DIGITAL MASTERS LIMITED V THE COUNTRY CHANNEL LIMITED HC AK CIV-2009-404-6545

DIGITAL MASTERS LIMITED V THE COUNTRY CHANNEL LIMITED HC AK CIV-2009-404-6545 24 June 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2009-404-6545UNDER The Companies Act 1993BETWEEN DIGITAL MASTERS LIMITEDPlaintiffAND THE COUNTRY CHANNEL LIMITEDDefendantAppearances: Mr Baird for plaintiffMr Blanchard for non-partiesJudgment: 24 June 2011 at 4:30 PMJUDGMENT OF ASSOCIATE JUDGE J P DOOGUE[on Costs]This judgment was delivered by me on24.06.11 at 4.30 pm, pursuant toRule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDateCounsel:C J R Baird, Southern Cross Chambers, Auckland – chrisbaird@paradise.net.nzMr G Blanchard, P O Box 1235, Auckland – greg@gregblanchard.co.nzBackground[1] The plaintiff is a company which makes television programmes. It supplied programming material to the defendant until a dispute developed between the two parties as to the charges that the plaintiff was making for its services. The dispute was never resolved. In or about July 2009, the plaintiff stopped work pursuant to the arrangement it had had with the defendant and accordingly no more programming material was provided by it to the defendant. The defendant, I am told, made other arrangements for supply of programming material.[2] In due course, the plaintiff issued liquidation proceedings after the defendant failed to comply with a statutory demand which the plaintiffs served on it 7 August 2009.[3] Mr Andrew Tyler was a principal of the plaintiff company. He was also a shareholder in and managing-director of the defendant. It appears that the plaintiff based its charges upon a contract that it entered into with the defendant in June 2008. Mr Tyler purported to execute the agreement for both parties to the contract.[4] The other shareholders and directors of the defendant were Colin Harvey, Larry Ward and Dallas Fisher.[5] Although the proceedings started out as a claim for liquidation based upon the insolvency, Mr Tyler alleged that the other three shareholders and directors ofThe Country Channel Ltd (―TCCL) effectively froze him out of participation in the defendant's business and he claims that they transferred the business of thedefendant to another company. He says they procured the defendant not to pay debts including those owed to the plaintiff.[6] Initially, the second group of directors caused the defendant to defend the liquidation proceedings but at the eleventh hour the defence was withdrawn. The plaintiff alleged that the defendant owed it slightly in excess of $1,000,000. This was claimed to be owing in respect of the supply of television production facilitiesand ―creative television services at agreed rates.[7] At a late stage in the proceedings, Mr Blanchard was instructed by the defendant and the non-parties. He made a recommendation to the defendant and the non-parties not to proceed with the defence after evidence asserting that the company was insolvent was filed by a Mr Cregten on behalf of the plaintiff. The company was duly placed in liquidation on 15 March 2010.[8] The plaintiff now seeks costs against the defendant and against certain of MrHarvey's companies' business associates.[9] Mr Blanchard said that the defendant had offered to pay the plaintiff's costs and disbursements calculated on a 2C basis which totalled $12,389.49.. Mr Baird who appeared for the plaintiff advised me that the plaintiff was seeking an award of actual and reasonable costs totalling $143,000 plus GST.[10] Mr Blanchard did not oppose in principle an increased cost award in excess of the calculation that would result from awarding costs under 2B. Indeed, he accepted that the court could well order to indemnity costs fixed at a reasonable level. But he said that the amount that the plaintiff was claiming was excessive. He told me that the central dispute in the liquidation proceedings was whether the debts claimed by the plaintiff were in fact owed. He submitted that the evidence filed by the plaintiff unnecessarily went into details of the wider dispute between the shareholders.[11] Mr Baird for his part said that the offer of costs on a 2C basis was ―woefully inadequate for what he described as the ―most unusual circumstances of thisparticular case. He referred me to the evidence filed by counsel who gave expert opinion for the plaintiff to the effect that the plaintiff had no alternative but to correct misstatements of fact that had appeared in affidavits filed on behalf of the defendant.[12] The overall result of this litigation is that the plaintiff has spent in excess of $143,000 in preparing evidence and preparing generally for the hearing of a defended liquidation case which, late in the piece, became undefended.[13] On the hearing of the costs application (for which one hour had been provided), the plaintiff placed before the Court a very large volume of material. These seem to have included most of the material filed for the liquidation application. The bundle of documents comprises material which I would estimate, without actually counting it, extends to some hundreds of pages. The plaintiff took matters to the extent of instructing expert counsel to provide affidavits where the experts commented on matters such as whether the scale of the affidavits filed in the proceeding by the plaintiff was reasonable. The defendants filed an affidavit in kind.The plaintiff's bundle of authorities for the costs argument extends to over 100 pagesand included 19 authorities.The substantive proceedings[14] The defence which was filed apparently took issue with the contention that the defendant was indebted to the plaintiff. In broad terms, the defendant took the position that the incurring of indebtedness by the defendant to the plaintiff had not been authorised by a resolution passed by three-quarters of the directors of thecompany as the shareholders' agreement required. However, I understand that thekey issue which remained for determination as the fixture became imminent was whether the defendant was insolvent.[15] On 1 March 2010, Mr John Joseph Cregten, who is an investigative and forensic accountant, filed an affidavit in reply on behalf of the plaintiff. The principal issue that he dealt with in his affidavit was that of the insolvency although there were other matters that he gave opinions about which do not seem to have been of direct relevance to the liquidation application. At the point when Mr Cregten swore his affidavit, the fixture for the defended liquidation application was some two weeks distant. Mr Blanchard for the defendant has described Mr Cregten's affidavitas being focused and relevant and I agree with that description. The affidavit makes it clear that the defendant company, based on its current financial statements, was insolvent from a liabilities point of view at face value (with liabilities exceeding its assets) and it also failed to pass the so-called ―cash flow solvency test. Mr Cregten's view was apparently based upon the financial statements of the companyas at March 2009, that is, almost a year prior to the date of the court fixture. He noted that:In addition, as at March 2009 the company had trade creditors in excess of $840,000 and current assets of only $204,000. On the face of it, if those trade creditors were to be paid on normal trade terms, a cash shortfall of in excess of $600,000 existed. This strongly indicates the company was unable to pay its debts as they fell due at March 2009.[16] As I have already mentioned, additional evidence of insolvency was available in the form of the presumption of the insolvency that arose when the statutory demand which had been served expired unsatisfied.[17] At some point the issues in dispute in the liquidation proceedings were widened to include allegations by Mr Tyler that he had been excluded from management of the defendant by the actions of another director, Mr Gedye. I understand that this matter was raised on the basis that it was relevant to disputes about who had been in control of the company when it gave purported approval ofthe plaintiff's charges and this matter may also have been viewed as relevant to the fact that the grounds upon which the plaintiff was seeking a liquidation were that itwould be ―just and equitable for the company to be wound up by the Court pursuant to s 241(4)(d) of the Companies Act 1993.[18] On 11 March 2010, counsel for the defendant advised Mr Baird who was acting for the plaintiff that the defendant would no longer oppose the application for appointment of liquidators. Shortly thereafter, counsel for the defendants advised that the defendant would not oppose costs being awarded against the defendant ―on a reasonable indemnity costs basis. It apparently proved impossible to reachagreement on costs and the plaintiff filed the present application.[19] I have mentioned already that the grounds for the defence to the liquidation proceedings apparently included an assertion that the plaintiff could not enforce thedebt it claimed to be owed because of the absence of an appropriate directors'resolution. It is possible that such a contention could have been disposed of by submissions based upon the so-called ―indoor management rule that I will assumethat it was necessary for the purposes of prudent preparation for the opposedliquidation application for the plaintiff to anticipate this point in the evidence. To do so would recognise the necessity of the plaintiff establishing that it was a creditor of the defendant.Reasonableness of costs incurred by the plaintiff[20] In light of the foregoing discussion, it is necessary to return to a consideration of whether the making of an order for the payment of the actual costs incurred by the plaintiff would be authorised by the rule which permits the Court to make orders forindemnity costs subject to those orders being ―reasonable.[21] That assessment has to be approached by looking at the evidence which has been filed on each side on that question with the Court then making its own assessment.[22] In the end, I assess this case as being other than a reasonably run-of-the-mill claim for a liquidation order based upon the inability of the company to pay its debts.[23] In order to justify the amount of costs sought, the plaintiff provided a detailedresume of the work which the plaintiff's lawyers undertook and the hourly rateswhich they charged.[24] Senior counsel was instructed to give affidavits on each side. The first was supplied by Mr Berman on behalf of the defendant. Mr Berman, in assessing thereasonableness of the costs charged by the plaintiff's advisers, adopted two criteria:those of proportionality of the evidence adduced and the relevance of that evidence. He noted that the defendant had offered to pay costs of a little over $12,000 which hedescribed as a ―generous approach to the scale and as a reasonable proposal for thepayment of costs. Notwithstanding that, Mr Berman was prepared to accept an overall order for costs on an indemnity basis would be as high as $18,000–$20,000inclusive of GST, disbursements and expert's costs, even though he said that at that level ―it would be an expensive liquidation proceeding. He made an overallcomment that the work carried out by the solicitor lacked focus on the issues in the case and exhibited over-kill and lack of proportionality. He said:In terms of proportionality, a claim of $144,717.51 for costs in a liquidation proceeding appears excessive in the extreme. Whether or not the plaintiff chose to expend that amount on legal services it is, in my opinion, disproportionate to the issue in dispute, namely the solvency of the defendant.[25] Mr Bryers also swore an affidavit on behalf of the plaintiff in which he dealt with the quantum of the costs claimed. He noted that issues which the defendant raised in affidavits which it had filed in the proceeding included the following:a) the claim on the part of the defendant that the charges which the plaintiff had invoiced were excessive;b) that the defendant's claim that the only debt in issue between the parties was in dispute;c) that there was a breakdown in relationships between the individuals involved in the companies;d) that the defendant, although not trading, was solvent; ande) that the plaintiff's invoices were disputed.[26] Mr Bryers was of the view that the affidavits filed by the defendant werecomprehensive and that the plaintiff, on receipt of those affidavits, ―faced aformidable task if it was to provide a response which would satisfy the Court thatliquidation was appropriate. He further observed that the plaintiff, in affidavits in reply, moved the emphasis from consideration of the defendant's ability to pay itsdebts to the more broad issue of whether it was just and equitable that the defendant should be liquidated. He opined that this was justified.[27] Against that background, the Court must assess whether the costs which the plaintiff claims are reasonable or not.Orders against non-parties[28] In October 2009, the plaintiff filed an application for costs against non- parties and discovery orders. Costs in terms of that application were sought against Country 99 TV Limited, Harvey Investment Fund Ltd, Colin Harvey, Mary Harvey and David Anderson. It is alleged:a) that costs should be ordered against some or all of those non-partieson a joint and several basis because they ―caused the defence to theliquidation to be brought and continued by the defendant until it was abandoned on the eve of a defended liquidation hearing'; andb) that it is just in all the circumstances that costs be awarded against some or all of the non-parties.[29] An allied discovery application was made to discover the identity of those of the non-parties who had actually paid the defendants costs on opposing the liquidation. Mr Blanchard for the defendants submitted that no order of the latter kind was required because that information had already been supplied to the plaintiff. The contributing party was, he said, Harvey Investment Fund Ltd(―HIFL). I am satisfied that this information which was provided by the defendantand confirmed by counsel from the bar is accurate. That being so, the application which the plaintiff made for discovery in this regard will be dismissed. Becauseonly HIFL contributed to the defendant's costs, I will consider only its position andnot say anything further about the other non-parties.Liability of the non-parties for costs[30] The next question is whether the non-party, HIFL, should be liable for costs.[31] The leading judgment in this area was that of the Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2).1 I accept that judgment is applicable and I intend to be guided by it. I further accept that the judgment establishes that the making of costs orders against non-parties is exceptional. The Privy Council also accepted that where the party who has paid for the continuation of litigation is substantially serving his own interests and will be the prime beneficiary of a successful outcome to the litigation, then it would not be just that he or she should be able to avoid a costs order on the ground that he or she is not technically a party to the proceedings. The judgment also referred to the need for proof that the costs in respect of which the applicant seeks an order against the non-party did in fact result from the intervention of the non-party. I interpolate that there does not seem to be any dispute about that issue in the circumstances of the present case.[32] In its decision in Dymocks, the Privy Council also made reference to a New Zealand authority, Arklow Investments Ltd v MacLean,2 a judgment of Fisher J:The guiding principle here is that costs orders against third parties are exceptional but that they are warranted in cases where there would otherwise be a situation in which a person could fund litigation in order to pursue his or her own interests and without risk to himself or herself should the proceedings fail or be discontinued. [W]here a person is a major shareholder and dominant director in a company which brings proceedings, that alone will not justify a third party costs order. Something additional is normally warranted as a matter of discretion. The critical element will often be a fresh injection of capital for the known purpose of funding litigation. [T]he overall rationale [is] that it is wrong to allow someone to fundlitigation in the hope of gaining a benefit without a corresponding risk that that person will share in the costs of the proceedings if they ultimately fail.[33] As to the other grounds, I understand that the policy distinctions between a pure funder and the party controlling the proceedings is that the latter is more closely identified with whether the proceedings are defended and its motivations and interests are more closely aligned with those of the defendant company than another party which simply advances the money which made the defence possible. A pure funder simply provides the means by which the company pursues its objectives1 Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145.2 Arklow Investments Ltd v MacLean HC Auckland CP49/97, 19 May 2000 at [19]–[21].which may include defending a liquidation proceeding which has been brought against it. A controlling party does more than that and contributes to the very decision as to whether a liquidation proceeding should be defended on the first place. The closer the connection between such a party and the decision to defend the proceeding, the more likely that it will be found liable for any costs which were incurred as a consequence of that decision.[34] Mr Blanchard for the funder submitted that there were good reasons why the funder provided the means by which the liquidation was defended. These had to do with the fact that the funder thought it was necessary to do so in order to retain the possible advantage of LAQC eligible losses. It was not until the litigation was well advanced that it concluded that it was no longer subject to that motivation, because of advice that it received.[35] My conclusion is that it is not very clear on the evidence quite what the objectives and purposes of the funder were when making available the resources to defend the litigation. However, as I understand it, the scheme and purpose of the LAQC provisions is to make losses which the company has incurred available to those who are shareholders in the company, which they can then use for the purposes of reckoning their own personal liability for taxation with the Commissioner of Inland Revenue. It is to be inferred, therefore, that the funding party here can plausibly be viewed as pursuing a private or personal advantage that might accrue if the company were to defeat the application to liquidate it. Of course, if the company were to defeat the winding up application and thereafter continue in business, it may be the case that it could have turned its accumulated losses to its own advantage in some way. There is insufficient information to say more than that. But the fact that the funding party might not be the only one to benefit from the litigation would not seem to be a sufficient reason to decline to make an order for costs against the funding party.[36] A further factor which Mr Blanchard submitted was relevant to the exercise of the discretion was that notice was only given to the non-parties that the plaintiff intended to seek non-party costs on 9 March 2010. This email in which the noticewas given stated that the plaintiff ―proposes to make an application for costs to beawarded against one or more third parties who were the driving force behind whatwould then be seen as the unsuccessful defence raised by TCCL (emphasisadded).[37] It was not until a late stage had been reached for the exchange of evidence that HIFL was put in possession of facts (being the material disclosed by Mr Cregten in his affidavit) which convinced it that there may not after all be proper grounds for contesting the insolvency of the defendant.[38] There is authority to the effect that a party who intends to seek costs from a non-party needs to bring that attention to the notice of the non-party promptly, otherwise the non-party is not aware that their actions are placing them at risk for the costs of the proceeding.[39] In such circumstances, the authority of Appleton v Attorney-General3 is applicable. In that case, Ronald Young J approved a passage from the judgment of the South Australian Supreme Court in Vestris v Cashman:4To express the concept in another fashion, common fairness dictates that a defendant seeking to place a non-party at risk of an order for costs must, either by bringing a timely application for security or, alternatively, at least by letter advising the defendant's intention, place the non-party on notice of that risk, so that the non-party will not, in effect, be lulled into a falsesense of security and ambushed, when it is too late for it to reflect .[40] As I already recorded, notice of a claim against the non-parties was not given until 9 March 2010.[41] Even that communication which might have obliquely given warning of an intention to seek costs from a non-party was not given to the party concerned, HIFL, but to the defendant. But in the circumstances of the case I do not regard that distinction as being material. The parties were closely linked and there was no submission from HIFL that the notice did not actually reach it because it was sent tothe defendant's counsel rather than itself.3 Appleton v Attorney-General HC Blenheim CP8/98, 13 June 2003.4 Vestris v Cashman (1998) 72 SASR 449 at 458 (SC).[42] While undoubtedly there is a risk of prejudice to a funding party who receives late notification of a possible claim, there are other matters that need to be considered in any particular case to ensure that this element does not receive disproportionate weight.[43] In most cases, the opposing party will not find out at all, or until a late stage, that a non-party funder is contributing to the cost. In proceedings such as liquidation proceedings which have a short life, that risk is more pronounced than in protracted cases where the opposite party has more time to make enquiries. To apply theVestris test inflexibly in the liquidation cases, to take one example, would mean the jurisdiction to order costs against non-parties would be needlessly constrained.[44] Further, while once there may not have been widespread knowledge about the availability of non-party costs orders, in recent times, legal advisers considering circumstances where a non-party was contemplating contributing to costs would no doubt advert to the risks and provide appropriate advice.[45] For the reasons which were stated in Vestris, however, the late notice of the intention to seek costs against a non-party is a factor which needs to be weighed when considering the overall justice of the present case.[46] I also consider it relevant to take into account the potential size of the order against the non-party. If it were the case that the non-party exposed itself to a very large liability in circumstances where notice was given very late that a claim of that kind would be made, the Court my may well hesitate to make an order. However, for reasons which I set out in the succeeding sections of this judgment, I propose that any order be of more modest dimensions than that which the plaintiff claims.[47] It is not clear in the circumstances of this case when the funder made the payments that have exposed it to the present claim. It would seem likely that given the very late notice, the bulk of the funding had already occurred at the point when notice was received.[48] It is the case, of course, though, that individuals every day commit acts oblivious to the fact that they may thereby incur a liability and there is nothing unique about funding parties in that regard. The power to make costs orders against funders is discretionary — it is not a matter of absolute right. There may therefore be justified uncertainty on the part of the funder in any particular case whether there is an actual risk that an order might be sought and made. That uncertainty cannot be avoided but it can be reduced to some extent if early notice is given that a claim is to be made against the funder.[49] My conclusion is that unexplained delay is undoubtedly a discretionary feature that the Court can take into account. In that regard, it is to be observed that in a case where a pursuing party asserts the insolvency of the opposite party, and yet that party seems to be spending money on an active defence, it is fair to say that the pursuing party may, or should, be on the alert to the possibility that there is an external funder in the background,[50] Because the making of an order and the quantum of that order are both discretionary, the approach that I take is that the amount of the costs order can be discounted to the extent necessary to avoid or mitigate hardship to the funding party resulting from the late notice that a claim might be made against it, and yet recognisethat party's responsibility for the continuance of unsuccessful litigation.[51] In the end, the reasons that Fisher J gave in the Arklow judgment5 to which I have made reference at [32] must be influential. I conclude that the overall justice of the case requires that a reasonable allowance should be made to the plaintiff by way of an order for non-party costs against HIFL.Quantum of costs[52] I agree with the defendant that the level of costs sought by the plaintiff is out of proportion to the significance of the proceeding which it brought. That is not to say that the proceedings did not have some elements of difficulty about them which would distinguish them from the run-of-the-mill cases where, typically, costs are5 Arklow, above n 2, at [21].awarded on a 2B basis. Nor do I conclude that the proceedings were not of importance to the plaintiff.[53] I make that comment even after considering the range of issues that the proceedings raised. The fact that the defendant contested whether the proper authority had been given for incurring debt to the plaintiff is one example. But as the proceedings developed, the emphasis moved into the subject area of whether the level of charges levied by the plaintiff was justified. Detailed evidence about theplaintiff's production costs and factors feeding into that issue were raised inaffidavits filed on each side. Questions about what control Mr Tyler had at the defendant company and the propriety of the plaintiff's charges were other matters that were aired in the affidavits filed. This was in addition to the question of thedefendant's solvency which seems to have become the prominent issue towards the conclusion of the exchange of evidence.[54] It might be suggested that the amount of the debt which was in the vicinity of $1 million was relevant to a consideration of whether the costs were reasonable. Theplaintiff's interest in the proceeding was to recover the amount that it considered was owed to it. All else being equal, a party would be justified in expending greater effort on recovering a major debt than a trivial one. This point was therefore not altogether irrelevant.[55] However, taking all the above matters into consideration, I am unable to accept that the costs which the plaintiff seeks are reasonable. I consider that a reasonable level of costs would be one which reflected a focused and proportional expenditure of effort having regard to the subject matter of the proceedings. If such an approach had been adopted, the amount of legal costs which the plaintiff might reasonably have expended would be much closer to the figures that Mr Berman has mentioned, rather than to the amount actually claimed. Making an assessment of these matters is not a scientific undertaking. Looking at matters broadly, it seems to me that a reasonable level of legal costs would be $20,000 together with additional disbursements as fixed by the registrar.Conclusion[56] There will be an order that the non-party HIFL is to pay costs of $20,000 to the plaintiff together with disbursements to be fixed by the Registrar. The costs order includes all matters up to the date of this judgment. Costs on the making of the application and the hearing are to lie where they fall.__________________________ J P DoogueAssociate Judge