A1 COMMERCIAL SERVICES 2012 LTD (now known as CITY UNITED TAXIS LTD) v FREEDOM TOURS & TAXIS LTD (In Liquidation) [2018] NZHC 1034

A1 COMMERCIAL SERVICES 2012 LTD (now known as CITY UNITED TAXIS LTD) v FREEDOM TOURS& TAXIS LTD (In Liquidation) [2018] NZHC 1034 [11 May 2018]IN THE HIGH COURT OF NEW ZEALANDDUNEDIN REGISTRYI TE KŌTI MATUA O AOTEAROAŌTEPOTI ROHECIV-2018-412-000010[2018] NZHC 1034UNDER the Contract and Commercial Law Act 2017IN THE MATTER of a sale and purchase agreementBETWEEN A1 COMMERCIAL SERVICES 2012LIMITED (now known as CITY UNITEDTAXIS LIMITED)PlaintiffAND FREEDOM TOURS & TAXIS LIMITED(In Liquidation)DefendantHearing: 8 May 2018Appearances: G A Paine and S Cumming for PlaintiffB Nevell for DefendantJudgment: 11 May 2018JUDGMENT OF ASSOCIATE JUDGE MATTHEWS[1] The plaintiff, A1 Commercial Services 2012 Limited (A1) sues the defendant,Freedom Tours & Taxis Limited (Freedom) under an agreement for sale and purchasedated 5 October 2017. A1 agreed to buy Freedom's business as a taxi call centre. Italleges breach of contract by Freedom in various ways. Sensing that Freedom mayseek to re-enter the business premises and take control of the business because it hadnot paid part of the purchase price, on 2 February 2018 it obtained, without notice, aninterim injunction and freezing order.1 Freedom has applied for orders setting asidethe orders made on 2 February. A1 applies for security for costs on this application.1 See reasons for these orders, dated 7 February 2018.[2] Freedom is now in liquidation. The liquidator is continuing to engage in thisproceeding. She accepts that should any costs award be made against Freedom it isnot likely that such an award could be met.[3] High Court rule 5.45 provides that if a judge is satisfied, on the application ofa defendant, that there is reason to believe that the plaintiff will be unable to pay thecosts of the defendant if the plaintiff is unsuccessful on the plaintiff's proceeding, thejudge may, if the judge thinks it is just in all the circumstances, order the giving ofsecurity for costs.[4] The consequence of the concession by the liquidator is that the threshold testfor the making of an order for security for costs is met. Therefore the issue in this caseis whether it is just in all the circumstances to order the giving of security.[5] The purchase price of the business was $440,000. A1 paid part in cash, andFreedom agreed to advance A1 the sum of $150,000 to be repaid over 23 monthswithout interest, though with a default interest rate of 12 per cent. This was the subjectof a term loan agreement and A1 gave security to Freedom by way of a general securityagreement.[6] It was also agreed that whilst A1 would pay the balance of the price toFreedom, Freedom's solicitor would retain in its trust account as a stakeholder the sumof $65,000. The basis of the retention was that if within three months from settlement,10 or more taxis paying a single shift fee to Freedom had given notice that theircontract would be terminated, the purchase price would be reduced by $65,000 andthe retained sum would be returned to A1.[7] The liquidator of Freedom is prevented by the freezing order from recoveringfrom A1 either the sum advanced to A1 of $150,000, or the retained monies. Theliquidator's position is that she is under a statutory duty to recover these sums as theyare assets in the liquidation of Freedom. In respect of the retained monies, she saysthat the period of three months from settlement having passed, she can establish thatfewer than 10 taxis have given notice of termination so Freedom is entitled to retainthis portion of the purchase monies.[8] The approach the Court is to take to an application for an order that a liquidatorgive security for costs is summarised in Cory-Wright and Salmon Ltd v KPMG PeatMarwick.2 The liquidator of Freedom is not a party, but given the principles to beapplied I am satisfied that I should approach the question of directing security for costsagainst Freedom on the same basis. Given that it will only be in a rare case that anorder for costs would be made against a liquidator, it should also be a rare case wherean order for security for costs is made against a company in liquidation.[9] In Cory-Wright and Salmon, after noting that the duty of the Court is to takeinto account all factors which are relevant to the application, Gallen J said:3I accept that for the reasons which have been emphasised in a number of cases,it will only be an exceptional case where costs are awarded against an OfficialLiquidator. That follows from the fact that the Official Liquidator is a publicofficer carrying out a public function. Nevertheless I do not consider that tobe an absolute bar. In each case all of the surrounding circumstances must beconsidered. That will involve a consideration of the persons on whose behalfthe litigation is being conducted and the general background to the litigation.[10] Based on this principle, a significant factor for the Court to take into accountis the public function of the liquidator. In her capacity as liquidator for Freedom sheseeks to have the freezing order set aside so she can access funds which she has astatutory obligation to gather in, and distribute them in accordance with her obligationsunder the Companies Act 1993. A principal creditor of Freedom is the Commissionerof Inland Revenue to whom a debt in excess of $300,000 is owed. It is not knownwhether there are any other creditors, but this demonstrates that in addition to thepublic function of the liquidator, there is also a public interest in the Commissioner ofInland Revenue recovering taxation which has been assessed as owing by Freedom.[11] In this case there is no evidence that the liquidator is backed financially by anycontributions from any secured or unsecured creditors. The only evidence of anyfinancial contribution to the liquidator's position is that her present solicitors areconducting this application on a contingency basis and, as I understand it, will alsoconduct the application to set aside the freezing order on the same basis. WhilstMr Paine suggested this may be inappropriate because there could be an element of2 Cory-Wright and Salmon Ltd v KPMG Peat Marwick [1993] 2 NZLR 701 (HC).3 At 706.personal gain to the solicitors concerned, there is no evidence to back up thatsuggestion, and I reject it. The solicitors concerned are entitled to act on a contingencybasis within the confines of the rules laid down by the Law Society.[12] In the absence of any financial backing, or cash in the liquidation, the liquidatoris unable to fund payment of a sum by way of security for costs. The making of anorder would thus deprive the liquidator of the ability to continue the application to setaside the freezing order in accordance with her duty as liquidator under the CompaniesAct.[13] A further factor I take into account is that the freezing order was made on awithout notice basis. So far Freedom has not been heard by this Court in relation towhether or not its assets should be frozen. The effect of making an order that securityfor costs be paid would therefore prevent the other side of the argument in relation tothe claims made by A1 being heard at all.[14] Mr Paine says that little weight should be accorded to this factor because theprospect of the freezing order being set aside is not substantial. So far as the vendorfinance is concerned, he says that A1 has cancelled the agreement for sale and purchaseand therefore Freedom cannot recover this sum from A1. This argument is not basedon a strong foundation. The funds were not advanced under the agreement for saleand purchase. They were advanced under a term loan agreement which contains aclear and binding obligation on A1 to repay the sum borrowed, together with allinterest and other charges. That agreement has not been cancelled. Mr Paine says thatthe advance was part of the cancelled sale agreement, but even if that is so (which Ido not accept) there is scope for the Court to make an order by way of relief under s 43of the Contract and Commercial Law Act 2017.[15] So far as the retention is concerned, Mr Nevell argues that cancellation of theagreement for sale and purchase does not prevent the Court making an order returningthis sum to A1. I agree: again, s 43 will apply.[16] The final point argued by Mr Paine is that unless security for costs is ordered,A1 will be exposed in relation to its own costs because it will not be able to recoverany part of those costs from Freedom if successful. Whilst that is evidently correctand is generally a significant factor to be taken into account, it does not weighsufficiently heavily in this case to warrant an order being made. Costs on a 2B basison the application to set aside the freezing order amount to $5,760. That is themaximum exposure that A1 has, and even if this were a case where the Court wasprepared to direct the giving of security, it would not likely be in the full amount of apotential adverse costs award. The exposure of A1 in the absence of security istherefore lower than that figure. Further, by bringing this application A1 has exposeditself to an adverse costs award, in the event of it being unsuccessful, in exactly thesame amount but does not seem to be sufficiently concerned about that prospect toweigh up the advisability of doing so. At the very least, the fact that there is establishedauthority that only rarely will the Court direct a liquidator to give security for costsshould have highlighted that risk. Given this, it is at least a possible inference that thisapplication is an attempt to prevent the liquidator being heard by the Court on the veryissues which A1 brought to the Court without notice.[17] Weighing up all factors, therefore, I am satisfied that this is not a case wherethe Court should order Freedom to give security for costs.Outcome[18] The application is declined.[19] A1 will pay costs to Freedom on this application on a 2B basis together withdisbursements fixed by the Registrar._______________________J G MatthewsAssociate JudgeSolicitors:Wilkinson Rodgers Lawyers, DunedinGuest Carter Law Limited, Dunedin