Brown v James Emily Properties Limited [2014] NZHC 2922 (24 November 2014)

Last Updated: 13 February 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-004319 [2014] NZHC 2922

BETWEEN	KERRY TREVOR BROWN Plaintiff
AND	JAMES EMILY PROPERTIES LIMITED Defendant

Hearing:	3 October 2014
Appearances:	I M Hutcheson for the Plaintiff P Stevenson for the Defendant
Judgment:	24 November 2014

_{COSTS JUDGMENT OF ASSOCIATE JUDGE SARGISSON}

This judgment was delivered by me on 24 November 2014 at 10.00 a.m. pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date.......................................}

Solicitors:

P Stevenson, Auckland Stafford Klaasen, Auckland I M Hutcheson, Auckland

The Small Law Firm Ltd, Auckland

_{Case officer: Iutita Esekielu}

KERRY TREVOR BROWN v JAMES EMILY PROPERTIES LIMITED [2014] NZHC 2922 [24 November

2014]

[1] In my judgment of 30 May 2014 I declined (on an interim basis) to put the defendant, James Emily Properties Limited, into liquidation and adjourned the plaintiff’s application for such an order to give the defendant, or the plaintiff’s co-shareholders in the defendant, the opportunity to take proper steps to purchase the plaintiff’s shares. I indicated that if proper progress had not been made by the time when the matter was to be relisted the plaintiff would have leave to renew his request for an order for liquidation. I also indicated with respect to costs as follows:

[51] In the meantime costs on the application are reserved. Again without expressing any definitive view on quantum, Mr Brown can anticipate that his reasonable costs of this application will be met. The need for an application has come about because of the directors’ default and the default of the defendant company in meeting his legitimate request for payment of his share of the loan.

[2] The defendant and the plaintiff’s co-shareholders made attempts to purchase the plaintiff’s shares. The parties could not agree on the terms, and I allocated a date for a further hearing to deal (on a final basis) with the question whether or not there should be an order for liquidation. However, it became unnecessary to hear further argument, as the parties went on to reach an accord on the acquisition of the plaintiff’s shares. The plaintiff’s application has now been discontinued as a result. The only remaining matter is that of costs.

[3] Counsel have filed costs memoranda. The defendant seeks an award of costs in its favour against the plaintiff essentially on the basis that he failed in his request for an order to liquidate the defendant. Counsel submits that, in accordance with the general presumption under the High Court’s statutory costs regime, costs should follow the event and that the defendant should have a costs award on a 2B basis plus disbursements. She argues that there are no discretionary factors that warrant a departure from the presumption. She also submits, in support, that the defendant was successful in obtaining confidentiality orders.

[4] The plaintiff applies for an order for indemnity costs of $58,849, or in the alternative, increased costs in the discretion of the Court (based on a Category C daily rate with an uplift under r 14.6) plus disbursements of $2,570.43. The rationale

for the plaintiff ’s application is that he was fully justified in bringing his application for an order for liquidation of this family company because it was in serious breach of its obligations to him both in respect of his entitlement to be paid a debt of

$128,035.80, and its obligations to comply with the terms of a deed of family arrangement. It did nothing to comply with, or to set aside, his statutory demand for the debt and it was only after the hearing took place on the plaintiff’s application to appoint a liquidator that it decided to pay the debt. Thereafter it continued to be in breach of the obligations it had under the deed of family arrangement to sell the business.

Principles

[5] The Court has complete discretion on all matters relating to costs.¹ This discretion is to be exercised in a principled way, the primary presumption being that costs should follow the event.²

[6] The discontinuance of proceedings attracts essentially the same general presumption, in the form expressed in r 15.23. Rule 15.23 expressly provides that unless the Court orders otherwise, a plaintiff that discontinues a proceeding must pay costs of and incidental to the proceeding up to and including discontinuance. For this reason, principles governing award of costs for discontinued proceedings are applicable to the present case.

[7] Generally, the Court will not consider the merits of the case or determine the outcome of a hypothetical trial. As Tompkins J observed in North Shore City Council v Local Government Commission (in the context of a discontinuance):³

It is now well established that as a general rule, in considering costs on a discontinuance, the Court will not consider the merits of the competing contentions. I state this as a general rule because I accept that there will be some circumstances where the merits, one way or the other, are so obvious that they should influence the costs issue.

¹ _{High Court Rules, r 14.1.}

² _{Rule 14.2(a).}

³ North Shore City Council v Local Government Commission (1995) 9 PRNZ 182 at 186.

[8] His Honour also noted that it would be relevant to consider whether the parties that seek or oppose costs acted reasonably in commencing or defending the proceeding.⁴ Additionally, he noted the Court of Appeal’s approval of the following approach:⁵

... the real point at the end of the day is that one just has to look at the state of the action as it is at the time when the application is made and see what the fair and just thing to do is at that moment and time. Obviously in doing that one has to take a variety of different matters into account.

Discussion

[9] I do not need to revisit the findings in my interim judgment on the plaintiff’s application. It is sufficient to note that it was entirely reasonable for him to bring his application, which was made in reliance upon two grounds:

(a) That the defendant was presumed insolvent because it had failed to comply with, or to take steps to have set aside, a statutory demand for

$128,035.80 that the defendant was obliged to pay him; and

(b) That it would be just and equitable to appoint a liquidator to liquidate the defendant because of its failure to comply with the terms of a deed of family arrangement to which it was a party.

[10] There was no substantial ground of dispute available to the defendant in respect of the debt claimed in the statutory demand. Had it such an answer, it could be assumed the defendant would have taken proper steps to challenge the demand. It was no answer for it to say that the plaintiff’s siblings, who are the controlling shareholders, had chosen to waive payment of equivalent debts. That election was theirs to make, but it was not one they were entitled to impose upon the plaintiff. As the defendant did nothing to satisfy or challenge the demand within the statutory time allowed, the plaintiff was entitled to proceed on the presumption of its

_insolvency.

⁴ _{At 187.}

⁵ At 187.

[11] In the circumstances, the defendant could not fairly claim that it was unreasonable of the plaintiff to commence a liquidation proceeding, or that it was put unreasonably to the cost of demonstrating its solvency. It had the onus of demonstrating solvency. It had only itself to blame for the cost of having to do so. That it saw fit to pay the debt shortly after I reserved my decision helped to reinforce its claimed solvency, but the payment was too little too late for it to reasonably expect that the case against it would lose all force. This is because the plaintiff’s case relied not simply on the statutory demand but on the just and equitable ground. The defendant, driven by the controlling shareholders, was seriously in breach of cl 7 of the deed of family arrangement. Collectively, though bound as parties to the deed, the defendant and the controlling shareholders resiled from the sale obligations imposed on them by the provisions of cl 7.

[12] Counsel for the defendant is right that the interim judgment did not order the defendant be put into liquidation as the plaintiff was seeking, but I do not agree that such a result means he failed in his application, or that the defendant was successful. Whether or not there was to be an order appointing a liquidator had yet to be finally determined and the possibility that the plaintiff might succeed remained live. Plainly, the question of whether or not the parties could find a solution less drastic than liquidation, along the lines that might have been ordered had application been made under s 174 of the Companies Act 1993, was going to be material.

[13] The fact is that the defendant and the plaintiff reached an agreed resolution before it was necessary to make a final determination on the question of liquidation. That they did so agree does not indicate success on the part of the defendant. Rather, it indicates that:

(a) The defendant recognised that it could not continue to dishonour its obligations to the plaintiff, and that it was incumbent upon it to propose a fair arrangement if it had the resources to do so.

(b) The plaintiff recognised that if a reasonable alternative to liquidation was proposed, that he had an obligation to fairly consider it.

[14] Happily the parties found a solution that they found acceptable. That said, I do not have the slightest doubt that the defendant would not have acknowledged its breaches and have faced up to its obligations had it not been for the plaintiff’s application.

[15] In these circumstances, I am satisfied that the fair and just course is for the plaintiff to be compensated for having to make the application. The proceeding is one that attracts a skill and experience categorisation of Category 2. Ordinarily the steps taken in the proceeding would attract a Band B time banding. However, I accept that this is a case where the defendant has prolonged the entire proceeding by doggedly refusing to accept its responsibilities under the deed. Instead of properly acknowledging the plaintiff’s rights under the deed, it acted throughout to promote the interests of the plaintiff’s co-shareholders by taking full advantage of the plaintiff’s unfortunate decision not to make his application under s 174

Companies Act 1993 (which affords wider jurisdiction to look at alternative relief). Though the potentially drastic consequences of liquidation for the co-shareholders warranted the further opportunity that the interim judgment permitted, the defendant should not be advantaged by its own serious default. Nor should the plaintiff be disadvantaged by that default.

[16] In these circumstances I am satisfied that it is appropriate to award increased costs, and pursuant to r 14.6(d) I allow an uplift of 50% on 2B costs plus disbursements, as approved by the Registrar. I am not however satisfied that I should go so far as to award indemnity costs. They plaintiff must take some responsibility for the consequences resulting from his choice of application.

[17] I make no award on the defendant’s application for orders for confidentiality. Such orders were warranted, but pursuant to r 17.7 I refuse to make an order in favour of the defendant. The defendant would not have needed to make the

_{application if it had honoured its commitments to the plaintiff at the outset.}

Associate Judge Sargisson