LUMEN BUSINESS SOLUTIONS LTD v WALLACE CORPORATION LTD [2023] NZHC 3030 _x000b_

LUMEN BUSINESS SOLUTIONS LTD v WALLACE CORPORATION LTD [2023] NZHC 3030[30 October 2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2023-404-000010[2023] NZHC 3030BETWEEN LUMEN BUSINESS SOLUTIONSLIMITEDApplicantAND WALLACE CORPORATION LIMITEDRespondentHearing: On the papersAppearances: K Puddle for the ApplicantG D Simms / I J Shores for the RespondentJudgment: 30 October 2023COSTS JUDGMENT OF ASSOCIATE JUDGE GARDINERThis judgment was delivered by me on 30 October 2023 at 3.30 p.m.pursuant to Rule 11.5 of the High Court Rules.Registrar/Deputy RegistrarDate.......................................Solicitors:TWA Legal Limited, AucklandWynn Williams, AucklandIntroduction[1] On 9 December 2022, Wallace Corporation Limited (WCL) issued a statutorydemand on Lumen Business Solutions Limited (Lumen) for debt allegedly owingunder a guarantee securing a loan agreement between Podular Housing SystemLimited (Podular) and WCL (the Guarantee). Under cl 27 of the Guarantee Lumen'sliability was limited to a sum equal to any amounts Lumen received from Podular torepay advances that Lumen had made to Podular.[2] On 25 November 2022, Podular was placed into liquidation. As a result, theguaranteed monies became owing.[3] WCL made demand on Lumen on 30 November 2022 for $1,192,796 it wasowed by Podular. WCL says that it demanded the full amount Podular owed it becauseit had no means of ascertaining what amounts Lumen had received from Podular.[4] Lumen responded by instructing lawyers who wrote to WCL's lawyers on8 December 2022 requesting full details of the sum said to be owing under theGuarantee with specific reference to cl 27 of the Guarantee and supportinginformation.[5] On 9 December 2022 WCL served the statutory demand for $1,192,796.WCL's lawyers also responded to Lumen's lawyers. They provided a spreadsheet saidto show the sums owing by Lumen. They did not respond to the cl 27 point.[6] On 21 December 2022 Lumen applied to set aside the statutory demand. Itraised the cl 27 limitation and said that it had no liability to WCL under the Guaranteebecause it had not, at the date of the statutory demand, received any sums from Podularin relation to advances, loans, credits or facilities it had provided to Podular.[7] Lumen also raised several other arguments, including that the Guarantee wasnot properly executed, did not have the approval of Lumen's sole shareholder andshould be set aside due to unconscionable conduct. In an affidavit filed in support ofthe application Ilan Gross set out the background to the execution of the Guarantee.He highlighted the cl 27 limitation. He provided screenshots obtained from Podular'srecords which showed payments made by Lumen to Podular of $1,601,963 and byPodular to Lumen of $121,143. Mr Gross explained that most of the payments fromPodular to Lumen were for IT services Lumen provided Podular and were made beforethe Guarantee was signed on 4 November 2022.[8] WCL filed a notice of opposition to the application on 25 January 2023together with an affidavit from James Wallace. Mr Wallace acknowledged the cl 27limitation. He challenged Mr Gross's evidence that the payments made by Podular toLumen were for IT services, saying there was a lack of supporting information, andthat he was making enquiries with Podular's liquidators.[9] By consent, WCL was given until 17 March 2023 to file and serve anyadditional evidence, Lumen was to file and serve any evidence in reply within10 working days and the application was set down to be heard on 1 June 2023.[10] WCL filed a further affidavit from WCL's accountant, Roger Hatrick-Smith on20 March 2023.[11] On 17 April 2023 Lumen filed and served a reply affidavit from Mr Gross.Mr Gross replied to Mr Wallace's challenges to his evidence about the payments fromPodular to Lumen.[12] WCL withdrew the statutory demand on 25 May 2023, explaining that basedon the explanation in Mr Gross's reply affidavit and further enquiries with theliquidators, it accepted that there was insufficient information for the correctapplication of the limitation to the payments received by Lumen to be determined inthe context of the application to set aside the statutory demand. WCL expressly didnot accept the allegations made in Lumen's application, which it said would bedetermined in ordinary proceedings. Lumen's application was accordingly dismissedon 26 May 2023.[13] WCL accepts that scale costs are payable to Lumen for discontinuance. Lumenseeks increased or indemnity costs. On that basis, the parties have been unable toagree on costs.Legal Principles[14] The Court's jurisdiction to award increased or indemnity costs is derived fromr 14.6 of the High Court Rules 2016. Rule 14.6 provides:14.6 Increased costs and indemnity costs[](3) The court may order a party to pay increased costs if—(a) the nature of the proceeding or the step in it is such that the timerequired by the party claiming costs would substantially exceed thetime allocated under band C; or(b) the party opposing costs has contributed unnecessarily to the timeor expense of the proceeding or step in it by—(i) failing to comply with these rules or with a direction of thecourt; or(ii) taking or pursuing an unnecessary step or an argument thatlacks merit; or(iii) failing, without reasonable justification, to admit facts,evidence, documents, or accept a legal argument; or(iv) failing, without reasonable justification, to comply withan order for discovery, a notice for further particulars, a noticefor interrogatories, or other similar requirement under theserules; or(v) failing, without reasonable justification, to accept an offerof settlement whether in the form of an offer under rule 14.10or some other offer to settle or dispose of the proceeding; or(c) the proceeding is of general importance to persons other than justthe parties and it was reasonably necessary for the party claiming coststo bring it or participate in it in the interests of those affected; or(d) some other reason exists which justifies the court making an orderfor increased costs despite the principle that the determination of costsshould be predictable and expeditious.(4) The court may order a party to pay indemnity costs if—(a) the party has acted vexatiously, frivolously, improperly, orunnecessarily in commencing, continuing, or defending a proceedingor a step in a proceeding; or(b) the party has ignored or disobeyed an order or direction of thecourt or breached an undertaking given to the court or another party;or(c) costs are payable from a fund, the party claiming costs is anecessary party to the proceeding affecting the fund, and the partyclaiming costs has acted reasonably in the proceeding; or(d) the person in whose favour the order of costs is made was not aparty to the proceeding and has acted reasonably in relation to it; or(e) the party claiming costs is entitled to indemnity costs under acontract or deed; or(f) some other reason exists which justifies the court making an orderfor indemnity costs despite the principle that the determination ofcosts should be predictable and expeditious.[15] In terms of increased costs, only to the extent to which a failure to actreasonably contributed to the time and or expense of the proceeding should anypercentage uplift be awarded.1[16] Indemnity costs are awarded where a party has behaved badly or veryunreasonably.2 Unreasonableness is determined by the conduct of the party againstwhom costs are sought.3 They may also be awarded when a party's case was obviously'hopeless', meaning 'totally without merit' or 'bound to fail'.4[17] It is well settled that where statutory demands are issued inappropriately,increased costs are routinely awarded.5 In Norwich Properties Ltd v Mark GrayArchitect, the Court held that an uplift on 2B scale costs of up to 50 per cent was notuncommon where an "ill-advised" statutory demand was improperly issued and setaside by the Court.6[18] In two recent decisions,7 the Court ordered a 50 per cent uplift in costs againstthe issuer of a statutory demand where the issuer knew, or ought to have known, the1 Commissioner of Inland Revenue v Chesterfields Preschools Ltd [2010] NZCA 400 at [165] .2 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [27]–[28].3 Body Corporate 166208 v York Trustees Ltd [2021] NZHC 1974 at [18].4 TheCircle.co.nz Ltd v Trends Publishing International Ltd (in liq and rec) [2021] NZCA 235 at[34].5 Andrew Beck and others McGechan on Procedure at [HR14.6.02(2)(a)(i)], as cited in HerbertConstruction Co Ltd v Viking Group Ltd HC Napier CIV-2011-441-206, 19 September 2011 at[17].6 Norwich Properties Ltd v Mark Gray Architect [2015] NZHC 994 at [31].7 Haines v Memelink [2019] NZHC 2169 at [39]–[50]; and Haines v Memelink [2021] NZHC 1063at [19]–[27].debt claimed was disputed; no legal advice was taken prior to the issue of the statutorydemand; and the issuer had the opportunity to withdraw but did not do so.[19] It is incumbent on the issuer of a statutory demand to ensure that the demandwas issued on a proper basis, and that the statutory demand was not the subject of agenuine dispute.8Submissions[20] Lumen submits that indemnity or increased costs are justified because thestatutory demand was served over a clearly disputed debt for an ulterior motive,relying on affidavits that lack credibility or at worst contain knowingly falsestatements.[21] Lumen says that while it was unable to verify that it had received no moneyfrom Podular, it should have been obvious before the statutory demand was issued thatthe limitation within the Guarantee would be disputed. Lumen cites correspondencethat its shareholder had not consented to the Guarantee and was stressed and pressuredby WCL's lawyer.[22] Lumen submits that WCL should have contacted Podular's liquidators toquantify the sum Lumen received from Podular and ascertain the amount to bedemanded before it served the statutory demand. It says that before the statutorydemand was withdrawn it had gone to the expense of preparing submissions and thebundle.[23] WCL submits that Lumen was in the best position to confirm what amounts (ifany) it had received from Podular and supply this evidence to WCL. WCL says thatas Lumen did not provide it with any information, WCL was justified in serving thestatutory demand for the full amount.[24] WCL notes that at the time of the statutory demand Lumen elected to apply toset aside the demand rather than inform WCL that Lumen had received no amounts8 AAI Ltd v 92 Lichfield Street (in req and in liq) [2016] NZHC 90 at [20], citing RembrandtCustodians Ltd v Pro-Drill (Auckland) Ltd HC Auckland M337/IN03, 13 June 2003 at [38].from Podular. WCL submits that the application, which pleads a range of defencesincluding that the Guarantee was not properly executed, was unconscionable and wasnot approved by Lumen's shareholder, contradicts Lumen's current position.[25] WCL says that it withdrew the statutory demand due to the late updatingaffidavit of Mr Gross providing more information about the nature of the paymentsfrom Podular to Lumen. WCL submits that had Lumen provided this informationearlier, the statutory demand would have been withdrawn sooner or not been issued atall. Instead, Lumen's evidence up until that point showed that Lumen had, in fact,received payments from Podular. WCL says that it relied on this fact to file anopposition to Lumen's application.Assessment[26] I have set out the chronology of events in some detail as I consider that it showsthat an order for increased costs should be made against WCL, because the statutorydemand should not have been issued or should have been withdrawn when Lumenfiled its application and supporting affidavit.[27] The short point is that the statutory demand procedure should only be invokedfor debts that are owing and due. It should have been readily apparent to WCL thatLumen's indebtedness to WCL under the Guarantee was limited to an amount equalto any sums Lumen had received from Podular in relation to advances, loans, credits,or facilities it had provided to Podular, according to cl 27 of the Guarantee. It wasWCL's lawyer who negotiated and drafted that limitation clause with Mr Gross. Itwas incumbent on WCL to ascertain the amount Lumen owed WCL, taking intoaccount the limitation, before serving a statutory demand. Instead, it wrongly serveda statutory demand on Lumen for the amount Podular owed WCL.[28] Furthermore, Lumen's lawyer asked WCL to explain how the amountdemanded had been calculated with reference to cl 27 before the statutory demand wasissued. That should have been a further indication to WCL that it needed to ascertainthe correct amount of the debt considering cl 27 before it proceeded further.[29] At the latest, WCL should have reconsidered when Lumen applied to set asidethe statutory demand and served the affidavit of Mr Gross. Mr Gross put the limitationin issue and furthermore contended, with reference to Podular's records, that Lumenhad not received any payments from Podular after the Guarantee was agreed and anypayments received prior were for IT services. This evidence could have been morefulsome, but it should have been readily apparent to WCL at this point, if not earlier,that the debt it had demanded was potentially substantially incorrect.[30] In this respect I do not accept that this ought not to have been apparent to WCLuntil Mr Gross served his reply affidavit. In this reply affidavit Mr Gross responds toMr Wallace's challenges to his evidence by referring back to his earlier evidence ofthe payments made by Podular to Lumen and the related transaction records exhibitedto that affidavit. The key information was present in Mr Gross's earlier affidavit filedin support of the application to set aside.[31] For these reasons I consider that, consistent with earlier authorities, it isappropriate that WCL should pay Lumen its 2B costs with an uplift of 50 per cent.[32] Lumen was required by the Court to file and serve its submissions and thehearing bundle 10 working days before the hearing, which was before WCL withdrewthe statutory demand on 25 May 2023. Accordingly, its costs should include this step.Result[33] Accordingly, I order that Wallace Corporation Ltd pay Lumen BusinessSolutions Ltd:(a) Costs and increased costs of $16,132.50; and(b) Disbursements of $498.81._______________________________Associate Judge Gardiner