Fankhauser v Strongline Buildings Limited [2014] NZHC 2629 (24 October 2014)

Last Updated: 17 November 2014

IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY

CIV-2014-470-154 [2014] NZHC 2629

IN THE MATTER	of section 241 of the Companies Act 1993
BETWEEN	MARK LINDSAY FANKHAUSER HILARY ANNE FANKHAUSER LP TRUST CO LIMITED Plaintiffs
AND	STRONGLINE BUILDINGS LIMITED Defendant

Hearing:	On the papers
Counsel	W G Manning for Plaintiffs H L Thompson for Trustees for M W & D J Keaney Family Trust (Non-Party)
Judgment:	24 October 2014

_{JUDGMENT OF ASSOCIATE JUDGE R M BELL}

This judgment was delivered by me on 24 October 2014 at pm

Pursuant to Rule 11.5 of the High Court Rules

.................................................

Registrar/Deputy Registrar

Solicitors: Legal People, Auckland , for plaintiffs

McMahon Butterworth Thompson, Auckland, for defendant

_{Counsel: W G Manning, Auckland}

FANKHAUSER & ORS v STRONGLINE BUILDINGS LIMITED [2014] NZHC 2629 [24 October 2014].

[1] The plaintiffs apply for costs against the non-parties in this liquidation proceeding, including increased or indemnity costs.

[2] They are 50 per cent shareholders in Strongline Buildings Limited. The non- parties, the trustees of the MW & DJ Keaney Family Trust, hold the other shares. On 15 September 2014 the plaintiffs applied for an order that Strongline Buildings Limited be put into liquidation. They relied on the just and equitable ground¹ and non-compliance with s 10 of the Companies Act 1993 (because the company lacked a director).² At the same time they applied on notice for the appointment of interim liquidators. On 17 September 2014 I gave directions for that application. Later that day counsel for the non-parties filed a memorandum advising that they consented to the company being put into liquidation. On 18 September 2014 I ordered the company to be put into liquidation and appointed liquidators. I gave directions for submissions on costs.

[3] For their costs application against the non-parties, the plaintiffs rely on the principles established by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2).³ The plaintiffs seek indemnity costs under r 14.6(4)(f) of the High Court Rules or increased costs under r 14.6(3)(d). If indemnity costs are awarded, they seek $28,969.87 (GST inclusive). If increased costs are awarded, they seek a 50 per cent uplift.

[4] Before dealing with the principles that apply in costs applications against non-parties, it is helpful to consider how costs are normally ordered in liquidation applications. In run of the mill undefended cases (for example, creditors’ applications against insolvent companies), the court awards costs to the plaintiff when making a liquidation order. The plaintiff’s costs rank third in the list of preferential claims under Schedule 7 of the Companies Act. The plaintiff is entitled

_{to its actual and reasonable costs under clause 1(1)(c) of Schedule 7:}

¹ _{Companies Act 1993, s 241(4)(d).}

² _{Section 241(4)(c).}

³ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR

145.

The reasonable costs of a person who applied to the court for an order that the company be put into liquidation, including the reasonable costs incurred between lawyer and client in procuring the order.

(Emphasis added)

[5] The right to recover actual and reasonable costs between lawyer and client was introduced under the Companies Amendment Act 2006⁴ so as to “reflect more closely the actual costs incurred by the creditor so that creditors do not issue such proceedings and suffer further loss”.⁵

[6] Notwithstanding Schedule 7 of the Companies Act, on most unopposed applications, plaintiffs seek ordinary costs under Part 14 of the High Court Rules without asking for indemnity costs under r 14.6. But Schedule 7 is justification for the Court’s award of indemnity costs under r 14.6(4)(f):

The court may order a party to pay indemnity costs if—

(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.

[7] In Black v ASB Bank Ltd the Court of Appeal set out the court’s approach under r 14.6(4)(e) when considering the reasonableness of a party’s costs, if a contract or deed provided for recovery of indemnity costs.⁶ That also applies when reasonableness is in issue in fixing costs on a liquidation order.

[8] Priority is given to the plaintiff’s costs in applying for the liquidation order because it is considered to have acted in the interests of all who have claims against the company.

[9] A plaintiff ’s recovery of its actual costs in obtaining a liquidation order is subordinate to any rights of secured creditors under s 305 of the Companies Act and any claims by liquidators or administrators for their fees and expenses.⁷ It can of

_{course happen that despite the priority, the plaintiff may not be paid out because of a}

⁴ _{Companies Amendment Act 2006, s 40.}

⁵ Law Commission Priority Debts in the Distribution of Insolvent Estates (NZLC SP 2, 1999)

_{at [36].}

⁶ _{Black v ASB Bank Ltd [2012] NZCA 384 at [77]- [80].}

⁷ Seventh Schedule, Clause 1(1)(a) and (b).

lack of sufficient assets in the company and because of prior claims. In those cases, the plaintiff has made a bad choice in applying for liquidation.

[10] While Parliament appears to have had the interests of creditors in mind in giving priority to the plaintiff’s actual costs in obtaining an order, the same provision applies when the Court orders liquidation when the plaintiff is a shareholder, as in applications on the just and equitable ground.

[11] Additional costs orders may be made in contested liquidation applications. If only the company opposes, an order for costs is made only against the company, except where the court exercises the power to order costs against a non-party. But others may oppose the liquidation application. Creditors and shareholders may file a statement of defence⁸ or an appearance.⁹ A good reason for them to take part is to preserve appeal rights. On a liquidation order being made, control of the company, including the right to appeal the liquidation order, passes to the liquidator. Directors no longer have the power to take proceedings in the name of the company, once it goes into liquidation.¹⁰ Creditors and shareholders who file a statement of defence or appearance are parties to the proceeding and, if unsuccessful, are vulnerable to costs orders.

[12] In a contested application for liquidation on the just and equitable ground where the plaintiff alleges a breakdown in relations between shareholders, the company is rarely active in the proceeding. Instead, the opposing shareholders become involved in the defence. As shareholders of the company¹¹ they have standing to apply for a liquidation order. Equally they have standing to oppose. Once they become parties to the proceeding, orders for costs may be made against them if they lose.

[13] On the other hand, shareholders who do not enter appearances or file statements of defence are not parties and therefore ordinarily are not exposed to the

_{risk of costs orders. If costs orders are to be made against them, it must be on the}

⁸ _{High Court Rules, r 31.16.}

⁹ _{High Court Rules, r 31.18.}

¹⁰ _{Companies Act, s 248(1)(b). Aotearoa Kiwifruit Export Ltd v ANZ National Bank Ltd}

_{HC Tauranga CIV-2011-470-697, CIV-2011-470-928, 3 February 2012.}

¹¹ Under the Companies Act s 241(2)(c)(iii).

basis that, even though they are not parties, they should be required to contribute to the costs of the successful party. In those cases the principles set out in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) and like cases come into play.

[14] Those principles include the following:¹²

(a) While costs orders against non-parties are exceptional, that means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.

(b) The discretion will not be exercised against pure funders.

(c) Where the non-party not merely funds the proceeding, but substantially also controls or is to benefit from it, justice will ordinarily require the non-party to pay the costs of the successful party.

(d) The basis for this is that the non-party is not just funding a party to enable access to justice, but is himself the real party.

[15] The Privy Council quoted with approval Tompkins J in Carborundum

Abrasives Ltd v Bank of New Zealand (No.2):¹³

In many cases a major consideration will be the reason for the non-party causing a party, normally but not always an insolvent company, to bring or defend the proceedings. If a non-party does so for his own financial benefit, either to gain the fruits of the litigation or to preserve assets in which the person has an interest, it may, depending upon the circumstances, be appropriate to make an order for costs against that person. Relevant factors will include the financial position of the party through whom these proceedings are brought or defended and the likelihood of it being able to meet any order of costs, the degree of possible benefit to the non-party and whether, in all the circumstances, the bringing or defending of the claim — although in the end unsuccessful — was a reasonable course to adopt.

¹² _{Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 3, at [25].}

¹³ _{Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC) at}

765, quoted in Dymocks Franchise Systems (NSW) Pty Ltd at [25].

[16] Because the purpose is to make those who are “real parties” but litigate through proxies answerable for costs in the same way as if they were named as parties to the proceeding, it is not appropriate to order costs against a non-party who has stayed out of the fray. In the context of a liquidation application, a shareholder who does not file a statement of defence or enter an appearance and who does nothing to assist those opposing the proceeding is a very unlikely target for a non- party costs order.

[17] Now for this case. Subject to any issue of amount, the plaintiffs are entitled to an order for costs against the company for their actual and reasonable expenses, including their legal fees. At present it is not known whether such an order will be barren or not. Mr Fankauser’s affidavit gives grounds to believe that the company is

insolvent.¹⁴ It is on the cards that there will be no distribution for shareholders. Any

payment of a costs order may turn on the claims of secured creditors to have priority. The trustees of the Keaney Family Trust say that they are secured creditors under a general security agreement of 17 July 2012, under which they are owed about

$850,000. They claim to have taken possession of the company’s assets under their security. They assert that there is no suggestion that the general security agreement is invalid or could be set aside. These are matters the liquidators might investigate. There may be grounds for setting the security aside under s 299 of the Companies Act, given that Mr Keaney was the director of the company and the security is in favour of his family trust, of which he is one of the trustees.¹⁵ At this stage it is too early to tell.

[18] If the costs can be paid from the company assets, the plaintiffs will suffer no loss and it will not be necessary to have recourse to anyone else. On the other hand, if it should turn out that the liquidation does not produce enough to pay the costs order, the plaintiffs will be in the same position as any other successful plaintiff with a costs order against a worthless company: they will have made a bad choice.

_{[19] The plaintiffs’ application for costs seems to be driven by two considerations:}

14. Not the least is a letter of 10 September 2014 by counsel for the non-parties stating that the company is not able to pay all of its debts as they fall due.

¹⁵ Companies Act, s 299(1)(a).

(a) the alleged injustice of imposing the plaintiffs’ costs on unsecured creditors; and

(b) the prospect of non-payment.

[20] As to the first, the general policy considerations for allowing costs orders to take priority apply just as much in this case as in any other court-ordered liquidation. If the plaintiffs find that unacceptable, they could surrender their priority. As to the second, they need to advance some principled ground for requiring the non-parties to make good any shortfall in the funds available to meet the costs order.

[21] They say that that ground can be found in the court’s power to order costs against non-parties. Their case is that the non-parties acted unreasonably in not accepting their proposal that the shareholders should resolve under s 241(2)(a) of the Companies Act to put the company into liquidation. They put their request in a letter to the non-parties’ lawyers on 10 September 2014, a Wednesday. By 15 September, the following Monday, they had not received a satisfactory response and filed this proceeding. In their submission the costs of this proceeding were unnecessary and could easily have been avoided if the non-parties had shown the good sense to recognise the obvious and agree to liquidation.

[22] That should be put in context. Mr Fankauser’s affidavit in support of the application to appoint interim liquidators shows that relations between shareholders had broken down and efforts to resolve differences were misfiring. His affidavit shows his grounds for concern at unilateral action taken by Mr Keaney, resigning as director, and by the non-parties, exercising rights under the general security agreement. I bear in mind that I have not required the non-parties to reply – because I do not consider that the airing of differences would be useful. All the same, without laying the blame on either side, I can see that the breakdown in relations had had such a severe impact as to make the company unmanageable.

[23] The plaintiffs’ complaint is no different from that of any other vindicated plaintiff. The other side has failed to accede to their justified claim and they have been put to the cost and trouble of taking proceedings. That entitles them to costs

under the principle that costs follow the event, but in a liquidation application, that entitlement is to costs from the company and from any party who opposes the application. It does not bring these plaintiffs within the Dymocks principles.

[24] The plaintiffs have not made out a case that costs should be ordered against the non-parties as people who took part in an opposed proceeding through proxies. Given that the Dymocks principles apply to conduct in a proceeding, it is hard to see how the non-parties’ conduct before the proceeding started could count against them. Once the proceeding started, the non-parties had the option of opposing both the substantive application and the application for appointment of interim liquidators. In that case, on losing, orders for costs against them would follow. If they had taken no steps at all, that would have put the plaintiffs to more work and cost, because the path to a final liquidation order would have required more time and effort. But doing nothing does not expose a non-party to costs. Non-party costs orders are made against those who become involved in the litigation, albeit indirectly, not against those who stay out of it. These non-parties did become involved, but in a positive way. Rather than put the plaintiffs to further costs, they promptly advised the court and the plaintiffs that a liquidation order could be made immediately. They cannot be treated worse than a shareholder who chooses to stay out of the fray.

[25] In a case where a breakdown in shareholder relations has required the company to be put into liquidation, it is appropriate that the costs incurred in putting the company into liquidation come out of the assets of the company. The shareholders share the burden of costs. But the plaintiffs have not shown a basis under the Dymocks principles to require the non-parties to pay their costs.

[26] There remains the amount of the costs order. The plaintiffs have provided copies of their lawyers’ invoices and time records. The information is not quite as full as that required in Crown Money Corporation Ltd v Grasmere Estate Trustco Corp Ltd,¹⁶ but it is enough to inform me about the steps taken, the charge-out rates and the reasonableness of the steps taken. The non-parties do not attack particular

_{steps or charges, but submit that the application for appointment of interim}

¹⁶ Crown Money Corporation Ltd v Grasmere Estate Trustco Corp Ltd [2008] NZHC 1816; (2008) 19 PRNZ 591 (HC)

at [14]-[15].

liquidators was not warranted. Their case is that as all the assets of the company were charged in their favour the court would not appoint interim liquidators as there were no assets for interim liquidators to take control of. That argument might have been aired in an opposed hearing to appoint interim liquidators. It was not guaranteed to succeed, given that the security might be open to challenge on liquidation and that they had not appointed receivers, but had taken possession of assets themselves.

[27] On the information available to the plaintiffs in mid-September it was reasonable to apply for interim liquidators. Matters had reached crisis point. The non-parties had declined to take part in mediation, Mr Keaney had resigned as director and the company had no management, the non-parties had purported to take possession of all assets under their security, the bank had frozen accounts, staff and sub-contractors were in the dark as to what was going on, some staff had left, others had been locked out of the company office. Someone had to be appointed to take charge.

[28] The application to appoint interim liquidators was prepared quickly, under urgency and competently. I am satisfied as to the reasonableness of the charges, including agency fees and disbursements.

[29] The plaintiffs have not addressed the GST question. I do not know whether they are registered for GST or whether they can claim an input credit for their legal fees in this proceeding. That is relevant to the costs order. Associate Judge Osborne explained why in Dunedin Catering Supplies Ltd v Mr Chips Ltd.¹⁷ The principles he summarised include these:¹⁸

(a) The non-profit rule is recognised under r 14.2 which provides that costs awarded should not exceed the costs incurred by a party.

(b) A party which is GST registered will, in relation to most services, recover from the Commissioner of Inland Revenue a GST input credit

¹⁷ _{Dunedin Catering Supplies Ltd v Mr Chips Ltd [2013] NZHC 1815, (2013) 21 PRNZ 798.}

¹⁸ At [67].

for the GST which it has paid to its solicitor. Such recovered GST is not generally recoverable in an indemnity costs award.

(c) There are situations where the successful party will not have been entitled to recovery of GST from the Commissioner of Inland Revenue including where the successful party is not GST registered or where the subject of the dispute does not for other reasons lend itself to a GST input credit such as where the service provided is an exempt supply under the GST legislation. In such cases, the GST component will generally be recoverable in an indemnity costs award.

(d) It is appropriate in a parallel manner to take into account or disregard the GST content of disbursements.

[30] Upon the plaintiffs clarifying their GST position, I will make a costs order. The order will be for the plaintiffs’ actual costs, as set out in their memorandum. If the plaintiffs will be able to claim an input credit, they will need to show what adjustments are required on account of GST. For the reasons given above, I will not

_{make a costs order against the trustees of the MW & DJ Keaney Family Trust.}

Associate Judge R M Bell