GLW Group Limited v Lepionka & Company Investments Limited [2016] NZHC 1380 (23 June 2016)

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UNDER	the Companies Act 1993
IN THE MATTER OF	an originating application pursuant to s 290 of the Companies Act 1993 to set aside a statutory demand
BETWEEN	GLW GROUP LIMITED Plaintiff
AND	LEPIONKA & COMPANY INVESTMENTS LIMITED Defendant

On the Papers
Counsel:	C J Reid for the Plaintiff in CIV-2015-441-104 and for the Defendant in CIV-2015-441-99 M Lawson for the Defendant in CIV-2015-441-104 and for the Plaintiff in CIV-2015-441-99
_Judgment:	_{23 June 2016}

[2] Lepionka & Company Investments Ltd (Lepionka) acknowledges that GLW is entitled to costs in proceeding CIV-2015-441-99 in which GLW is plaintiff, but says that costs should only be awarded on a 2B basis. In the other proceeding, in which Lepionka is the plaintiff, Lepionka says that it is entitled to an award of costs, and that GLW’s costs claim should be dismissed.

[3] Proceeding CIV-2015-441-99 (the setting aside application) is a proceeding in which GLW applied under s 290 of the Companies Act 1993 (the Act) to set aside a statutory demand served on it by Lepionka. A fixture had been allocated to hear the setting aside application on a defended basis on 10 May 2016, but the statutory demand was withdrawn by Lepionka on or about 6 May 2016.

[4] In proceeding CIV-2015-441-104 (the liquidation claim), Lepionka applied to have GLW put into liquidation. The liquidation claim was withdrawn on the day (10 May 2016) the liquidation claim was to be heard on a defended basis.

[5] Lepionka’s claim for costs on the liquidation claim is substantially based on the fact that GLW paid part of the amount claimed in the liquidation proceeding after the liquidation proceeding was commenced. Lepionka says that it responsibly withdrew the liquidation proceeding because payment was received on 2 May 2016.

[6] For GLW, Mr Lawson calculates that on a 2B basis GLW would be entitled to costs and disbursements totalling $15,057.17 on the setting aside application, and

$21,094.17 on the liquidation claim. Full solicitor/client costs, covering both proceedings, would be $45,506.44. He submits that while there is not a great difference between scale costs and the indemnity costs award which GLW seeks, it is appropriate having regard to Lepionka’s alleged conduct that full indemnity costs should be awarded.

[7] Lepionka served a statutory demand on GLW on 29 September 2015, claiming an alleged debt of $2,712,576.39. The setting aside application was then filed by GLW, but Lepionka took the view that the setting aside application was not served within the period of ten working days allowed for service under s 290(2) of

the Act. It filed the liquidation claim very soon after the expiry of the period allowed for service of the setting aside application.

[8] The setting aside application was called in this Court on 12 November 2015, and I directed that the question of the validity of the service of the setting aside application should be the subject of a preliminary hearing. That hearing took place on 11 December 2015. In a reserved judgment delivered on 21 December 2015, I directed under r 1.5(2)(b) of the High Court Rules that service had been sufficiently effected within the service period. The costs of that hearing were reserved.

[9] Lepionka then filed a further notice of opposition setting out its grounds of opposition to the substantive setting aside application. An affidavit was filed in opposition by Mr Stefan Lepionka, and Mr Paterson provided an affidavit in reply for GLW. The setting aside application was set down for hearing, on a defended basis, on 10 May 2016.

[10] GLW contends that when the statutory demand was served on Lepionka, Lepionka knew that the claimed debt was not only disputed but was the subject of a substantial proceeding which GLW and its director (or former director) Mr Garth Paterson had commenced in this Court in Auckland (the Auckland

[11] GLW further contends that the service of the statutory demand was just one step in the furtherance of a series of allegedly fraudulent, illegal, and bad faith actions on the part of Lepionka and associated interests of Mr Stefan Lepionka. Briefly, GLW says that Lepionka was formed in late March 2015 for the specific purpose of acquiring a first mortgage which GLW had given to Westpac Banking Corporation over certain land owned by GLW near Havelock North (the land). GLW was in default under the mortgage at the time and a notice issued by the bank under the Property Law Act 2007 has expired. The principal reason Lepionka acquired the

_{Westpac mortgage was to enable it to use its powers as mortgagee to
adopt two}

¹GLW Group Ltd & Anor v Lepionka & Company Investments Ltd HC Auckland CIV-2015-404-

existing agreements for purchase of sections in a proposed subdivision of the land, which had been entered into by entities associated with Lepionka. Those entities had paid substantial deposits to GLW for their sections, and they stood to lose those deposits if Westpac proceeded with a threatened mortgagee sale of the land

[12] Included in the Auckland proceeding are allegations by GLW that Lepionka breached its duty as mortgagee to allow redemption of the mortgage, and breached its duty as mortgagee to act fairly, in good faith and for a proper purpose.

[13] GLW contends that the recent decision of the Court of Appeal in Coltart v Lepionka & Company Investments Ltd, which dealt with similar allegations made by Mr Coltart against Lepionka in respect of the same subdivision, confirms that Lepionka acquired the mortgage as a form of “self-help” remedy, with knowledge of competing interests (including those of Mr Coltart) and with the intention of defeating those interests.²GLW’s contention is that this cause of action gives rise to substantial allegations of Land Transfer Act fraud.

[14] GLW also says that it made numerous attempts to redeem the mortgage, each being rejected by Lepionka.

[15] Mr Lepionka addressed the question of the Auckland proceeding in his affidavit sworn on 12 April 2016. He stated that the Auckland proceeding was commenced in September 2015, when the plaintiffs applied for an interlocutory injunction to prevent Lepionka from exercising its powers as mortgagee over the land. Mr Paterson filed an affidavit in support. On 23 September 2015 Mr Lepionka swore an affidavit in opposition to the interim injunction application.

[16] On 1 October 2015, Heath J dismissed the injunction application. His Honour’s Minute records that Mr Paterson had by then been adjudicated bankrupt in Australia. While there was an application by Mr Paterson to set aside the Australian adjudication order, the application had not been heard. Heath J recorded his

[17] The Minute recorded that GLW’s counsel recognised that the interim injunction application could not proceed. The application was withdrawn, and formally dismissed by the Court. Heath J ordered costs against GLW and Mr Paterson on a 2B basis, together with disbursements. The total of the costs and disbursements awarded was $8,875.24.

[18] On 2 November 2015, the Auckland proceeding came before Faire J. Senior counsel for GLW and Mr Paterson advised that he was without instruction. The Judge made an order staying the Auckland proceeding on the basis that application to reinstate could be made on seven days’ notice. Leave was also granted to Lepionka and the other defendants to apply to dismiss the Auckland proceeding for want of prosecution at an appropriate time, if no further action had been taken by GLW and Mr Paterson.

[19] In his 12 April 2016 affidavit Mr Lepionka deposed that no further steps had been taken in the Auckland proceeding by GLW or the defendants since the Court’s last order made on 2 November 2015.

[20] In filing the liquidation claim, Lepionka relied on GLW’s failure to comply with the statutory demand served on 29 September 2015 by paying the amount claimed, and its alleged failure to file and serve a valid application to set the statutory demand aside within the service period of 10 working days. GLW also pleaded a second cause of action, alleging persistent failure by GLW or its board to comply with the provisions of the Act.³The particular failure to comply with the Act alleged by Lepionka was a failure to notify the Registrar of Companies within 20 working days that Ms O’Neil had been appointed a director of GLW on 6 May 2015

(that notification being required by s 159 of the Act). Lepionka’s contention was that

the notice was not filed by Mr Paterson until 8 October 2015, by which time he had been adjudicated bankrupt in Australia.⁴

³Relying on s 241(4)(b) of the Act, which provides that the Court may appoint a liquidator of a company if it is satisfied that the company or the board has persistently or seriously failed to comply with the Act.

⁴The Australian adjudication order is said to have been made on 24 September 2015.

[21] In his affidavit in reply, Mr Paterson deposed that Ms O’Neil, who was Mr Paterson’s former wife, was made a director of GLW in May 2015. He stated that he was not aware of the basis for this allegation of breach, contending that Ms O’Neil’s appointment was recorded in the Companies Office register from 6 May

[22] Lepionka says that could not be correct, as Mr Paterson swore an affidavit in the Auckland proceeding on 11 September 2015 saying that he was then the sole director of GLW. And that was the position noted by Heath J in his Minute of

[23] On GLW’s allegation that it attempted on a number of occasions to redeem the mortgage, but its attempts were rebuffed, Lepionka says essentially that its action in adopting the two agreements for the sale of sections to the entities associated with Mr Lepionka was akin to an exercise of its power of sale under the mortgage. On that basis, Lepionka contended that GLW was too late – once steps had been taken by Lepionka to sell part of the land using its power of sale as mortgagee, GLW no longer has a right to redeem the mortgage.

[24] After the liquidation claim was commenced, I permitted Lepionka to amend its statement of claim by adding a third cause of action. The third cause of action was based on a statutory demand which Lepionka had served on GLW on

16 November 2015 in respect of the costs awarded against GLW in the Auckland proceeding on 1 October 2015. GLW had not paid those costs, and had not applied to set aside that statutory demand.

[25] Leave to amend Lepionka’s statement of claim by adding the third cause of action was granted on 18 February 2016. GLW was directed to file a statement of defence within 10 working days after service of Lepionka’s further verifying affidavit. On 2 May 2016 GLW paid the costs. On receipt of that payment, Lepionka decided to seek leave to withdraw the liquidation proceeding. An order granting leave to withdraw was made at the hearing on 10 May 2016.

[26] Looking first at GLW’s claim for costs on the setting aside application, the starting point is that Lepionka elected to abandon its opposition to the setting aside application, and it is clear in those circumstances that GLW is entitled to an award of costs.⁵Should the costs award be scale costs or something more than that? I consider first Lepionka’s use of the statutory demand procedure.⁶

[27] The statutory demand was served after GLW and Mr Paterson had commenced the Auckland proceeding. It seems to me that there was enough disclosed in the Auckland proceeding to make it clear to Lepionka that there was a genuine and substantial dispute over the amount claimed, particularly in respect of GLW’s allegations relating to the propriety of Lepionka adopting the purchase agreements made by related entities who would probably have lost their deposits and their interests in the land if the purchase agreements had not been adopted.

[28] In the Coltart judgment of the Court of Appeal, the Court noted that Lepionka had not sought to disguise that it acquired Westpac’s mortgage with the predominant, possibly sole, intention of preserving the security and exercising its power of sale to protect related parties. The Court of Appeal went on to note that “while that intention does not of itself prove bad faith, we agree with the Associate Judge that [Lepionka’s] subsequent actions arguably give rise to an inference that its predominant purpose was not to sell for the best price reasonably obtainable or to protect its security. Instead, [Lepionka’s] actions invite the inference that its predominant purpose was to secure collateral advantages for [the entities associated with Lepionka who were purchasing sections in the subdivision], driven by factors extraneous to the relationship of mortgagee and mortgagor. The strict legal separation between the two Lepionka entities is not enough to shield

⁵See for example, Telecom New Zealand v Landmark Techonologies Ltd (2010) 10 NZCLC

264,619[2009] NZHC 1133; , (2009) 20 PRNZ 744. In that case, the Court noted that withdrawal of a statutory demand is commonly equated to a discontinued proceeding requiring the withdrawing party to pay costs.

⁶In Greys Avenue Investments Ltd v New Zealand Mint Ltd [2015] NZHC 2633, (2015) 22 PRNZ

801 at [40], the Court noted that arguments as to improper use of the statutory demand may go to whether the Court should order increased or indemnity costs under r 14.6(3) and (4) of the High Court Rules.

[29] While those statements by the Court of Appeal were made in respect of Mr Coltart’s claims in that proceeding, the affected owner of the land and mortgagor was GLW, and it is clear that Lepionka in its capacity as mortgagee of the land owed duties in equity to GLW as mortgagor, and also a duty under s 176 of the Property Law Act 2007 to obtain the best price for the land.

[30] By the time the statutory demand was issued on 29 September 2015 it should have been clear to Lepionka that GLW had genuine arguments to raise in respect of the validity of the acquisition of the Westpac mortgage, the adoption of the purchase agreements entered into by the entities associated with Lepionka, and the subsequent refusal by Lepionka to accept repayment of the mortgage by GLW or some other party. If a Court were to hold that the transactions by which Lepionka adopted the purchase agreements entered into by the related entities were invalid, it would not seem to be a large step for that Court to hold that Lepionka was not justified in refusing offers to repay the mortgage made by GLW or others (or at least that would have been arguable for GLW).

[31] Claims for increased or indemnity costs are dealt with under r 14.6 of the High Court Rules. While Mr Lawson asks for indemnity costs in this case, he has not provided details of actual solicitor/client costs for the setting aside application (as opposed to his client’s total costs and disbursements covering both proceedings). In those circumstances I will treat GLW’s claim for costs on the setting aside application as a claim for increased costs.

[32] Rule 14.6(3) deals with claims for increased costs. It materially provides:

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

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

(d) some other reason exists which justifies the court making an order for increased costs despite the principle that the determination of costs should be predictable and expeditious.

[33] I am satisfied that GLW has made out a claim for increased costs in this case. I have found that it was inappropriate for Lepionka to use the statutory demand procedure in circumstances where the claim was clearly disputed, and GLW was put to significant expense in completing the application to set aside the statutory demand and a lengthy supporting affidavit by Mr Paterson, in later successfully arguing the preliminary point over service, in reviewing Mr Lepionka’s 12 April 2016 affidavit, and in arranging for Mr Paterson to file an affidavit in reply.

[34] I consider that Lepionka’s inappropriate use of the statutory demand procedure is alone sufficient to justify an uplift above scale costs, and in my view that will be sufficiently marked, and the justice of the case sufficiently met, by an award of $20,000 to GLW on the setting aside application, that sum to be inclusive of disbursements. There will be an order accordingly.

[35] I add that I see no basis for any higher award. I do not accept Mr Lawson’s submission that the points taken by Lepionka on the service issue were “spurious”, or beyond reasonable argument; GLW’s real point is that it should not have been put in the position of having to move urgently to set aside the statutory demand in the first place. Nor do I think the evidence is clear enough for me to find that Lepionka has engaged in a deliberate strategy of starting litigation against GLW with the intention of abandoning the litigation at the eleventh hour, thus avoiding judicial scrutiny of its claims. For example, Lepionka’s decision to abandon its opposition to

the setting aside application may well have been influenced by the Court of Appeal decision in Coltart, which was not delivered until 7 April 2016. And the late withdrawal of the liquidation claim was no doubt influenced by GLW’s late payment of the costs awarded against it by Heath J on 1 October 2015.

[36] Turning to the question of costs on the liquidation claim, I do not see this as a case where costs should be awarded to GLW. While GLW had grounds to challenge the statutory demand served on it on 29 September 2015, there were clear question marks over its solvency. It failed to pay the costs awarded on 1 October 2015, and it failed to comply with a statutory demand for payment of those costs. In addition, the liquidation claim was supported by no fewer than four supporting creditors. While the claims of those creditors (and the costs claim made by Lepionka) were eventually satisfied, it has not been explained by GLW why Lepionka’s costs judgment and the claims of the supporting creditors were not paid when they fell due for payment.

[37] Lepionka also relied on alleged serious or persistent failure by GLW or its board to comply with the Act. Whether there may have been merit in that part of its claim cannot be known for sure, as Lepionka later sought, and was granted, leave to withdraw the liquidation claim.

[38] In circumstances where the statutory demand relied upon in the liquidation claim was subsequently withdrawn, and Lepionka elected not to pursue the liquidation claim based on alleged failures to comply with the Act, I think the appropriate starting point for costs purposes is that Lepionka should be treated as not having had proper grounds for liquidation when it filed the liquidation claim. However the granting of leave to add the third cause of action, based on GLW’s failure to comply with the statutory demand in respect of the 1 October 2015 costs award, did then provide a proper ground for a liquidation claim.

[39] Mr Lawson advises that costs associated with the third cause of action in the liquidation claim have been paid, and Mr Reid did not challenge that statement in his written submissions.

[40] Weighing the various factors, I am not satisfied that there should be a costs award in favour of either party on the liquidation claim. Costs on the liquidation claim will accordingly lie where they fall.

High Court of New Zealand Decisions

GLW Group Limited v Lepionka & Company Investments Limited [2016] NZHC 1380 (23 June 2016)

High Court of New Zealand

GLW Group Limited v Lepionka & Company Investments Limited [2016] NZHC 1380 (23 June 2016)