Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 3000 (12 December 2016)

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BETWEEN	ADVICEWISE PEOPLE LTD AND ORS Plaintiffs
AND	TRENDS PUBLISHING INTERNATIONAL LTD Defendant

Hearing:	9 December 2016
Counsel:	D McLellan QC, S Bisley and C J Laing for Callaghan Innovation (on counterclaim) S Bisley and C J Laing for Plaintiffs (on claim) G P Curry and H E Enright for Defendant (on claim and counterclaim)
_Judgment:	_{12 December 2016}

(a) The first was an application by four creditors of Trends Publishing International Ltd (Trends) to set aside a compromise into which Trends had purported to enter with its creditors, under Part 14 of the Companies Act 1993 (the Act). I call that the compromise proceeding.

(b) The second is a counterclaim (brought within the proceeding to set aside the compromise) by Trends against one of the four creditors, Callaghan Innovation (Callaghan) for defamation, breach of contract, and breach of statutory duties. I am told that the defamation claim will not be pursued. I call that the counterclaim.

[2] Associate Judge Doogue made an order requiring the compromise proceeding and the counterclaim to be heard separately.¹I heard the compromise proceeding in July 2016. I gave judgment in favour of the four creditors on 7 September 2016, and made an order setting aside the compromise with immediate effect.²I awarded one set of costs in favour of the four creditors.³Trends has appealed against my decision. The appeal has been set down for hearing in the Court of Appeal on 4 May

[3] A hearing was convened before me on 9 December 2016, to determine the following applications:

(a) An application by Trends for an order staying execution of my judgment of 7 September 2016, pending determination of the appeal.

¹Accident Compensation Corporation v Trends Publishing International Ltd [2015] NZHC 3316.

At that time, Accident Compensation Corporation was a plaintiff in the compromise proceeding. It subsequently discontinued its claim.

²_{Advicewise People Ltd v Trends Publishing International
Ltd [2016] NZHC 2119, at para [137].}

(b) An application by the four creditors to fix costs and disbursements in relation to their successful application to set aside the compromise.

(c) An application by Callaghan Innovation to stay the counterclaim, until such time as the appeal from my judgment of 7 September 2016 has been determined.

(d) An application by a third party (Mr Read) for access to the transcript of evidence given before me on the application to set aside the compromise. Mr Read is a former employee of Trends who has brought a claim against it in the Employment Court. No appearance by or on behalf of Mr Read was required.

[4] Callaghan is a Crown entity established under a special statute, the Callaghan Innovation Act 2012. One of its functions is to provide financial grants for worthy scientific and technology based innovation research. Callaghan agreed to fund research to be undertaken by Trends, as a result of an agreement into which they both entered on 2 April 2014. In April and June 2014, Callaghan paid a total sum to Trends of $313,536.70.

[5] As a result of investigations undertaken at its instigation in late 2014, Callaghan formed the view that its advances had been induced by false representations as to Trends’ financial position. Callaghan terminated its contract with Trends, and demanded repayment of the moneys advanced. Although Callaghan was listed as an affected creditor for the purposes of the compromise, its claim is disputed by Trends. The counterclaim was set down for hearing over 10 days, starting on 21 November 2016. An inquiry into damages was originally sought. Evidence has now been given that Trends’ counterclaim is for a sum in excess of $22 million. The November hearing date was subsequently vacated. Further directions are now required before a new hearing date is allocated.

[6] Although they advanced other grounds at the hearing,⁴the core complaint of the four creditors on their application to set aside the compromise was that the proponents of the compromise (the directors of Trends) manipulated the voting procedures in order to manufacture statutory majorities to approve the compromise. They claimed that they were unfairly prejudiced, as a result.⁵Their concerns revolved around the inclusion, for voting purposes only, of insider creditors.

Thecircle.co.nz Ltd (Thecircle) waived a security that it held over Trends’ undertaking, to the extent of $3,080,361.80. Waiver of the security interest was required in order for Thecircle to cast a vote as an unsecured creditor. Because the compromise was put on the basis that secured and preferential creditors would stand outside its scope, those creditors were not affected by the compromise. They each retained existing rights to enforce payment of their debts.

[8] While the four creditors relied on grounds of material irregularities and unfair prejudice,⁷my decision to set aside the compromise was premised firmly on the basis that Trends, through its directors (as proponents of the compromise) had manipulated the majorities so as to secure a result favourable to insiders. I held that constituted an unfair prejudice sufficient to justify setting aside the compromise.⁸

[9] Trends, in reliance on r 12 of the Court of Appeal (Civil) Rules 2005, applies to stay execution of my judgment of 7 September 2016, pending appeal. On an application for stay, the balance to be struck is between the right of a successful litigant not to be deprived of the fruits of its litigation and the need to ensure that an appeal by an unsuccessful party is not rendered nugatory. There are a number of

_{factors that are typically weighed in determining where the balance
lies. They are}

⁸Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 2119, at paras [92]–

[10] In the unusual circumstances of this case, I do not need to consider those factors. There are two reasons why the application for stay must fail without the need to balance those competing rights.

[11] First, there is nothing to be gained by staying the judgment. At present, the compromise has been set aside. That means the creditors of Trends who would otherwise be bound by the compromise may now bring proceedings in the Court to put Trends into liquidation if its debt were not paid in full. The question whether that is an appropriate outcome will turn on the facts of a particular claim. The question of stay should be left to be considered either in the context of an application to set aside a statutory demand or to stay a liquidation proceeding. The rights of neither Trends nor the creditors affected by the purported compromise are prejudiced by proceeding in this way. Indeed, it could be said that ordering a stay, in the context of the compromise appeal, could prejudice affected creditors who have neither been served with the application for stay nor heard on it.

[12] The second point arises out of affidavit evidence filed on behalf of Trends. The effect of evidence from one of Trends’ directors, Mr Johnson, and its Chief Financial Officer, Mr Groves, is that Trends is endeavouring to negotiate with some of the creditors who would otherwise be bound by the compromise. A schedule exhibited to the affidavit of Mr Groves suggests that four debts have been settled in a manner that does not comply with the terms of the compromise. In that situation, if the appeal were successful, the status quo could not be restored, as some of the creditors who would have been bound by the compromise will have settled their claims on different terms. To grant a stay, the effect of which would be to reinstate the binding compromise, would be inconsistent with the steps now being taken by Trends.

⁹Dymocks Franchise Systems (NSW) Pty Ltd v Bigola Enterprises Ltd (1999) 13 PRNZ 48 (HC

[14] In my judgment, one set of costs were awarded in favour of the four creditors on a 2B basis, together with reasonable disbursements. I certified for second counsel.¹¹Subsequently, counsel for the four creditors prepared a schedule of costs and disbursements. Costs of $50,286.50 are claimed, together with disbursements of

[15] There is no dispute with the quantum of costs. Initially, and faintly, counsel for Trends sought to argue that Callaghan might be obtaining an inappropriate advantage through receiving costs. There is nothing in that point. Costs have been awarded in favour of the four creditors. Whatever arrangements have been made among them in relation to their respective liability for costs incurred is for them to determine, not the Court.

[16] The only disputed disbursement concerns an affidavit from an expert, Mr Grant Graham. His fee is in the sum of $50,276.02. Trends contends that this amount is not claimable. It calls in aid r 14.12 of the High Court Rules.

(a) means an expense paid or incurred for the purposes of the proceeding that would ordinarily be charged for separately from legal professional services in a solicitor’s bill of costs; and

(iii) expenses of photocopying documents required by these rules or by a direction of the court:

relevant issue, in relation to a disbursement, means the issue in respect of which the disbursement was paid or incurred.

(2) A disbursement must, if claimed and verified, be included in the costs awarded for a proceeding to the extent that it is—

(3) Despite subclause (2), a disbursement may be disallowed or reduced if it is disproportionate in the circumstances of the proceeding.

(4) A Judge or an Associate Judge may direct a Registrar to exercise the powers of the court under subclause (2) or (3).

(5) When considering whether a disbursement paid or payable for an expert witness's fee or expenses is reasonable for the purposes of subclause (2)(d), a Judge or an Associate Judge may—

(a) call for a report or an assessment from a professional organisation or otherwise; and

(b) make any incidental order considered just, including an order as to the cost of that report or assessment.

[18] An unusual feature of r 14.12 is the definition given to the term “relevant issue”.¹²It confines the term “disbursement” to “the issue in respect of which the disbursement was paid or incurred”. But, the expression “relevant issue” is not used in any other part of r 14.12.

[19] Mr Curry, for Trends, referred me to Bloor v IAG New Zealand Ltd,¹³on the question whether the ambit of disbursements claimable was affected by the definition of “relevant issue” in r 14.12(1). In that case, Stevens J said:

[38] The plaintiffs claim disbursements of $45,833.40. The defendant accepts that it is obliged to pay disbursements of $43,127.71, but disputes items 33, 38 and 39, on the grounds that they related to Ms Wacker’s evidence, which was wholly directed at an issue on which the plaintiffs’ claim failed. I accept the defendant’s submission on this aspect. A party is entitled to disbursements under r 14.12 for reasonable expenses incurred pursuant to a relevant issue in the proceedings. I agree with the view expressed in McGechan that limits disbursements claimable to those relating to issues on which the party succeeded.

[20] The passages from McGechan on Procedure that Stevens J adopted state:¹⁴

To be recoverable as a disbursement, an item must first meet the r 14.12(1) definitions, and is then recoverable to the extent it was “reasonably necessary”, “reasonable in amount” and is not held by the court to be “disproportionate in the circumstances of the proceeding”.

Although not mentioned in any other part of r 14.12, the aim of the definition of “relevant issue” in r 14.12(1) appears to be to limit recoverability to disbursements incurred in respect of an issue on which the claiming party succeeded. That interpretation is in line with r 14.7(d) providing for refusal or reduction of costs (and thus disbursements) when “that party has failed in relation to a ... issue”.

[21] Rule 14.7 of the High Court Rules, which the authors of McGechan believe supports the interpretation set out in HR14.12.01(2), deals with the topic of refusal of, or reduction in, costs that would otherwise be claimable. Rule 14.7(d), to which

¹³_{Bloor v IAG New Zealand Ltd HC Rotorua
CIV-2004-463-425, 3 February 2011 (Stevens J).}

Despite rules 14.2 to 14.5, the court may refuse to make an order for costs or may reduce the costs otherwise payable under those rules if—

(d) although the party claiming costs has succeeded overall, that party has failed in relation to a cause of action or issue which significantly increased the costs of the party opposing costs; or

[22] With respect to both Stevens J and the authors of McGechan, I do not consider that r 14.7(d) provides support for the interpretation advanced. Indeed, that part of r 14.7(d) that is quoted in HR14.12.01(2) omits an important qualification; the failure in relation to the cause of action or issue must have “significantly increased the costs of the party opposing costs” if it were to be used to reduce costs otherwise payable. Also, the fact that the term “relevant issue” is defined in r 14.12(1) as “in relation to a disbursement” tells against any material linkage between the definition and the exercise of the court’s jurisdiction under r 14.7(d) to reduce costs in appropriate circumstances.

[23] The definition of “relevant issue” is something of an island within r 14.12. As I am not persuaded by the view expressed by Stevens J in Bloor, an alternative interpretation is required. I must start from the proposition that the definition would not have been incurred had it not had some role to play in the assessment of proper disbursements.

[24] In my view, the link is more aptly between r 14.12(2)(c) and the definition of “relevant issue”. A disbursement, such as an expert’s fee, to be recoverable, will need to be “reasonably necessary for the conduct of the proceeding”. In order for it to be “reasonably necessary” in that context, it must be adduced as evidence on a relevant issue arising in the proceeding. There is nothing else in r 14.12 to suggest that a party should be denied recovery of a disbursement in circumstances where it was reasonably necessary to incur the cost for the conduct of the proceeding. While I accept there is a discretion not to award the disbursements in circumstances where a plaintiff has failed on a cause of action or relevant issue to which it is linked, I do

not accept that claimable disbursements are limited to issues on which the party entitled to costs succeeded.¹⁵

[25] That approach fits with the underlying principles that were explained by Chambers J in Beach Road Preservation Society Inc v Whangarei District Council. In that case, counsel for an unsuccessful party argued that it should not be required to pay expert witness fees because the expert’s evidence was found to be irrelevant. Chambers J, a particular authority on this topic, said:¹⁶

[18] Mr Bell, joined by Mr Mathias for the council, argued that the respondents should not have to pay for the society's expert witnesses on the basis that their evidence proved irrelevant. I reject that submission. It may be true that on the basis upon which I decided this case, these experts' evidence provided little assistance. It is often the case, with the benefit of hindsight, that parties appreciate that a particular witness was unnecessary. In this case, the society advanced its argument on a number of fronts. This expert evidence was relevant to some of the arguments advanced. The fact that I did not feel it necessary to determine all the arguments advanced should not deprive the society of costs in respect of these expert witnesses, whose testimony was obtained reasonably and in good faith.

[26] In my view, the r 14.12(2) question is whether the disbursement incurred was “reasonably necessary for the conduct of the proceeding” and “reasonable in amount”. Rule 14.12(3) allows the Court either to disallow or reduce a disbursement otherwise claimable “if it is disproportionate in the circumstances of the proceeding”.

[27] Mr Graham’s evidence was directed to the question whether there was any material irregularity in the procedures undertaken for the compromise which could have justified an order setting the compromise aside.¹⁷His evidence covered such topics as the adequacy of disclosure of financial information by Trends to compromise creditors, the adequacy of discovery in the compromise proceeding

_{itself, the way in which the compromise was adopted at the meeting of
creditors on}

22 May 2015 and whether the compromise creditors would have been better off financially if a liquidation had followed.

[28] Although I did not find in favour of the four creditors on the material irregularity points, I consider that the evidence was properly before the Court. There was no objection taken to the admissibility of the evidence. The threshold for admissibility of expert evidence is whether it is “substantially helpful” to the decision-maker.¹⁸

[29] There is something strange in the notion that a successful party may be deprived of reimbursement for fees properly incurred in relation to the retention of an expert witness in circumstances where his or her evidence on a particular issue did not find favour with the Judge. This was not a case in which the particular claim on which Mr Graham gave evidence was unreasonable. While other Judges may have put more weight on Mr Graham’s evidence than did I, I am satisfied that the evidence was “reasonably necessary for the conduct of the proceeding”, in terms of r 14.12(2)(c) of the Rules.

[30] However, I consider that some discount should be made to the fee claimable to reflect the fact that Mr Graham’s evidence was necessarily given based upon incomplete information and that a number of issues could equally have been addressed in submissions. I consider that the appropriate award is $40,000.

[31] The fact that I award that sum says nothing about the reasonableness of the fee charged to the four creditors by Mr Graham. The reasonableness of his fees, having regard to the totality of the instructions given to him, is something I do not need to consider.

[32] Mr McLellan QC, who is lead counsel for Callaghan on the counterclaim, submitted that no steps should be taken while Trends appeal on the compromise is pursued. He was concerned about the use of funds by Trends to deplete assets that

might otherwise be available to claim for costs in the event that Callaghan successfully defended the counterclaim.

[33] I do not consider that factor is sufficient to delay preparation of the counterclaim for hearing. Trends, through affidavit evidence filed by Mr Johnson and Mr Groves, acknowledges that the counterclaim is being funded by an associated company, Thecircle. The way in which the point has been put by those witnesses makes it likely that Callaghan could make a successful claim for any costs directly

against Thecircle as a non-party.¹⁹The assets of Thecircle are significant, based on

the evidence before me. In addition, Callaghan has the benefit of an order for security for costs which has been awarded on the counterclaim.

[34] Given that the counterclaim cannot be heard until the end of next year, I see no reason why interlocutory steps should not continue. I shall make directions in relation to the filing and service of a statement of defence to the amended counterclaim and direct that a telephone conference be convened before a Judge on the first available date after 13 February 2017, for further directions to be made.

[35] I was told by counsel that they are available for a substantive hearing at any time from November 2017. I direct the Registrar to allocate a hearing during that month.

[36] Mr Curry submitted that I should not allow Mr Read access to the transcript of evidence given at the hearing of the compromise proceeding. Mr Bisley, for the four creditors, abided the Court’s decision.

[37] I reject Mr Curry’s submission. If Mr Read had been present in open Court he would have heard all the evidence being given. In those circumstances, I direct that he may obtain from the Registrar a copy of the transcript of evidence, subject to payment of proper Court costs.

(b) Subject to reduction of the disbursement claimed in respect of Mr Graham’s fee to $40,000, I confirm the costs sought by the four creditors, and judgment may be sealed in those terms.

(c) A statement of defence to the amended counterclaim shall be filed and served on or before 27 January 2017. The Registrar shall allocate a case management conference by telephone before a Judge (not necessarily me) at 9am on the first available date after 13 February

2017. Counsel shall file a joint memorandum indicating the directions sought for the purpose of that conference. The memorandum shall be filed no less than three working days prior to the conference. The Registrar shall allocate a hearing for the counterclaim, to commence in November 2017.

(d) Subject to payment of proper Court fees, the Registrar may permit Mr Read (or his solicitors) to take copies of the transcript of the notes of evidence given at the hearing of the compromise proceeding.

High Court of New Zealand Decisions

Advicewise People Ltd v Trends Publishing International Ltd [2016] NZHC 3000 (12 December 2016)