Westpac New Zealand Limited v Jacob [2012] NZHC 729 (18 April 2012)

Last Updated: 8 May 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2010-404-005069 [2012] NZHC 729

IN THE MATTER OF The Insolvency Act 2006

BETWEEN WESTPAC NEW ZEALAND LIMITED Judgment Creditor

AND CHRISTOPHER THOMAS JACOB Judgment Debtor

/...Continued over

Hearing: 23 November 2010

Counsel: M V Robinson/E C Gellert for judgment creditor

P W J Paalvast in person

Judgment: 18 April 2012

_{JUDGMENT OF ASSOCIATE JUDGE ABBOTT}

In accordance with r 11.5 High Court Rules

I direct the Registrar to endorse this judgment with a delivery time of 3pm on 18 April 2012.

Solicitors:

M V Robinson/E C Gellert, Simpson Grierson, Private Bag 92518, Auckland

P W J Paalvast, C/- Official Assignee, Ministry of Economic Development, Private Bag 92513, Wellesley Street, Auckland 1141

WESTPAC NEW ZEALAND LIMITED V CHRISTOPHER THOMAS JACOB HC AK CIV 2010-404-005069 [18 April 2012]

CIV 2010-404-000336 [2012] NZHC 729

AND IN THE MATTER OF a proposal pursuant to Part 5 subpart 2 of the Insolvency Act 2006

BETWEEN CHRISTOPHER THOMAS JACOB Insolvent

AND WESTPAC NEW ZEALAND LIMITED, ASB BANK, PROPERTY FINANCE SECURITIES LIMITED, HSBC BANK & ORS

Creditors

[1] Westpac New Zealand Limited (Westpac) is a creditor in the estate in bankruptcy of Christopher Thomas Jacob. Prior to being adjudicated bankrupt, Mr Jacob put a proposal to his creditors. Peter William John Paalvast agreed to be the provisional trustee of the proposal, and chaired creditors’ meetings in which he excluded the debts of Westpac and another creditor when assessing whether the proposal had the statutory level of acceptance.

[2] Mr Paalvast applied to the High Court for approval of the proposal, on the basis that it had been accepted by the requisite statutory majorities. Westpac opposed that application. The application was dismissed on the twin grounds that the proposal had not been accepted by the requisite majority in value of creditors entitled to vote, and that there were other serious flaws with the application.

[3] Westpac seeks an award of indemnity costs against Mr Paalvast on the basis that in commencing and then continuing with the application for approval of the proposal, Mr Paalvast acted in a wilful disregard of known facts and clearly established law. It contends the application was utterly misconceived and led to the waste of a significant amount of time and money.

[4] Mr Paalvast did not respond to Westpac’s claim for costs. He has since been

adjudicated bankrupt.

Background

[5] Mr Paalvast had had a close involvement with Mr Jacob’s affairs before agreeing to appointment as trustee for the proposal. He appeared as Mr Jacob’s advocate in summary judgment proceedings commenced against Mr Jacob by Westpac in October 2009. He also purported to act for Mr Jacob when Westpac commenced bankruptcy proceedings against Mr Jacob almost a year later in September 2010 (Mr Paalvast appeared at a list hearing for the bankruptcy application on 2 November 2010 to seek adjournment of the application on Mr Jacob’s behalf).

[6] Mr Jacob filed his proposal on 22 January 2010. Mr Paalvast was named as provisional trustee. The proposal was served on Westpac on 2 February 2010 and stated that a creditors’ meeting was to be held on 26 February 2010. On 18 February

2010 Westpac sent its proof of debt in the sum of $436,593.11 to Mr Paalvast, together with its voting form indicating that it would vote against the proposal. No response was received from Mr Paalvast.

[7] The creditors’ meeting was adjourned to 31 August 2010 (for reasons that are unclear). Mr Paalvast did not give notice of the date for the adjourned meeting to all creditors (or, at least, did not produce proof of having done so). He certainly did not advise Westpac of the 31 August 2010 meeting, despite Westpac just a month or so beforehand having requested advice of the outcome of the February meeting. Mr Paalvast contended in his application for approval that the creditor at the August meeting approved the proposal.

[8] An application for approval of the proposal was filed on 1 November 2010. It was made (incorrectly) by Mr Jacob himself. Mr Paalvast failed to serve Westpac or its solicitors with the documents filed in the application. Westpac’s solicitors had to obtain these documents from the Court file directly.

[9] On 18 November 2010 an amended application for approval was filed.

Westpac’s solicitors were served with a copy of this amended application on 18

November 2010. On 22 November 2010 Westpac’s solicitors wrote to Mr Paalvast

stating that:

(a) The proposal had not been validly passed by the requisite majorities of the creditors pursuant to the Insolvency Act 2006 (the Act);

(b) The provisions of the Act had not been complied with; (c) Mr Paalvast had breached his obligations as trustee;

(d) The application for approval was vexatious and frivolous, and an abuse of court process; and

(e) Westpac might seek solicitor-client costs against him and his firm Morgan Freeman Penn (inter alia) in relation to steps taken in opposition to the application.

[10] Indemnity costs have previously been awarded against Mr Paalvast when acting as a trustee applying for approval of a proposal. In Re Liddle,1 Associate Judge Christiansen considered an application by the Bank of New Zealand (BNZ) for an order of indemnity costs on the basis that the insolvent, Mr Liddle, and his advisors/advocates acted vexatiously, improperly and unnecessarily in commencing

– and then continuing with – their application for approval of the proposal. The Judge rejected and dismissed the application for approval of the proposal on the basis that the trustee, the same Mr Paalvast, had no authority to reject BNZ’s vote against the proposal, which was sufficient to defeat the proposal obtaining the requisite majorities under the Act. Associate Judge Christiansen held Mr Paalvast and Mr Liddle jointly and severally liable for costs on an indemnity basis, in the sum of $12,238.00.

[11] The Judge made the following observations in respect to Mr Paalvast’s

conduct in that case:2

This is not a case of Mr Paalvast having misdirected himself. Ignoring his obligations as a provisional trustee he has proceeded to act as a lay advocate for the insolvent. It appears the services of Mr Paalvast and Morgan Freeman Penn were to be provided by way of commission payments to be deducted if the proposal had succeeded.

It is not the role of the provisional trustee to protect the insolvent’s interests. His role under the Act is a serious and important one. He must act neutrally, judicially and fairly. It is a solemn responsibility.

Costs against non-parties

[12] It is well established that the Court has jurisdiction to award costs against a person not party to a proceeding.3 This principle was first recognised in New Zealand

_{in Carborundum Abrasives Ltd v Bank of New Zealand (No. 2), where Tompkins J}

1 _{Re Liddle HC Auckland CIV-2009-404-5377, 25 June 2010.}

2 _{Re Liddle, at [12]-[13].}

3. Dymocks Franchise Systems (NSW) Pty Limited v Todd (No. 2) [2005] 1 NZLR 145 (PC) at [9]- [17]; Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC) at

763.

confirmed that the Court’s general discretion to determine matters relating to costs

under r 46(1) of the High Court Rules then in force (the equivalent of the current r

14.1) included the power to award costs against a person not a party to the proceedings. In the alternative, it was held that the Court has an inherent jurisdiction to award such costs.4

[13] The underlying rationale for awarding costs against non-parties is that it is wrong to allow someone to pursue litigation in the hope of gaining benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.5 Regarding the principles governing the proper exercise of discretion when ordering costs to be paid by a non-party, Tompkins J observed in Carborundum that: 6

For costs to be awarded against a non-party, that person must have some connection with, or involvement in, the proceedings. Such an order would be justified only where circumstances demonstrated that the connection or involvement was such as to justify the making of what I accept should be regarded as an exceptional order.

[14] In Dymocks Franchise Systems (NSW) Pty Limited v Todd (No. 2), the Privy Council endorsed the approach in Carborundum and held that while costs orders against non-parties are to be regarded as exceptional, “exceptional” in this context is to mean no more than “outside the ordinary run of cases”.7 The question will ultimately be whether in all the circumstances it is just to make the order.8

Principles for indemnity costs

[15] Westpac makes its application under r 14.6(4) of the High Court Rules, and particularly the following:

14.6 Increased costs and indemnity costs

_{(4) The court may order a party to pay indemnity costs if—}

4 _{Carborundum, at 7.}

5 _{Arklow Investments Ltd v MacLean HC Auckland CP49/97, 19 May 2000 at [21] per Fisher J.}

6 _{Carborundum, at 764.}

7 _{Dymocks Franchise Systems, at [25].}

8 Ibid.

(a) the party has acted vexatiously, frivolously, improperly, or unnecessarily in commencing, continuing, or defending a proceeding or a step in a proceeding; 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.

[16] The Court of Appeal has stated that awards for indemnity costs are exceptional and require exceptionally bad behaviour: Bradbury v Westpac Banking Corporation.9 The Supreme Court has said that misconduct must be “flagrant”: Prebble v Awatere Huata (No. 2).10

[17] New Zealand courts have adopted, as a guide, a categorisation of conduct that crosses the threshold that was (summarised in the judgment of the Federal Court of Australia in Colgate-Palmolive Co v Cussons Pty Ltd,11 adopted in Hedley v Kiwi Cooperative Dairies Ltd,12 and endorsed in Bradbury v Westpac Banking Corporation). Three of these categories are of particular relevance to the present case, namely:

(a) Evidence of particular misconduct that causes loss of time to the court and other parties;

(b) Commencing or continuing proceedings in wilful disregard of known facts or clearly established law; and

(c) Making allegations which ought never have been made (the “hopeless case” test).

[18] The party claiming indemnity costs bears the onus of persuading the court that the award is justified: Radfords Ltd v Advertising Works New Zealand Ltd.13

9 _{Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 (CA) at [28].}

10 _{Prebble v Awatere Huata (No. 2) [2005] 2 NZLR 467 (SC) at [6].}

11 _{Colgate-Palmolive Co v Cussons Pty Ltd [1993] FCA 536; (1993) 46 FCR 225 (FCA).}

12 _{Hedley v Kiwi Cooperative Dairies Ltd (2002) 16 PRNZ 694 (HC).}

13 Radfords Ltd v Advertising Works New Zealand Ltd HC Auckland CIV-2006-404-325, 25 April

2006.

[19] Indemnity costs are determined with reference to actual costs, but may be less than the actual costs if the court considers they were not reasonably incurred. In Bradbury v Westpac Banking Corporation the High Court found that costs are reasonably incurred if a reasonable observer would expect those costs for such litigation.14 They are calculated, not from the costs rules but from a “reasonable allocation of actual costs”, based on the appropriate time taken, the significance and complexity of the category of work and a median hourly rate reasonably applicable.15

Specific items of actual expenditure found unreasonable are excluded or reduced. That indicates that indemnity costs may be less than actual costs, if the court considers the latter to be unreasonably high.

The argument for indemnity costs

[20] Westpac submits that Mr Paalvast should be liable to pay indemnity costs. It claims that the application for approval of the proposal was entirely misconceived and should never have been filed. It made the following points, based on the evidence before the Court on the application, and the findings in the judgment dismissing the application.

Requisite majorities not reached

[21] Westpac contends that Mr Paalvast was aware that the requisite majorities had not been obtained to pass the proposal. Despite being aware that the application could not succeed, he persisted, causing the Court and Westpac to waste significant time and money.

[22] Further, it contends that Mr Paalvast improperly discounted Westpac’s proof of debt and its clear vote against the proposal. Mr Paalvast’s minutes from the creditors’ meeting incorrectly recorded that Westpac had abstained from voting. Mr Paalvast also improperly rejected the vote against the proposal made by another creditor, Property Finance Securities Limited (Property Finance). Together, Westpac

_{and Property Finance’s debts were in excess of 25% of Mr Jacob’s indebtedness. If}

14 _{Bradbury v Westpac Banking Corporation [2008] NZHC 751; (2008) 18 PRNZ 859 (HC) at [204]-[205].}

15 At [209].

Mr Paalvast had properly taken Westpac and Property Finance’s votes into account, he would have been obliged to reject the proposal as the requisite majorities under the Act had clearly not been met.

Process incurably deficient

[23] Westpac further submits that the proposal suffered from incurable procedural deficiencies. Firstly, it was filed by the debtor, Mr Jacob, when only his trustee, Mr Paalvast, had standing to make the application, pursuant to s 333(1) of the Act.

[24] Secondly, not all creditors were given appropriate notice of the creditors’ meetings or the outcome of the meeting, in accordance with s 330(1) of the Act and reg 36 of the Insolvency (Personal Insolvency) Regulations 2007 (Regulations). Westpac was not given notice of the second creditors’ meeting. Other creditors (Property Finance, ANZ National Bank and HSBC) were also not aware of the second creditors’ meeting.

[25] Thirdly, Westpac submits that it is implicit in the statutory requirements concerning creditors’ proposals that the detail of a proposal must be clear and understandable by the Court (so it can consider the application) and the creditors (to enable the creditors to consider and respond to the proposal). The proposal in this case was far from clear.

[26] Finally, Westpac contends that Mr Paalvast was advised of the concerns that the requisite majorities had not been obtained when its solicitors were served with the amended proposal. Westpac’s solicitors also warned both Mr Paalvast and Mr Jacob that they may be at risk of a claim of costs against them. In that context Westpac submits that this was not merely a “misguided” application.

[27] Westpac argues that this case is analogous to Re Liddle (see above, at [10]), noting that Mr Paalvast appeared at the list mentions on 2 November 2010 and later gave submissions in support of the application for approval, notwithstanding that he had appeared as Mr Jacob’s advocate at the summary judgment hearing. A

provisional trustee’s obligations to creditors and the court are serious and important.

It submits that Mr Paalvast failed to act neutrally, judicially and fairly.

[28] No response to Westpac’s memorandum has been received from Mr Paalvast.

Comments

[29] I am satisfied that this is a case “outside the ordinary run of cases” in which a costs order against Mr Paalvast is justified. Mr Paalvast clearly did not act neutrally, judicially or fairly in by taking his earlier role as Mr Jacob’s advocate into the meeting process, and propounding the alleged creditors’ resolution.

[30] I accept that this case is analogous to Re Liddle. Although there is nothing to suggest in this case that Mr Paalvast would gain financially if the proposal were to succeed (as was the case in Re Liddle), he nevertheless acted vexatiously, frivolously, improperly, or unnecessarily in commencing and continuing a proceeding, causing a loss of time to Westpac and the Court:

(a) The application for approval of the proposal was carried out against known facts and law.

(b) Mr Paalvast acted against legal advice that he could not and should not purport to reject Westpac’s (and Property Finance’s) votes and knew or ought to have known that the requisite majority had not been obtained to pass the proposal.

(c) Mr Paalvast had been warned that an application for approval could lead to the possibility of an order for costs being made against him, and that his responsibilities as provisional trustee were in conflict with his position as advocate for the insolvent.

[31] The fact that Mr Paalvast applied to the Court for approval constitutes a gross abuse of court processes.

[32] Furthermore, the application was made after costs were awarded against Mr Paalvast by court order in June 2010 for similar misconduct in Re Liddle. He has behaved in a persistently querulous and irresponsible manner.

[33] The above factors alone are sufficient to justify an order of indemnity costs. The Court does not need to further consider procedural defects in relation to the filing of the application, notice of creditors’ meetings and the clarity of the proposal. I accept that Westpac has met the high threshold for an order for indemnity costs.

[34] An award of costs can be made against a bankrupt – it does not fall within the category of a provable debt for the purposes of s 76 of the Insolvency Act 2006.16

[35] Westpac has provided sufficient detail to explain their charges totalling

$8,786 and there is nothing to suggest that any of the costs claimed are unreasonable. I make an order that Mr Paalvast is liable to pay Westpac’s solicitors’ costs in that

_{amount. These costs can be taken into account in his bankrupt estate.}

_{Associate Judge Abbott}

16 Rakich v Rakich HC Auckland CIV 2010-404-1654. 28 October 2010, at [3]; Tea Custodians

(Bluestone) Ltd v Barnett HC Wellington CIV 2011-485-17, 6 December 2011.