AAI Limited v 92 Lichfield Street (in receivership and in liquidation) [2016] NZHC 90 (5 February 2016)

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Hearing:	On the papers
Appearances:	C Langstone for Plaintiff S Munro and V Heward for Defendant
_Judgment:	_{5 February 2016}

[2] The Court held that 92 Lichfield Limited’s (Lichfield) use of a statutory demand was an abuse of process and that AAI was entitled to costs. It referred the matter back to the High Court for costs to be determined.

[3] On the issue of costs, the Court of Appeal declined to award indemnity or increased costs on the appeal. However, it considered that issues concerning abuse of process could be considered in the context of the fixing of costs in the High Court.²

[4] AAI then requested that the costs of all steps taken in the High Court be considered at the same time. Those steps arose in two sets of proceedings being:

(a) CIV-2015-409-143 (“the statutory demand proceedings”) concerning AAI’s application to set aside the statutory demand issued by Lichfield;

(b) CIV-2014-404-1712 (“the liquidation proceedings”) concerning Lichfield’s use of the statutory demand to issue liquidation proceedings against AAI.

[5] I agreed that it was sensible for all issues of costs in both the statutory demand proceedings and the liquidation proceedings to be dealt with at the same time, and made timetabling directions for the filing of costs memoranda accordingly.

[6] AAI claims disbursements of $3,742.20 as set out in schedule B to its costs memorandum. It also claims legal costs which, calculated on a 2B basis, would be

$25,066. However, AAI says these do not fairly compensate it for the costs to which it has been put by the statutory demand and liquidation proceedings. It seeks increased costs of $50,132 (being schedule costs with an uplift of 100 per cent),

(a) by knowingly issuing an improper statutory demand Lichfield pursued an unmeritorious claim (and defence) within the meaning of High Court rr 14.6(3)(b)(ii) and (d).

(b) Lichfield failed to accept an offer of settlement, without reasonable justification, under High Court r 14.6(3)(iii); and

(c) Lichfield issued and pursued liquidation proceedings based upon a statutory demand which was found to be improperly issued, particularly when AAI had provided evidence of its solvency and where the full judgment sum had been paid into its solicitor’s trust account.

[7] It is necessary at the outset to rehearse some of the background to the issuing of the proceedings as it is relevant to the claim by AAI for increased costs.

[8] In mid 2013, AAI’s loss adjuster wrote to the receivers of Lichfield with an

offer to settle Lichfield’s insurance claim for its earthquake-damaged building.

[9] After the offer had been extended, one of the receivers telephoned the loss adjustor, and followed it up with an email, advising that Lichfield was prepared to accept the offer and asking what further information was needed from the receivers.

[10] On 7 November 2013, AAI provided a discharge form to Lichfield which provided for execution by Lichfield and its interested parties, the three mortgagees.

[11] Seven days later the receivers’ solicitors wrote to AAI’s loss adjusters advising they considered it sufficient for Lichfield’s receivers alone to be a party to the settlement. However, AAI insisted the discharge needed to be signed by all relevant parties, including the three mortgagees. On the same day, the loss adjuster received a letter from one of the interested parties challenging the amount of the settlement offer, and stating it would not consider itself bound by it.

[12] Over the course of the next year or so, AAI and the receivers worked together to try to ensure that the interested parties would be bound by the settlement offer. Those efforts were unsuccessful and, on 19 February 2015, the receivers’ solicitors wrote to AAI’s solicitors stating there was a binding agreement and demanded that AAI pay the first mortgagee the settlement sum. That was followed by Lichfield serving a statutory demand for payment of the settlement sum on 6 March 2015.

[13] AAI’s solicitors wrote to Lichfield’s solicitors on 10 March denying the debt was owed because the settlement was in principle only. It asked for an undertaking that the statutory demand would be withdrawn. It advised that it would issue an application to set aside the statutory demand if it was not withdrawn and that it would seek increased or indemnity costs.

[14] On 13 March 2015, Lichfield responded, refusing to set aside the statutory demand. On 21 April, following further settlement discussions, AAI again advised Lichfield that it had no grounds for issuing the statutory demand and therefore Lichfield would be liable to pay AAI indemnity or increased costs. This was again denied by Lichfield’s solicitors on 20 May 2015. Two further letters were sent by AAI reiterating that there were no grounds for issuing the statutory demand and warning Lichfield that increased or indemnity costs would be sought by AAI.

[15] By a decision dated 23 June 2015, Associate Judge Osborne refused to set aside the statutory demand and directed AAI to pay Lichfield $6,500,000 within

[16] On 29 June 2015, AAI deposited $6,500,000 into its solicitor’s trust account. AAI then filed and served an application to stay enforcement of the judgment and for restrictions on advertising, and filed an appeal of the 23 June 2015 judgment.

[17] On 28 July 2015, Lichfield filed proceedings to place AAI into liquidation. There was correspondence between AAI and Lichfield during September 2015 where AAI’s solicitors warned Lichfield that indemnity costs would be sought by AAI, if the hearing in the Court of Appeal proceeded and the appeal was successful.

[18] As already identified, AAI’s appeal was successful, with the Court saying:

Lichfield knew that AAI’s position was that the settlement sum was not payable until Lichfield was able to procure that the interested parties were somehow bound by the settlement agreement. It is a fair characterisation of events to say that for 14 months Lichfield acquiesced to this view of the parties’ respective obligations, until only very shortly before the issue of the statutory demand. Lichfield knew that there was a substantial dispute as to whether the debt was payable, but nevertheless issued a statutory demand to force payment of the settlement sum.

[19] The Court of Appeal expressly found that the use of the statutory demand procedure in this case was an abuse of that procedure.³

[20] AAI points out that there is clear authority that a statutory demand is not to be invoked as a means of obtaining payment where a genuine dispute exists, citing Rembrant Custodians Ltd v Pro-drill (Auckland) Ltd, where Master Lang (as he was then) said:⁴

[38] One of the most significant potential consequences is the establishment of jurisdiction to immediately place the company in liquidation. If a company wishes to avoid those consequences it must either persuade the “issuer” of the statutory demand to withdraw it or, alternatively, apply to the Court for an order setting the demand aside. The timeframe for the filing of such an application is very tight. There is no room for error, because the Court has no power to extend the time within which an application to set aside the statutory demand may be filed. In those circumstances, it is obviously incumbent on the “issuer” of a statutory demand to ensure that the demand is being issued on a proper basis. In particular, it must take care to ensure that the debt which is claimed in the statutory demand is not the subject of a genuine dispute ...

[21] Equally in International Airline Training (NZ) Ltd v Rohlig NZ Ltd, Master Faire (as he was then) stated:⁵

⁴_{Rembrant Custodians Ltd v Pro-drill (Auckland) Ltd
HC Auckland M337/IM03 13 June 2003.}

⁵International Airline Training (NZ) Ltd v Rohlig NZ Ltd HC Auckland CIV-2003-404-3464

23 February 2004 at [16], and reiterated in Gateway Cargo Systems Ltd v Airborne Freight Ltd

... statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator. It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there was a contest as to liability for a given debt.

[22] AAI argues that Lichfield was aware that the settlement sum was not payable until all the parties had signed the discharge because the settlement was “in principle” only. AAI also points out that Lichfield also originally sought interest and damages in the statutory demand served, although it subsequently conceded that these were not due and payable.

[23] AAI says that because the statutory demand was issued when there was no proper basis for doing so, High Court r 14.6(3)(b)(ii) and (d) come into play and that, accordingly, the statutory demand proceedings which followed should attract an order for increased costs.

[24] AAI also says that High Court r 14.6(3)(b)(v) applies as Lichfield failed without reasonable justification to accept an offer of settlement. Its solicitors attach correspondence sent on 10 March 2015, which invited Lichfield to withdraw its statutory demand and enter settlement discussions, and warned Lichfield that if the statutory demand was not withdrawn, then increased or indemnity costs would be sought. That warning was repeated in subsequent correspondence. By implication AAI says it was unreasonable for Lichfield not to have withdrawn the statutory demand because no grounds existed for issuing it, and it could have avoided the claim for increased or indemnity costs by accepting the terms proposed.

[25] AAI also claims increased costs for all steps associated with the liquidation proceedings. It claims this because:

(a) the liquidation proceedings were based upon a statutory demand that was improperly issued; and

(b) Lichfield filed liquidation proceedings against a company that it knew was solvent and which had already provided security for the entire judgment sum.

[26] In essence, it argues because the statutory demand was improperly issued, liquidation proceedings commenced in reliance on it were equally improper. More importantly, it argues that failure to comply with the statutory demand only raises a presumption of insolvency. It is open to the defendant to overcome that presumption and it says this was clearly rebutted when AAI paid the judgment sum (plus the costs awarded) into its solicitors’ trust account. AAI cites Taxi Trucks Ltd v Nicholson, where it was held that payment into the appellant’s solicitor’s trust account pending determination of the appellant’s liability provides all the protection that the

respondent could reasonably ask.⁶AAI says it follows that it is an abuse of process

to file liquidation proceedings against a company when that company has provided security and is clearly able to pay its debts.

[27] The increased costs sought are a 100 per cent increase on costs assessed on a

2B basis. These are still shy of actual costs which, including billed disbursements, exceed $80,000.

[28] AAI says that an uplift of this magnitude is consistent with the recent decisions of Associate Judge Matthews in McWilliam Consulting Group Ltd v Keith Ussher Architecture Services Ltd,⁷and Mastagard Ltd v Solly’s Freight (1978) Ltd,⁸where a 100 per cent uplift on costs assessed on a 2B basis was awarded against parties which had improperly issued statutory demands.

[29] Lichfield acknowledges liability for 2B costs, totalling $9,154, in respect of the application in the High Court to set aside the statutory demand, along with

⁷_{McWilliam Consulting Group Ltd v Keith Ussher
Architecture Services Ltd [2012] NZHC 33.}

⁸Mastagard Ltd v Solly’s Freight (1978) Ltd HC Nelson CIV-2012-442-106, 11 May 2012.

associated disbursements incurred in that proceeding of $1,967, but otherwise submits that costs should lie where they fall.

[30] In opposing increased costs in relation to the application to set aside the statutory demand, Lichfield makes the following points:

(a) the actual costs incurred by AAI of approximately $80,000 are not relevant when considering whether to award increased costs;⁹

(b) although AAI succeeded on its appeal it ran a different argument in the Court of Appeal to that which it argued before the High Court;¹⁰

100 per cent can be distinguished, in that the statutory demand was set aside in the first instance hearing, and not on appeal. In any event, as Associate Judge Matthews has made it clear in a subsequent decision, “scale costs are intended to represent approximately two-thirds of actual costs and an uplift of 50 per cent should therefore approximate actual costs incurred ... the decision McWillam Consulting is not a

[31] Lichfield rejects AAI’s application for costs, with an uplift of 100 per cent in respect of the applications it made subsequent to Associate Judge Osborne’s judgment dated 23 June 2015; (being its applications to stay enforcement of its judgment, to stay the liquidation proceedings commenced by Lichfield on

28 July 2015, to correct an error in the stayed judgments, and for costs on this costs

⁹_{Holdfast NZ Ltd v Selleys Pty Ltd [2005] NZCA 302; (2005) 17 PRNZ 897
(CA).}

¹⁰With AAI arguing that it was an express term of the agreement that Lichfield and the other interested parties would discharge all claims they had under the policy in return for payment of the settlement amount, rather than it being an implied term.

¹¹Nuvita Manufacturing and Development Ltd v Design and Managements Service Ltd [2013] NZHC 3256 at [49].

[32] Lichfield submits that costs on the subsequent applications should lie where they fall but, even if the Court is minded to award AAI costs in respect of those applications, there are no grounds to support an award of increased costs. Lichfield says that AAI’s conduct in bringing the subsequent applications cannot be ignored and the Court of Appeal’s subsequent finding that the use of the statutory demand procedure was an abuse of process does not support an award for increased costs after the initial judgment where Lichfield was responding as the (then) successful party. This reflects the comments of the Court of Appeal itself in considering costs on the appeal where it observed that it did “not consider that increased or indemnity costs should be awarded in this Court, as before us, Lichfield was defending a

[33] Lichfield argues that costs should lie where they fall in respect of AAI’s application to stay enforcement of the judgment of Associate Judge Osborne because:

(a) it made no attempt to agree a stay with Lichfield before filing its application and it served its application just after 4.00 pm on the day the judgment sum was to be paid;

(b) Lichfield advised it would consent to a stay on terms which effectively reflected the Court’s order in this stay application, being an interim payment of $4,627,000 to Lichfield and the balance of the settlement sum and costs to be held in the solicitors’ trust account.

Lichfield’s application to liquidate AAI and AAI’s application to stay those

¹²AAI Ltd v 92 Lichfield Street (in rec and in liq) [2015] NZCA 559 at [63].

(a) Lichfield made the application to liquidate AAI, not to exert undue pressure on AAI to force payment of the settlement sum, but rather to preserve Lichfield’s position in the event that AAI’s appeal against the judgment of Associate Judge Osborne was unsuccessful;

(b) while Lichfield relies on its payment of the judgment sum to its solicitors’ trust account, this ignores the fact that at the time Lichfield filed its application to liquidate AAI, it had a judgment in its favour that there was no genuine and substantial dispute, and it was seeking to preserve its position as the successful party;

(c) AAI had opportunity to avoid the liquidation proceedings and, consequently, the application to stay those proceedings but, as Associate Judge Osborne acknowledged, the orders sought by AAI did not seek to extend the time for AAI to comply with the statutory demand or stay the period in which Lichfield had to apply under s 288 of the Companies Act 1993 to liquidate AAI in reliance on the unmet statutory demand.

[35] Furthermore, while Lichfield refused to consent to a stay of the liquidation proceedings before AAI made its application to do so, it had clearly set out the terms on which it would consent to a stay in its notice of opposition to AAI’s application to stay enforcement of the judgment dated 28 July 2015.

[36] Lichfield opposes an award of increased costs in respect of the stay applications saying there are no grounds under rr 14.6(3)(b)(ii) and (v) and (d) to support an award of increased costs. Lichfield’s opposition to AAI’s stay applications was neither an unnecessary step nor an argument that lacked merit. There was no offer of settlement by AAI to agree the terms of a stay of enforcement before it made its application. AAI has not demonstrated that any “other reason exists which justifies the Court making an order for increased costs” in respect of the stay applications, and the Court of Appeal’s determination that the use of the statutory demand procedure was an abuse of process does not apply to steps taken by

Lichfield after it successfully defended the application in the High Court to set aside the statutory demand.

[37] If, contrary to Lichfield’s submissions, the Court is minded to award AAI costs on its stay applications, Lichfield takes issue with the following steps for which AAI has claimed:

(a) appearance at one day hearing on 8 September 2015. The hearing took only half a day so any award should reflect that adjustment;

(i) neither of these memoranda were filed in respect of a case management conference or mentions hearing (as item 11 of schedule 3 of the Rules refers);

(ii) it is unlikely that the memoranda took .4 days to prepare, so there is a risk that the costs claimed in respect of each exceeds the costs actually incurred by AAI; and

(iii) in any event, these costs properly fall to be considered in relation to AAI’s application for costs on the costs application (which is opposed).

[38] Lichfield challenges AAI’s application for costs on its application to remove a reference to Vero Insurance from the judgments of Associate Judge Osborne dated

23 June 2015, and my subsequent judgment dated 11 September 2015. Lichfield says it bears no responsibility for these costs for the following reasons. In submissions for the hearing of the application to set aside the statutory demand, AAI’s counsel referred to a “policy issued by AAI (trading as Vero Insurance) and it

is this and other references that were repeated in the judgments. AAI’s counsel did not clarify or correct the position in subsequent submissions for the hearing of the stay applications, for example, referring to “a publicly listed entity such as AAI (Vero Australia)” and Lichfield did not oppose AAI’s application to correct the judgments.

[39] In any event, even if the Court is minded to award AAI costs on its application to correct the judgments, there are no grounds under the rules to support an award of increased costs (in any amount).

[40] Lichfield submits that costs on the costs application should lie where they fall, irrespective of the outcome. This is because:

(a) AAI has made no submissions in support of its claim for costs on the costs application;

(b) it has not explained, as required by rr 14.5(1)(b) and (c), how one day is a reasonable time; and

[41] The Court of Appeal in Holdfast provided guidance on the correct approach to an award of increased costs:

(d) the applicant for costs should step back and look at the costs award it could be entitled to at this point if it considers it can argue for additional costs under r 14.6(3)(b). It should do so, but any increase above 50 per cent on the costs produced by steps 1 and 2 is unlikely, given that the daily recovery rate is two-thirds of the daily rate considered reasonable for the particular proceeding.

[42] In the present case, the parties are agreed that the appropriate categorisation under r 14.3 is 2B.

[43] The only challenge to the reasonable time for each step in the proceeding is the challenge to claim for a full day hearing on 8 September 2015 and I accept that Lichfield is correct in asserting that should be a half day hearing for the purpose of the costs calculation.

[44] I am satisfied that AAI has pointed to two clear grounds for awarding increased costs in relation to the application in the High Court to set aside the statutory demand. This is because, as the Court of Appeal found, the use of the statutory demand procedure in the circumstances was an abuse of process. Lichfield knew there was a dispute as to whether the debt was payable but chose to issue the statutory demand to force payment.

[45] Furthermore, Lichfield was repeatedly warned that if it did not withdraw its statutory demand and forced AAI to incur the cost of applying to set it aside, it risked a claim for increased or indemnity costs. In the circumstances, where Lichfield had the option of pursuing the alleged agreement through ordinary litigation, or taking up AAI’s offer to engage in further settlement discussions, I consider it was unreasonable for it not to withdraw the statutory demand as proposed. By failing to take up that offer, it knowingly ran the risk of having to pay increased or indemnity costs.

[46] I am satisfied, therefore, that a significant uplift in costs is justified and the question is how significant that uplift should be.

[47] While noting that scale costs are intended to represent approximately two-thirds of actual costs, and an uplift of 50 per cent should therefore approximate actual costs incurred, there is no barrier to awarding higher costs as long as there is no over recovery.

[48] Here, there was a clear dispute as to whether a binding settlement agreement had been reached, and this was pointed out on a number of occasions by AAI. Lichfield itself only took the stance that the settlement proposal was binding more than a year after it had been negotiated. It then used the statutory demand procedure to endeavour to force payment of the settlement sum. In those circumstances, I am satisfied that a 100 per cent uplift in costs is warranted, particularly where, looking at the overall costs incurred in the proceedings, AAI will not be fully recompensed for actual costs incurred.

[49] Accordingly, AAI is entitled to a 100 per cent uplift on costs incurred on the application to set aside the statutory demand.

[50] However, I accept Lichfield’s point that the subsequent applications should not necessarily be seen in the same light as, at the time it engaged in those applications, it had a judgment in its favour. The steps taken in reliance on the Court’s decision upholding the statutory demand are not, therefore, in the same category as the steps taken in the application to set aside the statutory demand. Instead I will consider the particular circumstances in which each subsequent step was taken for the purpose of determining costs.

[51] In respect of the application for costs on the stay applications, it is acknowledged that AAI deposited the judgment sum into its solicitors’ trust account shortly after receipt of the judgment of Associate Judge Osborne and more than two weeks before it was required to pay the judgment sum. It then applied for a stay on the day the judgment sum was due to be paid. While Lichfield opposed AAI’s application for a stay, I accept that the orders made following the hearing of the stay applications largely reflected what Lichfield had indicated it would consent to (that is, an interim payment of $4,627,000 to Lichfield, and the balance to be held in its

solicitors’ trust account). Thus AAI was only partially successful in obtaining the stay sought, and it was largely on terms that Lichfield would have agreed to. This means that both parties achieved a measure of success in the stay application, and I consider, therefore, that costs should lie where they fall.

[52] I also accept Lichfield’s position that the claim for filing memoranda in respect of the timing and procedure for dealing with costs should be considered under the claim for costs in relation to costs submissions, rather than in relation to the stay applications.

[53] While Lichfield submits that it was obliged to file its application to liquidate AAI when it did to preserve its position in the event that AAI’s appeal against the judgment of Associate Judge Osborne was unsuccessful, that ignores the fact that AAI had paid the full judgment sum into its solicitors’ trust account, pending determination of AAI’s appeal. I accept that where the full amount has been paid over as security, it is difficult to imagine a situation where a liquidation order would

be made.¹³For that reason I have decided that AAI is entitled to costs, again with a

[54] I accept Lichfield’s submission that the application to remove the reference to Vero Insurance from the judgments of Associate Judge Osborne dated 23 June 2015, and my judgment dated 11 September 2015 cannot be placed at Lichfield’s feet and Lichfield bears no responsibility for these costs. The error did not arise out of submissions made by Lichfield and Lichfield did not oppose AAI’s application to correct the judgments. It is appropriate that costs lie where they fall in respect of this

[55] AAI applies for costs in respect of filing memoranda in relation to the timing and procedure of determining costs in the High Court¹⁴and also for preparing the costs submissions themselves. While there has been some divergence in the Court’s approach to awarding costs on applications for costs, it is well established that such costs may be awarded.¹⁵In my view it is appropriate that AAI receives costs for preparing the memoranda as to the timing and procedure of dealing with costs in the High Court, and for preparing its costs submissions. While it has not been successful in all its claims for costs, this was not a straightforward costs claim and AAI has satisfied me that an increase in costs is justified in respect of some aspects of the proceedings. However, there is no basis for an uplift in costs for this aspect of the proceeding and, accordingly, I award 2B costs in respect of the filing of memoranda on 1 October 2015 and 27 November 2015, along with the filing of costs

Stage of Proceedings	Basis of Award	Total Awarded
Application in the High Court to set aside statutory demand	2B costs plus 100 per cent uplift	$18,308.00
Application to stay enforcement of judgment and restrain advertising	Costs to lie where they fall	-
Liquidation proceedings	2B costs plus 100 per cent uplift	$4,906.00
Steps taken in relation to both stay applications	Costs to lie where they fall
Application to correct error in judgment	Costs to lie where they fall
Costs submissions (including preliminary memoranda)	2B costs	$3,914.00
Disbursements	As claimed	$3,742.20
Total		$30,870.20

¹⁵Body Corporate Administrative Ltd v Mehta (No. 4) [2013] NZHC 213 at [85].

BETWEEN	AAI LIMITED Plaintiff
AND	92 LICHFIELD STREET (IN RECEIVERSHIP AND IN LIQUIDATION) _Defendant

High Court of New Zealand Decisions

AAI Limited v 92 Lichfield Street (in receivership and in liquidation) [2016] NZHC 90 (5 February 2016)