INDEPENDENT SECURITY CONSULTANTS LIMITED v FARRELLY & ANOR [2021] NZHC 1162

INDEPENDENT SECURITY CONSULTANTS LIMITED v FARRELLY & ANOR [2021] NZHC 1162 [25 May2021]IN THE HIGH COURT OF NEW ZEALANDROTORUA REGISTRYI TE KŌTI MATUA O AOTEAROATE ROTORUA-NUI-A-KAHUMATAMOMOE ROHECIV-2019-463-000138[2021] NZHC 1162IN THE MATTER of section 290 of the Companies Act 1993BETWEEN INDEPENDENT SECURITYCONSULTANTS LIMITEDApplicantAND DEREK FARRELLY and LADBROOKSSOLICITORS TRUSTEES LIMITED astrustees of the Buchanan TrustRespondentHearing: (On the papers)Counsel: David O'Neill for the ApplicantRachael Scott for the RespondentJudgment: 25 May 2021[COSTS] JUDGMENT OF MOORE JThis judgment was delivered me on 25 May 2021 at 2:15 pmpursuant to Rule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarDate:Introduction[1] This judgment follows the vacation of a fixture relating to an application to setaside a statutory demand after the respondents' opposition was withdrawn and thestatutory demand was set aside.[2] The parties are agreed that costs will be awarded against the respondents on a2B basis. Remaining at issue is the applicant's claim for a 25 per cent uplift anddisbursements totalling $18,940.00.Background[3] On 17 December 2019, the respondents served a statutory demand on theapplicant claiming a debt of $150,000.00 plus interest of $129.48.[4] By application dated 19 December 2019 the applicant applied for an order toset aside the statutory demand on the basis that there was a substantial dispute as towhether or not that debt was owing or due and that it would be unjust to allow therespondents to proceed with the liquidation of the applicant.[5] The respondents opposed the application which was set down for a hearing on25 May 2020. Several timetabling breaches followed which counsel for therespondents claimed arose from personal difficulties experienced by Mr Farrelly, thefirst respondent and one of the trustees of the Buchanan Trust. By Minute dated21 May 2020, Hinton J declined to grant the adjournment sought by the respondentsand determined that the matter would proceed on the following Monday, being25 May 2020 unless opposition was withdrawn.[6] Perhaps unsurprisingly, on Friday 22 May 2020 the respondents advised thatthey would withdraw their opposition. Accordingly, on 25 May 2020, Hinton J issueda Minute recording that she had vacated the hearing and directing that costsmemoranda be filed if the parties were unable to agree.[7] On 27 May 2020, Hinton J minuted a joint memorandum of the parties settingout that:(a) the matter had settled apart from costs; regarding which memorandawere to be referred to the Court for determination;(b) the opposition to the application was withdrawn; and(c) the statutory demand was set aside.[8] The parties agreed at that stage that costs in favour of the applicant, assessedon a 2B basis, were appropriate.Parties' submissionsApplicant[9] By memorandum dated 27 May 2020, Mr O'Neill, for the applicant, seeks:(a) $9,799.00 in costs; and(b) $18,940.00 in disbursements (comprising $18,400.00 for the forensicaccounting fee and $540.00 in filing fees).[10] To both these sums he also seeks a 25 per cent uplift.[11] Mr O'Neill submits that the uplift claimed is appropriate because therespondents failed to accept a generous proposal in February 2020 that if the statutorydemand was withdrawn, the application would be discontinued. As a consequence, theapplicant would suspend its forensic investigation and costs would lie where they fell.Mr O'Neill submits that in rejecting that proposal and maintaining opposition, only towithdraw it "at the eleventh hour", the respondents put the applicant to cost inpreparing for the hearing and engaging a forensic accountant to examine the accounts.[12] In light of this ultimately unnecessary expense caused by the respondents'conduct, the applicant submits that it is appropriate that the costs of the workundertaken by the forensic accountant be borne by the respondents, and that an upliftof 25 per cent be applied.Respondents[13] Needless to say, Ms Scott, for the respondents, takes a different view. Sheopposes both the uplift and disbursements sought.[14] The 25 per cent uplift is challenged on the basis that:(a) the respondents did not contribute unnecessarily to time or expense inthe proceeding;(b) the COVID-19 lockdown caused practical issues when it came toobtaining instructions from Mr Farrelly;(c) the respondents acted responsibly by withdrawing their demand beforethe hearing and accepting costs on a 2B basis; and(d) there is no vexatious litigation before the Court.[15] The disbursements are opposed on the basis that while the forensic report maybe recoverable in substantive proceedings, it ought not be recovered in theseproceedings. Ms Scott submits that the report focuses on monies that may have beenreceived by Mr Farrelly in his private capacity, whereas the statutory demand wasissued by the Buchanan Trust. While Ms Scott accepts that there are inferences in thereport in support of the setting aside application, that is a question for substantive trialif the matter proceeds to that step.[16] Consequently, Ms Scott submits that there is no real ability for the Court toassess whether this disbursement was reasonable at the relevant stage of proceedings.Discussion[17] It is not at issue that the applicant is entitled to the agreed 2B costs of$9,799.00. The issues for determination relate only to the uplift and disbursements. Ishall discuss each in turn.Uplift[18] Though not explicitly stated, Mr O'Neill's submissions seem to rely onr 14.6(3)(b)(v) of the High Court Rules 2016: that the respondents contributedunnecessarily to the time and expense of the proceeding by failing without reasonablejustification to accept the offer of settlement.[19] I do not consider that this ground justifies an uplift in this case. The context inwhich the respondents turned down the applicant's proposal in February of 2020 wasmarkedly different to the context in which they withdrew their application in May2020. Ms Scott had repeatedly made it known that, as a result of the COVID-19lockdowns which commenced in March 2020, the respondents' ability to receiveinstructions from Mr Farrelly, who lived in a remote area with limited ability tocommunicate electronically with counsel and was suffering from medical conditionsexacerbated during lockdown, had been materially compromised during those months.[20] I note that McGechan on Procedure makes clear that wasted costs when afixture is vacated due to the other party's default may come within r 14.6(3)(d).1 Thatmay justify the making of an order for increased costs. However, I do not considerthat in the present case such a course is justified.[21] In Fu Hao Construction Limited v Landco Albany Limited an uplift wasdeemed appropriate where the unsuccessful party – who had requested the vacation ofthe two week hearing approximately one week before the allocated fixture – hadcontributed unnecessarily to the costs by failing to comply with directions of the Courtand failed to explain its non-compliance or seek an extension.21 Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at[HRPt14.6].2 Fu Hao Construction Ltd v Landco Albany Ltd HC Auckland CIV-2004-404-006608, 23 May2008 at [7].[22] That is plainly not the case here. Ms Scott had both sought extensions andattempted to explain the respondents' compliance. When the one-month extensionsought was not granted,3 the opposition was promptly withdrawn in order to avoid theMonday hearing for which the respondents recognised they were not prepared. This isnot to excuse the extensive delays caused by the respondents' delinquency incomplying with directions. It simply recognises that the respondents had made someeffort to explain themselves and seek variations.[23] In such circumstances, I do not consider that an uplift is appropriate.Disbursements[24] Disbursements, that is expenses paid or incurred for the purpose of theproceeding,4 are recoverable to the extent they are "reasonably necessary","reasonable in amount" and not held by the court to be "disproportionate in thecircumstances of the proceeding".5[25] It is common ground that the $540.00 filing fee sought is recoverable underthis test.[26] The question with relation to the claimed disbursement is whether the$18,400.00 fee for forensic accounting advice and report carried out by a Mr Parsons,incurred in a context where the applicant was facing a statutory demand from therespondents worth $150,000.00, was reasonable in the circumstances.[27] I do not accept Ms Scott's submission that this disbursement is not recoverableat this stage of proceedings as there is no ability for the court to assess whether theforensic evidence is a reasonable disbursement. It is inevitable that the court is not inthe position to carry out as full an analysis of expert disbursements in the context of avacated hearing. But this ought not preclude the granting of expert costs. Where thetrial has been vacated because of the defendant's default, it is inevitable that the3 See Independent Security Consultants Limited v Farrelly and Ors HC Rotorua CIV-2019-463-138, 21 May 2020 per Hinton J.4 High Court Rules 2016, r 14.12(1)(a).5 High Court Rules, r 14.12 (2) & (3).plaintiffs will have wasted costs as a result.6 As Venning J observed inJeffreys v Morgenstern, it is clear that in such circumstances the Court has jurisdictionto make an order for these wasted costs, including the costs of expert witnesses whereincurred.7[28] The court's consideration of wasted costs must involve the "impression and thebest judgment of the court at the time".8 While a hearing may have enabled a morefull assessment of the reasonableness of the disbursements, I am prepared to proceedwith my best judgment of this expert evidence in the circumstances.[29] I note that the forensic accounting expense arose in circumstances where therespondents knew that the cost was being incurred by the applicant. The applicant'sproposal in February expressly offered to cease the forensic examination if therespondents' opposition were withdrawn. A joint memorandum filed on24 February 2020 provided that Mr Parson's report would be filed by 22 March 2020.By withdrawing opposition mere days before the hearing in May, the respondents musthave known this would expose them to a costs order relative to this disbursement.While this finding does not address the reasonableness of the quantum of thedisbursement, it does speak to the context in which it was incurred.[30] The application in which the disbursement was incurred was for the settingaside of a statutory demand. This process is governed by s 290 of the Companies Act1993. While a full and comprehensive forensic report may not have been necessaryto support the grounds for setting aside the statutory demand, regarding which theapplicant bears the onus, it is clear that evidence in the form of Mr Parson's report wasnecessary to put in question whether there was in fact a sum owed by Mr Farrelly.6 As stated in Tamihere v Hosking [2019] NZHC 2421 at [9], it is clear that when a party withdrawsits application they do so knowing that they have "exposed themselves to an award of costsforall steps taken to that point in defending the application".7 Jeffreys v Morgenstern [2013] NZHC 1361 at [31] and [38] – [39]; see also Fu Hao ConstructionLtd v Landco Albany Ltd, above n 2.8 Simpson v Hubbard HC Timaru CIV-2012-476-000144, 7 November 2012; and see also Jeffreysv Morgenstern, above n 7, at [34].[31] Whether or not these debts accrue to Mr Farrelly in his private capacity ratherthan in his capacity as trustee of the Buchanan Trust, as Ms Scott submits, would havebeen examined had the hearing not been vacated.[32] Faced with a statutory demand claiming a debt of $150,000.00,9 it was entirelyreasonable for the applicant to respond by engaging a forensic accountant to provideevidence to support the strike out application. This is particularly so in circumstanceswhere the respondents were aware the report was being prepared and took no steps toalert those commissioning it that it would not be necessary; even going to the extentof signing a joint statement.[33] Despite this, I do not accept that the cost of engaging Mr Parson's forensicaccounting services can be properly characterised as entirely wasted. This is not asituation where the cost incurred has been altogether sunk. Potentially, this evidencemay still be useful in the context of the substantive proceedings (if those do go ahead).It does not, therefore, amount to a cost which will have to be paid twice as a result ofthe defendants' default. In Jeffreys v Morgenstern, Venning J considered it appropriateto grant 50 per cent of the expert witnesses' costs where they determined that therewould be an additional cost incurred because of the delayed proceedings.10 It was alsofound to be appropriate to grant 50 per cent of the cost of preparation of briefs, issuesand the common bundle for trial on the basis that these costs were partially wasted,having to be redone for the purposes of trial albeit on a refocused basis.11[34] I regard the circumstances of the present case to be similar. Here, the costincurred was wasted only in part. It retains a residual prospective utility should theproceedings go to trial. On this basis I am satisfied that a 50 per cent recovery of$9,200.00 is appropriate in the circumstances.9 A demand which, the applicant claims, gave no further information to support the claim other thanto state that the debt was owing.10 Jeffreys v Morgenstern, above n 7, at [38] – [39].11 At [37].Result[35] I am satisfied that the applicant is entitled to 2B costs of $9,799.00, togetherwith $9,740.00 in disbursements.Moore JSolicitors:Mr O'Neill, HamiltonTompkins Wake, Rotorua