ASSET BUILDING M PRITCHARD LIMITED V HAMBEG LIMITED HC AK CIV-2008-404-3781

ASSET BUILDING M PRITCHARD LIMITED V HAMBEG LIMITED HC AK CIV-2008-404-3781 21 November 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2008-404-3781IN THE MATTER OF the Companies Act 1993 BETWEEN ASSET BUILDING M PRITCHARD LIMITED Plaintiff AND HAMBEG LIMITED Defendant Hearing: 13 November 2008 Appearances: J Lethbridge for Plaintiff No appearance for Defendant CR Andrews for MG Begley Judgment: 21 November 2008 at 4:45 pmJUDGMENT OF ASHER JThis judgment was delivered by me 21 November 2008 at 4:45 pm pursuant to Rule 540(4) of the High Court Rules .. Registrar/Deputy Registrar .. DateSolicitors: Wills Toomey Robinson, Lawyers, Private Bag 6018, Napier McVeagh Fleming, PO Box 4099 Auckland 1140Introduction[1] Following the liquidation of Hambeg Limited (In liquidation) ("Hambeg"), Asset Building M Pritchard Limited ("Asset Building") seeks an order for costs against a non-party, Michael Begley. Mr Begley is the sole director of Hambeg and one of its two shareholders. [2] Asset Building is a private company carrying on business as a builder in Napier. In 2007 Asset Building carried out substantial construction work for Hambeg on a multi-storeyed building in Napier under a building contract. The construction work involved the conversion of a building at 3 Shakespeare Road, Napier, into 61 apartments and two commercial units. [3] Hambeg found itself in financial difficulties. Twenty of its apartments have been sold at a mortgagee sale. As of April 2008 Hambeg owed Asset Building the sum of $194,163.47 for the construction work on the Napier site. On 16 April 2008 Asset Building served on Hambeg a statutory demand under the Companies Act 1993 for this amount. Hambeg took no steps to pay the debt specified in the statutory demand. It sent a fax on 28 April 2008 briefly setting out two reasons why it disputed the debt. [4] On 20 June 2008 Asset Building filed proceedings seeking an order that Hambeg be placed into liquidation. The proceedings were served on Hambeg on 15 July 2008. Hambeg took no steps to oppose the proceeding in the following months. On 8 October 2008 Hambeg filed an application for leave to appear out of time and to file a statement of defence. Mr Begley swore an affidavit in support. On 17 October 2008 the matter came before Associate Judge Faire who made various timetable orders and set the application for leave and the substantive proceeding down for hearing on 14 November 2008. [5] In compliance with Associate Judge Faire's timetable orders Asset Building filed on 29 October 2008 a notice of opposition and affidavit in opposition to theapplication for leave and to file a statement of defence out of time. The affidavit was signed by the principal of Asset Building, Martin Pritchard. [6] In the meantime another company, Waipureka Holdings Limited ("Waipureka"), had served a statutory demand by Hambeg on 4 June 2008 for $33,338.24. Waipureka filed proceedings seeking an order that Hambeg be placed in liquidation on 17 June 2008. Hambeg was placed into liquidation on 31 October 2008, after Mr Pritchard's affidavit in opposition to Hambeg's application had been filed. [7] As Hambeg is already in liquidation the relief sought by Asset Building is no longer available. The proceedings issued by Asset Building therefore no longer have any purpose and will presumably in due course be discontinued. Hambeg's application for leave to appear out of time and to file a statement of defence cannot proceed now that Hambeg is in liquidation.The application for costs against Mr Begley[8] Asset Building now seeks an order that Mr Begley pay its costs relating to Hambeg's application for leave to appear out of time and to file a statement of defence. Mr Begley is not a party to the litigation. However, r 46 provides that all matters relating to the costs of and incidental to a proceeding are at the discretion of the Court. Rule 47 sets out the principles applying to the determination of costs. The general principle is that the party who fails should pay costs to the successful party. There is no express reference to costs against a non-party. [9] The jurisdiction to order costs against a non-party was first recognised in New Zealand in Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757, and confirmed by the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145. The reason for the development of the jurisdiction was summarised by Tompkins J in Carborundum at 765, quoted inDymocks Franchise Systems at 156:Where proceedings are initiated and controlled by a person who, although not a party to the proceedings, has a direct personal financial interest in theirresult, such as a receiver or manager appointed by a secured creditor, a substantial unsecured creditor or a substantial shareholder, it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the proceedings fail or be discontinued. That will be so whether or not the person is acting improperly or fraudulently.[10] The Privy Council described costs orders against non-parties as "exceptional", in that context meaning "no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense": at [25](1). The jurisdiction is in the end fact specific. It will not be exercised against pure funders, but where a party does not merely fund the proceedings but substantially controls them and is to benefit from them, justice will ordinarily require that if the proceedings fail that non-party will pay the successful party's costs. As was stated in Dymocks Franchise Systems at [23](3):The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation.[11] The Privy council discussed the specific position of non-party directors and liquidators of party companies at [29]:In the light of these authorities their Lordships would hold that generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his own interests.[12] The Privy Council quoted with apparent approval at [28] the cautionary statement of Millett LJ in Metalloy Supplies Limited (In liquidation) v MA (UK) Limited [1997] 1 All ER 418 (CA):It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend proceedings which he funded and which ultimately failed. Where such proceedings were brought bona fide to the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded in the principle that such order should be exceptional would be nullified.[13] It is therefore clear that costs will not be ordered against a non-party director or a liquidator who can realistically be regarded as acting in the interests of the company rather than his or her own interests. The non-party must have promoted and funded the proceedings by an insolvent company solely or substantially for that non-party's own financial benefit. [14] A number of New Zealand decisions have confirmed that the award of costs against a non-party is exceptional: De Vries v Queenstown.Com Limited HC INV CIV-2003-425-000086 23 December 2004, Panckhurst J; Wairarapa District Health Board v Shirley (2005) 18 PRNZ 34 (CA) at [104](d). I do not discern in these cases or in Dymocks Franchise Systems itself a requirement for bad faith or impropriety on the part of the non-party, although such conduct will of course be relevant. [15] Mr Begley is also a shareholder in the defendant company. Caution must be exercised before holding a non-party shareholder in a party company liable for costs. The principle of corporate inviolability set out in Salomon v Salomon & Co Ltd[1897] 1 AC 22 (HL), which provides that a company is a distinct legal entity from its shareholders, must be observed. However, the Court's approach to Mr Begley's liability for costs would be the same if the party whose litigation he had funded was not a company but a person. It is not so much a matter of "lifting the corporate veil" in relation to the company's actions, but an examination of the relationship between the company and its funder and the benefit that the funder would achieve from the litigation. [16] While a wide range of matters may be relevant to the exercise of the discretion, the following features can be usefully considered in this case: a) Whether the unsuccessful party is liable for costs; b) Whether the non-party controlled the litigation; c) Whether the non-party stood to benefit from the outcome of the litigation;d) The merits of the litigation under the control or influence of the non- party; and e) The procedural steps taken under the control or influence of the non- party. It is now necessary to consider these specific matters in relation to this litigation.Is the unsuccessful party liable for costs?[17] Hambeg's interlocutory application for leave to appear out of time and to file a statement of defence cannot proceed now that it is in liquidation. That application is dismissed. Hambeg is therefore to be regarded as the unsuccessful party. [18] The Court has jurisdiction to make costs orders in relation to interlocutory applications under rr 47(a) and 48E of the High Court Rules. For reasons that I will set out later in this judgment, Hambeg's opposition to Asset Building's application to have Hambeg placed in liquidation was seriously out of time and without merit. If it were not for the liquidation, costs would have been ordered against Hambeg on its application.Did the non-party control the litigation?[19] Mr Begley swore the affidavit in support of Hambeg's application for leave to appear out of time and to file a statement of defence. He described himself correctly as the sole director of Hambeg. He is also jointly with a Derryn Begley, who is shown to share Mr Begley's address, the sole shareholder. The wording of the affidavit indicates that he was and still is solely in control of all Hambeg's decisions. For instance, in explaining his failure to take steps initially in the proceeding, he stated at para 26:As a result, it has become something of a necessity for me to juggle and prioritise the various issues that have made demands on my time and attention. Unfortunately, as a result, this matter did not receive my earlier attention as it no doubt deserved. On behalf of the defendant therefore, I seek this Court's indulgence I am confident, that given a further 14 days,I can get a proper statement of defence completed and filed and served in this proceeding.There is no reference to Derryn Begley at all. I therefore infer that Mr Begley was in control of the litigation.Did the non-party stand to benefit from the litigation?[20] Mr Begley and Derryn Begley are the only shareholders in Hambeg. If Hambeg could have survived its present crisis and in due course return a profit from its property developments, he and Derryn Begley would have benefited financially from Hambeg's survival. Given that Derryn Begley shares a surname and an address with Mr Begley I infer that he or she is a close family member. I therefore infer that Mr Begley or his family interests stand to benefit from the litigation. [21] Hambeg's application to appear out of time and to file a statement of defence after months if inaction was clearly an attempt by Mr Begley to halt or delay Asset Building's liquidation proceedings. Mr Begley stated in his affidavit:It is something of an understatement to say that I had a lot of distractions and conflicting priorities at that time. I believe that it is common knowledge that the crisis which has hit the commercial finance sector has had a flow-on effect into the property development industry. During this period of turmoil, I have been very distracted with the complex issues that have emerged in other property developments and property development companies in which I am involved as a director and/or shareholder: that is, development companies other than the present defendant, Hambeg Limited.The fact that keeping his financial interests including Hambeg afloat was occupying him totally supports an inference that he was to benefit from stopping or delaying the proceedings. [22] It is in concluding that he would benefit financially from delaying or preventing the liquidation of Hambeg, that a Court comes closest to lifting the corporate veil. This step requires a recognition of Mr Begley's interest as a shareholder. However, that shareholding is considered no more than on the basis that it is a matter of public record, and because of the inescapable logical conclusion that follows the existence of that shareholding, and his actions, that he will benefit from Hambeg's legal actions.Merits of the application[23] I have already noted that the merits of Hambeg's opposition have not been determined. Indeed there has been no full airing of the parties' respective positions, although I have received affidavits and vigorous submissions on the topic in relation to this costs application. While this factor makes the Court cautious in attempting an assessment of the merits, it is not a bar to an assessment. Similar assessments as to the merits must be made on the basis of affidavits in summary judgment or interim injunction applications. [24] Mr Begley in his affidavit has raised two defences to Asset Building's claim. First, he contends that retentions of $70,287.01 were not yet payable. Secondly, he asserts that four invoices relate to variations that he did not sign off. [25] In his fax of 28 April 2008 Mr Begley asserted that at that time the retentions were not payable until 90 days after the issue of code of compliance certificates, which were not issued until 10 January 2008. In the submissions in this matter his position has changed somewhat. Mr Begley now asserts that no satisfactory code of compliance certificates have been issued. However, Mr Pritchard's affidavit states that the necessary code of compliance certificates were indeed issued. This appears to be the case on the face of the documents annexed to the affidavits. Mr Begley has not sought leave to file any further affidavit in support of his revised position. Further, the wording of the construction contract does not indicate that the issue of code of compliance certificates is a pre-requisite to payment. Thus, on the material before the Court this is not a basis of defence. [26] Mr Begley's second defence is that he did not sign off the variations. In fact they were signed by Mr Begley's architect and agent, a Mr Raiper. This was consistent with the method adopted for administering the contract, whereby Asset Building would prepare statements, invoices and variations which would be taken to Mr Raiper for approval. He would then sign them off on Hambeg's behalf and send the originals to Hambeg for the attention of Mr Begley. Mr Andrews for Hambeg argued that the variations had to be signed off by an "engineer", and that Mr Raiper was not the engineer. However, the definition of "engineer" in the building contractincludes an architect, which Mr Raiper was. Further, given that Mr Raiper was undoubtedly acting as Hambeg's agent throughout and that Mr Begley knew that Mr Raiper would sign off the variations, Hambeg would be estopped from denying its liability in respect of those invoices. [27] I therefore have no doubt that the defences asserted by Mr Begley in his affidavit were without merit, and designed to delay or defeat genuine meritorious claims. [28] I also accept the submission of Ms Lethbridge who appeared for Asset Building that Mr Begley must have known that his company was insolvent by at least October. The liquidation order of 31 October 2008 in respect of a sum of $33,338.24 is a clear indication of this. This obviously bears on the merits of Hambeg's opposition to Asset Building's liquidation proceeding. [29] I note that in the Electrotech Controls Limited v Plumbing and Sheetmetal (NZ) Limited litigation, Mr Begley tried to argue that another company he controlled was not bound by documents signed off by Mr Raiper. This defence was rejected. The fact that Mr Begley appears to have pursued such an unmeritorious defence on a second occasion is noteworthy.The procedural steps taken under the control or influence of the non-party[30] There were significant procedural failures on the part of the defendant. Hambeg did not respond to Asset Building's statutory demand under the Companies Act, save to send a brief eight-line letter asserting that the debt was disputed. Although the letter did not seek a reply, Mr Begley explains that the lack of a reply was the reason why he took none of the steps to contest the demands set out in the Companies Act 1993. This is not a satisfactory explanation. Indeed, he did not seek a reply or follow up on his letter which was no more than a peremptory statement. [31] Hambeg then failed to take any steps once the application for an order placing the company into liquidation was served the company on 15 July 2008. The time for filing a defence was therefore 29 July 2008. Hambeg took no steps tooppose the proceeding until 8 October 2008. Mr Begley explains this by saying that he did not properly read the information in the notice of proceeding as he was distracted by a business crisis. [32] While trading times are undoubtedly very difficult and one must feel sympathy for the pressures on developers at the present time, Mr Begley's explanation is simply unconvincing and unsatisfactory. It is clear from the judgment in Electrotech Controls Limited v Plumbing and Sheetmetal (NZ) Limited DC NAP 395/02 20 March 2003, Judge Rea, that Mr Begley is no stranger to litigation. He should therefore be aware of and alive to its procedural requirements. No adequate excuse has been presented for the procedural failures. Hambeg's inaction and late application under Mr Begley's control smacks of a last-minute attempt to put off the inevitable.Conclusion[33] Mr Begley had control of the litigation and stood to benefit from it. These factors alone do not persuade me to order costs against him. However, Mr Begley's late filings, when considered with Hambeg's spurious defences, suggest an attempt to manipulate the Court system by delaying the making of a liquidation order. It must be borne in mind that Mr Begley's actions have put Asset Building to considerable legal costs which are likely to considerably exceed scale costs. They have significantly delayed the date of liquidation, which can have important consequences for creditors in regard to relation back. These factors in my view combine to put this case outside the ordinary run of cases, and into that category where an order of costs against a non-party should in the interests of justice be made. I am therefore satisfied that it is appropriate to make an order that Mr Begley personally pay the costs of Asset Building in this proceeding.Result[34] Hambeg's application for leave to appear and for an extension of time to file a statement of defence is dismissed.[35] The costs sought amount to $2,240. Costs on a 2B basis are awarded against Michael John Begley, the sole director and joint shareholder of the defendant Hambeg, in favour of the plaintiff Asset Building. Mr Begley is also ordered to pay costs on this application also on a 2B basis. Asher J