HORNE AS LIQUIDATOR OF WESTLAND MACHINERY TRADERS LIMITED V SMITH AND ANOR HC CHCH CIV 2005-418-000063

HORNE AS LIQUIDATOR OF WESTLAND MACHINERY TRADERS LIMITED V SMITH AND ANOR HC CHCH CIV 2005-418-000063 1 March 2006IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV 2005-418-000063BETWEEN KEIRAN ANNE HORNE AS LIQUIDATOR OF WESTLAND MACHINERY TRADERS LIMITED Plaintiff AND RAYMOND BRUCE SMITH First Defendant AND JOHN PHILLIP RATHGEN Second Defendant AND MICHAEL FRANCIS TUCKER Third Party Hearing: 1 March 2006 Appearances: B Russell for Plaintiff G D Jones and D Vukelic for First Defendant H A Evans for Second Defendant Judgment: 1 March 2006JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN UPON APPLICATION BY DEFENDANTS FOR SECURITY FOR COSTS[1] These proceedings have been brought by Ms Horne as liquidator of Westland Machinery Traders Limited (in liquidation) ("Westland"). Westland was indebted to Ricon Private Limited ("Ricon") in the amount of $465,553. On application by Ricon, Westland was put into liquidation in March 2003. There are no secured creditors of Westland. Apart from a debt of $50 owed to the Inland Revenue Department, Ricon is the only unsecured creditor of Westland.[2] The first defendant was a director of Westland from February 1991 until November 2001. The second defendant was appointed a director in March 1997 and remains a director. In broad terms the statement of claim alleges a number of failings of the defendants with regard to the general running of Westland as well as some specific transactions undertaken by them on Westland's behalf. In particular, it is alleged that the defendants caused Westland to enter into a number of transactions with companies controlled by, or connected to, the defendants. There are also allegations about the failure to maintain adequate financial records. It is alleged that these failings were major contributing factors to Westland's insolvency. [3] The defendants have filed statements of defence and have pleaded an affirmative defence pursuant to the Limitation Act 1950. The defendants have joined a third party who was a director of Westland between April 1995 and February 1998.Application for security for costs[4] The first and second defendants applied for an order for security for costs pursuant to r 60(1)(b) on the grounds that there is reason to believe that the plaintiff will be unable to pay the defendants' costs if the proceedings are unsuccessful. The defendants state that the plaintiff does not accept personal liability for costs awarded against the plaintiff if the claim is unsuccessful. As Westland has no assets out of which an order for costs could be satisfied, the defendants seek an order to enable enforcement of any costs award on a successful defence of the claim. [5] The plaintiff opposes the application on a number of grounds: 1. The proceedings are not overly complex or difficult in that there are no unusual circumstances justifying an award. 2. The claim has reasonable grounds of success. 3. There is a reasonable argument that the impecuniosity of Westland is due to the defendants' actions.4. The defendants have delayed in bringing the application. 5. There is no evidence the plaintiff will be unable to pay costs if such an order is made. [6] In her affidavit in opposition Ms Horne states that Westland's major unsecured creditor, Ricon, has met the costs of the proceedings to date. She says if an order for security of costs is made she will approach Ricon to see if they are willing to provide further funds as security. She adds:I am not aware of whether Ricon would be in a position to supply further funds to enable me to meet such an order or whether it would be prepared to do so.Principles[7] These are well known. They include: 1. The ordering of security for costs is discretionary. 2. There is no burden one way or the other. It is a discretion to be exercised in all the circumstances of the case. 3. In the exercise of the discretion there is no predisposition one way or the other. 4. The interests of both the plaintiff and the defendant should be considered. The rule should not be used oppressively to prevent a genuine claim by a plaintiff of limited means. On the other hand an impecunious plaintiff must not be allowed to use its inability to pay costs as a means of putting unfair pressure upon the defendant. 5. The Court should give consideration to the merits of the plaintiff's case.6. The Court should consider whether there is any reasonable probability that the plaintiff's impecuniosity has been caused by the defendants' actions. 7. The means of interested shareholders and creditors and their ability to assist with the provision for security may be a relevant matter. 8. Whether there are grounds for thinking that the defendants are using the application oppressively to prevent the plaintiff's case from coming before the Court. 9. The amount of any security is not intended as a pre-estimate of party/party costs but should be fixed in an amount which is appropriate in the interests of justice and requires a consideration of all the issues bearing on that matter in the particular case.Considerations[8] Counsel estimate the length of trial to be between seven and ten days. What is evident to the Court from the papers filed and from what I have been told by counsel I am of the view that the proceeding has aspects of complexity and will require the calling of expert evidence. [9] The plaintiff pleads that she has a strong case. In her view the overall effect of the transactions complained of and at issue was to replace realisable assets of Westland with unrealisable assets of dubious value such as shareholdings in companies controlled by the first defendant. She says there was little or no analysis of the value of the companies in which the investments were made; there was no valuation of Westland's stock or shares before they were on-sold for little or no consideration, again to companies in which the first defendant held shares. [10] However, this summary of the position propounded on behalf of the plaintiff overlooks the fact that at all relevant times Ricon was a 25% shareholder in Westland. The defendant has pleaded that steps taken by the directors at all relevanttimes were taken with the informed consent of the shareholders. The defendants submit Ricon was not just an arms length creditor and was more than merely a supplier of goods. It was a key stakeholder and joint venturer in the company's business. Therefore it took a risk in investing in the company. It follows that Ricon cannot claim impecuniosity caused by the directors' actions. [11] If there has been delay in bringing this application then such, in the circumstances, is relatively minor. The application was filed about four months after the proceeding was lodged and has not been heard earlier due to any fault of the parties. [12] There is clear evidence the plaintiff would be unable to pay costs if such an order was ultimately made against her in favour of the defendants. Indeed, she says as much by her affidavit. The available inference from her own evidence is that she would not be prepared to fund the cost of the proceedings herself. [13] Historically Courts have been reluctant to award security for costs in cases brought by liquidators. Liquidators carry out a statutory function and they should not be inhibited in carrying out that function by an order for security. Very often the company in liquidation has few resources to fund the costs of proceedings. The Court's general view has been that this impecuniosity should not usually prevent action being undertaken by the liquidator. Accordingly, and as case law has developed, it is only in exceptional cases that security for costs should be ordered against a liquidator. Rule 60 does not preclude the making of such an order. It will depend in each case on all of the surrounding circumstances and in appropriate instances should involve a consideration of the position of persons on whose behalf the liquidation is being conducted. [14] For my purposes the decision of Gallen J in Cory-Wright and Salmon Ltd v KPMG Peat Marwick [1993] 2 NZLR 701 provides guidance. In that case an order for security was made against the official liquidator. The facts of that case are very similar to the present one. In that case there was no undertaking from the Crown that it would meet any award of costs awarded against the official liquidator personally. There were no assets available in the liquidation to meet any award of costs againstthe liquidator. Funding of the case was apparently coming from secured creditors. They were substantial financial organisations and were able to fund the proceeding and were at risk only to the extent of their own funding. On the other hand, the defendants were individual private citizens who risked not only the costs to which they would be put, but also the possibility that, if successful, they would be unlikely to recover such costs that may be awarded against them. The creditors were therefore in an unduly favourable position compared with that of the defendants and therefore the case was outside the general run where orders for security will not be made. [15] In this case the litigation has been funded to date by a creditor who stands to gain from a successful claim. The Court can infer in this case that the creditor is a substantial organisation because it is funding the litigation and because its debt is owed for "goods supplied". Further Ricon was a substantial investor in Westland. [16] It follows, as in Cory-Wright, the creditor in this case is in an unduly favourable position compared with the defendants. Ricon risks only its own costs whereas the defendants also risk not being able to recover costs if they are successful. [17] Although the plaintiff acts in accordance with her statutory duty, in reality these proceedings have been brought for the benefit of one creditor only. If that creditor who has funded the litigation to date is unable to provide a further funding or is unwilling to meet with that risk from an adverse decision in the outcome then it is better that position be known now for that is far preferable than trying to address the issue following trial.Judgment[18] I direct that the plaintiff provide security for costs in the sum of $12,500 for each of the defendants. I expect counsel to consult about how this requirement may be satisfied but if there is disagreement then security should be fixed in such manner as satisfies the Registrar.[19] It is intended this sum provides security in respect of matters to date and to that stage by which time ordinary interlocutory processes would be completed. Thereafter leave is reserved to the defendants to apply for further security for the costs of trial. [20] Costs on these applications is reserved. [21] General leave is reserved to the parties to apply on short notice for a telephone conference to be convened for any purpose at all. [22] Pending the posting of security the proceedings herein will be stayed.Solicitors: Kensington Swan, Auckland, for Plaintiff Lane Neave, Christchurch for First Defendant Young Hunter, Christchurch for Second Defendant