DORCHESTER FINANCE LIMITED V CHRISTCHURCH FOODCOURTS LIMITED AND ANOR HC AK CIV 2005-404-006193

DORCHESTER FINANCE LIMITED V CHRISTCHURCH FOODCOURTS LIMITED AND ANOR HC AK CIV 2005-404-006193 5 December 2008IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2005-404-006193BETWEEN DORCHESTER FINANCE LIMITED Plaintiff AND CHRISTCHURCH FOODCOURTS LIMITED First Defendant AND TONY NG THIAM SOON Second DefendantCIV 2007-404-005811AND BETWEEN TONY NG THIAM SOON AND BETTY GOH AS THE TRUSTEES OF THE GLOBAL TRUST Plaintiffs AND DORCHESTER FINANCE LIMITED Defendant Hearing: 2 December 2008 Appearances: D H McLellan and E C Gellert for Dorchester Finance Ltd A J Forbes QC and W J Palmer for Defendants in 6193/Plaintiffs in 5811 Judgment: 5 December 2008 at 4.45 p.m.JUDGMENT OF VENNING JThis judgment was delivered by me on 5 December 2008 at 4.45 p.m., pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: Buddle Findlay, Christchurch Simpson Grierson, Wellington Copy to: A J Forbes QC, Christchurch D H McLellanApplications[1] Dorchester Finance Limited seeks an order requiring Christchurch Foodcourts Limited to pay $200,000 on account of indemnity costs. In the alternative it seeks an order that Christchurch Foodcourts and Mr Ng pay $200,000 by way of security for costs. Dorchester also seeks an order requiring Mr Ng and Ms Goh as trustees of Global Trust to pay $50,000 for security for costs. [2] Christchurch Foodcourts, Mr Ng and Ms Goh oppose the applications. Christchurch Foodcourts and Mr Ng cross-apply for further and better discovery from Dorchester.Background[3] For the background I gratefully draw from the summary of Panckhurst J in an earlier decision on a related file. Mr Ng is a director of Christchurch Foodcourts. Mr Ng has a business association with Mr Wuu. In 2003 Mr Wuu entered into an agreement to borrow US$10 million from Dorchester, purportedly on behalf of Global Trust. Dorchester required the provision of a guarantee as a term of the loan arrangement. Mr Wuu sought a bank guarantee from a Swiss Bank. The Swiss Bank required payment of a facilitation fee of $750,000 in relation to the guarantee. Mr Wuu was unable to provide that. Mr Ng agreed to assist Mr Wuu. [4] To provide the $750,000 Christchurch Foodcourts and Mr Ng entered an agreement with Dorchester pursuant to which Dorchester advanced $785,000 to Christchurch Foodcourts. Christchurch Foodcourts provided a mortgage as security. Mr Ng provided a guarantee. At the same time Christchurch Foodcourts and Mr Ng entered a guarantee in relation to the original advance by Dorchester to the Global Trust but limited to the sum of $2 million. [5] Subsequently Mr Ng became concerned about the $US10 million loan transaction between Mr Wuu and Dorchester. The then trustees of the Global Trustseemingly had no knowledge of it. They retired and Mr Ng and Ms Goh were appointed as trustees. Mr Ng came to the view he had been misled when he had sought assurances from Mr Wuu and Dorchester about the principal advance before he and Christchurch Foodcourts agreed to provide the second mortgage and guarantee. [6] The borrowers fell into default under the loan arrangements. Dorchester issued a summary judgment application in this Court at Auckland. After crediting certain payments it claimed approximately $457,000 from Christchurch Foodcourts under the second mortgage and a like sum from Mr Ng as guarantor. In addition, and in reliance upon the partial guarantee of the Global Trust borrowing, Dorchester claimed approximately $1.088 million from both Christchurch Foodcourts and Mr Ng. [7] Around this time Christchurch Foodcourts entered an agreement for sale and purchase of the property, the subject of the mortgage security. It wished to obtain a release of the mortgage to enable the sale to settle. Christchurch Foodcourts however, wished to pay the principal, interest and costs under protest and subject to reserving its right to challenge both liability and quantum. Dorchester was not prepared to provide a release on that basis without a further contingency sum being provided to cover Dorchester's solicitor/client costs in any such litigation. Christchurch Foodcourts obtained, on an ex parte basis, in this Court at Christchurch, a mandatory injunction requiring Dorchester to allow Christchurch Foodcourts to redeem the mortgage. [8] In a judgment delivered on 15 December 2007 in those proceedings Panckhurst J rescinded the mandatory injunction. On a de novo reassessment the Judge was satisfied an order was required to enable repayment to occur against the background of the proceeding. The Judge directed Dorchester to provide a discharge to release the land from the mortgage but on the basis Dorchester retained the benefit of the covenants including those in the guarantee. He also directed that Christchurch Foodcourts and/or Mr Ng provide $200,000 as a contingency fund to be held by Dorchester's solicitors upon the terms that the fund was to be applied to future litigation costs with any surplus refundable to Christchurch Foodcourts and Mr Ng.[9] There have been a number of developments following Panckhurst J's judgment. First, the Christchurch proceedings were struck out as an abuse of process, given the existence of the proceedings that Dorchester had previously issued in Auckland. Mr Ng and Ms Goh as trustees of Global Trust then issued the fresh proceedings against Dorchester. In those proceedings they claim the losses said to have been sustained by Global Trust. The basis for that claim is essentially the same as Christchurch Foodcourts and Mr Ng's claim in the related proceedings. The proceedings have since been consolidated and are for a fixture in February 2010. [10] The sum of $200,000 held by Dorchester's solicitors as a contingency fund for litigation costs has been exhausted. It has been applied to pay solicitor/client costs already incurred by Dorchester in these proceedings. [11] It is against that background that Dorchester seeks an order "topping up" the contingency sum with a further $200,000 or, in the alternative, security for costs in that sum against Christchurch Foodcourts and Mr Ng. It also seeks a further sum of $50,000 for security for costs against Mr Ng and Ms Goh in the related proceedings. [12] Christchurch Foodcourts and Mr Ng seek orders for discovery against Dorchester directed at disclosure of the information relating to the fees that have been rendered by Dorchester's legal advisers and to which the $200,000 has been applied.The discovery application[13] The discovery application can be cleared away first. Mr McLellan properly accepted that in principle Christchurch Foodcourts and Mr Ng were entitled to discovery of the relevant documents relating to the solicitor/client costs incurred by Dorchester and against which the fund of $200,000 (that they had provided) had been applied and ultimately exhausted. Dorchester has apparently offered to make the documents available by 19 December. Mr McLellan noted there was only one issue. That was in relation to Mr McVeigh QC's fees. Mr McVeigh is presently overseas and unable to be contacted. Mr Forbes submitted the matter should not bedealt with informally and pursued an order from the Court. He noted that if there are issues of privilege they might require further intervention by the Court. [14] There is no opposition filed. Christchurch Foodcourts and Mr Ng are plainly entitled to the order for particular discovery. The only issue that might arise is that of privilege. That can be claimed if necessary and appropriate. In the circumstances I make an order in terms of the application filed by Christchurch Foodcourts and Mr Ng dated 5 November 2008. The order is to be complied with by 19 December 2008. [15] Costs to Christchurch Foodcourts and Mr Ng on a 2B basis for the preparation of and filing of that application and any incidental attendances before the Associate Judge. I also allow costs on today's appearance but only for one counsel and only on the basis of a conference appearance as the application was not opposed.The "top-up" issue[16] Mr McLellan submitted that:• There is no difference in principle between the original order requiring Christchurch Foodcourts and Mr Ng to pay contingency costs of $200,000 and a top-up of that sum at this stage.• Although the security interest in the subject land has been discharged from the mortgage the personal covenants in the mortgage remain in force. The personal covenants provide a basis for Dorchester to claim its litigation costs incurred in these proceedings on a solicitor/client basis against Christchurch Foodcourts and Mr Ng.• Contingent liabilities including future solicitor/client costs are secured by the mortgage notwithstanding they may not have fallen due. A mortgagor cannot redeem while such contingent liabilities are capable of arising and money: Re Rudd & Son (1986) 2 BCC 98,955 (CA).• Further, a mortgagee's liability to pay legal fees in defence of litigation is a contingent liability secured by the mortgage: Esteril Investments Pty Limited v Westpac Banking Corporation (1993) 6 BPR 13,146 (NSWSC).• In making the earlier order, Panckhurt J had preserved the position of Dorchester to seek a further top-up. The earlier order could be varied to achieve that. [17] I am not able to accept Mr McLellan's submissions. The high point of the case for Dorchester is the authority of Re Rudd & Son Limited, a decision of the English Court of Appeal. Two companies that were partners in a firm of builders had granted mortgages of land to the bank. Both went into voluntary liquidation. The liquidator called on the bank to release the mortgages because the partnership and the companies' overdrafts had been paid in full. The bank declined to release and discharge the mortgages because at the companies' request it had given performance bonds to the local council. Subsequently the bank was called upon to make payment to the council under the performance bonds. Dillon LJ, delivering the leading decision of the Court, said:... it is implicit in the scheme of this mortgage that the Bank can only demand payment from the mortgagor of moneys for which the Bank could demand payment at the time from the firm. ... That however does not prevent the security also extending to contingent liabilities and therefore, in my judgment – and with every respect to the learned judge, who took a different view – the liquidator was not entitled to redeem the security as he claimed to do.[18] Re Rudd confirms that the existence of contingent liabilities can support a mortgagee's refusal to allow redemption of the security. But it does not address the issue of whether, once the security has been released, further and additional security can be required. The short point in the present case is that the land has been redeemed and released from the mortgage security. What remains are the personal covenants of Christchurch Foodcourts and Mr Ng under the mortgage security. Mr McLellan was driven to accept that there is no provision in the mortgage document that enables Dorchester as mortgagee to require further security from Christchurch Foodcourts or Mr Ng. There is no further security clause of the type discussed by the Court in Equiticorp Finance Group Limited and Equiticorp Financial ServicesLimited v Martin & Ors HC AK M2025/88, 17 February 1989, Chilwell J for example. [19] The case of Estoril Investments Pty Ltd v Westpac Banking Corporation does not assist Dorchester either. The mortgage document included a term pursuant to which the mortgagor covenanted to pay all costs the mortgagee "shall sustain in connection with the mortgage". The mortgagor was sued by a third party which resulted in protracted and complex litigation. The mortgagee was joined as a co- defendant. The mortgagor submitted that, inter alia, it was not liable to pay the mortgagee's legal costs of the proceedings and that the mortgage should have been retired years before when the mortgagor had requested a pay-out figure. It was held the mortgagor was not entitled to a redemption of the mortgage once the case had commenced as there would be no security for the contingent liability in that situation. In delivering judgment Young J observed that:... It seems to me that had the mortgagor sought redemption before the [case] commenced even though there might have been some threatening of action by [the plaintiff] it may have been able to redeem the mortgage for what was then owing on its trading account. ...[20] Again Estoril can be distinguished on its facts as the security had not been released from the mortgage. [21] At its highest, in the present case Dorchester has a claim against Christchurch Foodcourts and Mr Ng for the solicitor/client costs it may incur in successfully opposing their claims in this proceeding. I emphasise the word "successfully" having regard to the case of Sharp v Amen [1967] NZLR 629 and the rejection of the unsuccessful mortgagee's claim to costs in that case – even though the mortgagee had acted reasonably. Absent any further security provision in the mortgage Dorchester can only recover such costs by way of judgment in the existing proceedings, (if pleaded) or following the proceedings by way of a successful application to the Court for full solicitor/client costs on the basis of r 48C(4)(e): seeANZ Banking Group (NZ) Limited v Gibson [1986] 1 NZLR 556 (CA) per Richardson J at 566.[22] Nor am I able to accept Mr McLellan's submission that the existing order of Panckhurst J could simply be varied to provide for a top-up. The order that Christchurch Foodcourts and Mr Ng provide a contingency sum was a practical, or in Mr McLellan's words an "equitable" solution to enable the security over the land to be released at that time. The Judge contemplated that one or other of the parties might apply for a ruling on the construction of the charging clause. Neither did. The Judge also went on to say:[67] I am also satisfied that the appropriate course is for Dorchester to provide a discharge releasing the land from the second mortgage, but retain the benefit of the covenants, including, of course, those in the guarantee. This, I consider, is necessary because the $200,000 figure is necessarily an estimate. It is conceivable that litigation costs could exceed that amount, in which case Dorchester must be entitled to pursue its contractual rights (assuming of course it succeeds in relation to the question of construction).[23] On my reading of that paragraph the Judge is expressing the same conclusion that I have come to, namely that Dorchester retains its rights against Christchurch Foodcourts and Mr Ng arising from the covenants in the mortgage and those rights may enable it to either obtain judgment for costs or a costs award following judgment. But the paragraph does not support Mr McLellan's submission that the existing order could be somehow varied to provide a top-up. [24] I conclude there is no jurisdiction for the top-up order sought by Dorchester. [25] In the circumstances it is unnecessary to consider the alternative argument for Christchurch Foodcourts and Mr Ng that if the mortgage document permitted Dorchester to require them to provide a further fund on account of future costs of the mortgagee, it would be oppressive, harsh, unjustly burdensome, unconscionable or in breach of reasonable standards of commercial practice. I have to observe that there is nothing wrong in principle with a further security clause or with a solicitor/client indemnification clause. If a further security clause had existed I am unable to see that there could be any proper basis to suggest that it would be struck down under the provisions of the Credit Contracts and Consumer Finance Act 2003. But, as noted, it is not necessary to determine the point as the mortgage does not provide for that in any event.Security for costs - Christchurch Foodcourts and Mr Ng[26] That leaves the alternative application for security for costs. [27] Christchurch Foodcourts and Mr Ng oppose the amended application insofar as it seeks security for costs in the sum of $200,000. Mr Forbes submitted that:• Dorchester has not established it would face difficulties recovering any order for costs from Christchurch Foodcourts or Mr Ng;• Although Mr Ng is resident outside New Zealand there is no inflexible principle that a plaintiff resident outside New Zealand should normally be ordered to give security: Aquaculture Corporation v McFarlane Laboratories (1984) Ltd(1987) 1 PRNZ 467.• Dorchester has already had the benefit of $200,000;• It cannot be said that the counterclaim against Dorchester is unjustified or has little chance of success;• If the Court was minded to order security the amount sought was excessive.Threshold[28] It is accepted that Mr Ng is resident out of New Zealand. Rule 60(a)(a)(i) is satisfied. I also accept in terms of r 60(1)(b) there is reason to believe that Christchurch Foodcourts will be unable to pay Dorchester's costs if Christchurch Foodcourts is unsuccessful in its counterclaim against Dorchester (which is now effectively the focus of the proceeding in 2005-404-6193). The financial accounts of Christchurch Foodcourts to 31 March 2008 disclose a substantial net loss of $725,000 to March 2007 and an operating loss for the two months to 31 March 2008 of $41,398. More significantly the accounts disclose the company's principal assets are shareholder funding. Without that shareholder funding it would be insolvent. Ms Ng is the majority shareholder, holding 51 percent. She resides in Singapore.The minority shareholding is a New Zealand company, Astro Investments Limited, which in turn is wholly owned by a Singaporean company that also trades at a loss. [29] Once the threshold is met, the Court must then consider whether, in all the circumstances, security ought to be ordered and, if so, in what sum: A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747. [30] The counterclaim is for a significant sum of money, but in the context of claims in this Court, is not remarkable. Christchurch Foodcourts claims $1,974,449.30 and, in addition the $200,000 paid under Panckhurst J's order. But at least part of Christchurch Foodcourts' claim seeks judgment for $412,213 which is part of the advance of $785,000 that Dorchester had paid out to it. To that extent Christchurch Foodcourts seeks judgment for a sum that on any view of it could not recover. That is approximately one-fifth of its claim. [31] A relevant factor is the merits of the claim. But as the Court of Appeal observed in A S McLachlan case an assessment of the merits at an interlocutory stage such as this can be no more than impression. Christchurch Foodcourts and Mr Ng's claim largely turns on the issue of misrepresentation by a representative of Dorchester. Christchurch Foodcourts and Mr Ng claim they were induced to enter the commitments to Dorchester on the basis that Dorchester had loaned Global Trust the $16.75 million, and that it was deposited in a bank account. They refer to the provision of a written statement headed Global Trust settlement as at 24 May 2004. But Mr McLellan submitted that the claim of misrepresentation was implausible because the whole purpose for which the additional loan entered by Christchurch Foodcourts was necessary was to confirm the principal advance in the first place. I can see the force of such an argument. It is also relevant that Christchurch Foodcourts made a number of repayments under the mortgage advance before raising the issue it now relies on. While it is not possible to form a firm view on the matter, it is sufficient to observe that the claim by Christchurch Foodcourts Limited and Mr Ng appears to have its difficulties. [32] As to other considerations, there is no suggestion in the present case that any impecuniosity or financial difficulties that Christchurch Foodcourts or Mr Ng mayhave are as a consequence of Dorchester's actions. Dorchester has not delayed in bringing this application. No submission is made that an order for security would prevent the counterclaim being brought. It is apparent from the steps the parties have taken to date that Dorchester will incur substantial costs in opposing the counterclaim. Having regard to all those factors, I conclude that it is appropriate for further security to be provided. [33] The next issue is quantum. Dorchester seeks $200,000. Mr Forbes submits that is excessive. Dorchester's claim for an additional $200,000 is on the basis of its right to solicitor/client costs. Again, without deciding, the provision in the mortgage that enables Dorchester to recover solicitor/client costs for "legal services arising from or relating to ... the enforcement or exercise or attempted enforcement or exercise of any of the mortgagee's rights, remedies and powers under this mortgage" could arguably apply to the costs Dorchester incurs in resisting the claim by Christchurch Foodcourts and Mr Ng. [34] But even accepting for present purposes Dorchester may be entitled, if ultimately successful, to pursue costs on a solicitor/client basis, the quantum of security remains a discretionary decision for the Court. I take into account that Dorchester has already had $200,000 on account. I also take into account the stage that the proceedings have reached. With the exception of the particular discovery application before the Court, discovery and inspection have been completed. What remains will primarily be preparation for trial and presentation of the case. On a category 2 basis allowing 10 days for trial, 20 days preparation and five days for second counsel, costs in the sum of approximately $56,000 would be awarded. In the circumstances, and bearing in mind this is a claim for solicitor/client costs a figure for security of $100,000 for future costs is appropriate in this case.Order for security[35] Christchurch Foodcourts and/or and Mr Ng are to provide security in the sum of $100,000. That security is to be provided by 13 February 2009 by payment of that sum to the Registrar of this Court to be held in an interest bearing deposit pending further order of the court or written direction of all parties.The application for security – Mr Ng and Ms Goh as trustees of Global Trust[36] Dorchester also seeks security in relation to the claim brought against it by Ms Goh and Mr Ng as trustees of the Global Trust. It is acknowledged that the claim is in large part based on the same facts as the counterclaim. There are some minor differences directed primarily at the different role of Global Trust as principal borrower of approximately $2 million. [37] Mr Ng and Ms Goh's financial position is unknown. Mr Ng resides overseas. There is some evidence by way of documentation on the file to suggest that Ms Goh resides in Christchurch. There is no information as to her financial position one way or another. I am not prepared to draw any adverse inference against Ms Goh as to her financial ability to pay costs. [38] On balance, I again accept that it is appropriate there be an order for security against Mr Ng but the order must reflect that there is a fair degree of overlap between the two claims and a substantial order has been made on the other proceeding. The order must be restricted to Mr Ng as there is no sufficient information before the Court at the moment to require Ms Goh to provide security:Smith v Covington Spencer Limited [2008] 1 NZLR 75. [39] In the circumstances I direct that security is to be provided by Mr Ng in the sum of $20,000 for the claim in 5811. That is to be provided by 13 February 2009 on the same terms as the other order for security.Costs[40] It is appropriate to fix costs on this application at this time: r 48E. I decline, in exercise of the Court's discretion, to make an order on an indemnity basis on this application. While Dorchester has succeeded in obtaining orders for security for costs, it has been in a lesser quantum than sought and it failed on its application for a top-up. I also take into account that the initial application for security did not extendto Christchurch Foodcourts and Mr Ng. There will be an order for costs to Dorchester on a 2B basis for one application with allowance for one counsel. __________________________ Venning J