Action Media Limited (in liquidation) v Mitchell [2016] NZHC 2555 (26 October 2016)

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UNDER	the Companies Act 1993
IN THE MATTER	of Action Media Limited (In Liquidation)
BETWEEN	ACTION MEDIA LIMITED (IN LIQUIDATION) First Plaintiff
AND	HENRY DAVID LEVIN AND VIVIEN JUDITH MADSEN-RIES AS LIQUIDATORS OF ACTION MEDIA LIMITED (IN LIQUIDATION) Second Plaintiffs
AND	SEAN WESLEY MITCHELL First Defendant
AND	FARRY & CO TRUSTEES LIMITED Second Defendant

	On the papers
Appearances:	P Murray and P Shackleton for the Plaintiffs P R Cogswell for the Defendants
_Judgment:	_{26 October 2016}

This judgment was delivered by me on 26 October 2016 at 3pm pursuant to Rule 11.5 of the High Court Rules.

ACTION MEDIA LIMITED (IN LIQUIDATION) v LEVIN AND MADSEN-RIES AS LIQUIDATORS OF ACTION MEDIA LIMITED (IN LIQUIDATION) [2016] NZHC 2555 [26 October 2016]

[1] The parties have filed applications for costs following judgments I issued on

9 December 2015, regarding the defendants’ omnibus interlocutory application; and

28 January 2016, regarding the defendants’ application for an adjournment. There are eight matters which might give rise to costs’ liability:

Judgment date	Matter	“Successful” parties
Discontinued	Defendants’ application for strike- out	Plaintiffs
9 December 2015	Discovery of s 261 notices	Plaintiffs
9 December 2015	Discovery of correspondence regarding creditor’s compromise	Defendants
9 December 2015	Discovery of correspondence regarding Mr Mitchell’s personal compromise	Plaintiffs
9 December 2015	Discovery of IRD case notes	Plaintiffs
9 December 2015	Directions under s 286 of the Act	Plaintiffs
9 December 2015	Mode of discovery and inspection	Defendants
28 January 2015	Adjournment	Defendants

[1] The first plaintiff, Action Media Ltd (in liquidation) (the Company), was incorporated in 2006. It carried on business as a publisher. It ceased trading on 4 May 2010 and was placed into liquidation by special resolution of its shareholders the same day. The second plaintiffs are the liquidators of the Company (the Liquidators).

[2] The first defendant, Sean Mitchell, was a director of the Company and its sole director from 3 January 2007. Together with the second defendant, Farry & Co Trustees Ltd, which is a solicitor’s trustee company, he jointly held shares in the Company.

[3] Unsecured creditors’ claims in the liquidation total $1,172,802.93. There are five creditors, the Inland Revenue (the IRD) being by far the largest creditor. All other creditors are related in some way to the Company.

[4] The amounts owed to the IRD include sums for PAYE, goods and services tax (GST), Kiwisaver employee deductions, Kiwisaver employer contributions, student loan employer deductions and interest and penalties.

[5] The Liquidators say that the Company was unable to pay its due debts from at least 31 July 2007 and was balance sheet insolvent from at least 31 March 2008.

[6] The Company pleads three causes of action, in the alternative, against Mr Mitchell, in respect of recovery of remuneration and other benefits paid to a director, under s 161(5) of the Companies Act 1993 (the Act); recovery of distribution paid to a shareholder under s 56(1) and/or s

137 of the Act, and failed to keep adequate accounting records and prepare financial statements in accordance with the obligations set out under s 194 of

the Company’s loss in compensation. The Liquidators then claim against both defendants seeking to set aside insolvent transactions pursuant to ss 294 and 295 of the Act.

October 2015, the defendants filed an interlocutory application for orders: (a) Striking out the plaintiffs’ sixth cause of action;

(i) All notices pursuant to s 261 of the Companies Act 1993 issued by the Liquidators;

(ii) All correspondence between the Liquidators and the IRD relation to the substantive proceeding; the Liquidation of the Company; Mr Mitchell’s application for leave to remain a director of Techday Ltd; the consideration of the creditors’ compromises and any other matter touching on the issues in the claim; and

[4] The strike-out application was discontinued three days before the hearing. At that point in time, the plaintiffs had filed a notice of opposition but had not yet filed submissions.

[5] The hearing took place on 20 November 2015 and the judgment was delivered on 9 December 2015. The relevant points from that judgment were as follows:

(a) Discovery of all s 261 notices was not necessary, as the proceedings were not an enquiry into how the liquidation of the company was being conducted. The Liquidators’ assurance that all relevant s 261 notices had been discovered was sufficient.

(b) Correspondence regarding the creditor’s compromise was clearly relevant to the proceeding. The Liquidators had already filed a s 261 notice seeking documents but the IRD had failed to comply. The Liquidators had the power to seek enforcement of compliance with the notice. Therefore the Liquidators should be required to provide discovery.

(c) The correspondence regarding Mr Mitchell’s personal compromise with the IRD in order to retain his directorship of Techday Ltd was not documents relating to the Company and therefore could not be the subject of a s 261 notice. The Liquidators could not be required to provide discovery.

(d) The unredacted case notes were the property of the IRD and therefore could not be the subject of a s 261 notice. Therefore the Liquidators could not be required to provide discovery.

(e) The Liquidators were entitled to issue s 261 notices to Mr Mitchell in the course of their duties as liquidators. The application for orders under s 286 of the Act was dismissed.

(f) The documents in question, namely invoices, were of marginal relevance to the proceeding and therefore the principle of proportionality did not support an order that the defendants scan the documents and provide them electronically. The defendants’ application for an order that the Liquidators attend at the offices of the first defendant’s solicitor to inspect the documents was granted.

[6] Therefore the plaintiffs were successful in relation to four out of six issues argued at the hearing and also benefited from the defendants’ late decision to discontinue their strike-out application.

[7] The substantive trial was scheduled to commence on 15 February 2016 for seven days. However, the defendants filed an application for an adjournment on three grounds:

(a) There were outstanding court orders arising from the judgment issued on 9 December 2015 which were subject to challenge by the plaintiffs.

(b) There were outstanding interlocutory issues, namely that the plaintiffs had not provided supplementary discovery of documents relating to the creditor’s compromise and had not exercised their right to inspect the defendants’ documents.

[8] In the course of the hearing, I indicated to the plaintiffs that the issues they raised in respect of the 9 December orders would not be taken any further. By the time of the hearing, the plaintiffs had served their expert evidence. The defendants

also accepted that the plaintiffs’ decision whether to inspect discoverable documents

[9] The January judgment therefore solely concerned the plaintiffs’ failure to provide supplementary discovery. The plaintiffs had communicated with the IRD regarding the files but had not yet obtained the documents. They maintained that the defendants were already in possession of the relevant documents, since they had been provided in an affidavit filed by Mr Christopher Orr in a separate proceeding to which the first defendant was a party. The plaintiffs opposed the application for adjournment on that basis. However, Mr Orr’s affidavit referred to other documents which were not in the possession of the defendants and the plaintiffs could not guarantee that those documents were irrelevant. The trial was accordingly adjourned.

[10] The plaintiffs seek costs in relation to the defendants’ omnibus interlocutory application, on the basis that they were broadly successful in their opposition to that application. The plaintiffs acknowledge that the defendants were successful in obtaining two of the orders sought, but submit that this should be accorded minimal weight. Further, the plaintiffs ask the Court to note that there would be grounds for increased costs in relation to the defendants’ discontinued strike-out application, on the basis that there was clearly an evidential basis sufficient for that claim to go to trial.

[11] The plaintiffs submit that costs should lie where they fall in relation to the adjournment application. They say that the Liquidators had made previous attempts to obtain the relevant correspondence from the IRD and had been told that some documents were unavailable. The Liquidators had (wrongly) relied on previous case law which suggested that there was no further obligation to pursue the IRD for those documents. However, once the decision regarding the interlocutory application was released, the Liquidators promptly took steps to obtain the required documents. From that point, the plaintiffs were reliant on the IRD to provide those documents

and were not at fault for the delay in providing the relevant documents to the defendants. The plaintiffs ultimately served the supplementary discovery affidavit on 15 April 2016.

[12] The defendants submit that costs should lie where they fall in respect of the interlocutory application, since each party achieved some degree of success. They say that any costs order in respect of the discontinued strike-out application should be reserved until trial so that the merits of the defendants’ application can be properly assessed. However, if costs are to be determined at this point, the defendants submit that an order for increased costs in respect of the discontinued strike-out application is unnecessary, since the application was discontinued before the plaintiffs were required to file submissions; and further, the decision to bring that application was initially prompted by the Liquidators’ failure to respond to enquiries from the defendants.

[13] The defendants seek costs in relation to their successful adjournment application on a 2B basis. They submit that the plaintiffs should have been aware from an early stage in proceedings that information from the IRD regarding the creditor’s compromise would be relevant to the proceeding and that the plaintiffs should have made the relevant enquiries at an earlier date so that the documents were discovered in time for the trial to proceed as scheduled.

[14] The general principle regarding costs is that costs should follow the event.¹

Where the event in question is an interlocutory application, costs should generally be fixed at the determination of the application unless there are special reasons to the contrary.²In this case, however, there are two further issues which require brief consideration:

(b) Costs in relation to a decision which results in partial success for both parties.

[15] Where an interlocutory application has been determined by way of discontinuance, costs will be fixed in the normal way. Rule 15.23 provides:

Unless the defendant otherwise agrees or the court otherwise orders, a plaintiff who discontinues a proceeding against a defendant must pay costs to the defendant of and incidental to the proceeding up to and including the discontinuance.

[16] As to whether costs should be reserved until the determination of the substantive application on the basis that the court has not had the opportunity to determine the merits of the case, I note the decision Chapman v Badon Ltd, in which the Court of Appeal held:³

... Apart from applications for summary judgment, the general approach to costs in respect of interlocutory applications is that they are dealt with at the time the applications are determined rather than being held over until the outcome of the proceedings is known. This reflects the fact that the merits of particular applications and the merits of the substantive proceedings are different matters.

[17] In relation to the second issue regarding an award of costs following partial success, the Court of Appeal judgment in Packing In Ltd (in liq) v Chilcott is relevant.⁴The Court held:

[5] In a case such as the present, where in broad terms each party has had similar success, we do not consider it helpful to focus too closely on the question which party has failed and which has succeeded. Costs in a case such as this should rather be based on the premise that approximately equal success and failure attended the efforts of both sides. To that starting point should be added issues such as how much time was spent on each transaction or group of transactions in issue, and any other matters which can reasonably be said to bear on the Court’s ultimate discretion on the subject of costs. In the end, as in all costs matters, the Court must endeavour to do justice to both sides, bearing in mind all material features of the case.

[6] ... Success or failure in this context is better assessed by a realistic appraisal of the end result rather than by focusing on who initiated what step, and the extent to which that step succeeded or failed.

[18] Of the six issues considered in the December judgment, the defendants were successful on two issues and the plaintiffs were successful on four issues. This outcome is close to evenly weighted, particularly given the importance of discovery of the documents relating to the creditor’s compromise. In determining success for the purpose of costs awards, the Court must take a realistic appraisal of the overall

result.⁵Judges must approach the issue of costs in a broad way, looking at the end

result and the key developments during the course of the proceeding that have led to that result.⁶In a number of cases, a party’s partial success has been recognised by reducing the costs award the “successful” party would otherwise be entitled to.⁷

Having weighed up these matters, I determine that, in respect of the issues addressed in the December judgment, costs should lie where they fall.

[19] The plaintiffs are, however, entitled to some costs in respect of the discontinued strike-out application because, when that is taken into account, the weighting shifts in favour of the plaintiffs. The defendants maintained that action from the time of filing until three days before the hearing on 20 November 2015. Although the plaintiffs had not filed submissions on this issue at the time of discontinuance, they must have taken substantial preparatory steps. It is reasonable that the plaintiffs should recover some of those costs.

[20] The plaintiffs made reference to having grounds for increased costs in relation to the strike out application, given how clear it was that there was a factual basis for the proceeding. The party claiming increased costs has the onus of persuading the Court that it is justified.⁸Presumably, the plaintiff ’s claim is based on the strike out being an unnecessary step in the proceeding, under r 14.6(3)(b)(ii).

[21] In the context of costs on a discontinued proceeding, there is always a tension as to determining the reasonableness or otherwise of a proceeding where the merits

⁵_{Waterhouse v Contractors Bonding Ltd HC Auckland
CIV-2010-404-3074, 7 June 2011.}

⁷Godfrey Hirst Ltd v Cavalier Bremworth [2013] NZHC 2256 (costs reduced by 25 per cent);

Clearwater Cove Apartments Body Corporate No 170989 v Auckland Council [2014] NZHC

have not yet been considered.⁹Lang J did give a strong indication at case management that the strike out was unlikely to succeed, and it appears that the plaintiffs consistently took the position that affidavit evidence showed a strong basis for their claims. However, the defendants say there was a delay in providing the evidence and also provide affidavit evidence showing the difficulties engaging the liquidators about the basis for the claim.

[22] In the circumstances in which this claim arises, when there appear to have been issues about the timeliness and completeness of discovery and the application was discontinued, increased costs are not awarded.

[23] The defendant’s omnibus application included five separate matters, one of which was the strike-out application. I am satisfied it is appropriate to award costs of 20 per cent in respect of all steps taken by the plaintiffs prior to the discontinuance, to reflect the fact that costs are awarded in respect of only one of the

Item	Description	Category	Time	Costs
23	Filing opposition to interlocutory application	2B	0.6	$1,338
12	Appearance at mentions hearing on 19 October 2015	2B	0.2	$446
24	Preparation of written submissions	2B	1.5	$3,345
11	Filing memorandum dated 9 November 2015	2B	0.4	$892
13	Appearance at conference on 16 November 2015	2B	0.3	$669
Total costs				$6690
At 20%				$1338

[24] In relation to the defendants’ application for adjournment, there is no good reason to depart from the general principle that costs should follow the event. The

_{plaintiffs knew that they had not fulfilled their obligation to provide
supplementary}

discovery, as required by the December judgment, but nonetheless chose to oppose the defendants’ application for an adjournment. The fact that the defendants may have been able to obtain some of the relevant documents from an earlier affidavit of Mr Orr did not erase that obligation, particularly since, by the plaintiffs’ own admission, they could not give an assurance that Mr Orr’s affidavit contained all the relevant documents. In fact, the plaintiffs did not provide supplementary discovery until April of this year, two months after the scheduled date for trial to commence.

[25] The defendants seek an award of costs in relation to the adjournment application as follows:

Item	Description	Category	Time
22	File interlocutory application	2B	0.6
24	Preparation of reply memorandum/submissions	2A	0.5
26	Hearing 25 January 2016	-	0.25
26	Hearing 28 January 2016	-	0.25

[26] The plaintiffs dispute this claim on the basis that the interlocutory application did not require a supporting affidavit and therefore the allocation of 0.6 days for the filing is excessive; that the defendants are entitled to claim for preparation of a memorandum, rather than submissions; and that the hearings on 25 January 2016 and

[27] There does not appear to be any dispute that the interlocutory application did not have a supporting affidavit attached to it. There is no record of an additional affidavit on the court file. The application itself was relatively straightforward. Given the defendants’ concession that the preparation of submissions should be on a 2A basis, I consider it fair to award costs for the filing the interlocutory application on a

[28] Further, as the defendants rightly note, the High Court Rules do not provide for costs to be awarded for 0.2 hearing days; rather, costs must be awarded to reflect “[t]he time occupied by the hearing measured in quarter days.” The defendants are entitled to claim 0.25 days in respect of the hearings.

Item	Description	Category	Time	Costs
22	File interlocutory application	2A	0.3	$669
24	Preparation of reply memorandum/submissions	2A	0.5	$1115
26	Hearing 25 January 2016	-	0.25	$557.50
26	Hearing 28 January 2016	-	0.25	$557.50
Total costs				$2899

[30] Rule 14.17 provides that if opposing parties are awarded costs against each other, their respective costs must be set off and the lesser sum must be deducted from the greater. The plaintiffs’ award should be subtracted from the total payable to the defendants.

[31] In their submissions on costs, the parties have also addressed an allegation raised by the defendants that the plaintiffs have failed to comply with supplementary discovery obligations. The defendants say that the plaintiffs have not discovered communications between the IRD and the Liquidators regarding the creditor’s compromise, but only communications between the IRD and the Company. In reply, the plaintiffs say that communications between the IRD and the Liquidators were discovered at an earlier stage and do not need to be “re-discovered”.

[32] Neither of the parties make any request for orders or directions from the court in relation to this issue and I take it no further.

(a) The plaintiffs are to receive costs of $1,338 in respect of the discontinued strike-out application;

High Court of New Zealand Decisions

Action Media Limited (in liquidation) v Mitchell [2016] NZHC 2555 (26 October 2016)