Adams v Sun [2014] NZHC 1395 (20 June 2014)

High Court of New Zealand

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Adams v Sun [2014] NZHC 1395 (20 June 2014)

Last Updated: 30 June 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

COMMERCIAL LIST

CIV 2013-404-4168 [2014] NZHC 1395

UNDER	THE COMPANIES ACT 1993
IN THE MATTER OF	STARPLUS HOMES LTD (IN LIQUIDATION)
BETWEEN	SHAUN NEIL ADAMS AND JOHN ROBERT BUCHANAN (AS LIQUIDATORS OF STARPLUS HOMES LTD (IN LIQUIDATION)) Applicants
AND	DAVID WEI SUN First Respondent MAGSONS HARDWARE LTD Second Respondent HAMILTON HARDWARE RETAIL LTD Third Respondent UNITED TIMBER MERCHANTS LTD Fourth Respondent DALE KING BUILDING SUPPLIES LTD Fifth Respondent RD 1 LTD Sixth Respondent

Hearing:	13 June 2014 (by audio visual link)
Counsel:	No appearance by or on behalf of Applicants N W Ingram QC for First Respondent M D Arthur for Second Respondent K A Lomas for Third and Sixth Respondents P R Cogswell for Fourth Respondent No appearance by or on behalf of Fifth Respondent
Judgment:	20 June 2014

_{JUDGMENT (NO. 4) OF HEATH J}

This judgment was delivered by me on 20 June 2014 at 4.00pm pursuant to Rule 11.5 of the High

Court Rules

_{Registrar/Deputy Registrar}

RE STARPLUS HOMES LTD (IN LIQUIDATION)) v SUN [2014] NZHC 1395 [20 June 2014]

Questions of costs

[1] I am required to determine the incidence of costs as among competing claimants to money that was paid into Court (the fund). The fund originated from the proceeds of sales conducted by a first mortgagee.¹ The questions arise out of two judgments that I gave on 6 May 2014, on an application for directions made by the liquidators of Starplus Homes Ltd (in liquidation) (Starplus).

[2] In my judgments of 6 May 2014, I decided which claimants were entitled to participate in the fund² and whether the liquidators of Starplus were entitled to indemnity costs out of it.³ Subsequently, the basis on which the successful claimants were to participate was agreed among the parties, and confirmed by provisional declarations (subject only to costs) recorded in a third judgment, delivered on 13

_{May 2014.}⁴ _{The incidence of costs falls to be determined in light of those}

decisions.⁵

Background

[3] Starplus was engaged in property development. Before it was put into liquidation on 22 April 2013, its primary lender, ASAP Finance Ltd (ASAP), held first mortgages over a large number of properties that it owned. They fell into default. ASAP conducted mortgagee sales of each to recover moneys owing to it. By the time the last two properties (731 and 741 Redoubt Road, Manukau) came to be sold, it was clear that a surplus would exist that could be applied towards other debts.

[4] ASAP applied to this Court⁶ for an order authorising the sales of the two Redoubt Road properties and requiring their proceeds, together with any other surplus money, to be paid into Court to await a judicial decision about distribution

_{among competing claimants. Brown J made an order to that effect. Following the}

¹ _{See para [3] below.}

² _{Re Starplus Homes Ltd (in liq) [2014] NZHC 912.}

³ _{Re Starplus Homes Ltd (in liq) (No. 2) [2014] NZHC 913.}

⁴ _{Re Starplus Homes Ltd (in liq) (No. 3) [2014] NZHC 982.}

⁵ _{Ibid, at para [4]. See also, Re Starplus Homes Ltd (in liq) (No. 2) [2014] NZHC 913 at para [27].}

⁶ Under s 200 of the Property Law Act 2007.

sale of those properties, a sum of $1,747,229.28 (exclusive of interest) was paid to the Registrar.

[5] Because it had been paid in full, ASAP had no desire to incur further costs to promote its application. As a result, on 9 September 2013, the liquidators filed a discrete application for directions. That superseded ASAP’s proceeding. On 10

December 2013, by consent, Lang J granted leave for the ASAP proceeding to be discontinued and directed that the money paid into Court be held pending determination of the liquidators’ application.

[6] I heard the liquidators’ application on 24 and 25 February 2014. There were five competing claimants. One, Mr Sun, held a second registered mortgage over the two Redoubt Road properties. The other four were building supply companies that had contracted to sell materials to Starplus on credit. Each alleged that it had an agreement to mortgage over various properties. Some were protected by registered caveats.

[7] When the application was heard, it was common ground that the following sums (exclusive of interest and costs) were owed to those claimants who sought to participate in the fund:

(a) Mr Sun $920,000

_{(b) Magsons Hardware Ltd (Magsons) $4,236,964.90}

(c)	Hamilton Hardware Retail Ltd
	(Hamilton Hardware)	$1,387,508.74
(d)	United Timber Merchants Ltd7 (United Timber)	$88,947.44
(e)	RD 1 Ltd (RD 1)	$17,127.59

⁷ At the time the transaction was initially entered into this company was known as Akarana

Timber Ltd. It’s name was changed on 17 May 2013.

TOTAL $6,650,548.67

The liquidators’ application

[8] In determining questions of entitlement, it was necessary for me to consider the validity of the respective security interests claimed, the priority to be afforded to each creditor with a valid claim and whether the equitable doctrine of marshalling⁸ applied. I found that:

(a) Mr Sun had a valid registered second mortgage against the two

Redoubt Road properties.

(b) Magsons, Hamilton Hardware, United Timber and RD 1 each held valid equitable security interests in respect of a number of properties, under agreements to mortgage.

(c) The claims made by Magsons, Hamilton Hardware and RD 1 had priority over those of United Timber.⁹

(d) On the application of equitable principles of marshalling, the outcome of ASAP’s choice of the order in which to sell all of the properties over which it had a first mortgage had arbitrarily affected the remaining secured creditors, such as to require the doctrine of marshalling to be invoked.¹⁰

[9] The liquidators incurred costs of $37,349, in relation to their proceeding. I took the view that a deduction of one-third should be made to represent the benefit of work undertaken for preferential and unsecured creditors, so that those classes of creditors were not inappropriately subsidised by secured creditors that were entitled

_{to participate in the fund. On that basis, a sum equating to $24,650.34 was awarded}

8. The relevant principles are discussed in Re Starplus Homes Ltd (in liq) [2014] NZHC 912 at paras [75]–[80].

⁹ _{As to priorities, see Re Starplus Homes Ltd (in liq) [2014] NZHC 912 at paras [64]–[74].}

¹⁰ Re Starplus Homes Ltd (in liq) [2014] NZHC 912 at paras [83]–[92].

to the liquidators, together with agreed disbursements, to be paid out of the fund in priority to the successful claimants.¹¹

[10] I am now told that the amount payable to the liquidators will need to be increased because hearing fees charged to the liquidators were not taken into account. The parties agree that those distributions should be paid out of the fund, in the same way. That adjustment to the sum payable to the liquidators has the consequence of reducing the balance otherwise available to the successful claimants, albeit in a relatively minor way.

[11] Following delivery of my first judgment, the successful parties (Mr Sun, Magsons, Hamilton Hardware and RD 1) agreed that the costs that I had awarded to the liquidators could be paid out of Court and that the balance of the fund would be held in Court pending resolution of remaining question of costs. Subject to the outcome of the present applications, and the increased amount of disbursements to be paid to the liquidators, the amounts payable to each successful claimant are

agreed to be:¹²

(a) $331,430.69 to Mr Sun

(b) $1,389,939.77 to Magsons, Hamilton Hardware and RD 1 (the successful building supply companies).¹³

Analysis

(a) The issues

[12] There are two classes of costs in issue:

(a) What costs should be ordered, as among the competing claimants to the fund?

¹¹ _{Re Starplus Homes Ltd (in liq) (No. 2) [2014] NZHC 913 at paras [22]–[25].}

¹² Re Starplus Homes Ltd (in liq) (No. 3) [2014] NZHC 982 at para [4]. The priorities as among Magsons, Hamilton Hardware and RD 1 have been resolved by agreement. The interest accumulated on the fund while held in Court is to be paid to Mr Sun and the successful building supply companies in the same proportion that the amounts payable bear to each other.

¹³ These three creditors have agreed their respective priorities as among themselves and do not require any order in that regard.

(b) Which party (or parties) should bear the burden of depletion of the fund, as a result of the costs that have been awarded in favour of the liquidators?

[13] I am grateful to all counsel for their helpful and comprehensive submissions. Without intending any disrespect, I propose to set out my conclusions (and the reasons for them) without specific reference to the submissions.

(b) Legal principles

[14] The starting point is that all questions of costs “are at the discretion of the Court”.¹⁴ While, for the purposes of efficiency and predictability, a number of rules have been developed to deal with specific circumstances,¹⁵ they remain subject to that overriding discretion.¹⁶ Having said that, the specific rules have a presumptive effect. In Manukau Golf Club Inc v Shoye Venture Ltd,¹⁷ the Supreme Court held that reasons must be given for any departure from the general rule.

[15] A number of general principles are set out in r 14.2 of the High Court Rules. An award of costs must reflect the complexity and significance of the proceeding.¹⁸

Costs should usually be assessed by application of an appropriate daily recovery rate, normally two-thirds of the daily rate considered reasonable in relation to the proceeding, for each step reasonably required.¹⁹

[16] There are three categories of proceedings. They reflect questions of complexity and significance. Category 1 involves proceedings “of a straightforward nature”; Category 2 concerns proceedings “of average complexity” and Category 3 covers proceedings that “because of their complexity or significance require counsel

_{to have special skill and experience in the High Court”.}²⁰

¹⁴ _{High Court Rules, r 14.1(1).}

¹⁵ _{Ibid, rr 14.2–14.10.}

¹⁶ _{Ibid, r 14.1(2).}

17. Manukau Golf Club Inc v Shoye Venture Ltd [2013] 1 NZLR 285 (SC) at paras [7] and [16]. See also Glaister v Amalgamated Dairies Ltd [2004] 2 NZLR 606 (CA) at para [22].

¹⁸ _{High Court Rules, r 14.2(b).}

¹⁹ _{Ibid, r 14.2(c) and (d).}

²⁰ Ibid, r 14.3(1).

[17] The determination of “reasonable time” to take steps in the proceeding is governed by rr 14.4 and 14.5, in conjunction with Schedule 3, of the High Court Rules. For present purposes, Band B applies “if a normal amount of time is considered reasonable”; Band C is applicable “if a comparatively large amount of time for the particular step is considered reasonable”.²¹ Separate provision is made

for what are called “increased”²² and “indemnity”²³ costs.

[18] In Bradbury v Westpac Banking Corporation,²⁴ the Court of Appeal said: [27] The distinction among our three broad approaches – standard

scale costs, increased costs and indemnity costs – may be summarised broadly:

(a) standard scale applies by default where cause is not shown to depart from it;

(b) increased costs may be ordered where there is failure by the paying party to act reasonably; and

(c) indemnity costs may be ordered where that party has behaved either badly or very unreasonably.

[19] As it has relevance to the way in which I shall deal with questions of costs, I

set out relevant parts of the rule that deals with increased costs:²⁵

14.6 Increased costs and indemnity costs

...

(3) The court may order a party to pay increased costs if—

...

(b) the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in it by—

...

(ii) taking or pursuing an unnecessary step or an argument that lacks merit; or

²¹ _{Ibid, r 14.5(2).}

²² _{High Court Rules, r 14.6(3). See also para [19] below.}

²³ _{Ibid, r 14.6(4).}

²⁴ _{Bradbury v Westpac Banking Corporation [2009] 3 NZLR 400 (CA) at para [27].}

²⁵ High Court Rules, r 14.6(3).

(iii) failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument; or

....

(c) Costs as among the competing claimants

[20] The successful building supply companies seek costs (primarily) against Mr Sun but also against United Timber. While Mr Sun, was successful in demonstrating an entitlement to a significant portion of the fund,²⁶ it is said that his conduct over- complicated the proceeding, thereby throwing additional costs on other parties. United Timber was unsuccessful in its claim to participate in the fund, on the basis that I found its debt to have a lower priority than those payable to the successful building company.

[21] When dealing with the liquidators’ claim for indemnity costs to be paid out of the fund, I referred to r 14.6(4)(c).²⁷ That rule enables costs to be paid from a fund where the party claiming costs is a necessary party to the proceeding and has acted reasonably. Rule 14.6(4)(c) was designed to deal with a common fund proceeding of the type that Kekewich J identified in the first category of cases, in Re Buckton:²⁸

In a large proportion of the summonses adjourned into Court for argument the applicants are trustees of a will or settlement who ask the Court to construe the instrument of trust for their guidance, and in order to ascertain the interests of the beneficiaries, or else ask to have some question determined which has arisen in the administration of the trusts. In cases of this character I regard the costs of all parties as necessarily incurred for the benefit of the estate, and direct them to be taxed as between solicitor and client and paid out of the estate.

[22] For the purposes of the present application, I must examine further the categories identified in Buckton. They were considered (authoritatively) more

_{recently, by the Court of Appeal of England and Wales, in McDonald v Horn.}²⁹ _The

²⁶ _{See para [11](a) above.}

²⁷ _{Rule 14.6(4)(c) is set out in Re Starplus Homes Ltd (No. 2) [2014] NZHC 913 at para [15].}

²⁸ Re Buckton [1907] 2 Ch 406 (ChD) at 414. See also Waitara Leaseholders Association Inc v New Plymouth District Council HC New Plymouth CIV 2004-443-162, 20 December 2005 at paras [13] and [16].

²⁹ McDonald v Horn [1995] 1 All ER 961 (CA).

various options were summarised in the principal judgment, given by

Hoffmann LJ:³⁰

... The classic statement of the principles upon which the court acts is by Kekewich J, who was acknowledged in his time as a master of Chancery procedure, in Re Buckton, Buckton v Buckton [1907] 2 Ch

406 at 413–415. While warning that it was 'well nigh impossible to lay down any general rules which can be depended on to meet the ever varying circumstances of particular cases', he said that trust litigation could be divided into three categories. First, proceedings brought by trustees to have the guidance of the court as to the construction of the trust instrument or some question arising in the course of administration. In such cases, the costs of all parties are usually treated as necessarily incurred for the benefit of the estate and ordered to be paid out of the fund. Secondly, there are cases in which the application is made by someone other than the trustees, but raises the same kind of point as in the first class and would have justified an application by the trustees. This second class is treated in the same way as the first. Thirdly, there are cases in which a beneficiary is making a hostile claim against the trustees or another beneficiary. This is treated in the same way as ordinary common law litigation and costs usually follow the event. Kekewich J acknowledged that it is often difficult to discriminate between cases of the second and third classes, but said ([1907] 2 Ch 406 at 415):

... when once convinced that I am determining rights between adverse litigants I apply the rule which ought, I think, to be rigidly enforced in adverse litigation, and order the unsuccessful party to pay the costs.

I should add that it is also sometimes difficult to discriminate between the first and third categories. Not all proceedings commenced by trustees for the determination of some question affecting entitlement to the fund are within the first category. Particularly in a case which does not involve the construction of a trust instrument but rather a dispute over the beneficial ownership of the trust property, the proceedings may be more akin to an interpleader.

(Emphasis added)

[23] The object of the liquidators’ proceeding was to enable competing claimants to make submissions to the Court on questions of validity and priority. Later, it became apparent that the doctrine of marshalling was likely to come into play. At

_{that stage, I would have regarded the proceeding as one that should be considered in}

³⁰ Ibid, at 970–971.

a manner akin to an interpleader proceeding.³¹ Had that remained the position, I would have taken the view that parties who had acted reasonably and had co- operated to achieve prompt resolution of arguable claims should bear their own costs.

[24] However, Mr Sun did not advance his case in that way. Rather, he created a hostile environment, bringing an unnecessary application for discovery, requiring witnesses to be present for cross-examination at the substantive hearing, and advancing arguments that lacked merit. The requirement for deponents to attend for cross-examination and a number of unpromising arguments were only withdrawn days before the hearing. In reacting to Mr Sun’s position, other counsel were obliged to prepare witnesses for cross-examination and to research the abandoned legal points. As a result, they would have incurred significantly greater costs than would ordinarily have been visited upon them.

[25] I illustrate the unmeritorious arguments put forward on behalf of Mr Sun by reference to three of them:

(a) First, it was submitted that no security interest arose in favour of the building supply companies because there was no certainty of terms in the asserted agreements to mortgage. That argument overlooked the implication of default terms (for all mortgages) set out in Schedule 2 to the Property Law Act 2007.

(b) Second, he contended that an election to pursue a claim as an unsecured creditor had been made. As a result, he challenged the security interests claimed by those who had proved in the liquidation. In fact, an unequivocal election to pursue a claim as a unsecured creditor had not been made. That is the essence of the doctrine of

_{estoppel by election.}³²

31. See the last quoted paragraph from McDonald v Horn [1995] 1 All ER 961 (CA) at 970–971, set out at para [22] above.

³² Compare with Re Cider (NZ) Ltd [1936] NZLR 374 at 377 (Smith J).

(c) Third, he asserted that the equitable security interest arguments failed through lack of registration. An equitable interest in land, by definition, is one that has not been registered. The need to take account of the interests of unregistered mortgagees in distributing the proceeds of a mortgagee sale has been spelt out plainly in cases such

as Hope v Hope.³³

[26] From the outset, it was clear that the proceeding should be determined promptly. Ideally, that would have involved the parties identifying discrete questions that could have been argued in short order. However, Mr Sun elected to take an adversarial approach that, initially, put in issue whether the equitable doctrine of marshalling could apply. Mr Sun did not disclaim that argument until a few days before the hearing. In the end, his argument on marshalling was limited to two general equitable defences, on both of which he failed.

[27] Ultimately, I have a discretion as to costs. That must be exercised on an individualised basis, having due regard to the interests of each of the affected parties. To the extent that I consider that greater costs should be awarded than those which would apply on an standard 2B basis for an originating application, I consider that I am entitled to quantify that amount by any available methodology.

[28] In considering costs in relation to each party, I have decided that the just outcome should reflect the amount of work required to prepare for the hearing on the part of each of the successful building supply companies and the extent to which common interests were being promoted. On that basis:

(a) Mr Sun shall meet costs incurred by Magsons on a 2B basis, with an uplift of 25%, together with reasonable disbursements.

(b) Mr Sun shall meet costs incurred by Hamilton Hardware on a 2B

_{basis, with an uplift of 15%, together with reasonable disbursements.}

³³ Hope v Hope [1977] 1 NZLR 582 (SC) (Wilson J) at 583.

(c) Mr Sun shall meet costs incurred by RD 1 on a 2B basis, together with reasonable disbursements.

[29] I consider that United Timber took a responsible approach to the resolution of the priority questions. In those circumstances,³⁴ I make no order as to costs against that company.

(d) Who should bear the burden of the liquidators’ indemnity costs

[30] Questions of costs were always going to arise in relation to those incurred legitimately and reasonably on the part of the liquidators. They were effectively standing in the position of a stakeholder.³⁵ I consider that Mr Sun and United Timber should meet those costs.

[31] The conduct of the litigation did not affect the costs incurred by the liquidators, to any material extent. That being so, I consider that Mr Sun and United Timber should each bear 50% of the costs and disbursements awarded in favour of the liquidators.

Result

[32] Mr Sun shall pay to each of the successful building supply companies costs on the bases set out in para [28] above, together with reasonable disbursements. Once calculated, those costs shall be paid out of moneys to which Mr Sun would otherwise have been entitled to receive from the fund.

[33] No order as to costs is made as among the successful claimants and United

Timber.

[34] Mr Sun and United Timber shall each bear 50% of the costs and disbursements paid (or to be paid) to the liquidators out of the fund. The amounts payable by United Timber and Mr Sun shall be met out of moneys to which they

_{would otherwise be entitled to receive from the fund.}

³⁴ _{See para [23] above.}

35. High Court Rules, r 4.64. Had they received the funds and interpleaded they would also have been entitled to indemnity costs.

[35] The amount ordered in favour of the liquidators in my second judgment³⁶ shall be increased by the total of the hearing fees that have subsequently been charged to the liquidators.³⁷

[36] In the event that the quantum of costs and disbursements cannot be agreed, they shall be fixed by the Registrar.

[37] I make no order as to costs in relation to the parties’ preparation for and

appearances at the hearing on 13 June 2014.

[38] In the event that counsel can agree the terms of an order to reflect the judgments I have given, they may submit that order to the Registrar for sealing. If agreement cannot be reached, a joint memorandum shall be filed identifying the areas of dispute, the position of each party and the reasons why that position has

_{been taken. I will then rule on any disputes on the papers.}

_{P R Heath J}

_{Delivered at 4.00pm on 20 June 2014}

³⁶ _{Re Starplus Homes Ltd (in liq) (No. 2) [2014] NZHC 913.}

³⁷ See para [10] above.