LITTLE v NZ NATURAL THERAPY LIMITED (IN LIQUIDATION) [2021] NZCA 461

LITTLE v NZ NATURAL THERAPY LIMITED (IN LIQUIDATION) [2021] NZCA 461 [10 September 2021]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA598/2018[2021] NZCA 461BETWEEN JOHN LAWSON LITTLEAppellantAND NZ NATURAL THERAPY LIMITED (INLIQUIDATION)First RespondentVIVIEN JUDITH MADSEN-RIES ANDHENRY DAVID LEVINSecond RespondentsHearing: 24 March 2021Court: Clifford, Ellis and Muir JJCounsel: P J Dale QC for AppellantK H Morrison and H Hui for RespondentsJudgment: 10 September 2021 at 3.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellant must pay one set of costs to the respondents for a standardappeal on a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Clifford J)Introduction[1] The appellant, John Little, was the sole director of the first respondent,NZ Natural Therapy Ltd (the Company) which was put into liquidation in 2012.The Company was the corporate trustee of one of Mr Little's family trusts, a tradingtrust called the NZ Natural Therapy Trust (the Trust). The second respondents,Vivien Madsen-Ries and Henry Levin, are the liquidators of the Company appointedby the High Court. Three creditors subsequently filed claims in the liquidation,totalling approximately $207,000.[2] Proceedings commenced by the liquidators in 2012 had, by June 2020,1resulted in Mr Little having been found by the High Court to owe:(a) the Company in its capacity as trustee $323,148, being the debtrepresented by the overdrawn balance of Mr Little's drawings accountas shown in the Trust's accounts for the financial year ending31 March 2012;2 and(b) the liquidators' scale 2B costs of $151,245.50 and disbursementsof $65,124.82.3[3] Mr Little now accepts his liability to the Company for his current account debt.He continues to argue, however, that he should not have to pay any or, if some, thenonly greatly reduced costs to the liquidators. In this appeal he challengesthe High Court's costs decision.Background[4] To explain this question of costs it is unfortunately necessary to go intoconsiderable detail.1 In May 2019 this Court had observed of those proceedings: "the case has been procedurallytortuous and the delays regrettable": Little v NZ Natural Therapy Ltd (in liq) CA598/2018, 23 May2019 at [1].2 NZ Natural Therapy Ltd (in liq) v Little [2018] NZHC 2164.3 NZ Natural Therapy Ltd (in liq) v Little [2020] NZHC 1506 [Judgment under appeal].[5] When the liquidators first commenced proceedings against Mr Little in 2012they said:(a) As a first cause of action, he owed the Company $1,059,590.49; moneyhe had unlawfully caused the Company to pay him. They claimed, inthe alternative and in amounts to be determined after inquiry,for monies Mr Little caused the Company to pay when it was insolvent,or to the prejudice of its creditors, or for compensation for breaches byMr Little of his director's duties.(b) As a second cause of action they said Mr Little owed the Company astrustee of the Trust part of the sum of $323,148, which was owing tothe Trust on the beneficiaries' current account as at 31 March 2012.Mr Little pleaded a simple denial to that claim.First cause of action[6] The High Court heard and determined the first cause of action separately.4[7] At the hearing of that claim it was accepted by both parties that if, as Mr Littleclaimed, the Company was in debt to its creditors as trustee of the Trust, then thatamount would not be owing.5 Reflecting the very disorganised and undocumentedstate of affairs the liquidators had faced from their appointment, Mr Little was unableto provide direct evidence of the Company's status as trustee and of many other factshe purported to rely on. The Court's task was, accordingly, more difficult and morecomplex than would normally be the case.[8] At the end of that hearing Brewer J gave a results judgment finding thatthe Company was indeed acting as trustee as Mr Little had claimed, and so dismissingthe liquidators' first cause of action.6 Costs were reserved.74 NZ Natural Therapy Ltd (in liq) v Little [2016] NZHC 2585.5 At [4]–[6].6 At [34].7 At [35].[9] At that point the hearing was adjourned part heard, and orders were made forfurther disclosure in response to matters that had become apparent during the trialthus far.8 Shortly after that judgment was released the relevant trust documentationwas found amongst papers held by Mr Little's lawyers. It was acknowledged thatthe disorganised state of the Company's records and those of related entities hadlargely contributed to that unfortunate oversight.Second cause of action[10] The liquidators subsequently filed amended pleadings. In those pleadings(and as a first cause of action), they claimed Mr Little owed the Company the fullamount of the $323,148 shown as owing on the beneficiaries' current account.The pleading of that claim was, however, considerably more detailed than it hadpreviously been, including references to the Trust's financial statements for the years2006 to 2012. In addition the liquidators:(a) added, as second defendants, Mr Little and his (former) wife in theircapacity as trustees of another family trust;(b) claimed that same amount from the second defendants as monies paidto them by the Company to the prejudice of its creditors andthe liquidators; and(c) claimed in the alternative against Mr Little himself for breach ofvarious duties he owed to the Company and the liquidators assole director of the Company.[11] Mr Little disputed that liability, including by reference to what he said wasthe significance of transfers between the Trust and Mr Little's other family trust,Woodside. If those transactions were correctly accounted for the Trust, and hencethe Company as trustee, would owe Woodside $93,852.8 NZ Natural Therapy Ltd (in liq) v Little HC Auckland CIV-2013-404-4866, 1 September 2016.[12] The High Court heard those claims over four days in May 2018, and releasedits decision in August of that year.9 Preferring the expert accounting evidence calledby the liquidators over that called by Mr Little, the High Court found Mr Little liableto the Company as trustee for the amounts showing in the Trust's 2012 financialstatements as the overdrawn beneficiaries' current accounts of $323,148.10 In doingso, the Court rejected Mr Little's argument that those amounts constituted distributionsfrom the Trust to its beneficiaries, and hence not a debt.11[13] The Judge also found for the liquidators on their alternative causes of actionalbeit, as regards some, to the extent of liability only.12 The Judge reservedquestions of:(a) compensation to the Company for Mr Little's breaches of directors'duties and his failure to keep adequate accounting records;13 and(b) the determination of Mr Little's affirmative defence: that the liquidatorswere not entitled to recover the costs of the liquidation because theyhad not acted in the best interests of the Company and had actedinconsistently with their obligations as liquidators.14Mr Little's substantive appeal[14] At that point, and before those reserved questions and the related question ofcosts in the proceedings could be determined, Mr Little appealed all aspects ofthe High Court's decision to this Court.[15] At the commencement of that appeal, Mr Little advised this Court through hiscounsel Mr Dale QC that he no longer challenged the High Court's finding he owedthe personal debt of $323,148. Rather, and as this Court put it:159 NZ Natural Therapy Ltd (in liq) v Little [2018] NZHC 2164.10 At [37] and [144](a).11 At [28].12 At [61] (dispositions made to the prejudice of creditors), [115] (breaches of directors' duties) and[126] (failure to keep adequate accounting records).13 At [113]–[115] and [126].14 At [143].15 Little v NZ Natural Therapy Ltd (in liq), above n 1, at [2].Instead, he wished to argue that he should not be required to pay the fullamount of that debt where it exceeded the extent of creditors' claims againstthe company, and a lack of proportionality in the liquidators' conduct oughtto disentitle them to recovery of substantially more than is required to satisfycreditors' claims.[16] In light of that concession, this Court adjourned the hearing and referredthe matter back to the High Court for it to decide the reserved questions.16The High Court addresses the reserved questions[17] The reserved questions were addressed by the High Court in a judgment of29 November 2019.17 First, as regards the question of compensation, the Court notedthe position remained reserved, and it would be open to the liquidators to apply forspecific compensation in the event the liquidation is concluded and there wereoutstanding liquidators' costs.18 Secondly, the High Court determined that even wereit to find for Mr Little on his allegations against the liquidators, that would not reducehis personal liability to pay the $323,148 the Court had earlier found he owedthe Company.19 The Court then found against Mr Little as regards his claimthe liquidators had breached their duties and had acted unlawfully.20[18] Thus, the liquidators were entitled to be paid their reasonable costs;the quantum of which would be determined in due course. The question of costs inthe proceedings were "fully at large", with memoranda to be filed.21Judgment under appeal[19] In his final foray on to these troubled waters Brewer J determined the questionof costs in the proceedings. At that point Mr Little argued that the liquidators' conductover the course of the litigation disqualified them from obtaining any costs, and indeedthey should pay costs to him. As a fall-back submission, Mr Little argued that ifthe liquidators were entitled to some costs then a global figure of no more than $50,000should be payable.16 At [8].17 NZ Natural Therapy Ltd (in liq) v Little [2019] NZHC 3132.18 At [40] and [45].19 At [11]–[12].20 At [39].21 At [47]–[48].[20] Largely for the same reasons as he had earlier rejected Mr Little's affirmativedefence, the Judge determined that the question of costs in the proceedings would beassessed on the usual basis: namely, costs would be payable to the successful party,the liquidators.22[21] The liquidators claimed costs totalling $252,811.32 comprising:(a) scale 2B costs of $151,245.50;(b) disbursements of $65,124.82; and(c) increased costs of $36,441.[22] Whilst the liquidators had failed in their first cause of action, if Mr Little hadcomplied with his discovery obligations and discovered the Trust documents thatsubsequently became available, the Judge determined the liquidators would not haveproceeded with that claim.23 The Judge also weighed Mr Little's formal success onthat first cause of action and his subsequent unsuccessful defence against the claimbased on the beneficiaries' overdrawn current account.24 Accepting the liquidators'claims for disbursements but not their claim for increased costs,25 the Judge awardedcosts of $150,245.50 on a 2B basis, and disbursements of $65,124.82.26This appeal[23] Mr Little now appeals. As he did in the High Court, he contends theliquidators' costs are disproportionate to the task that was properly theirsas liquidators. In particular, he points to a settlement offer the liquidators' made beforethe first hearing, which was for an amount considerably in excess of that claimed inthe liquidators' first cause of action and even more again than the amount ofthe judgment they finally obtained. That was, he says, the only settlement offer madeby the liquidators capable of acceptance. It was accordingly evident of their22 Judgment under appeal, above n 3, at [20].23 At [21]–[22].24 At [23].25 At [24].26 At [31]–[32].disproportionate approach. What was involved here was a comparatively simpleliquidation, in which three creditors had proved for debts and which could have beenwound up by the liquidators with considerably less costs and expenses than theyin fact incurred.Analysis[24] For Mr Little, Mr Dale placed considerable emphasis on the differencesbetween the amounts for which the liquidators:(a) offered to settle the proceedings in 2016, that is $1,633,794.38;(b) claimed under their first cause of action against Mr Little, that is$1,059,590; and(c) claimed, and were awarded, by reference to the outstanding balance ofthe beneficiaries' drawings account in the books of the Trust as at31 March 2012, namely $323,148.[25] In hindsight, and once the High Court had determined that the Company wasthe trustee of the Trust, the initial amounts claimed do appear unusually high.They invite the criticism that, in general terms, it cannot be proper for liquidators topursue claims against officers of a company where by far the largest part of the amountclaimed is not needed to satisfy the creditors' claims, and will only be returned tothe shareholders, less the liquidators' costs, at the end of the day. At the hearing ofthis appeal, we were mindful of that concern.[26] We were also concerned by some aspects of the liquidators' pleadings, whichasserted that the Company had a "beneficial interest" in the Trust's assets to the extentof its indemnity, and that the pleadings did not appear to reflect an awareness ofthe distinction between the Company trading on its own account and trading as trusteeof the Trust. On reflection, and given that the Company's only activities were carryingout the day-to-day business of the Trust as its trustee, those concerns, whilst justifiedin general terms, may not have been of great practical significance in this case.[27] We note that, reflecting our discussion with counsel at the hearing, we askedfor and received further submissions from both Mr Little and the liquidators on the roleof liquidators of a company which is a sole trustee and which is placed in liquidation.We were referred to the decision of Levin v Ikiua,27 and the statutory provisions as tothe removal of insolvent corporate trustees.28 As those materials reflect, thefundamental position is that the liquidator of a corporate trustee is primarily interestedin the assets of the trust only to the extent of the trustee's right to be indemnified.That right does not constitute a beneficial interest in the trust's assets, but rather anequitable lien over both the capital and income of the trust.29 Further, the powerprovided under statute to replace an insolvent trustee can helpfully crystallise therelationship between an insolvent trustee and a trust. The replacement of an insolventtrustee separates the affairs of the trust from those of the insolvent trustee subject, ofcourse, to the trustee's right of indemnification.[28] Be that as it may, as the Judge found:(a) The hearing on the first cause of action was a direct consequence ofMr Little's failure as shareholder and director of the Company, and asappointer of the Trust, to ensure that records were kept of the businessand affairs of those entities30 — even if not to the absolute letter ofthe law — then at least to the extent where the liquidation could beconducted reasonably efficiently.(b) The High Court having found that the Company was indeed acting astrustee, it was then Mr Little's denial of any liability on the amountsstated by the Trust's accounts to be owing by beneficiaries that gaverise to the necessity for the second hearing. The time and effect,particularly that of expert accounting witnesses and of counsel involvedin the second hearing, was the direct result of that denial. It was in thatcontext that the liquidators incurred a large portion of their costs.3127 Levin v Ikiua [2010] 1 NZLR 400.28 Trustee Act 1956, s 43 (and the equivalent provisions in Trusts Act 2019, ss 92 and 105).29 See Levin v Ikiua, above n 27, at [117]–[119].30 Judgment under appeal, above n 3, at [22].31 At [23], citing NZ Natural Therapy Ltd (in liq) v Little, above n 17, at [38].Given the significance of Mr Little's denial, his criticism ofthe liquidators' approach does not have any great force.(c) Finally, it was not until the opening of his substantive appeal in thisCourt that Mr Little accepted his personal liability. The significance ofthat, relative to his position theretofore, was reflected in this Courtremitting the outstanding matters to the High Court for determination.32[29] Against that background, we endorse the Judge's comments at [28] to [38]of his substantive judgment of 29 November 2019 and in particular the following:33[35] I do not accept Mr Little's criticisms. Mr Little had breached his dutyto maintain proper records. He did not give the liquidators the deed appointingthe Company corporate trustee. He did not accept liability to pay the currentaccount debt.[36] The liquidators were entitled to sue Mr Little. They did not haveto confine their suit to the current account debt. They could not be sure itwould succeed, or, if it did, what the quantum might be. Further, it was alwayspossible that more creditors might be identified.[37] In one sense, the amounts the liquidators sued Mr Little for didnot matter. He could not be liable for a sum greater than the admitted debtsand the liquidators' reasonable costs. Any surplus would be returned to himas sole shareholder.[38] I also find that Mr Little unduly contributed to the expenses ofthe liquidation by the way he defended the current account claim. It was onlyat the 2016 trial that he unexpectedly raised the defence that the recordsshowing the current account amount were wrong. He wished to call expertevidence to establish that point. The liquidators had no choice but to go to theconsiderable trouble of examining Mr Little's experts' opinions and tocounter them. In the end they were successful.[30] In our view, accordingly, Brewer J was well placed to make the costs decisionMr Little now challenges. We see no error of principle or otherwise in thatdiscretionary decision.Result[31] The appeal is dismissed.32 At [13].33 NZ Natural Therapy Ltd (in liq) v Little, above n 17.[32] The appellant must pay one set of costs to the respondents for a standard appealon a band A basis and usual disbursements.Solicitors:Neilsons Lawyers, Auckland for AppellantMeredith Connell, Auckland for Respondents