settlement, the matter was “destined to end in court”. McWilliam’s solicitors did not respond so on 9 August Ussher’s solicitors sent an email thus:

Unless we have a response, we need to take instructions from our clients on debt recovery proceedings.

[7] On 1 September McWilliam’s solicitors wrote, advising they were considering the level of loss their client had suffered and wished to confirm with the City Council certain issues which had previously been raised with Ussher’s solicitors.

[8] Ussher’s solicitors sent a letter on 20 September stating:

... the lack of a response and commitment by your client warrants the issue of a statutory demand, we enclose a copy of the statutory demand, which has been served at the company’s address for service today.

[9] I am satisfied:

(a) The letter of 27 May 2011 set out a number of substantial grounds for disputing liability to pay the debt.

(b) The lengthy response from the solicitors for Ussher dated 20 June fully set out Ussher’s position, but did not serve to demonstrate that no dispute in fact existed. In paragraph [24] of the judgment dated

2 December I pointed out that the role of the Court on an application to set aside a statutory demand is not to adjudicate upon any dispute that may exist but rather to determine whether or not such a dispute exists. Cross reference was made to paragraph [2], where I referred to Focus

_{International Export Ltd v Honeywell Ltd.}[3]

(c) By that point it had become entirely inappropriate to issue a statutory demand under s 289 of the Companies Act in relation to the disputed fees. The correct course was to proceed as the solicitor for Ussher predicated in an email of 9 August 2011:

... to take instructions from our clients on debt recovery proceedings.

On the basis of the authorities referred to in this judgment, and numerous other judgments of this Court referred to in McGechan on Procedure and company law texts, the appropriate procedure was to issue civil proceedings for recovery of a disputed sum.

[10] Accordingly I approach the question of costs on the basis that the procedure provided for under s 289 of the Companies Act was improperly invoked.

[11] The consequence for McWilliam was that it was required to take rapid steps to respond to the notice, as noted in Rembrandt Custodians Ltd v Pro-drill (Auck) at paragraphs [37] and [38]. In its memorandum counsel for Ussher noted that following service of the demand McWilliam did not issue an invitation to Ussher to withdraw the demand, prior to filing an application to set it aside. Given the clear written record of the issues in dispute and exigencies of the statutory timeframes, there is no force in this point.

[12] Counsel for Ussher then drew my attention to a letter written on 10 October, prior to the filing of a notice of opposition, without prejudice save as to costs. This letter was produced to me on this application. After purporting to justify the issuing of the demand the solicitors for Ussher advised they were prepared to withdraw the demand and refile proceedings in the District Court “to enable the matter to be settled in what may prove to be a more appropriate forum, on the basis that your client withdraws the application to set aside without issue as to costs”. Through its solicitors, McWilliam’s response was that its costs should be paid as it had incurred costs in preparing an originating application and affidavits in support and had met the expense of a court filing fee. On that basis it was not prepared to accept the offer. Consequently Ussher opposed the application and McWilliam was put to the

further expense of preparing and filing a very lengthy affidavit from a director of

McWilliam, and preparing for and presenting argument at a defended fixture.

[13] As I have recorded, I am satisfied that the notice under s 289 should not have been issued in the first place. Even if I am wrong in that conclusion, it should certainly have been withdrawn once the affidavit in reply by McWilliam’s director was served. It was manifestly apparent at that point that there were significant disputes between the parties. That would have avoided the costs of a defended hearing, and this subsequent application for an award of costs which is, itself, also defended.

[14] In my view McWilliam was entitled to reject the without prejudice offer in the terms in which it was made. In my view, for the reasons I have given, it was reasonable for it to expect to be paid costs and disbursements on the issue of the application to set aside the demand, given the clear disputes as to liability which had already been enunciated, the tight time limits within which these proceedings had to be prepared and filed, and the well-established principles condemning the issue of statutory demands where there is a genuine dispute over liability. I am not therefore prepared to take into account, in my overall exercise of discretion on costs, the without prejudice offer.

[15] In the ordinary course of events a proceeding of this nature would fall into Category 2, and be within band B in terms of Schedule 3 of the High Court Rules. McWilliam would receive $5,452. Counsel informed me that its actual costs exceed

$15,000, plus GST. Counsel submitted that costs should be awarded on a 2C basis.

[16] The assessment of the correct band to apply is based on r.14.5, with band B applying if a normal amount of time is considered reasonable and band C being applied if a comparatively large amount of time for a particular step is considered reasonable. In my opinion this is not the correct way in which to approach this application. Band C is appropriate where the time required for any step or steps in a particular proceeding exceeds the amount of time considered to be normal. Here the position is different. The proceeding should not have been required in the first place. Having been commenced, it would appear that, so far as it can be assessed, an

average or normal amount of time was taken for conducting it through to the close of the fixture. I think it preferable, therefore, to approach the matter on the basis that reasons exist which justify the Court in making an order for increased costs, despite the principle that the determination of costs should be predictable and expeditious (r.14.6(3)(d)).

[17] My attention was drawn to other cases where various increases have been applied to scale costs. Whilst consistency is generally a desirable aim, it is not readily achieved in situations where the facts governing the exercise of discretion vary widely. I prefer to approach the exercise of discretion on a principled basis, by reference to the facts of the case. These reasons justify a significant increase over scale costs:

(a) the notice was improperly issued : paragraphs [9] and [10];

(b) the applicant was put to immediate and significant expense responding to it within a tight timeframe : paragraph [11];

(c) at any time, therefore, the notice could and should have been withdrawn and costs paid, but this did not occur;

(d) there is no justification for the respondent having proceeded as it did at any point since May 2011.

[18] I award to the applicant costs in the sum of $10,904 being a 100 percent increase on costs assessed on a 2B basis, together with disbursements as claimed,

_$483.40.

J G Matthews

_{Associate Judge}

Solicitors:

Cameron & Company, PO Box 1985, Christchurch. [e-mail]

Saunders & Co, PO Box 18, Christchurch. [e-mail]

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[1] _{Rembrandt Custodians Ltd v Pro-drill (Auck) Ltd HC Auckland M337-IM03 13 June 2003.}

[2] Gateway Cargo Systems Ltd v Airborne Freight Ltd HC Auckland CIV-2003-404-7207,

16 March 2004.

[3] Focus International Export Ltd v Honeywell Ltd HC Auckland M134-IM99, 28 May 1999.