Pacific Tiger Group Limited v Lochar Estate Limited (in receivership) [2015] NZHC 323 (2 March 2015)

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UNDER	the Companies Act 1993
IN THE MATTER OF	of the liquidation of Lochar Estate Limited
BETWEEN	PACIFIC TIGER GROUP LIMITED Plaintiff
AND	LOCHAR ESTATE LIMITED (In Receivership) Defendant

Memoranda filed:	26 January 2015, 10 February 2015 and 18 February 2015
Appearances:	C R Andrews for Plaintiff G M Downing for Fico Finance Ltd and G J Falloon
_Judgment:	_{2 March 2015}

The defendant was ordered to pay the plaintiff ’s costs and disbursements in a sum of

$2,939.62 (the costs component having been assessed on a 2B basis). The defendant was also ordered to pay supporting creditors’ costs and disbursements, each in a sum of $906.00.¹

[2] I reserved the question of costs as against Fico Finance Ltd (the defendant’s

secured creditor) and Geoffrey John Falloon, the receiver of the defendant from 12

¹Pacific Tiger Group Ltd v Lochar Estate Ltd (in receivership) HC Christchurch CIV-2014-409-

PACIFIC TIGER GROUP LIMITED v LOCHAR ESTATE LIMITED (In Receivership) [2015] NZHC 323 [2

[3] A statement of defence had been filed on behalf of both the defendant and Fico. The statement of defence recorded that the defendant, by its agent the Receiver (Mr Falloon), opposed the adjudication application and that Fico, the defendant’s secured creditor, opposed the application. The plaintiff’s allegation that the defendant was unable to pay its debts was admitted. ²But in the statement of defence it was alleged that a liquidation of the defendant would prejudice the orderly sale of the defendant’s business and prejudice the interests of the secured creditor and the unsecured creditors. It was stated that the plaintiff was a small shareholder

(as to five per cent) of the defendant and only one of a number of unsecured creditors. It was stated that it would be neither just nor equitable to put the defendant into liquidation.

[4] Four other unsecured creditors entered appearances in support of the adjudication application. The debts claimed by those in support were:

directed that the defendant’s evidence be filed and served by 2 December 2014.

[6] No evidence was filed by the defendant or Fico. Their solicitor (Mr Downing) advised the Court on 8 December 2014 that the defence was no longer being pursued. The liquidation followed on 15 December 2014 at the adjourned

[7] At the hearing, the Court ordered and fixed costs and disbursements as between plaintiff and defendant and reserved the question of costs against Fico and the receiver.

(a) Is it appropriate to order costs against Fico and/or the receiver? (b) If so, in what sums.

[9] I will consider the position as against Fico and the receiver in turn. The liability of Fico is the more straightforward as Fico exercised its right as a creditor of the defendant to file a defence.³

[10] As against Fico, the plaintiff is entitled to costs on the basis that they should follow the event.⁴

[11] The plaintiff applies for increased costs under r 14.6(3) High Court Rules on the basis that Fico took or pursued an unnecessary step or an argument which lacked merit or failed without reasonable justification to admit facts or accept legal argument.⁵

[12] For the plaintiff, Mr Andrews submits that a basic level of costs should be calculated on a Category 2 Band B basis and then subjected to an uplift of 50 per

[13] Calculated on that basis, the plaintiff seeks a costs award of $5,373 and disbursements of $1,500. I return to the amount below.⁶

[14] The defendant was indisputably insolvent. Those seeking and supporting this liquidation were unsecured creditors.

[15] Mr Downing’s firm wrote to the plaintiff’s solicitors after the proceeding was served. They said that they acted for the receiver and had been instructed to oppose the plaintiff’s application. The receiver considered that seeking a liquidation order at the time would only serve to diminish the value of the defendant’s assets and that if the liquidation proceedings were notified, any methodical sale of the company’s assets would be impeded and the likely resulting sale value would be diminished. It was suggested that it would be inevitable in such circumstances that potential purchasers would view the sale as a “fire sale”.

[16] The plaintiff’s solicitors responded that even were there validity in the receiver’s view, his view was unlikely to prevail over the wishes of unsecured creditors of a plainly insolvent company. First of all, such creditors have a prima facie entitlement to a liquidation order.⁷The judgment of Heath J in Lim v Morning Star (St Luke’s Garden Apartments Limited) proceeds on the recognition that the interests of a secured lender, who is the effective opponent to a liquidation, do not militate strongly against adjudication on the application of unsecured creditors.⁸As was the case in Lim, the secured creditor in this case apparently chose not to make a payment out to the creditors to satisfy their debts, preferring instead to file a statement of defence to the liquidation application.

would prejudice the orderly sale of the defendant’s business as a going concern because potential purchasers would view the sale as a “fire sale”.

⁷Commissioner of Inland Revenue Department v Chester Trustee Services Ltd [2003] 1 NZLR

⁸Lim v Morning Star (St Lukes Garden Apartments Limited) HC Auckland CIV-2009-404-3279,

[18] In response to the defence, the plaintiff adduced additional evidence. Judy Kwan of the plaintiff company deposed in some detail as to the importance to the plaintiff of having a liquidator appointed to investigate the defendant’s affairs. The plaintiff also adduced evidence from Boris van Delden, as an expert with insolvency specialisation, who deposed that on the available information there was likely to be a clearance of the debt to Fico but a substantial shortfall for unsecured creditors. Mr van Delden dealt with the Fico concern as to a “fire sale”, explaining his rejection of the likelihood of prejudice through appointment of a liquidator while the receiver was effecting realisations.

[19] For Fico, Mr Downing recognised the discretion of the Court in relation to costs but opposed the making of any order against Fico on a number of grounds.

[20] First, Mr Downing submitted that the Court has already awarded costs (namely on 15 December 2014 when the liquidation was ordered). Mr Downing then makes two points. First, that “there appears to be no risk that such costs [as ordered] will not be paid to the plaintiff”, saying that the sale of the defendant’s business achieved a figure well in excess of the market value. Secondly, Mr Downing submits that the plaintiff has, apart from filing Mr van Delden’s affidavit, done no more than it would have in any other liquidation application.

[21] There is nothing in these grounds to cut across the Court now considering costs as between the plaintiff and Fico, as they were expressly reserved at the 15

December 2014 hearing. The fact that one liable party may be confidently expected to pay costs it has been ordered to pay is not a reason for not making a similar or larger award against another party. The memorandum filed by Mr Andrews for the

15 December hearing put Fico and the receiver on notice that costs higher than scale would be sought against Fico and the receiver. When I come to consider quantum I will be considering the reasonable steps taken by the plaintiff in this particular litigation.

[22] Secondly, Mr Downing makes a submission under a heading “plaintiff not ready to proceed at first call”. In particular, Mr Downing refers to the fact that the

plaintiff had not completed the advertising of the application when first called on 27

November 2014. I accept Mr Andrews’ submission that the point made for Fico is without merit. Fico and the receiver had by then filed a defence and correspondence was taking place between solicitors. The plaintiff’s refraining from advertising at that point was a responsible step and not one to be counted against it in a costs context.

[24] Mr Downing ignores submissions which Mr Andrews had made in support of uplift with specific reference to r 14.6(3) High Court Rules.

[25] On the evidence filed, the plaintiff (and supporting creditors) had a strong case to obtain an order liquidating the defendant. While the decision of Mr Downing’s clients to withdraw their defence does not necessarily indicate their acceptance that the plaintiff’s case would inevitably succeed, the withdrawal of the defence is consistent with the defendants’ coming to that realisation. It was, on my view of the evidence, the correct conclusion.

[26] It is just that there be a costs award against Fico with an uplift from a 2B award upon the basis that the defence lacked merit. It matters not that the other defendant (Lochar Estate Ltd itself) has been ordered to pay a lower sum of costs and disbursements. Fico and the receiver, before the 15 December 2014 hearing, were on notice that increased costs would be sought against them.

[27] I accept Mr Andrews’ submission that there is not an immediately appropriate step description in Schedule 3, High Court Rules, for the work undertaken by the plaintiff in this case to address the defendant’s opposition. One must proceed by

analogy with that schedule.⁹The amount of affidavit evidence which the plaintiff needed to file was more analogous to an originating application than to a liquidation application.

[28] I agree that the following table of costs submitted by Mr Andrews reflects an appropriate calculation:

Item	Description	Time
37	Preparation of originating application and supporting affidavits	2 days
Less 49	Time allowed for preparation of statement of claim for liquidation	0.6 days
	Subtotal	1.4 days
Plus 11	Consent (memorandum in respect of appearance for 27 November 2014)	0.4 days
	Total amount of time allowance:
	1.8 days @ $1,990 a day	$3,582.00
	Plus – 50% uplift as increased costs	$1,791.00
	Total of costs	$5,373.00

[29] An uplift of 50 per cent over a 2B calculation justly reflects the lack of merit

[30] The only disbursement claimed by the plaintiff is for the costs paid to its

_{expert witness ($1,500). Mr Downing did not suggest that item to be
irrecoverable.}

[31] An order that Fico pay costs and disbursements in the sum sought by the plaintiff is appropriate.

[32] To the extent that costs and disbursements of $2,939.62 have already been ordered against the defendant, it will be appropriate that the liability of Fico is joint. The order to be made will reflect that.

[33] The plaintiff seeks an order that, to the extent that Fico pays costs and disbursements, the costs and disbursements are to be personal to Fico and not reimbursable out of the assets of the defendant.

[34] The requested order would recognise the fact that Fico might otherwise rely upon its secured finance agreements, or similar documents, to treat the costs and disbursements it has incurred beyond those payable by the defendant as an expense recoverable contractually.

[35] I accept Mr Andrews’ submission that there ought to be this further order as Fico could otherwise avoid the financial consequences of its actions in defending the liquidation proceeding by effectively passing the costs back to unsecured creditors.

[36] The principles applicable to the exercise of the discretion to award costs against a non-party were identified by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) and are accurately summarised in the head-

¹⁰Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR

(a) Costs orders against non-parties are exceptional, but only to the extent that they are outside the ordinary run of cases where parties pursue claims at their own expense. The ultimate question is whether it is just to make the order.

(b) The discretion will not generally be exercised against “pure funders”, being those with no personal interest in the litigation, and not standing to benefit from it or control its course.

(c) Where a non-party not only funds, but substantially controls or stands to benefit from the proceeding, justice will ordinarily require that the non-party pay the successful party’s costs.

(d) Where a non-party promotes and funds proceedings by an insolvent company substantially for its own financial benefit, that non-party should ordinarily be liable for costs if the claim fails. Such orders may not be appropriate where the non-party can realistically be regarded as acting in the interests of the company rather than in its own interests. (paras 25, 29)

Carborundum Abrasives Ltd v Bank of New Zealand (No 2) where his Honour said:¹¹

Where proceedings are initiated by and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in their result, such as a receiver or manager appointed by a secured creditor, a substantial unsecured creditor, or a substantial shareholder, it would rarely be just for such a person pursuing his own interests to be able to do so with no risk to himself should the proceedings fail or be discontinued. That will be so whether or not the person is acting improperly or fraudulently.

[38] My judgment in Poh v Cousins & Associates involved an application of the authorities to which I have referred and led to the making of an order of costs against the receivers in that case.¹²The receivers had exercised a distinct degree of control over the proceeding both as to whether it was necessary in the first place and as to how it was resolved. Poh’s case was subsequently distinguished by the Court of Appeal in Capital + Merchant Finance Ltd (in rec and in liq) v Vision Securities Ltd (in rec).¹³The Court of Appeal found (with apparent approval of the Poh decision)

_{that the distinguishing features of Poh’s case were that
there had been a “distinct}

¹¹Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 at p 765, this passage approved by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 10 at [25](4).

¹²_{Poh v Cousins & Associates HC Christchurch
CIV-2010-409-2654, 4 February 2011.}

¹³Capital + Merchant Finance Ltd (in rec and in liq) v Vision Securities Ltd (in rec) [2011] NZCA

degree of control” over the proceedings and that there had been no tenable argument against the plaintiff ’s claims. The litigation had been avoidable if modest research had been undertaken.¹⁴

[39] The statement of defence began by identifying Mr Falloon as the receiver of the defendant company appointed by Fico. The statement of claim then stated that the defendant was opposing the application “by its agent the receiver”.

[40] In short, it was the receiver who had control of the defendant’s defence. The liquidation proceeding was defended despite the defendant being admittedly insolvent. There was clearly a deliberate decision on the part of the receiver himself to have the defendant defend the proceeding despite the fact that Fico, as a creditor in its own right, was also defending the proceeding. As in Poh, my assessment of the receiver’s defence of this proceeding is that it had little or no prospect of success. The abandonment of the defence was a responsible step but came too late to avoid costs being incurred by other parties.

[41] Mr Falloon has filed an affidavit in relation to costs. He explains that he obtained registered valuations of the defendant’s business which show a distinctly lower value in the event of a forced sale. He deposes that he was concerned to achieve the highest possible price he could for the property and that a sale was concluded by tender at a price significantly higher than even the current market valuation he had received. He explains that his initial concerns when the liquidation application was served was “to prevent interference with the sale process”. He states:

My concern was that the hint of a liquidation sale or forced sale would prejudice the ability to obtain the best price.

[42] He gives this evidence as a factual witness and does not qualify himself as an expert.

[43] Mr Falloon goes on to indicate that another concern for him was the identity of the plaintiff. Mr Falloon notes that he was acting for a secured creditor of the defendant whereas the plaintiff was itself a five per cent shareholder, being one of a number of small shareholders based overseas and predominantly in Hong Kong. He refers to the appearance of disputes between the shareholders and a former manager, director and major shareholder of the defendant. He states that he was “uncertain what the motive for the application to appoint a liquidator was”. He refers to a number of the sums claimed by creditors as having been “for undocumented and unsecured advances of cash”.

[44] Mr Falloon goes on to refer to communications after this proceeding was commenced between the plaintiff’s solicitors and his solicitors, concerning the tender process for the defendant’s business. The plaintiff’s solicitors made enquiries as to what price or offer indications had been received for the property. The plaintiff subsequently submitted a tender which turned out to be the lowest tender. In his submissions, Mr Downing criticises the request for details about other tenders which he submits was “clearly inappropriate”.

[45] Mr Falloon identifies the sale price achieved on the tender exercise (with settlement on 19 December 2014) which exceeded by a very substantial margin the debt owing to Fico.

[46] When the plaintiff and other unsecured creditors sought the liquidation of the defendant, the defendant was plainly insolvent. Fico, with its security, had taken steps to protect its interest and, upon his appointment, the receiver was (with his rights as agent of the defendant) pursuing realisations to recover the debt owing to Fico. The statement of defence filed by Fico and the defendant expressly recorded that one of the concerns of those parties was that the liquidation of the defendant would prejudice the interests of the secured creditor. The defence also asserted that the liquidation would prejudice the interests of unsecured creditors. But at least five creditors in that category took a justifiable view that the prompt liquidation of an insolvent company was in their better interests. The unsecured creditors were

entitled to take the view that an earlier liquidation carried more advantage for them than any benefit which might flow from a deferred liquidation with assets being realised while the defendant was not in liquidation. The evidence of Mr van Delden indicates that the unsecured creditors’ view was commercially sound based on expert experience.

[47] While it was open to the receiver and Fico as unsecured creditor to take a stand against liquidation, by pursuing a defence of the liquidation application they exposed themselves to a costs order particularly if it transpired that there was no tenable defence to the plaintiff’s claim. In the period before the defence was withdrawn, they exposed the plaintiff to substantially more costs than would have been incurred through an undefended liquidation proceeding.

[48] It is just that Mr Falloon shares a joint liability with Fico to meet the costs and disbursements of the litigation. It is appropriate that that be on the same uplifted basis as applies to Fico.

[49] The plaintiff’s costs application has been keenly contested by Fico and Mr

[50] Counsel for the plaintiff was constrained to provide detailed submissions by way of a memorandum in support of the application. Counsel then had to deal with the opposing memorandum and affidavit evidence of the receiver. Counsel therefore filed a memorandum in reply.

[51] While I would normally award costs in this situation on the basis of a single memorandum, the filing of two memoranda was justified in this case. The costs associated with both memoranda should appropriately be recovered.

0.4 days. I do not impose an uplift in relation to these costs with the consequence that the order for costs in this regard will be $1,592.

(a) Fico Finance Ltd and Geoffrey John Falloon shall have a joint liability (as between themselves and with the defendant, Lochar Estate Ltd (in rec and in liq)) for the plaintiff’s costs and disbursements in this proceeding in relation to $2,939.62;

(b) Additionally, Fico Finance Ltd and Geoffrey John Falloon shall have a joint liability to the plaintiff for an additional sum of $3,933.38 by way of costs and disbursements;

(c) Fico Finance Ltd and Geoffrey John Falloon jointly shall pay to the plaintiff the sum of $1,592 in relation to the costs of this costs application; and

(d) The costs and disbursements payable by Fico Finance Ltd and Geoffrey John Falloon under Orders 2 and 3 are not to be recovered by Fico Finance Ltd or Geoffrey John Falloon out of the assets of the defendant (whether pursuant to contractual rights of reimbursement or

2B calculation	$3,582.00
Plus – 50 per cent uplift	$1,791.00
Total award	$5,373.00

High Court of New Zealand Decisions

Pacific Tiger Group Limited v Lochar Estate Limited (in receivership) [2015] NZHC 323 (2 March 2015)