C-DAX LIMITED V W E AND L FRANKLIN AS TRUSTEES OF SYDNEY HOUSE TRUST AT PALMERSTON NORTH HC PMN CIV 2009-454-000513

C-DAX LIMITED V W E AND L FRANKLIN AS TRUSTEES OF SYDNEY HOUSE TRUST AT PALMERSTON NORTH HC PMN CIV 2009-454-000513 2 August 2010IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY CIV 2009-454-000513UNDER the Companies Act 1993 IN THE MATTER OF a Statutory Demand BETWEEN C-DAX LIMITED Applicant AND WILLIAM EDWARD FRANKLIN AND LESLIE FRANKLIN AS TRUSTEES OF SYDNEY HOUSE TRUST AT PALMERSTON NORTH Respondents On the papers: 21 May 2010 - submissions for respondents on review of costs order 27 May 2010 - submissions for applicant on review of costs order 2 June 2010 - submissions for respondents in reply Judgment: 2 August 2010JUDGMENT OF WILD J: REVIEW OF ASSOCIATE JUDGE'S COSTS ORDERIntroduction[1] The respondent trustees (I will refer to them as SHT) seek review of Associate Judge Gendall's judgment of 21 April ordering them to pay costs of $4,992 plus $585 disbursements, a total of $5,577, to C-Dax Limited (CDL). [2] The award followed CDL successfully applying to set aside a statutory demand by SHT for $273,056. SHT ultimately agreed to their demand being set aside.Background[3] SHT's demand followed CDL's refusal to pay SHT the balance of their shareholders' current account with CDL. The demand was made in the context of negotiations for the sale of SHT's shareholding in CDL. [4] For CDL, Mr Millard submits the demand "was a tactical move outside the route prescribed in the constitution of CDL to strengthen SHT's negotiating position". Replying for SHT, Mr Kennedy rejects that, countering that the share sale and the current account debt were entirely separate matters in terms of the sale process under CDL's constitution. Mr Kennedy complains that CDL had wrongly sought to extract a 30% discount from SHT, not only on the value of their shares, but also from their current account entitlement. [5] I mention these background matters, only because counsel's restrained submissions belie obvious animosity between the parties. In economic terms, this costs dispute must be akin to taking to a walnut with a sledgehammer.Approach on review[6] Within the confines of Part 14 of the High Court Rules, costs are quintessentially discretionary. It follows that I should interfere with the Associate Judge's decision only if he has erred in principle, factored in an irrelevant consideration or overlooked a relevant one, or made a decision that is plainly wrong:Shirley v Wairarapa District Health Board [2006] 3 NZLR 523 (SC) at [15]. That applies the well established formula from the Court of Appeal's judgment in May v May (1982) 1 NZFLR 165 at 170. "Plainly wrong" does not mean simply wrong. It refers to a decision which is outside the available ambit of judicial discretion, as assessed (somewhat obviously) by the appellate Court: G v G [1985] 2 All ER 225 (HL) at 228H and 229C, per Lord Fraser in a judgment with which the other four Law Lords concurred.Errors contended for by SHT and my decision on them[7] Rather than undertaking some general summary of the Associate Judge's decision, I move straight to the three errors SHT contend marred that decision. As well as dealing with counsel's opposing submissions on the review, I will refer – to the extent necessary – to the relevant part of the Associate Judge's decision, and in more detail to the background.(A) SHT slow to concede[8] CDL's application to set aside SHT's statutory demand was set down for hearing before the Associate Judge on 23 November 2009. One day earlier CDL had filed an "affidavit in response" producing a Deed of Subordination (the Deed). The Deed precluded CDL's shareholders demanding payment of their current accounts without the express consent of CDL's banker, HSBC. HSBC had not expressly consented to SHT's demand. The Deed was thus a "king hit" precluding SHT's demand and ensuring that CDL's application to set aside that demand must succeed. [9] Given the "last minute" provision of the Deed, the Associate Judge accepted that SHT should have a reasonable opportunity to provide evidence in reply. He granted a (first) adjournment to 9 December on terms, notably one requiring CDL to file, by the following day, an affidavit clarifying the circumstances in which the Deed was signed and detailing CDL's current indebtedness to HSBC. Although that affidavit was filed, SHT was unable to reassess its position in time to file a reply affidavit as required by 4 December. By consent, the hearing was adjourned for a second time, to 1 March 2010 (the Associate Judge's minute incorrectly states 1 March 2009). By minute dated 15 February 2010, Associate Judge Gendall refused a request by SHT for a third adjournment, through to May. He said it seemed to him that SHT was no longer disputing that it could not maintain its statutory demand, but rather was "perplexed" by HSBC's decision to refuse permission for the demand. [10] While Mr Kennedy accepts that SHT should pay the costs of its unsuccessful application for a third adjournment, he contends the Associate Judge erred in holdingthat SHT was "slow to concede that the demand should be set aside", and "unnecessarily dragged out the proceeding" following the scheduled 23 November 2009 hearing. [11] I start by assuming that SHT could not earlier have known of or discovered the Deed produced by CDL for the first time on 22 November. Whether that assumption is correct is the next point I deal with (in [13] and following below). On that assumption, SHT was perfectly entitled to an adjournment on 23 November, and got one. I consider it was also entitled to the second adjournment, through to 1 March. Counsel for CDL had "no difficulty" in that adjournment being granted, and the Associate Judge had no difficulty in granting it. [12] If the Associate Judge's critical remarks were directed to the period 23 November 2009 to 1 March 2010, then I consider them to be ill founded. Mr Kennedy concedes any costs should go against SHT in respect of the period beyond 1 March 2010.(B) SHT failed to exercise proper caution before making its decision to issue the demand[13] The criticism here is of this paragraph in the Associate Judge's decision:[18] Moreover, it is relevant in this context that the respondents decided to proceed with the statutory demand against the applicant despite the applicant's clear position and warnings that the debt was not then due. Although the applicant failed to produce documentary evidence of the agreement reached in the deed at that stage, and also did not appear to give particulars of its claim that the respondents were not entitled to call for repayment of their account on the basis of an agreement between shareholders, I am satisfied that the respondents should have been slow to issue a statutory demand in the face of such opposition. It is well established that creditors need to be cautious before issuing statutory demands to ensure that there is in fact no genuine dispute as to the debt: Keystone Ridge Ltd v City Sales Ltd HC Auckland M549-IM02 19 July 2002 at [10].[14] Mr Kennedy submitted that the Associate Judge was wrong to hold that SHT had acted incautiously. He referred to the exchange of letters between the parties' solicitors over April and May 2009 (SHT issued its statutory demand on 29 June 2009) in which CDL's liability to pay SHT's current account was debated. Inparticular, Mr Kennedy referred to the request of SHT's solicitors made to CDL's solicitors that CDL provide "documentary evidence of any agreement which precluded the shareholders of (CDL) from making demand on their current accounts". Mr Kennedy listed the three arguments raised by CDL's solicitor in response. He contends they were "patently without merit", and Mr Millard does not gainsay that. Rather, Mr Millard seems to make two points: a) Evidence – or at least some evidence – of the agreement not to call the shareholders' loan accounts was provided to SHT before it made demand. b) SHT ought to have known of the Deed for two reasons. First, Mr Franklin, one of the trustees, negotiated the terms of CDL's banking finance with HSBC, in his capacity as Managing Director of CDL at the relevant time. Secondly, Mr Franklin and his wife, as co-trustees of SHT, on the eve of their departure overseas, executed the powers of attorney pursuant to which the Deed was signed. [15] This second error is, I think, the major one which SHT contends the Associate Judge made in his costs decision. Dealing with this necessitates going into some detail. CDL was incorporated in 1994. Its business was the manufacture of agricultural spraying and spreading equipment. C-Dax sprayers and fertilizer spreaders have become a common sight on the back of tractors and quad bikes in rural New Zealand. Mr Franklin was CDL's original General Manager, and later Managing Director. For several years from 1998, part of Mr Franklin's remuneration package as Managing Director comprised the issue to him of shares in CDL. Mr Franklin described this as "sweat equity". [16] In 2001 the other shareholders of CDL bought out Mr Don Cowie, who held 51% of CDL's shares. Following this buyout, and at the completion of the issue to him of shares as part of his remuneration, Mr Franklin held approximately 14% of CDL's share capital.[17] In 2007 Mr Franklin indicated that he wanted to retire as Managing Director of CDL, with effect from the following year. Subsequently, a valuation of CDL's business was obtained from Mr Rob McGregor, a Lower Hutt accountant. I gather this was initially obtained against the possibility that the whole of CDL's business might be sold. [18] In about September 2008, having ceased as Managing Director of CDL, Mr Franklin indicated that he wished to sell his interests in the Company. A copy of Mr McGregor's valuation, still in draft form, was then provided to Mr Franklin. Mr Franklin deposes that he asked Mr Kirkcaldie for his view of the value of CDL, and Mr Kirkcaldie told him $7 million on the basis of discounted enterprise value. Mr Kirkcaldie had been the Chairman of CDL from the outset and was a substantial shareholder, via a trust. At the time he was also a trustee of SHT. Mr Franklin's shareholding had, earlier been transferred to SHT which held the shares on behalf of Mr Franklin and his wife. [19] In order to achieve what Mr Franklin described as a "swift resolution", SHT offered to accept $695,000 for its shareholding in, and current account debt owed by CDL. Mr Franklin deposes that the Board of CDL "wanted to play hard ball" and, on 7 April 2009, offered $422,462 for SHT's shares and its current account, which stood at $273,056. Mr Franklin says it became clear to him that CDL's other shareholders had very little interest in acquiring SHT's interest in CDL unless it was heavily discounted. In those circumstances, Mr Franklin says SHT elected to pursue repayment of its shareholder's current account. Mr Franklin accepts that SHT was bound by the pre-emptive rights regime in CDL's Constitution in terms of the sale of its shareholding. [20] By letter dated 23 April 2009 Mr Franklin repeated his request that SHT's shareholder's advance of $273,000 be repaid in full regardless of the proposed sale of SHT's shares in CDL. [21] On 6 May 2009 Minter Ellison, acting for SHT, formally requested immediate repayment of the $273,000.[22] On 11 May 2009 Evans Henderson Woodbridge, acting for CDL, responded. The letter advised that CDL did not accept SHT was able to demand repayment of its current account. The three reasons given were (and I summarise):• SHT could not demand repayment because Mr Franklin was a director of CDL and the demand placed him in a situation of conflict.• All shareholders had agreed that their current accounts and shareholding would remain in the ratio of 23 cents per share, or 17.51 cents per share for SHT.• A large part of SHT's current account was statute barred. [23] On 15 May 2009 the shareholders of CDL passed a special resolution removing Mr Franklin as a director. [24] On 20 May 2009 Minter Ellison replied. It rejected, in detail, each of the three reasons Evans Henderson Woodbridge had proffered for CDL not being liable to repay SHT's shareholder's account. This letter included the following:Shareholder agreement6. We are instructed that [SHT] is not party to any agreement which precludes it from seeking payment of its current account debt by the company. If you have documentary evidence of any such agreement, please provide it by return.[25] On 26 May Evans Henderson Woodbridge replied. In relation to the shareholder agreement, it stated:Shareholder AgreementMr Franklin was party to a Resolution that formalised the realignment of shareholders accounts in May 2008. We do not hold a copy of the signed Resolution but have requested a copy and will forward it upon receipt. In the meantime, we enclose a copy of what we believe to be the Resolution that was signed. We refer you in particular to paras 5 and 7, in which it is clear that current accounts may only be reduced: (a) In such sum as the board shall deem appropriate; and (b) That any payments be pro rata respective shareholdings.[26] The resolution referred to in that letter was, I think, one passed on 16 April 2008 resolving to pay out $780,615 to three shareholder trusts in CDL, although not to SHT. Mr Franklin deposes that, when he attended the Board meeting at which that resolution was passed, it was clear to him that it had been discussed beforehand amongst the other directors and was a foregone conclusion. He wasn't asked for his position on the resolution. Mr Franklin makes two points. First, the result of the resolution was that SHT was the only shareholder which had not received any payment in reduction of its current account since 2005. Secondly, the resolution did not address the position of a departing shareholder's entitlement to payment of its current account. [27] Although in his affidavits Mr Franklin accepts that the shareholders of CDL had not, in fact, demanded repayment of their current accounts, he deposes that repayment was never the subject of an agreement between shareholders. The exception was the position of C-DAX Nominees Ltd, which he accepts was more heavily regulated. Mr Franklin also deposes that SHT's position was different from the other Trust shareholders in CDL, because its shareholding was "largely derived from my role as Managing Director of the Company". He makes the point that the parties had not considered what would happen when Mr Franklin ultimately ceased to hold that position. [28] SHT issued its statutory demand under s 289 Companies Act 1993 on 29 June 2009. It was issued by Mr Kennedy of Minter Ellison as agent for SHT, and was for $273,056. [29] I have outlined all of this for several reasons. First, it demonstrates that considerable correspondence preceded the issue by SHT of its statutory demand. Only one of the three reasons put forward by CDL's solicitors for not paying the demand could be said to have any substance. That was the assertion that there was an agreement between shareholders debarring them from demanding repayment of their shareholder's current account. When SHT's solicitors asked for documentary evidence of that agreement, they were referred to a resolution which was not stated to be pursuant to any agreement between shareholders, did not specifically refer to or record any such agreement, but did record payment out of substantial sums toshareholders other than SHT. I have already referred to what Mr Franklin had to say about the background to that resolution – to his exclusion from the discussion that led to it. [30] Thirdly, and most importantly, the reasons given by CDL's solicitors for not repaying SHT's current account had nothing whatsoever to do with the Deed. Nor did they have anything to do with CDL's arrangements with its banker HSBC. [31] In his submissions for CDL, Mr Millard contended that Mr Franklin "ought to have known the terms of its banking finance which he (as Managing Director of CDL at the time) negotiated". He bases that submission on the affidavit Mr Henderson swore on 19 November 2009. Mr Henderson wears the several caps of shareholder (through a trust), director and solicitor to CDL. It was Mr Henderson who signed the Deed for Mr and Mrs Franklin, as trustees of SHT. He did that pursuant to the powers of attorney they had provided to him two days earlier, before they departed overseas. Mr Henderson deposed:6. There is no question that the Franklins were aware of the requirement for the Deed of Subordination. Draft documents were submitted by the solicitors for HSBC at the outset of the transaction and reviewed by the directors. The requirement for the Franklins to be a party to the Deed of Subordination was known in advance and thus the Powers of Attorney were granted to allow the transaction to proceed in their absence.[32] Mr Franklin responded on this aspect by stating that Mr Henderson had advised CDL on the banking documents. He said he had no recollection now of the advice Mr Henderson had given in 2001. Mr Franklin deposed:11. For my part, although I was vaguely aware of the existence of the financing documents entered into with HSBC in December 2001, I was certainly not aware of their specific terms nor the significance of the Deed to the litigation with C-Dax. I also generally recall us granting Mr Henderson a Power of Attorney but not for the specific purpose of signing the Deed on our behalf. I certainly do not recall receiving a copy of the Deed nor being advised of its terms or significance by Mr Henderson at any stage. 12. However, Mr Henderson presumably fully appreciated the terms of the Deed as he advised C-Dax on the HSBC documents generally and executed the Deed on behalf of his own interests as well as ours.13. Furthermore, these were documents which C-Dax either had or ought to have had on its files given that they governed the relationship it had with its primary financier. Following my resignation as managing director and C-Dax's decision to expel me as a director of the company, I no longer had access to the company's records. 14. Had C-Dax produced a copy of the Deed during the parties' negotiations in the matter, we would not have issued the statutory demand. Its failure to do so has occasioned us in significant cost.[33] That last paragraph deals with a further point made by Mr Millard, namely that SHT had "not expressly said" that it would not have issued its statutory demand had it known of the Deed. [34] Having sifted through all of this background, I do not think that the Associate Judge could be satisfied that SHT was incautious in issuing its statutory demand, and ought not to have done so. Bar the critical Deed, I cannot see that CDL would have succeeded in resisting the demand. What was the evidence of the shareholder's agreement that it claimed existed? Could that agreement be said to bind SHT, which had a shareholding derived in a quite different way from that of other shareholders? When and how had CDL addressed the position that would arise – and did arise – when Mr Franklin ceased being the Managing Director of CDL, and wanted out of the Company? I see no indication that these questions would be resolved in CDL's favour. [35] Quite apart from all this, there is the overriding point that CDL did not produce the critical Deed until a day before the hearing. While accepting this, and accepting some responsibility for that situation, Mr Henderson has effectively said "but you (Mr Franklin) should have known about the Deed anyway". Having considered the unexamined evidence of the two men about that, I do not accept that Mr Franklin ought to have known. If CDL was relying on the Deed to resist SHT's statutory demand, it needed to meet that demand by promptly providing SHT with a copy of the Deed. It failed to do that. I accept Mr Franklin's assertion that, had he been shown the Deed at the outset, SHT would not have proceeded with a statutory demand. It just could not succeed.(C) Associate Judge failed to apply the principle that a party granted an indulgence will be required to pay costs[36] Mr Kennedy's point here is that the Court indulged CDL by accepting, for filing on 23 November, its affidavit "in reply" annexing the Deed. Mr Millard conceded that the affidavit was not properly one in reply. Again, the real point is that the Deed should have been annexed to CDL's affidavit in support of its application to set aside the statutory demand. That affidavit (there were actually two affidavits) was filed, along with its application, on 13 July 2009. [37] This point is something of a subset of the previous one, or is at least closely related to it. I have held that SHT was not incautious in serving a statutory demand. If the "king hit" answer to its demand was not produced to it until the day of the hearing, 23 November, then SHT should have its costs through to that date, and beyond that date until it should, reasonably, have abandoned its demand. The granting of an indulgence serves simply to underline that costs position, but does not alter it. Mr Kennedy is not submitting that the Court ought not to have received that affidavit. Given that the Deed was a complete answer to SHT's claim, such a submission would be untenable. [38] Having found that the Associate Judge erred in respects A) and B) dealt with above, his decision cannot stand. He has based it on two factors which were either irrelevant, or which can be viewed as plainly wrong. I therefore quash his costs decision. [39] SHT is entitled to the total costs and disbursements of $4,763 it sought in its 5 March 2010 memorandum. As far as I can see, those costs do not include SHT's costs of its first two adjournment applications, which I have held were justified. CDL should have its costs of SHT's unsuccessful application for a third adjournment. I think this is best resolved by not allowing any costs either way in respect of those adjournments. [40] Almost needless to say, I have not overlooked the principle set out in r 14.2(a) High Court Rules:The party who fails with respect to ... an interlocutory application should pay costs to the party who succeeds.[41] For the reasons I have explained, it is not appropriate to apply that principle here.Result[42] Having reviewed the Associate Judge's costs decision, I set it aside. [43] I order CDL to pay SHT a total of $4,763 costs and disbursements in respect of CDL's successful application to set aside SHT's statutory demand. [44] I also allow SHT costs of $1,500 for its successful review application. That is my assessment of a reasonable figure for preparing two sets of written submissions, and considering CDL's submissions. I cannot fix a figure pursuant to Schedule 3, since items 14-16 do not apply here, as there was no hearing.Solicitors: Evans Henderson Woodbridge, Marton for the Applicant Minter Ellison Rudd Watts, Auckland for the Respondent