Adams v Sun [2014] NZHC 913 (6 May 2014)

Last Updated: 12 May 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

COMMERCIAL LIST

CIV 2013-404-4168 [2014] NZHC 913

UNDER	THE COMPANIES ACT 1993
IN THE MATTER OF	STARPLUS HOMES LTD (IN LIQUIDATION)
BETWEEN	SHAUN NEIL ADAMS AND JOHN ROBERT BUCHANAN (AS LIQUDIATORS 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:	26 February 2014
Counsel:	M J Tingey for Applicants M Arthur for First, Second, Third, Fourth and Sixth Respondents No appearance by or on behalf of Fifth Respondent
Judgment:	6 May 2014

_{JUDGMENT (NO. 2) OF HEATH J}

This judgment was delivered by me on 6 May 2014 at 4.00pm pursuant to Rule 11.5 of the High Court Rules

_{Registrar/Deputy Registrar}

ADAMS AND BUCHANAN (AS LIQUDIATORS OF STARPLUS HOMES LTD (IN LIQUIDATION)) v SUN [2014] NZHC 913 [6 May 2014]

Introduction

[1] Mr Adams and Mr Buchanan are the liquidators of Starplus Homes Ltd (in liquidation) (Starplus). They applied to this Court for directions in relation to the distribution of a sum of $1,747,229.28, a surplus arising from the sale by ASAP Finance Ltd (ASAP), the first mortgagee of some 20 properties that Starplus had owned.

[2] The moneys were held in Court as a result of orders made by Brown J on 31

July 2013.¹ Those orders followed an application by ASAP, under s 200 of the Property Law Act 2007, to authorise the last of the mortgagee sales. In general terms, they represented the surplus from the sale of two properties at Redoubt Road, in Manukau, that Brown J’s order had authorised ASAP to sell. In a judgment being delivered contemporaneously,² I have ruled on competing claims to moneys held in Court. The background to the litigation is set out fully in my substantive judgment. There is no need to repeat it.

[3] The liquidators claim that they are entitled to have their reasonable indemnity costs, in relation to the application, paid out of the surplus in priority to successful claimants. Mr Tingey, for the liquidators, submits that the costs were incurred to help the secured creditors to resolve their differences and should be treated as linked specifically to the fund in question. The five claimants to the fund have taken a common position. In an argument advanced by Mr Arthur on their behalf, they object to costs being awarded on that basis.

Background

[4] After Brown J’s orders were made (but before the s 200 application was finally determined), the liquidators of Starplus decided to seek directions from the Court on how the money should be distributed. Ultimately, without opposition from any of the claimants, the s 200 proceeding was discontinued and the fund was made

_{subject to the liquidators’ application.}³

¹ ASAP Finance Ltd v Starplus Homes Ltd (in rec and in liq) HC Auckland CIV 2013-404-3432,

_{31 July 2013 (Minute of Brown J) at para [3](c).}

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

³ ASAP Finance Ltd v Starplus Homes Ltd (in rec and in liq) HC Auckland CIV 2013-404-3432,

[5] The issues that require determination on the liquidators’ costs application

require an assessment to be made of:

(a) the appropriateness of the liquidators’ decision to issue a separate

proceeding to resolve questions of entitlement to the surplus funds

(b) whether it is appropriate for all (or some) of the claimed costs to be borne by the general body of creditors, rather than the secured creditors that are entitled to participate in it.

[6] There is no dispute about the quantum of the liquidators’ costs. Nor is there any suggestion that, in relation to the present proceeding, the liquidators incurred any costs unnecessarily. The questions for decision are linked to the notion that had the s 200 proceeding continued, any involvement by the liquidators of Starplus would have been as adversary parties, in respect of whom standard costs may have been ordered, depending on the outcome of the application.

[7] If the liquidators were to have their costs out of the surplus funds, separate issues arise in relation to the incidence of those costs as among the successful claimants. I reserve that issue for resolution, in conjunction with the costs reserved in my substantive judgment.⁴

[8] I do so for two reasons. First, the claimants, sensibly, agreed to be represented by common counsel on the costs argument. Plainly, Mr Arthur could not make submissions on the competing interests of those parties. Second, my judgment on the substantive questions may impact on questions of contribution.

Competing submissions

[9] Mr Tingey contended that once ASAP had obtained an order authorising it to sell the Redoubt Road properties and that the surplus be paid into Court, ASAP had no further interest in the s 200 proceeding. At that stage, it became necessary for the

_{liquidators to seek directions, so that the proper recipients of the moneys held in}

_{10 December 2013 (Minute of Lang J).}

⁴ Re Starplus Homes Ltd (in liquidation) [2014] NZHC 912 at paras [95]–[96].

Court could be identified. Mr Tingey submitted that was because the liquidators had to be parties to the application. They had not been joined as parties to ASAP’s application.

[10] Mr Tingey contended that an application for directions by a liquidator under s 284(1) of the Companies Act 1993 had advantages over continuation of the existing s 200 application. They were:

(a) It was questionable whether the Court had jurisdiction to make orders under s 200 of the Property Law Act⁵ on an application by a party other than the mortgagee.

(b) In obtaining directions under s 284(1), the liquidators gain the protection of s 284(3) of the Act by way of defence in relation to any claim that may be brought against them in respect of their dealings with the fund in issue.

(c) The liquidators were able to place evidence before the Court about the wider context of the liquidation. This was not available on the ASAP application.

[11] Mr Arthur submitted that:

(a) The liquidators’ involvement (by bringing the substantive application)

was not necessary for the due administration of the liquidation.

(b) The liquidators did not act reasonably, in the sense required by r 14.6(4)(c) of the High Court Rules,⁶ because their involvement was not necessary to ensure the substantive issues were resolved properly. That submission proceeds on the premise that the liquidators should

_{have used the existing s 200 proceedings.}

⁵ Section 200 is set out at para [19] below.

(c) ASAP’s s 200 application requested not only that the Redoubt Road properties be sold but also “such other orders as the Honourable Court considers necessary”.

(d) The liquidators did not provide evidence that could not have been obtained from any other party, and the fact that directions as to service were made did not alter the position materially.

[12] Despite those submissions, Mr Arthur accepted that the liquidators did incur some costs which they ought reasonably to recover from the fund. In particular, he referred to “their costs in responding to information requests and providing evidence about proofs of debt”. Those amounts correspond to the sums of $4,436 and $1,199 claimed by the liquidators.⁷ Mr Arthur also accepted it was reasonable for the liquidators to be reimbursed costs in preparing the common bundle of documents. That sum is $2,439.⁸

[13] The costs claimed are:

(a) $8,389 in respect of the substantive originating application, the interlocutory application for directions as to service, and the supporting affidavit of Mr Adams.

(b) $2,474 in respect of corresponding with the solicitors for one of the claimants in relation to information requests; corresponding with respondents in relation to appropriate procedure for progress of the application, reviewing documents in response served by respondents; and drafting affidavits of service;

(c) $3,218 in respect of reviewing memoranda filed by respondents for a case management conference on 18 October 2013; drafting a memorandum for that conference; preparation for and attendance at conference on 18 October 2013; reporting to liquidators on result of

_conference;

⁷ See para [13](d) and (g) below.

(d) $4,436 in relation to reviewing various correspondence from solicitors for first respondent seeking information from liquidators, discussions with liquidators as to ability to obtain and provide information; and drafting correspondence in reply;

(e) $4,931 for reviewing notices of opposition and eleven affidavits filed by respondents; advising liquidators on the contents of the same; reviewing whether to file affidavit(s) in reply;

(f) $6,430 for drafting joint memorandum for a case management conference on 13 December 2013; reviewing memorandum for first respondent seeking orders for tailored discovery; researching authorities and drafting submissions in reply to second respondent’s application, reviewing memoranda filed by other respondents; preparation and attendance at the conference on 13 December 2013;

(g) $1,199 in respect of drafting further affidavit of Mr Adams; corresponding with the solicitors for one of the claimants in respect of second respondent’s proof of debt; and filing and serving further affidavit of Mr Adams;

(h) $2,439 in respect of drafting index for the bundle of documents and circulating; compiling the bundle of documents and filing and serving the same; and

(i) $1,323 in respect of reviewing correspondence of parties in relation to notices to cross-examine all deponents, including Mr Adams; preparation and attendance for conference on 17 February 2014 and advising applicants of the result of the conference; and

(j) $2,510 in respect of research and drafting of submissions in relation to costs and discussions with the liquidators in respect of the same.

[14] The liquidators also seek their disbursements of $643.48 (being filing fees for the substantive originating application and the interlocutory application as to directions as to service), together with $565 in respect of costs incurred in serving the application.

Analysis

[15] The circumstances in which a party might receive indemnity costs are set out in r 14.6 of the High Court Rules. Relevantly, r 14.6(1)(b) and (4)(c) provide:

14.6 Increased costs and indemnity costs

(1) Despite rules 14.2 to 14.5, the court may make an order—

...

(b) that the costs payable are the actual costs, disbursements, and witness expenses reasonably incurred by a party (indemnity costs).

...

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

...

(c) costs are payable from a fund, the party claiming costs is a necessary party to the proceeding affecting the fund, and the party claiming costs has acted reasonably in the proceeding; or

....

[16] In Waitara Leaseholders Association Inc v New Plymouth District Council,⁹

Harrison J took the view that r 14.6(4)(c) was designed to deal with the first of two categories of cases identified in Re Buckton.¹⁰ Kekewich J, in that case, said:¹¹

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

⁹ Waitara Leaseholders Association Inc v New Plymouth District Council HC New Plymouth CIV-

_{2004-443-162, 20 December 2005 at para [16].}

¹⁰ _{Re Buckton [1907] 2 Ch 406 (ChD).}

¹¹ Ibid, at 414.

benefit of the estate, and direct them to be taxed as between solicitor and client and paid out of the estate.

[17] In Waitara Leaseholders, Harrison J observed:¹²

[13] In order to succeed under [the predecessor of r 14.6(4)(c)] [the Leaseholders’ Association] must satisfy these three criteria: (1) costs are payable from a fund or funds; (2) [the Leaseholders’ Association] is a necessary party to the proceeding affecting the fund or funds; and (3) it has acted reasonably in the proceeding. Even then, a residual discretion is vested in the Court as to whether to order payment on an indemnity basis.

[18] I accept that r 14.6(4)(c) applies. The application relates to a common fund held in Court as a result of a judicial direction. The liquidators were parties from whom the Court ought to have heard before determining the distribution question. The liquidators were entitled to be heard to safeguard the interests of preferential and unsecured creditors who may have had a genuine interest in the outcome. Whether the liquidators acted reasonably in the prosecution of the application is a separate issue that is more relevant to quantum than jurisdiction.

[19] In my view, it is doubtful whether it was open to the liquidators to deal with the questions of priority through the existing proceedings issued by ASAP. Section

200 of the Property Law Act 2007 is restricted to an application by a mortgagee, and the orders that the Court may make are closely allied to that. Section 200 provides:

200 Sale by mortgagee through court

(1) A mortgagee who is entitled to sell mortgaged property may apply to a court for assistance—

(a) in exercising the power of sale; or

(b) in completing the transfer of the property to the purchaser (if the property has already been sold by the mortgagee).

(2) The court may make all or any of the orders specified in subsection (3)

if it is satisfied that—

(a) there has been a default that has not been remedied or, in the case of personal property, the property is at risk; and

(b) the mortgagee has become entitled under the mortgage and subpart 5 to exercise a power of sale in respect of the mortgaged property.

¹² Waitara Leaseholders, above n 9.

(3) The orders are as follows:

(a) an order directing the sale of the whole or any part of the mortgaged property:

(b) an order that the sale be conducted by the mortgagee or by the Registrar:

(c) an order making conditions concerning all or any of the following matters:

(i) the advertising of the sale:

(ii) other marketing of the mortgaged property proposed to be sold:

(iii) the conditions of sale:

(iv) the manner in which the sale is to be conducted:

(d) an order permitting the mortgagee to become the purchaser at the sale otherwise than under section 196:

(e) an order permitting the current mortgagor or any other person entitled to redeem the mortgaged property to redeem it otherwise than under subpart 4 or section 195:

(f) an order vesting the property, for any estate or interest that the court thinks fit, in the purchaser (including the mortgagee if the mortgagee is the purchaser) or discharging any mortgage or other encumbrance:

(g) an order directing the Registrar, or, if it is more convenient, appointing a person other than the Registrar, to execute or register a transfer or assignment of the property to the purchaser (including the mortgagee if the mortgagee is the purchaser) or a discharge of any mortgage or other encumbrance:

(h) an order determining the priority of mortgages or other encumbrances over the property.

(4) An order under subsection (3)(f), or a transfer, assignment, or discharge executed or registered under subsection (3)(g), has the same effect as a transfer or assignment instrument for the mortgaged property executed or registered by a mortgagee under section 183, or a mortgage discharge instrument for a mortgage duly executed or registered in accordance with section 83, as the case may be.

[20] More importantly, whatever procedural mechanism was used, it was always going to be necessary for a quasi-stakeholder to apply for necessary directions and for all relevant parties whose interests might be affected by distribution of the

surplus funds to be served and provided with an opportunity to put a contrary argument to protect their own interests.

[21] I consider there is some merit in Mr Tingey’s submission that other parties acquiesced in the use of the liquidators’ own application to resolve issues, as a result of consent orders made by Lang J on 10 December 2013.¹³ At that time the Judge 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 for directions, which had been filed on 9 December 2013.

[22] While I accept that the liquidator has made a proper application for costs, the position remains that costs are within the discretion of the Court. In this case, there was no real prospect that the Court’s response to the liquidators’ application would leave funds available for preferential or unsecured creditors. The stance taken by the liquidators in not putting forward an adversary position on that issue tends to confirm that.

[23] In undertaking necessary research for the application for directions, the liquidators will have carried out work that has benefits for the general body of creditors, as opposed to the secured creditors I have held are entitled to participate in the surplus. It would be unfair for the Court (effectively) to permit subsidisation by the secured creditors entitled to participate in the fund of costs incurred for the benefit of preferential and unsecured creditors. The preferential and unsecured creditors should bear some of the liquidators’ costs.

[24] It is not possible to assess the amount of costs that should be paid, other than on a broad basis. The amount claimed is $37,349. I am satisfied that there should be a deduction of one-third from those costs to represent the benefit of the work undertaken for preferential and unsecured creditors. That means that two-thirds should be paid out of the fund held in Court, in priority to those creditors whose

_{secured claims have been marshalled. That sum equates to $24,650.34.}

¹³ See para [4] above.

[25] In addition, it is also appropriate for the filing fees in relation to both the substantive originating application and the interlocutory application as to directions for service and the costs incurred in serving the application to be paid out of the fund.

Result

[26] For those reasons, I make an order that the liquidators shall be paid the sum of $24,650.34 out of the surplus funds on account of its costs, together with the agreed disbursements.¹⁴

[27] Leave is reserved for any party to make submissions as to the incidence in which those costs should be borne. That can be done in submissions filed for the

_{resolution of questions of costs set out in my substantive judgment.}¹⁵

Delivered at 4.00pm on 6 May 2014

Solicitors:

Bell Gully, Auckland Harkness Henry, Hamilton Chapman Tripp, Auckland Cogswell Law, Auckland Quinn Law, Auckland Counsel:

N W Ingram QC, Auckland

_{C J R Baird, Auckland}

P R Heath J

¹⁴ _{See para [14] above.}

¹⁵ Refer Re Starplus Homes Ltd (in liquidation) [2014] NZHC 912 at para [96].