FTG SECURITIES LIMITED v BANK OF NEW ZEALAND [2020] NZHC 2009

FTG SECURITIES LIMITED v BANK OF NEW ZEALAND [2020] NZHC 2009 [10 August 2020]IN THE HIGH COURT OF NEW ZEALANDCHRISTCHURCH REGISTRYI TE KŌTI MATUA O AOTEAROAŌTAUTAHI ROHECIV-2018-404-002013[2020] NZHC 2009BETWEEN FTG SECURITIES LIMITEDApplicantAND BANK OF NEW ZEALANDRespondentHearing: 8–10 June 2020Appearances: A J Forbes QC and H M Weston for ApplicantK M Paterson and A E Cao for RespondentJudgment: 10 August 2020JUDGMENT OF OSBORNE JThis judgment was delivered by me on 10 August 2020 at 4.00 pm pursuant to Rule 11.5of the High Court RulesRegistrar/Deputy RegistrarDate:Introduction[1] FTG Securities Ltd (FTG) applies for an order setting aside a statutory demandissued by the Bank of New Zealand (BNZ).[2] BNZ opposes the application.The judgment debt[3] The judgment debt (the debt) arose as an order of this Court dated 16 August2018, by which FTG was ordered to pay to BNZ costs and disbursements of $43,133(the costs order).1[4] In the substantive proceedings to which the costs order related FTG hadentitlements by reason of an assignment of interest in the indebtedness of andsecurities granted by Tuam Ventures Ltd (in rec and in liq) (Tuam). This Court foundthat there had not been a valid statutory assignment.2 FTG was without standing toseek the declarations it sought as to priorities under the Priority Deed.[5] The costs order was subsequently made on 16 August 2018.[6] FTG appealed the High Court judgment, but the appeal was dismissed.3 FTGthen applied for leave to appeal to the Supreme Court, but leave was declined.4 Inrelation to each of the appeals further costs and disbursements were awarded. Thosecosts do not form part of the debt which is the subject of the statutory demand.[7] In the meantime, upon the issuing of the costs order, BNZ had issued itsstatutory demand for payment of the debt.[8] FTG responded with this application for an order setting aside the statutorydemand.1 FTG Securities Ltd v Bank of New Zealand [2018] NZHC 2108 at [11].2 FTG Securities Ltd v Bank of New Zealand [2018] NZHC 1516.3 FTG Securities Ltd v Bank of New Zealand [2019] NZCA 16, [2019] 3 NZLR 607.4 FTG Securities Ltd v Bank of New Zealand [2019] NZSC 93.[9] For a lengthy period thereafter, the setting aside application was not broughton for hearing while appeal rights were pursued and this proceeding was consolidatedwith other proceedings involving the parties.Name of respondent[10] In FTG's setting aside application, BNZ was incorrectly named as "Bank ofNew Zealand Limited". As that error has not been formally corrected I make an orderpursuant to r 1.9 High Court Rules 2016 amending the respondent's name to read"Bank of New Zealand".FTG's grounds of application[11] In its notice of application, FTG asserted that:(a) FTG is solvent;(b) BNZ has already been paid because BNZ recovered the debt from fundsthat are owned in equity by FTG; and(c) it is in the interests of justice that the statutory demand be set aside.[12] FTG relied upon a brief affidavit of David Henderson, whose wife KristinaBuxton is the director of FTG. He deposed that he has direct knowledge of the mattersin his affidavit. His affidavit was sworn in September 2018 at a time when FTG wasawaiting its ultimately unsuccessful hearing in the Court of Appeal.[13] Mr Henderson explained: "FTG claims that it has equitable ownership of thedebt and securities in [Tuam] and the surplus funds that are held by the receivers of[Tuam]."[14] Mr Henderson went on to note that FTG had issued a further proceeding(the -1710 proceeding) to establish its equitable ownership of the debt and securities.FTG's claims in that -1710 proceeding are the subject of the separate judgment issuedtoday, by which this Court has ruled that the assignment of interest to FTG had beenineffective to transfer to FTG any equitable interest in the Priority Deed.5 Thatjudgment contains a declaration as to FTG's entitlement to proceeds of realisation ofTuam's assets which may come into the hands of Crown Asset Management Ltd(CAML) but, on the evidence, no such funds are in CAML's possession.[15] Mr Henderson exhibited to his affidavit correspondence from BNZ's solicitorswhich indicated that all costs incurred by BNZ in the earlier proceeding had been metout of funds held by the receivers of Tuam.[16] Mr Henderson concluded his affidavit by stating that FTG considers that thedebt has been paid with funds to which FTG is entitled.BNZ's grounds of opposition[17] By its notice of opposition BNZ asserted that:(a) FTG produced no evidence in support of its assertion as to solvency;(b) there is no genuine or substantial dispute as to whether the debt is dueand owing; and(c) even were any of the grounds in s 290(4) Companies Act 1993established (which was denied), the Court should refuse to exercise itsdiscretion to set aside the statutory demand.[18] BNZ adduced affidavit evidence from Peter Adamson (BNZ manager –Strategic Business Services) of the arrangements in relation to the costs which hadbeen paid to BNZ by the receivers of Tuam out of receivership funds. The paymentshad covered the costs incurred by BNZ in FTG's unsuccessful proceeding. BNZ hasconfirmed that any funds to be received by BNZ from FTG pursuant to the costs orderwill be repaid to the receivers of Tuam and will form part of the surplus funds to bedistributed by the receivers.5 FTG Securities Ltd v Crown Asset Management Ltd [2020] NZHC 2007.The jurisdiction to set aside a statutory demand – the principlesSection 290 Companies Act[19] The Court's jurisdiction to set aside a statutory demand is contained in s 290Companies Act, and I refer specifically to the basis upon which the Court may grantan application as contained in s 290(4), which reads:290 Court may set aside statutory demand(4) The court may grant an application to set aside a statutory demand ifit is satisfied that –(a) there is a substantial dispute whether or not the debt is owingor is due; or(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less theamount of the counterclaim, set-off, or cross-demand is lessthan the prescribed amount; or(c) the demand ought to be set aside on other grounds.[20] For the purposes of this hearing I adopt as a general approach to the exerciseof this jurisdiction the following principles.[21] As to s 290(4)(a):(a) The applicant must show that there is arguably a genuine andsubstantial dispute as to the existence of the debt. Put another way, theapplicant must show that there is a real and not a fanciful orinsubstantial dispute.(b) The mere assertion that the dispute exists is not sufficient. Materialshort of proof is required to support the claim that the debt is disputed.(c) If such material is available the dispute should normally be resolvedother than by means of proceedings in the Court's Companies Actjurisdiction.(d) It is not usually possible to resolve disputed questions of fact onaffidavit evidence alone, particularly when issues of credibility arise.[22] As to s 290(4)(c):(a) There exists a residual discretion under the "other grounds" jurisdictionof 290(4)(c) which enables the Court to do justice between the parties.As Tipping J indicated in Commissioner of Inland Revenue v ChesterTrustee Services Ltd, the exercise of the discretion comes down to theCourt's judgement as to whether the creditor's prima face entitlementto liquidate the company is outweighed by some factor making itplainly unjust for liquidation to occur.6Solvency[23] There is scope for the proven solvency of a debtor to be taken into account inthe assessment of "other grounds" under s 290(4)(c) but the scope is limited. Such isclear from the judgment of the Court of Appeal in AMC Construction Ltd v FrewsContracting Ltd.7 There, the Court of Appeal stated:8If there is no dispute as to the company's liability, so that para (a) or (b) of theAct cannot be invoked, it is difficult to imagine circumstances in which thecompany should be able to avoid paying a debt, merely by proving that it isable to pay that debt. If the debt is indisputably owing, then it should be paid.If the company simply refuses to pay, without good reason, it should not beable to avoid the statutory demand process by proving, at the statutory demandstage, that it is solvent. The demand should be allowed to proceed.[24] Counsel for FTG placed reliance on the judgment of the High Court inRothschild Properties Ltd v New Zealand Customs Service as establishing solvency asa proper ground in itself for setting aside a statutory demand pursuant to s 290(4)(c).9The apparent breadth of observations in that decision, however, must be read in thelight of the subsequent judgment of the Court of Appeal in Pioneer Insurance Co Ltd6 Commissioner of Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395 (CA) at [3].7 AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].8 At [7].9 Rothschild Properties Ltd v New Zealand Customs Service HC Napier CIV-2004-441-398, 23February 2005.v White Heron Motor Lodge Ltd.10 The Court of Appeal there observed that statutorydemands are issued to obtain payment of a debt. If payment is not made the demandfulfils the "secondary purpose" of providing a basis on which the debtor's inability topay its debts as they fall due may be proved, in the event liquidation proceedings arebrought.11Has the debt been paid already?Submissions[25] For FTG, Ms Weston referred to the evidence which confirms that BNZ hashad its costs incurred in the earlier proceeding met out of funds held by the receiversof Tuam. On that basis she submitted that there is no debt outstanding to BNZ andthat, were FTG to pay the judgment debt, BNZ would be "double dipping".[26] For BNZ, Ms Cao submitted that the circumstances in which BNZ receivedpayment are no different from those in which a party to litigation, whose lawyer hasbeen paid through legal aid, recovers the costs which are awarded at the end of thelitigation. That party then pays the costs recovery on to Legal Aid Services.[27] This Court's judgment in Taunoa v Attorney-General is an example of a costsaward in favour of a legally-aided plaintiff.12 In Taunoa the Court awarded theplaintiff $358,000, representing the total fees paid by the Legal Services Board to theplaintiff's lawyer.[28] Ms Cao submitted that there is a further analogy with the situation of a litigantwhose legal costs are covered for the time being by a litigation funder. As betweenthe parties, the unsuccessful party is susceptible to an award of costs. I awarded costsin that situation in Deo Gratias Developments Ltd v Tower Insurance Ltd.13 Althoughthe appropriateness of awarding such costs in that situation was not made an issue on10 Pioneer Insurance Co Ltd v White Heron Motor Lodge Ltd [2008] NZCA 450, (2008) 19 PRNZ286.11 At [24].12 Taunoa v Attorney-General (2004) 8 HRNZ 53 (HC).13 Deo Gratias Developments Ltd v Tower Insurance Ltd [2018] NZHC 767.the costs application (because it had been conceded by the defendant), I was satisfiedthat the successful plaintiffs were entitled to costs.Discussion[29] The submission for FTG – to the effect that the debt has been discharged –involves a fundamental misconception. What have been paid are the costs anddisbursements which BNZ incurred with their solicitors through successfullydefending the previous proceeding. As it happened, BNZ had the benefit through thatperiod of an indemnity under its contractual arrangements with Tuam as a result ofwhich payments from the receivers of Tuam covered the legal fees and disbursements.[30] Had FTG wished to assert that there should be no costs order by reason of thefull payment made of BNZ's legal fees and disbursements, then such argument shouldhave been raised at the time the parties made their submissions in relation to the costsorder which was then made. There is now a judgment debt which has not been paid.The payment made (by a different party) was of the legal costs incurred by BNZ.[31] The costs order was made and the judgment debt remains unsatisfied. Theorder has not been appealed. FTG is estopped from asserting that the judgment debtwas incorrectly created.[32] Had it been open to FTG to challenge the making of the costs order (which ithas not), then the two situations identified by Ms Cao (situations of legal aid andlitigation funding) illustrate the misconception in FTG's submissions.[33] A fully reasoned answer is also found in the judgment of Mildren J in Johnsonv Santa Teresa Housing Association.14 In that case, the party claiming costs (J) wasentitled to indemnity for his costs by the Territory Insurance Office under applicablelegislation. The headnote to the reported case accurately summarises Mildren J'sreasoning:Even if J was entitled to indemnity for his costs under the Act, the fact that aparty was entitled to indemnity for his costs from a third party not a party to14 Johnson v Santa Teresa Housing Association (1992) 83 NTR 14 (NTSC). See also Lawrie vLawler [2016] NTCA 3, (2016) 39 NTLR 1 at [477] and [256].the suit did not preclude J seeking an order for his costs against the firstdefendant. Where a party was indemnified as to his costs by a third party thatparty may obtain an order for his costs against another party, unless it wasproved that there was an agreement by that party with his legal representativesthat in no circumstances was the party to be liable to pay his legal costs. Therewas no evidence of such an agreement in the present case, indeed, the fact thatJ would have been indemnified was the evidence to the contrary. The firstdefendant should therefore pay the costs of J on the third party notice.[34] The relationship of this right of costs recovery to the underlying rationale ofcosts awards was explained by McClure JA, delivering the leading judgment of theWestern Australian Court of Appeal in Altorfer & Stow (a firm) v Lindsay, where herHonour stated:15The general rule is that costs are recoverable on a party and party basis wherethe party on the record is liable for costs incurred by his or her solicitors; theunderlying rationale being that it is just and reasonable that the party who hascaused the other party to incur the costs of litigation should reimburse thatparty for the liability incurred: Latoudis v Casey.16 The principle is sometimesreferred to as the indemnity principle (see Dyktynski v BHP Titanium MineralsPty Ltd).17 The indemnity principle is not breached if the litigant is in turnindemnified by a third party for his or her legal costs: see Davies v Taylor (No2);18 Hudgson v Endrust (Australia) Pty Ltd.19[35] There are numerous decisions illustrating the entitlement of a successful partyto a costs award notwithstanding a regime or arrangement which provided them withcover for the payment of their legal fees. These examples include parties who were:20(a) legally aided under New Zealand legislation;21(b) legally aided as members of a trade union;22(c) indemnified by an insurer;2315 Altorfer & Stow (a firm) v Lindsay [2005] WASCA 73 at [61] (footnotes added).16 Latoudis v Casey [1990] HCA 59, (1990) 170 CLR 534 at 567 per McHugh J.17 Dyktynski v BHP Titanium Minerals Pty Ltd [2004] NSWCA 154, (2004) 60 NSWLR 203 at 216.18 Davies v Taylor (No 2) [1974] AC 225 (HL).19 Hudgson v Endrust (Australia) Pty Ltd (1986) 11 FCR 152 (FCA).20 See also G E Dal Pont Law of Costs (4th ed, LexisNexis, Chatswood, 2018) at [7.16].21 Taunoa v Attorney-General, above n 12.22 Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495 (CA).23 Johnson v Santa Teresa Housing Association, above n 14.(d) in receipt of litigation funding;24(e) represented by the Treasury Solicitor, intervening in the proceeding;25(f) really representing the Crown's interests and represented by a CrownSolicitor;26(g) indemnified by the Crown as ministers or public servants;27 and(h) complainants, on behalf of a society.28[36] The common factor in such cases is that the party in question remains liable asprincipal for their own costs or, at the least, their liability to pay their lawyers' costs ispreserved to the extent of their entitlement to recover costs from the unsuccessful partywith a "no win, no fee" or "no win, no recoupment" arrangement.[37] Accordingly, it would not have been an answer to BNZ's successful costsapplication in the earlier proceeding that BNZ was entitled to or had receivedindemnification of the legal costs that it incurred. As it is, the costs order was madeand has not been met. FTG's assertion that the judgment debt has been paid isfactually and legally incorrect.Is FTG solvent?[38] Ms Weston's submission on solvency was summarised in a single paragraph inFTG's synopsis:FTG is solvent. It is legally and beneficially entitled to the substantial surplusfunds held by the receivers which are the subject of a separate proceeding more detailed submissions will be filed in relation to that issue in the 229proceeding which is to be heard at the same time as this application.24 Deo Gratias Developments Ltd v Tower Insurance Ltd, above n 13; Dyktynski v BHP TitaniumMinerals Pty Ltd, above n 17; Australian Beverage Distributors Pty Ltd v Redrock Co Pty Ltd[2008] NSWSC 114.25 R v Archbishop of Canterbury [1903] 1 KB 289 (CA).26 Lenthall v Hillson [1933] SASR 31 (SASCFC).27 Peters v Bennett [2020] NZHC 1734.28 Backhouse v Judd [1925] SASR 395 (SASCFC).[39] Leaving aside the extent to which solvency may appropriately be brought intoaccount on an application of the present nature, the minimum expectation where anapplicant asserts solvency is that a person with detailed knowledge of the company'sfinancial situation declares on oath such solvency and provides a reasonable degree ofsupporting evidence. An accurate and up-to-date balance sheet represents a good butnot necessarily adequate starting point.[40] The most significant aspect of FTG's affidavit evidence is that Mr Hendersonneither stated that FTG is solvent nor produced any information as to the state ofFTG's balance sheet.[41] Regardless of whether FTG may have claims against funds which it might atsome time receive, the Court has been given no evidence to establish either the currentfinancial state of FTG or the impact that receipt of further funds would have upon itssolvency.[42] These were matters within the peculiar knowledge of Mr Henderson and/or MsBuxton. The onus of proving solvency (if it were to be taken into account) lay onFTG.[43] FTG has failed to establish its solvency.Do other considerations of justice arise?[44] Counsel did not point to any other specific grounds, the interests of justice asinvoked by FTG appearing to be in the nature of a catch-all.[45] As it stands, the circumstances in which the various proceedings wereconsolidated and adjourned for hearing has led to a situation through which thejudgment debt has become almost two years' old.[46] By the Court's other judgments delivered today it has been established that,just as the assignment of interest on which FTG relies for a future flow of funds wasineffective as a statutory assignment, it was also ineffective as an equitableassignment.[47] There is no injustice in BNZ now being able to pursue the statutory demandprocedure under the Companies Act in order to obtain evidence of FTG's insolvency.Costs[48] Costs must follow the event.Orders[49] I order:(a) The application for an order setting aside the statutory demand issuedby BNZ dated 6 September 2018 is dismissed.(b) If FTG fails to make payment as required in the statutory demandwithin 10 working days after the date of this judgment, BNZ may fileand serve a liquidation proceeding.(c) FTG shall pay to BNZ the costs of this application on a 2B basistogether with BNZ's reasonable disbursements.29Osborne JBarristers:A J Forbes QC, ChristchurchH M Weston, Barrister, ChristchurchSolicitors:Buddle Findlay, Christchurch29 High Court Rules 2016, category 2 under r 14.3(1) and band B under r 14.5(2).