KHURANA TRUSTEE LIMITED v CASTLE BACKPACKER K ROAD LIMITED [application for leave to appeal and costs] [2021] NZHC 1315

KHURANA TRUSTEE LIMITED v CASTLE BACKPACKER K ROAD LIMITED [application for leave toappeal and costs] [2021] NZHC 1315 [4 June 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV 2020-404-000049[2021] NZHC 1315UNDER Part 16 of the Companies Act 1993IN THE MATTER OF the liquidation of CASTLE BACKPACKERK ROAD LIMITEDBETWEEN KHURANA TRUSTEE LIMITEDPlaintiffAND CASTLE BACKPACKER K ROADLIMITEDDefendantHearing: 12 May 2021Appearances: S C I Jeffs for the PlaintiffT J P Bowler the DefendantJudgment: 4 June 2021JUDGMENT OF VAN BOHEMEN J[application for leave to appeal and costs]This judgment was delivered by me on 4 June 2021 at 4.00pmPursuant to Rule 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Patel Nand Legal, AucklandBankside Chambers, AucklandNeilsons Lawyers, AucklandIntroduction[1] The plaintiff, Khurana Trustee Ltd (Khurana), seeks leave to appeal mydecision of 4 December 2020 in which I granted the defendant, Castle Backpacker KRoad Ltd (Castle), leave to file out of time a statement of defence to the proceedingbrought by Khurana to put Castle into liquidation.1 In addition, the parties have beenunable to agree costs and have filed memoranda setting out their positions.[2] This decision deals with both matters.[3] For the reasons explained in my minute dated 14 April 2021, there was somedelay in dealing with both of these matters. However, I heard submissions fromMr Jeffs, counsel for Khurana, and from Mr Bowler, counsel for Castle, at a telephoneconference on 12 May 2021. Neither counsel was instructed on the originalapplication by Castle for leave to file a statement of defence out of time.Relevant background[4] In my decision, I found that:(a) Castle had an arguable defence;2(b) Castle's failure to file a defence or to seek leave for an extension oftime before the COVID-19 Level 3 lockdown began wasunderstandable, if unwise. However, any prejudice from the delay wasovertaken by the adjournment of the first call of the proceeding becauseof the lockdown;3(c) Castle had rebutted the presumption of insolvency, albeit by a baremargin but that, even if I had not been satisfied that Castle has rebuttedthe presumption of insolvency, I would not have regarded that as the1 Khurana Trustee Ltd v Castle Backpacker K Road Ltd [2020] NZHC 3192.2 At [62].3 At [72].determining factor in deciding whether to exercise my discretion as towhether to grant leave to Castle;4 and(d) There was no significant prejudice to Khurana.5[5] Khurana seeks leave to appeal on the basis that my judgment contains arguableerrors of law. Khurana's notice of leave to appeal alleges six such errors of importanceto Khurana and identifies two of them as being of general and public importance.[6] The two alleged errors of general and public importance are:(a) I erred in treating the insolvency of Castle as an important, but notdecisive, factor relevant to the exercise of the Court's discretion to grantleave to Castle;(b) I erred in finding that the balance sheet test of solvency was irrelevant,or of marginal relevance, to the assessment of Castle's solvency for thepurposes of s 241 of the Companies Act 1993.[7] The four other alleged errors, which are said to be of significance to Khurana,are:(a) Finding that Castle had an arguable defence on the basis that Castle didnot receive funds from Khurana and so was not liable under the loanagreement between Khurana and Castle;(b) Finding that Castle had rebutted the presumption of insolvency basedon the information before the Court;(c) Taking into account Khurana's rights against the guarantors of the loanwhen assessing Castle's solvency;4 At [96].5 At [97].(d) Finding that the overall interests of justice lay in granting Castle leaveto file a defence out of time.Requirement for leave[8] Section 56(3) of the Senior Court Act 2016 provides:No appeal, except an appeal under subsection (4), lies from any order ordecision of the High Court made on an interlocutory application in respect ofany civil proceeding unless leave to appeal to the Court of Appeal is given bythe High Court on application made within 20 working days after the date ofthat order or decision or within any further time that the High Court may allow.[9] Khurana's notice of leave to appeal, and the supporting affidavit of Preeti KinraKhurana were filed on 25 January 2021, the 20th working day after the date of myjudgment, taking into account the definition of "working day" in r 1.3 of the HighCourt Rules 2016.Considerations relevant on an application for leave[10] In Greendrake v District Court of New Zealand,6 the Court of Appeal,referencing the decision of Fitzgerald J in Finewood Upholstery Ltd v Vaughan,7agreed that the requirement for leave to appeal should serve as a "filteringmechanism," to ensure that unmeritorious appeals of interlocutory orders, or appealsof interlocutory orders of no great significance to either the parties or more generally,do not unnecessarily delay the proceedings in which the orders were made.[11] The Court of Appeal in Greendrake also recognised the followingconsiderations as relevant to an application for leave to appeal:(a) a high threshold exists;(b) the applicant must identify an arguable error of law or fact;6 Greendrake v District Court of New Zealand [2020] NZCA 122 at [6].7 Finewood Upholstery Ltd v Vaughan [2017] NZHC 1679 at [13].(c) the alleged error should be of general or public importance warrantingdetermination or otherwise of sufficient importance to the applicant tooutweigh the lack of general or precedential value;(d) the circumstances must warrant incurring further delay; and(e) the ultimate question is whether the interests of justice are served bygranting leave.Submissions[12] Mr Jeffs submitted that the asserted errors at [6] above are errors of generaland public importance because:(a) There is conflicting High Court authority on whether insolvency is animportant or a decisive factor when a Court is deciding whether to grantleave to file a defence out of time; and(b) The cashflow and balance sheet tests of solvency are both relevant toan assessment of solvency under s 241 of the Companies Act.[13] Mr Jeffs submitted that the alleged errors at [7] above are of significantimportance to Khurana and some may have broader significance, such as whether acourt can have regard to a creditor's rights against a third party when assessing acompany's solvency.[14] Mr Jeffs argued that further delay caused by an appeal is warranted becausemy judgment canvassed many of the issues that will need to be addressed on Khurana'sapplication to place Castle into liquidation and that, however those issues are decided,an appeal by Khurana or Castle is likely. On the other hand, if the Court of Appealupholds Khurana's appeal, that would be the end of the proceeding.[15] Mr Bowler submitted that there is no conflict in High Court authorities overwhether solvency is an important or decisive factor and no real issue over the greaterrelevance of cash flow over balance sheet solvency. Mr Bowler also submitted thereis no substance to the other asserted errors and that, in any event, they are not mattersof general and public importance.[16] Mr Bowler also said that Castle will need to file further evidence if Khurana'sapplication to put Castle into liquidation proceeds and that it would be much moreefficient and in the interests of justice for the case to be decided on its substantivemerits.Analysis[17] As Fitzgerald J said in Finewood Upholstery, the court hearing an applicationfor leave to appeal from an interlocutory order needs to stand back and assess, in apragmatic and realistic way, whether the interests of justice are served by grantingleave to appeal.8 As Her Honour further said, it is necessary to bear in mind theinherent tension of being the both Judge who delivered judgment in the matter and theJudge who then has to consider whether that judgment discloses arguable errors of lawor fact.9[18] It is common ground that an applicant seeking leave to appeal must satisfy ahigh threshold. The principal points of contention are whether Khurana has identifiedarguable errors of fact or law and whether those errors are of general or publicimportance warranting determination or otherwise of sufficient importance to theapplicant to outweigh the lack of general or precedential value.Insolvency an important or decisive consideration?[19] Mr Jeffs says there are competing High Court authorities on whether solvencyis an important or a decisive consideration when considering whether to grant leave toextend time to file a defence to an application to place a company into liquidation.Mr Jeffs refers, in particular, to the decisions in Fresh Cut Flowers Wholesalers Ltd vLiving and Giving Gift Co Ltd,10 Matthew Mini Coaches Ltd (in liq) v Scotch Myst8 Finewood Upholstery Ltd v Vaughan, above n 7, at [14].9 At [15].10 Fresh Cut Flowers Wholesalers Ltd v Living and Giving Gift Co Ltd (2001) 16 PRNZ 173.Ltd11 and FV Aluminium 2011 Ltd v Firma Construction Co12 as authority for what hesays is the correct position, namely that solvency is a decisive consideration. Mr Jeffssays, albeit by inference, that these decisions are to be preferred to those decisionswhere the Court has held that solvency is not always the decisive consideration.[20] One example of the latter is Body Corporate 62870 v Health Distributors(Holdings) Ltd, which I cited in my decision,13 in which Osborne AJ said that theinsolvency of the defendant is an important consideration but that, in some cases,insolvency may not be decisive but is a strong factor against the exercise of thediscretion.14[21] I do not consider that these decisions are in conflict or establish conflictinglines of authority.[22] In Fresh Cut Flowers Wholesalers, Paterson J did not state that the insolvencyof the defendant was the decisive consideration. He decided not to grant leave to filea defence out of time on two bases. The first basis of his decision was that he did notaccept that the defendant had an arguable defence to the allegation that it had failed topay trade creditors when debts fell due.15 That the defendant was insolvent was afurther issue that mitigated against granting leave.16[23] In Matthew Mini Coaches, Andrew AJ held only that the solvency of thedefendant company was of "particular relevance." He did not state that it was thedecisive consideration. While the Associate Judge noted that the Court had stated ona number of occasions that, even if there is an arguable defence, leave should not begranted if the applicant is insolvent, in the footnote referring to the relevant casesincluding Fresh Cut Flowers Wholesalers, Andrew AJ stated:1711 Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd [2019] NZHC 3015.12 FV Aluminium 2011 Ltd v Firma Construction Co [2020] NZHC 1385.13 Khurana Trustee Ltd v Castle Backpacker K Road Ltd, above, n 1 at [38].14 Body Corporate 62870 v Health Distributors (Holdings) Ltd [2018] NZHC 1717 at [24].15 Fresh Cut Flowers Wholesalers Ltd v The Living and Giving Gift Co Ltd, above n 10, at [20] and[23].16 At [21] and [23].17 Matthew Mini Coaches Ltd (in liq) v Scotch Myst Ltd, above n 11 at [24].In Body Corporate 62870 v Health Distributors (Holdings) Ltd, the Court statedthat while not always decisive, the insolvency of the defendant company is a strongfactor against the exercise of the Court's discretion.[24] Similarly, in FV Aluminium 2011, Osborne AJ, in reference to one of his earlierdecisions,18 stated:19As recognised in Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd, theinsolvency of the defendant is an important consideration. In some cases itmay not be decisive but it is a strong factor against the exercise of thediscretion.9[25] In short, there is no real divergence of position in the High Court decisions. Itfollows that the asserted error regarding whether solvency is an important or a decisiveconsideration is not an arguable error of law, let alone one of general or publicimportance.Cashflow and balance sheet tests of solvency[26] Khurana says I erred in finding that the balance sheet test of solvency wasirrelevant, or of marginal relevance, to the assessment of Castle's solvency for thepurposes of s 241 of the Companies Act. Khurana refers, in particular, to paragraphs[75] and [90] of my judgment. Mr Jeffs says that, on appeal, Khurana will submit thatthe cash flow and balance sheet tests of solvency are both relevant to an assessment ofsolvency under s 241 of the Companies Act.[27] I did not find that the balance sheet test of solvency was irrelevant, or ofmarginal relevance, to the assessment of Castle's solvency for the purposes of s 241.Rather, at [75] I noted that, as Doogue AJ had observed in Commissioner of InlandRevenue v F B Duvall Ltd,20 the "cash-flow" test of solvency, based on the ability of acompany to pay its debts as they become due in the normal course of business as setout in s 4(1)(a) of the Companies Act, is the test that counts, rather than the "balancesheet" test of whether the value of a company's assets exceeds the value of itsliabilities, as set out in s 4(1)(b).2118 Hurunui Estate (2002) Ltd v Hurunui Hotel (2004) Ltd [2015] NZHC 1152.19 FV Aluminium 2011 Ltd v Firma Construction Co, above n 12 at [24].20 Commissioner of Inland Revenue v F B Duvall Ltd (2010) 10 NZCLC 264,455, (2009) 24 NZTC23,135 at [10].21 At [10].[28] At [90], when assessing the evidence of Mr Nair, an accountant who gaveevidence for Khurana, I stated:[90] I have taken account of the criticisms made by Mr Nair. However,some of those criticisms were focused on balance sheet solvency which, asnoted, is of lesser relevance in assessing whether a company can pay its billsas they fall due.[29] At neither [75] nor [90] did I find that the balance sheet test of solvency wasirrelevant, or of marginal relevance, to the assessment of Castle's solvency[30] Section 241(4)(a) of the Companies Act provides that the Court may appoint aliquidator if it is satisfied that the company is unable to pay its debts. That is the firstleg of the meaning of solvency set out in s4 (1)(a) of the Act.[31] Brookers Insolvency Law and Practice, on which Doogue AJ based hisobservations in Commissioner of Inland Revenue v F B Duvall, states:22The "cash flow" test of solvency, based on the ability of a company to pay itsdebts, must be contrasted with the "balance sheet" test of solvency which isconcerned with whether the value of a company's assets exceeds the value ofits liabilities. In determining whether the liquidation of a company can bejustified under s 241(1)(a), it is the cash flow test that counts[32] Given the language of ss 4(1)(a) and 241(4)(a) of the Companies Act, as wellas the commentary in Brookers, I do not consider that it is seriously arguable that Iwas in error in holding that the cash flow test is the test that counts when determiningwhether a company can pay its debts.[33] For these reasons, I do not consider that this ground of Khurana's applicationdiscloses an arguable error of law, let alone one of general or public importance.Khurana's other grounds for seeking leave[34] Three of Khurana's other grounds for seeking leave, as set out at [7] aboverelate to the substance of its contention that Castle owes it a debt which has not been22 L Hampton and others, Brookers Insolvency Law and Practice, (looseleaf ed, Brookers Ltd,Wellington, 2007) vol 2 at [CA241.03]; and Commissioner of Inland Revenue v F B Duvall Ltd,above n 20.paid and should be put into liquidation. The last ground relates to the overall justiceof the granting Castle's application for an extension of time.[35] The factual bases of the three grounds that relate to the substance of the disputebetween Khurana and Castle can all be explored fully if Castle is able to file its defenceand there is a substantive hearing of Khurana's application. In that sense, Khuranawill suffer no substantive prejudice in relation to those grounds if its application forleave is denied. For that reason, I do not accept these grounds are of such importanceto Khurana that leave to appeal should be granted.[36] With one possible exception, none of the three grounds relating to thesubstance of the dispute has any precedential value. The possible exception isKhurana's contention that I took into account Khurana's rights against third partyguarantors when assessing Castle's solvency. However, I consider that that contentionis based on a misreading of my decision of 4 December 2020.[37] At [94] I referred to the evidence of Mr Rajvanshi, who had confirmed that heand Mr Manvinder Singh had made advances to Castle. Mr Rajvanshi also providedevidence of a settlement offer Castle made to Khurana. I then stated:23That supports the evidence of the company's bank balance that Castle hassufficient funds to pay the sum in dispute if it is found liable under the LoanAgreement.[38] That part of the paragraph was concerned with Castle's solvency.[39] I then stated:24Any risk that those funds might be disbursed to those who advanced the fundsto the detriment of Khurana is offset by the fact that Mr Rajvanshi andMr Manvinder Singh have personally guaranteed the loan under the LoanAgreement so are liable regardless.[40] This sentence was not addressed to Castle's solvency but rather to the risk thatthe funds that Castle had might be dissipated to the detriment of Castle's creditors –which had been highlighted in the submissions of counsel for Khurana. While that23 Khurana Trustee Ltd v Castle Backpacker K Road Ltd, above, n 1 at [94].24 At [94].sentence relates indirectly to the question of whether Castle can pay its bills, I do notconsider that such a finding, which was made directly in response to submissions ofKhurana, raises an issue of broader significance.[41] For these reasons, I do not consider that any of the three grounds relating tothe substance of Khurana's dispute with Castle provides any sufficient basis forgranting leave to appeal, particularly having regard to the high threshold that applies.[42] Khurana's final ground for seeking leave is that I was wrong in finding that theinterests of justice lay in granting Castle leave to file a defence out of time.[43] I do not accept this ground for the reasons as set out at [100] of my earlierdecision. I consider that this application is another example of Khurana looking to usestatutory and Court processes to enforce, on a narrow technical basis, the debt theysay is owed by Castle but being unwilling to address the wider issues that arise inrelation to the circumstances in which the debt was incurred.Conclusion and result on application for leave to appeal[44] For all these reasons, and standing back and assessing in a pragmatic andrealistic way whether the interests of justice lie in granting leave to appeal, I amsatisfied that leave to appeal should not be granted.[45] Accordingly, Khurana's application for leave to appeal is dismissed.[46] Castle is entitled to costs on this application on a 2B basis. If the partiescounsel cannot agree costs, counsel may file memoranda of no more than four pages.Costs on Castle's application for leave to file a statement of defence out of time[47] In my decision of 4 December 2020, I held that Castle was entitled to costs ona 2B basis on its application to file a statement of defence out of time. I invited counselto agree costs but gave leave to apply if they could not.2525 At [104] – [105].[48] Counsel for Castle and Khurana filed a number of memoranda. For presentpurposes, the relevant memoranda are the memorandum of Mr Bowler dated22 January 2021 and the memorandum of Mr Jeffs dated 19 February 2021. BecauseI am deciding costs in the context of my decision dismissing Khurana's application forleave to appeal, it is unnecessary to decide whether any order on costs should awaitthat decision – as Mr Jeffs submitted but which Mr Bowler disputed.[49] In his memorandum Mr Bowler submitted a schedule of costs calculated on a2B basis under sch 3 of the High Court Rules. According to that calculation, Castle isentitled to costs of $16,252.00 plus disbursements of $400.00 (exclusive of GST) forfiling fee, photocopying and binding.[50] In his memorandum, Mr Jeffs took issue with a number of items claimed inMr Bowler's calculation of costs and with the claim for photocopying and binding.Mr Jeffs said Castle's costs should be $8,126 plus disbursements of $226.09.Disputed itemsStep 22: Filing interlocutory application: $1,434.00[51] Mr Jeffs said Castle's application for leave to file a defence out of time soughtthree orders, two of which were not pursued and that Castle should therefore receiveonly half the claimed amount.[52] This objection has no merit. If Castle had applied only for leave to file adefence out of time, it would have been entitled to the amount claimed. The fact theapplication also addressed other matters that were not pursued provides no basis for adeduction. I am satisfied this item is correctly claimed.Step 32: Preparation for hearing: $$4,784.00[53] Mr Jeffs said Step 32 relates to preparation for an affidavits hearing and thatcosts for preparation of an interlocutory application can be claimed only under steps24 to 26 of sch 3 of the High Court Rules.[54] Mr Jeffs is correct. The headings in sch 3 of the High Court Rules in relationto interlocutory applications can be claimed only under steps 22 to 29 and that step 32relates to preparation for an affidavits hearing.[55] The claim under this item should be deducted.Step 11: Filing two memoranda of counsel: $956.00 x 2[56] Mr Jeffs said Castle should not be able to obtain costs that relate to the filingof memoranda after the hearing had concluded. Mr Jeffs said these memoranda werefiled because of inadequacies in Castle's preparation. He said further that I gave leaveto Castle to file only one memorandum.[57] Mr Jeffs is not correct in his assertion that the memoranda were filed to addressinadequacies in Castle's preparation. In my decision, I observed that counsel forKhurana had made detailed criticisms of the accounts in order to impugn theircredibility and had invited the Court to undertake a far more searching analysis of thecompany's accounts than I considered was required or appropriate.26 Given the levelof detail that counsel for Khurana had pursued, I considered it appropriate to give leaveto counsel for Castle to respond.[58] I am satisfied, therefore, that Castle can appropriately claim the costs ofpreparing the first memorandum dated 11 September 2020. I agree, however, that Igave leave to Castle to file only one memorandum, and to Khurana to file a reply if itwished. I do not consider that Castle can claim the costs of preparing a memorandumin response to Khurana's reply.[59] Accordingly, the costs of preparing the second memorandum should bededucted.Step 11: Memorandum on costs: $478.00.[60] Mr Jeffs said Castle cannot claim the costs of preparing a costs memorandumand that to do so amounts to claiming costs on costs and should not be permitted.26 At [85].[61] Mr Jeffs is correct that the Court does not usually allow a claim for costs onpreparing a costs memorandum. While the Court has power to award such costs, thisis unusual and the Court it is reluctant to do so.27 Counsel for Castle has pointed to noexceptional circumstances in this case sufficient to displace that reluctance.[62] The claim under this item should be deducted.Disbursements for filing fee, photocopying and binding: $400.00[63] Mr Jeffs accepted that Castle can recover the filing fee of $226.09 butsubmitted that Castle cannot recover the cost of "photocopying, binding etc." Theseare overhead costs (unsupported by invoices) that are reflected in the general award ofcosts.[64] Rule 14.12 of the High Court Rules requires that a disbursement be specific tothe conduct of the proceeding, reasonably necessary for the conduct of the proceedingand reasonable in amount. Office overheads which are usually absorbed by a party'slegal solicitors, for example an online search, are not recoverable.28 In contrast officeexpenses (such as photocopying and binding) which are "necessary and specific to thelitigation" can be recovered.29[65] I do not accept that photocopying and binding can properly be described asoverhead costs where they are carried out for the specific purpose of this proceeding.In this sense they can be properly characterised as disbursements that can be approvedunder r 14.12.[66] While Castle has not provided invoices or shown a breakdown betweenphotocopying and binding, I am satisfied that the claim of $173.91 for these costs isunremarkable and appropriate.27 See for example Jeffreys v Morgenstern [2013] NZHC 1361 at [40]; Epsom Woods Ltd v WaitakereFarms Ltd [2020] NZHC 3137 at [4]; and Combined Property Maintenance Limited v Singh [2021]NZHC 621.28 See for example Todd Pohokura Ltd v Shell Exploration NZ Ltd HC Wellington CIV-2006-485-1600,1 July 2011 at [61] and [70]; see also Andrew Beck (ed) McGechan on Procedure (online looseleafed, Thomson Reuters) at [HRPt14.12].29 Mawhinney v Waitakere City Council HC Auckland CIV-1999-404-1850, 26 September 2007 at[12].Result on costs[67] The net result is that the sum of $6,218.00 should be deducted from the amountclaimed by Castle, leaving a balance of $10,034.00 plus disbursements of $400.00.OrderAccordingly, I order Khurana to pay Castle costs of $10,034.00 plus disbursements of$400.00.______________________G J van Bohemen J