FRESH TO GO LTD V PAMELA CAMPBELL T/A 1 FRESH MUSHROOMS HC AK CIV 2006-404-5833

FRESH TO GO LTD V PAMELA CAMPBELL T/A 1 FRESH MUSHROOMS HC AK CIV 2006-404-5833 9 November 2006IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2006-404-5833UNDER Companies Act 1993 IN THE MATTER OF Fresh to Go Limited BETWEEN FRESH TO GO LIMITED Applicant AND PAMELA CAMPBELL TRADING AS 1 FRESH MUSHROOMS Respondent Hearing: 2 November 2006 Counsel: M Russell for applicant P Campbell respondent (in person) Judgment: 9 November 2006 at 14:30JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application for costs]Solicitors: Morrison Kent, PO Box 10 035, Wellington for applicant P Campbell, 45A Vale Road, St Heliers:, respondent[1] The applicant seeks an order for costs against the respondent. The application is made as a result of the withdrawal of a statutory demand making unnecessary the prosecution of the application to set it aside. [2] The applicant filed an application to set aside a statutory demand. I accept the applicant's evidence that it was filed on 22 September 2006 and therefore on the last day for making an application as required by s 290 of the Companies Act 1993. The application was allocated its first date of hearing for 11.45am on 2 November 2006. [3] The application was served on the respondent's solicitor, but not the respondent. As the papers indicate, the respondent is a natural person. Service did not comply with r 192 of the High Court Rules. That, of course, prescribes the various permissible modes of service. [4] The applicant's solicitors served submissions in support of the application on the respondent's solicitors at 4:22pm on 31 October 2006. Those submissions were followed by advice from the respondent's solicitors that the statutory demand was withdrawn. The precise time of that advice is not known, but it must have been within 24 hours of receipt of the submissions. [5] It is appropriate to mention that the applicant's submissions drew attention to the service problem and that r 5 and the decisions in North Shore Nurseries Ltd v Wearmouth 12 PRNZ 667 and Invercargill City Council v Hamlin (1994) 7 PRNZ 674 would be invoked. The Rule and those authorities would be invoked to cure the irregularity in relation to service. [6] Advice of the withdrawal of the statutory demand evoked a response from the applicant's solicitors at 10:05am on 1 November 2006. The response was that the applicant would apply to the Court for costs. Submissions on costs were faxed to the respondent's solicitors. [7] The applicant seeks costs on an increased basis or, in the alternative, an award of costs pursuant to Category 2 Band B of the High Court Rules. That laterbasis would, in terms of Items 26, 4.10 and 4.17 of the Third Schedule of the High Court Rules, produce a cost order of $3,520.00 plus approved disbursements. The applicant in this case had prepared a synopsis of argument and bundle of documents as required by r 251A. Those documents are certainly very helpful. They were not required, however, as that Rule only relates to a defended interlocutory application. No notice of opposition has been filed in this case. Counsel was not able to put forward any justification for my allowing for preparation for a defended hearing in accordance with Item 30 of the Third Schedule and accordingly I have not taken it into account in arriving at the cost quantification based on Category 2 Band B of $3,520.00. [8] Before considering the background it is appropriate to record the specific issues raised by this application and which counsel for the applicant very properly drew to the Court's attention. The summary is mine and not counsel's. They are: a) Was an application filed and served as required by s 290 and the other provisions of the Companies Act 1993? If it was not so filed, is the application before the Court effectively a nullity or is the defect an irregularity? What position arises if that is the case in relation to the applicant's claim for costs? b) What approach should the Court adopt where a statutory demand is withdrawn after the filing and service of an application to set it aside? and c) In the event that there is an order for costs in favour of the applicant, do the circumstances justify an order for increased costs pursuant to r 48C of the High Court Rules?The first issue[9] I address the first issue. What is involved in this case is the question of whether there has been served on a natural person, the creditor, an application pursuant to s 290 of the Companies Act 1993. The short answer is that there has notbeen such service. If the creditor had been a company incorporated under the Companies Act 1993, that would have been fatal to the application to set aside the statutory demand. That position was arrived at after a careful examination of the relevant statutory provisions in Livi Investments Ltd v Butler Gilpat Ltd (1998) 11 PRNZ 680. [10] Where the creditor is a natural person, however, service is governed, not by s 387 of the Companies Act 1993, which was dealt with in Livi Investments Ltd v Butler Gilpat Ltd but by r 192 of the High Court Rules. Rule 192 sets out the modes of service which are permitted by the High Court Rules. In this case, service was effected on the respondent's solicitors. That service did not comply with r 192 and following Rules and, in particular, r 209 of the High Court Rules which provides for service on a party's solicitor. [11] Although service was not in accordance with r 192, that is not necessarily fatal to the application. In North Shore Nurseries Ltd v Wearmouth, Salmon J applied Invercargill City Council v Hamlin and r 5 of the High Court Rules. He ruled that the service irregularity was not serious and proceeded to hear the application on an opposed basis. [12] There are significant differences between that case and the instant case.North Shore Nurseries Ltd v Wearmouth was an opposed application that proceeded to a defended hearing. Both parties were represented by counsel. The judgment indicates that the matter was considered on the merits. In the present case, as soon as the submissions indicating an application under r 5 to cure the service problem as part of the case was revealed, the statutory demand was withdrawn. The respondent's solicitors had referred previously to the application as a draft application. There is no communication from the respondent's solicitors indicating any acceptance of the documents for service purposes. The respondent was not represented by counsel. Her submissions were general in nature that were designed to convince me that no order for costs should be made. It was at my specific request that counsel for the applicant was asked to expand on the service deficiency.[13] In dealing with the first issue it is apparent that the application is not of itself a nullity but certainly service was irregular. To that extent, the applicant requires an indulgence so that the application can be kept alive. [14] The problem that this case has thrown up is one that was identified by Master Kennedy-Grant in Livi Investments Ltd v Butler Gilpat Ltd and by virtue of the fact that a statutory demand does not require, by definition, an address for service in respect of any application to set it aside to be contained in the statutory demand itself. [15] I next consider the second issue. In Jones Odell Motor Bodies Ltd v Hard Core Limited 17 PRNZ 809 I considered a situation where a statutory demand was effectively withdrawn after the filing and service of the application to set it aside. I adopt and set out the comments I made at [4], [5], [6], [7], 17 and [20] of that judgment as follows:[4] In fixing costs it is appropriate that I refer briefly to the approach, which the Court must take on an application for costs. Rule 46 provides that costs are to be in the discretion of the Court. InMansfield Drycleaners Ltd v Quinny's Drycleaning (Dentice Drycleaning Upper Hutt) Ltd CA 296/01 29 September 2002 the Court of Appeal, in noting the Court's over-riding discretion pursuant to r 46 said:There is a strong implication that a Court is to apply the regime in the absence of some reason to the contrary: Body Corporate 97010 v Auckland City Council. We do not think that a Court should hesitate to depart from the regime where appropriate but we agree that some articulation of the reason for doing so is to be expected, however succinct. If no reason is given it will expose the award to close appellate scrutiny.[5] The general principles to be applied in the exercise of that discretion are those contained r 47. Subrule (a) provides that:The party who fails with respect to a proceeding should pay costs of the party who succeeds.[6] In Commerce Commission v Southern Cross Medical Care Society[2004] 1 NZLR 491 the Court of Appeal, referring to the authorities said in relation to costs:In the interests of predictability and expedition, Courts will be less inclined to depart from the prescribed approach. The prescribed approach includes the presumption that costs follow the event. However, we do not think that the Court should hesitate to depart from that approach where clear reason for it is shown.[7] In Glaister & Ors v Amalgamated Dairies Ltd & Anor [2004] 2 NZLR 606 the Court of Appeal endorsed the proposition it made in the earlier decision in Mansfield Drycleaners Ltd v Quinny's Drycleaning (Dentice Drycleaning Upper Hutt) Ltd. It noted that if there was any departure from the costs regime as set out by the High Court Rules that could only be done on a particularised and principled way. [17] I repeat what I said in relation to statutory demand applications inInternational Airline Trading (NZ) Ltd v Rohlig NZ Ltd HC AK CIV-2003-404-3464 23 February 2004:[13] There is developing a trend where debt collectors use statutory demands as the first step in a process to recover a debt. The statutory demand procedure is not intended as a debt collection device. Its purpose is to provide the evidential foundation to support an application to appoint a liquidator in respect of a company. That follows from s 287 of the Companies Act 1993. One of the persons authorised to apply to appoint a liquidator, by virtue of s 241 of the Companies Act 1993, is a creditor of the company. A creditor, in terms of s 241 of the Companies Act 1993, includes both contingent and prospective creditors. A creditor will be successful if the creditor can show that the company is unable to pay its debts. It is for that purpose that the statutory demand is used. The reason that it is used is because non- compliance, in terms of s 287, presumes that the company is unable to pay its debts. Precise proof of the quantum of debt where a liquidator is appointed is a matter that will ultimately have to be determined by the liquidator of the company. The liquidator's principal duties are defined in the Companies Act 1993 starting at s 253. [14] I emphasise these matters because there is a common misconception that the statutory demand procedure is in some way analogous to the summary judgment regime which relates to ordinary proceedings. A summary judgment application is, of course, [813]an interlocutory application. An application made to set aside a statutory demand, as I have already said, is an originating application. In short, it is a discrete, stand-alone, application. [15] Because of its special nature, an order on the application concludes the specific application to the Court. Generally it will not be appropriate to reserve costs pending some other event. However, because the Court is required to exercise the discretion, each case will be determined on the facts before the Court. Nevertheless, there needs to be good reason for departing from the general principle that the party who fails should pay costs to the party who succeeds. [16] If the above points are observed, statutory demands should only be issued in cases which are appropriate, that is, where there is a genuine basis for establishing the evidential foundation so that an application can ultimately be made to appoint a liquidator. It is quite improper for the procedure to be used as a debt collection device or as a device to embarrass a party in a situation where there is a contest as to liability for a given debt.[20] The judgments of Heath J, in Keystone Ridge Ltd v City Sales Ltd 19/7/02, Heath J, HC Auckland M549im02, and Master Lang, in Insolare Investments Ltd v Fetherston 17/10/02, Master Lang, HC Auckland M1042im02, emphasise the need for creditors to take care before issuing statutory demands that there is in fact no dispute as to the debt. Service of the statutory demand on a company requires it to work within a very tight timetable imposed by s 290 of the Companies Act 1993. If it fails to so act, then the presumption created by s 287 applies.[16] Normally, if a statutory demand is withdrawn before the actual hearing of the application to set aside the statutory demand the Court will apply, by analogy, the position that arises on a notice of discontinuance. That, of course, is set out in r 476 of the High Court Rules. There is a presumption that a discontinuing party will be liable for costs: North Shore City Council v Local Government Commission 9 PRNZ 182. Generally, the Court will not inquire into the merits of the case unless the answer is clear and obvious. [17] I next consider the third issue. Increased costs may be awarded at the discretion of the Court and having regard to r 48C(3). The Court of Appeal inHoldfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 has given guidance on the approach to awards for increased costs. The application was advanced having regard to r 48C(3)(b)(i) and (iii).48C Increased costs and indemnity costs(3) the Court may order a party to pay increased costs if— (b) The party opposing costs has contributed unnecessarily to the time or expense of the proceeding or step in the proceeding by— (i) Failing to comply with these rules or a direction of the Court; or (iii) Failing, without reasonable justification, to admit facts, evidence, documents, or accept a legal argument;[18] The applicant's case is based on the premise that the respondent should have appreciated, at an early stage, that setting aside was inevitable. That is, in substance,because it is submitted that it must have been appreciated that quantum was substantially in dispute.Further analysis[19] It is unhelpful to attempt a full review of the nature of the alleged dispute about the debt claimed. The respondent's action in belatedly withdrawing the statutory demand has removed the need. Some observations however must be made. a) The statutory demand provided no particularisation of the debt. Certainly considerable material was provided subsequently by the respondent's solicitors; b) The applicant's solicitors wrote to the respondent's solicitors on 18 September 2006 and before the expiry of time for the filing of an application under s 290. They clearly put in issue that the debt was disputed. They drew attention to the lack of particularisation of it in the statutory demand. They drew attention to the fact that debt collectors previously engaged by the respondent had been made aware of the dispute. They drew attention to the fact that they would be forced to make the application to set aside the statutory demand unless it was withdrawn by 5 pm on 19 September 2006; c) The response received from the respondent's solicitors came with a fax on 19 September 2006 alleging that full accounts had been delivered and claiming that a staff member of the applicant had acknowledged that the amount was due and payable. It then sent what it claimed to be a full summary of all the invoices. It suggested a basis for resolving the dispute using an independent accountant. It added that unless there was agreement, the respondent would pursue the notice and would assume that the applicant was unable to pay its debts; andd) After the filing of the application and initial affidavit in support, the respondent's solicitors wrote referring to the draft proceedings and setting out further documents, which they said, involved: i) A reconciliation of the creditor's invoice and amounts paid by the debtor; ii) Summary for October, November and December 2004 invoices not paid with invoices attached; and iii) Summary of other invoices not paid; e) The next step was a further affidavit in support of the application filed by the Accounts Manager of the applicant. It is date stamped as having been filed on 24 October 2004. The Accounts Manager carried out an analysis of the accounts. She drew attention to the fact that there is a dispute concerning any liability to pay for mushroom crates. In addition, in respect of the balance of the claim, she asserts that it is difficult to establish if in fact any debt is outstanding. She goes on to say if there is any balance outstanding it would be in the sum of approximately $6000 and certainly not the $25,043.48 claimed. It is apparent that within seven days of that affidavit that the statutory demand was finally withdrawn; f) A statutory demand will not be set aside by reason of a defect or irregularity unless the Court considers that substantial injustice would be caused if it were not set aside. A defect in this regard includes a material misstatement of the amount due to the creditor and a material mis-description of the debt referred to in the demand. That position is covered by subs (5) and (6) of s 290 of the Companies Act 1993; and g) The application requires an indulgence because service was defective. The Court, must be careful with any cost order made in these circumstances, that it does not encourage non-compliance with s 290and r 192 of the High Court Rules where service of the application is required on a natural person. The problem will not apply where the statutory demand is issued by a company registered under the Companies Act 1993. The fact that an indulgence is needed to keep the application alive, because of non-compliance with the Rules, is a matter which is listed in r 48D(e)(1) as justifying either a reduction in a cost order or a refusal to make a cost order.Conclusion[20] Criticism can be levelled at the position adopted by both parties having regard to the further analysis that I have set out above. What is apparent, however, is that the applicant has incurred the cost of an application. The respondent has no specific costs relating to the appearance at Court in relation to the application. The dispute between the parties does require resolution in another forum. Weighing all these matters up I reach the view that r 48D should be applied and there should be a reduction in costs that should be allowed to the applicant in this case. Having reached that conclusion it will be obvious that I find no justification for an order under r 48C which would justify an order for increased costs in this case. The foundation for that claim simply has not been made out. [21] My assessment of costs on a 2B basis that would be allowed discloses a figure of $3,520 plus approved disbursements. I consider the appropriate result is that the applicant should be entitled to half those costs and half the disbursements that the Registrar can approve on a normal basis for such an application. In that way, criticisms of the position that I have referred to that arise from the positions of both parties are best met and I hope the integrity of the statutory requirements of s 290 and r 192 of the High Court Rules can be best maintained but, nevertheless, the order will still do justice between the parties.Order[22] The application to set aside the statutory demand is withdrawn having regard to the withdrawal of the statutory demand itself. The respondent shall pay the applicant's costs of $1,760 together with half the disbursements which the Registrar would normally approve for an application to set aside a statutory demand. _____________________ JA Faire Associate Judge