MARYLAND BASSETT CO LTD v TAIHE INNOVATION MANAGEMENT LTD [2023] NZHC 1934

MARYLAND BASSETT CO LTD v TAIHE INNOVATION MANAGEMENT LTD [2023] NZHC 1934 [24 July2023]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2022-404-1302[2023] NZHC 1934UNDER s 290 of the Companies Act 1993BETWEEN MARYLAND BASSETT COMPANYLIMITEDApplicantAND TAIHE INNOVATION MANAGEMENTLIMITED (in rec)RespondentHearing: On the papersAppearances: RE Harrison KC and D Liu for the ApplicantRJ Hollyman KC and JD Ryan for the RespondentJudgment: 24 July 2023JUDGMENT OF ASSOCIATE JUDGE SUSSOCK[Costs]This judgment was delivered by me on 24 July 2023 at 4 pmpursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors/Counsel:Heritage Law, AucklandClaymore Partners, AucklandRE Harrison KC, AucklandRJ Hollyman KC, AucklandIntroduction[1] The applicant, Maryland Bassett Company Limited (Maryland), seeksindemnity costs of $54,541.55 following its successful application to set aside thestatutory demand served on it by Taihe Innovation Management Limited (inreceivership) (Taihe).1[2] Indemnity costs are sought on the basis either:(a) that there is a contractual indemnity in the deed of trust and indemnitydated 7 March 2022 (Deed) relying on r 14.6(4)(e) of the High CourtRules 2016; or(b) that Taihe had a "hopeless case" and it acted vexatiously, frivolously,improperly and unnecessarily in opposing Maryland's application to setaside the statutory demand, relying on r 14.6(4)(a) of the High CourtRules.[3] In addition to costs against Taihe, Maryland seeks costs against the receiverson the basis that Taihe is insolvent, the receivers are actively participating, thereceivers' appointer has an interest in the proceeding and that it is in the interests ofjustice to do so.[4] Taihe, in response, submits that the Deed forms part of a sham transaction withdishonest involvement by Maryland and so it would be contrary to public policy toallow an indemnity. Counsel for Taihe therefore submits that costs should lie wherethey fall or be reserved pending determination of liability. Furthermore, they say thereceivers acted reasonably and no exceptional circumstances exist to make it just toaward non-party costs or indemnity costs.[5] I set out the relevant costs principles below before considering the appropriateaward.1 Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec) [2023]NZHC 801.Relevant cost principles[6] The starting point in any costs decision is r 14.1 of the High Court Rules whichconfirms that all matters relating to costs are at the court's discretion. The discretionvested by r 14.1 is wide but must be exercised subject to the general principles in r 14.2and the remaining costs provisions.[7] Rule 14.6 provides for when increased or indemnity costs may be ordered andrelevantly includes as follows:14.6 Increased costs and indemnity costs(1) Despite rules 14.2 to 14.5, the court may make an order—(a) increasing costs otherwise payable under those rules(increased costs); or(b) that the costs payable are the actual costs, disbursements, andwitness expenses reasonably incurred by a party (indemnitycosts).(2) (3) The court may order a party to pay increased costs if—(b) the party opposing costs has contributed unnecessarily to thetime or expense of the proceeding or step in it by—(ii) taking or pursuing an unnecessary step or anargument that lacks merit; or(iii) failing, without reasonable justification, to admitfacts, evidence, documents, or accept a legalargument; or(d) some other reason exists which justifies the court making anorder for increased costs despite the principle that thedetermination of costs should 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 aproceeding or a step in a proceeding; 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 anorder for indemnity costs despite the principle that thedetermination of costs should be predictable and expeditious.[8] In Bradbury v Westpac Banking Corp, the Court of Appeal summarised theprinciples applying to the award of indemnity costs as follows:2We therefore endorse Goddard J's adoption in Hedley v Kiwi Co-operativeDairies Ltd at [11] of Sheppard J's summary in Colgate v Cussons at [24].While recognising that the categories in respect of which the discretion maybe exercised are not closed (see r 14.6(4)(f)), it listed the followingcircumstances in which indemnity costs have been ordered:(a) the making of allegations of fraud knowing them to be false and themaking of irrelevant allegations of fraud;(b) particular misconduct that causes loss of time to the court and to otherparties;(c) commencing or continuing proceedings for some ulterior motive;(d) doing so in wilful disregard of known facts or clearly established law;(e) making allegations which ought never to have been made or undulyprolonging a case by groundless contentions, summarised in FrenchJ's "hopeless case" test.[9] As the Supreme Court held in Synlait Milk Ltd v New Zealand Industrial ParkLtd, determining whether there is an entitlement to indemnity costs pursuant to acontract or deed is a matter of contractual interpretation, with ordinary principles ofcontractual interpretation applying.32 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] 3 NZLR 400 at [29] (citationsomitted).3 Synlait Milk Ltd v New Zealand Industrial Park Ltd [2020] NZSC 157, [2020] 1 NZLR 657 at[192].[10] In ANZ Banking Group (NZ) Ltd v Gibson the Court held that a contractualobligation to pay costs on a full solicitor/client basis will be enforceable unlesscontrary to public policy.4[11] Rule 14.7 provides that despite rr 14.2 to 14.5, the court may refuse to makean order for costs or may reduce the costs otherwise payable under those rulesincluding where the party claiming costs, although succeeding overall, has failed inrelation to a cause of action or issue which significantly increased the costs of the partyopposing costs or where some other reason exists which justifies the court refusingcosts or reducing costs despite the principle that the determination of costs should bepredictable and expeditious.5Should indemnity costs be awarded?[12] Maryland seeks indemnity costs either pursuant to the Deed or r 14.6(4)(a).[13] Clause 3.2 of the Deed provides an indemnity to Maryland by both Taihe andMr Zhang, Taihe's sole director, on the following terms:3.2 Taihe and the Beneficiary will at all times indemnify and keepindemnified Maryland against any and all costs, claims, actions,damages, liabilities of any kind arising out of or in connection withthe Loan Agreement, as well as Maryland's enforcement or attemptedenforcement of its rights and remedies under this deed.[14] As I held in my judgment, Taihe did not challenge the authenticity of the Deed.6Because it was an application to set aside a statutory demand, I did not need to reacha final view on whether the indemnity contained in clause 3.2 provided a basis forMaryland asserting that it had a cross demand exceeding or equal to the amount ofdebt that was the subject of the statutory demand. The applicant's argument was thatthe indemnity applied in respect of the whole of the allegedly outstanding loan thatwas the subject of the statutory demand.4 ANZ Banking Group (NZ) Ltd v Gibson [1986] 1 NZLR 556 (CA) at 566.5 Rules 14.7(d) and (g).6 Maryland Bassett Company Limited v Taihe Innovation Management Limited (in rec), above n 1,at [81].[15] The indemnity is now being relied on for legal costs in successfully applyingto set aside the statutory demand in respect of the allegedly outstanding loan. Forindemnity costs to be awarded on the basis of this clause, the question of whether itprovides an indemnity for the allegedly outstanding loan needs to be determined asotherwise a question may remain as to whether Maryland was enforcing its rights andremedies under the Deed when seeking to set aside the statutory demand.[16] I do not consider that I can award indemnity costs on the basis of the indemnityclause until that question is finally determined. I still consider, however, that costsother than those in reliance on the contractual indemnity ought to be determined nowas that is consistent with the rules. If the contractual indemnity is found by the courtat a later stage to operate as the applicant contends then the difference between thecosts awarded here and indemnity costs may be sought.What is the appropriate costs award?[17] Counsel for Taihe set out their calculation for costs on a 2B basis as amountingto $10,994.00 plus disbursements of $1,180.00. Counsel for Maryland does notcomment on this calculation in their reply, and it appears to be correct. Costs on atleast this basis therefore ought to be awarded.[18] Following the service of the statutory demand, the solicitor for Maryland wroteto the receivers attaching a copy of the Deed and asking for the statutory demand tobe withdrawn. The letter closes by saying that if it is not, "costs [would] be soughtagainst you and Taihe on an indemnity basis".[19] Although it comes close to being a "hopeless case", I do not consider thatTaihe's steps to oppose the application meet the threshold for conduct described inBradbury v Westpac Banking Corp (as set out above) because of the complication ofthe sham allegation. Indemnity costs are not therefore awarded.[20] However, the existence of the Deed, the authenticity of which was notchallenged, ought to have led to the withdrawal of the statutory demand at leastfollowing the filing of the application to set aside (if not earlier). The threshold forsetting aside statutory demands is low and so opposing the application in suchcircumstances clearly falls within r 14.6(3)(ii) and (iii) of the High Court Rules.[21] The question is therefore what the appropriate uplift to scale costs is. As I saidabove, proceeding with the opposition was close to a hopeless case, especially wherethe authenticity of the Deed was not challenged. In these circumstances I considerthat a 50 per cent uplift is appropriate.Should costs be ordered against the receivers as non-parties?[22] In ETB Realty Ltd v Eastlight Asset Trading No 3 LtdAssociate Judge Osbourne referred to Knight v FP Special Assets Ltd in which theHigh Court of Australia recognised a general category of cases in which an order forcosts was appropriate against a non-party:7General category of cases where appropriate:That category of case consists of circumstances where the party to thelitigation is an insolvent person or man of straw, where the non-party hasplayed an active part in the conduct of the litigation and where the non-party,or some person on whose behalf he or she is acting or by whom he or she hasbeen appointed, has an interest in the subject of the litigation. Where thecircumstances of a case fall within that category, an order for costs should bemade against the non-party if the interests of justice require that it be made.[23] Maryland submits that all of the factors identified in Knight v FP Special AssetsLimited militate in favour of an order for non-party costs against the receivers in thiscase as:(a) Taihe's solicitor's letter dated 1 May 2023 (a copy of which wasattached to Maryland's costs memorandum) freely acknowledges thatTaihe has no unsecured assets and the receivers' latest report (copy alsoattached to memorandum) confirms that Taihe is hopelessly insolvent;(b) the receivers instructed Claymore Partners and Bob Hollyman KC tooppose the application and one of the receivers provided an affidavit inopposition to Maryland's application;7 ETB Realty Ltd v Eastlight Asset Trading No 3 Ltd [2016] NZHC 609 at [29]; citing Knight v FPSpecial Assets Ltd [1992] HCA 28; (1992) 174 CLR 178 at 192–193.(c) the receivers' appointor, Bing Guan NZ Capital No. 2 LP, has an interestin the proceeding in that any amount recovered from Maryland wouldbe distributable to the appointor as secured creditor;(d) the interests of justice require an order for non-party costs against thereceivers because:(i) the receivers' latest report dated 3 March 2023 shows that thereceivers' legal fees from 5 July 2022 to 4 January 2023 totalledonly $3,634.98 from which Maryland submits it can be inferredthat Taihe's legal costs are being funded by an undisclosed thirdparty (presumably the receivers' appointor) and it would becontrary to the interests of justice to allow the funder of thelitigation to hide behind an insolvent Taihe;(ii) no reasonable receiver who had sighted the Deed would havepersisted with the statutory demand or opposed the applicationto set aside the demand.[24] These factors may be present in this case but I have a concern that the receiversought to be given a proper opportunity to respond before any costs award is madeagainst them personally.[25] In Easton Agriculture Ltd v Manawatu-Wanganui Regional Council, Kós Jaccepted that costs may be awarded against a receiver in certain circumstances andthat the liability of the receiver would be as a non-party.8 The circumstances in thatcase are distinguishable as the relevant party had gone into receivership partwaythrough the proceedings so the decisions in relation to the proceedings were notnecessarily being made by the receivers in the same way as they were here.[26] However, Kós J emphasised that an application on notice to the receiver isrequired before a costs award against them can be made.9 In that case Kós J held that8 Easton Agriculture Ltd v Manawatu-Wanganui Regional Council HC Palmerston North CIV-2008-454-31, 22 December 2011 at [46]–[47].9 At [50].such an application may have been premature as the relevant party may meet the costsaward in their own right. Leave was therefore reserved to apply for costs against thereceiver subsequently if appropriate.[27] The Supreme Court referred to this decision in Haines v Memelink, where theCourt of Appeal had held that the High Court had no jurisdiction to make a costs orderagainst a non-party in the absence of a formal application.10 The Supreme Court heldthat the jurisdiction to award non-party costs arises through the Court's inherentjurisdiction and the discretion afforded by r 14.1 of the High Court Rules so it was"arguable" whether the Court of Appeal in that case was correct in holding that theHigh Court had no jurisdiction where formal application had not been made. TheSupreme Court commented however:11 natural justice will generally require that the non-parties be given notice ofthe possibility of a costs order against them and be provided with anopportunity to respond.[28] I am not satisfied in this case that adequate notice and opportunity to respondhas been given to the receivers. Whilst it can be assumed that the receivers' positionhas been taken into account by counsel for Taihe in its costs memorandum, there wasno notice given in the application to set aside that costs would be sought against thereceivers and the response to the claim for costs against the receivers is dealt with inone short paragraph in Taihe's costs memorandum.[29] In these circumstances I consider it is appropriate to reserve leave to Marylandto apply for non-party costs against the receivers if costs are not paid by or on behalfof Taihe.Result[30] I order:(a) Taihe is to pay costs on a 2B basis with a 50 per cent uplift in the amountof $16,491.00 plus disbursements of $1,180.00; and10 Haines v Memelink [2021] NZSC 14.11 At [14].(b) leave is reserved to Maryland to apply for costs against the receivers ofthe respondent.______________________________Associate Judge Sussock