MONA VALE CONSTRUCTION LIMITED (IN LIQUIDATION) V FAGERLUND AS THE LIQUIDATOR OF CARMEL PARKING BUILDING AND SUPPLIES LIMITED (IN LIQUIDATION) HC CHCH CIV-2008-409-000464

MONA VALE CONSTRUCTION LIMITED (IN LIQUIDATION) V FAGERLUND AS THE LIQUIDATOR OF CARMEL PARKING BUILDING AND SUPPLIES LIMITED (IN LIQUIDATION) HC CHCH CIV-2008- 409-000464 6 June 2008IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY CIV-2008-409-000464UNDER Section 284(1)(b) of the Companies Act 1993 BETWEEN MONA VALE CONSTRUCTION LIMITED (IN LIQUIDATION) Applicant AND NEVILLE PETRIE FAGERLUND AS THE LIQUIDATOR OF CARMEL PARKING BUILDING AND SUPPLIES LIMITED (IN LIQUIDATION) Respondent Hearing: 4 June 2008 Appearances: D Lester for Applicant A W Robinson for Respondent Judgment: 6 June 2008 at 2.30pmRESERVED JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN Application to reverse Liquidators' decision refusing creditor's claim.[1] The liquidators of the applicant (Mona Vale) have filed an originating application seeking leave to appeal the rejection by the respondent of a creditor's claim. Their application seeks leave to commence the proceeding by way of an originating application pursuant to Part 4A of the rules. Described as an appeal, it is, in fact, an application to reverse the decision of the liquidator of Carmel Park Building & Supplies Limited (In Liquidation) (Carmel).Application for security for costs.[2] The immediate concern for the Court is the respondent's application requiring Mona Vale to give security for costs. [3] The issues in the security for costs application are concise. I was grateful for the assistance of experienced counsel. The issue is whether security for costs could be applied for in a matter which describes itself as an appeal, albeit from the liquidator's decision. [4] If a r 60 security for costs application was available then likely the issue would be determined by principles addressing: (a) An impression of the merits of the application; and (b) An assessment of precedent regarding the appropriateness of awarding security against company liquidators. [5] Counsels' argument was, appropriately, brief. In the outcome I provided counsel with an indication of my likely decision. This brief written judgment confirms the position indicated.Whether an application for security for costs is available[6] The application, albeit brought by way of originating application, purports to be an appeal of a liquidator's decision. [7] Rule 60 enables applications for security for costs in respect of "proceedings". Rule 2 of the High Court Rules excludes an appeal from the definition of a "proceeding". It would appear, therefore, that an application for security for costs cannot be made in respect of an appeal. I do not think that precludes an application in this instance. We are dealing with an application to challenge a ruling of a liquidator. Undoubtedly, a liquidator is required to act in a principled manner. That does not mean, I think, he/she acts in a quasi-judicialmanner. It is a question of looking at the substance rather than form, and in this instance we have a review of the decision of a person not engaged in exercise of a judicial process. [8] Therefore, I am satisfied we are dealing with a process in respect of which an application for security for costs can properly be brought.Whether security ought to be granted[9] Mr Lester acknowledges the threshold for an order for security has been proved. His objection is that the merits would not justify an award, but also that in the ordinary course, an award of security ought not to be made against a company in liquidation. [10] This case concerns two companies who are in liquidation. Mona Vale has nil assets and a creditor deficit in the vicinity of $140,000. Clearly, as Mr Lester concedes, it has a deficiency of assets with which to fund this proceeding. It follows that unless the merits of its claim are strong it ought to be required to post security unless there is other good reason for it not doing so. Mr Lester relies upon an often expressed principle that liquidators should not be in jeopardy of orders for security for reason they are bringing or supporting proceedings to maximise the return for the benefit of all creditors. It follows that orders for security against liquidators are usually made in exceptional cases only. [11] Usually a company in liquidation does not have the means to fund litigation. Conversely, in the absence of financial constraint, a plaintiff company would be able to take advantage of its impecuniosity. These competing considerations should not disadvantage a company from making a genuine claim. Usually the Court is reluctant to restrain the ability of liquidators to pursue claims that might benefit a body of unsecured creditors. In turn, the Court is reluctant to inhibit that process unless it is pursued primarily for the advantage of a single creditor, or unless the pursuit is unlikely to bear reward.[12] In my assessment, although the applicant has no means to fund separate litigation, it ought not to be constrained by an order requiring it to post security. [13] The reason is, I believe, because the applicant's case to the Court to request the liquidators decision to refuse its claim has merit, at least to the view point of encouraging the Court to hear evidence about the circumstances by which Carmel's liquidator decided to reject Mona Vale's claim. In that assessment I do not criticise the decision the liquidator made upon the information available to him at that time.Background/Merits of the application[14] Mona Vale's application arises because of its claim to have advanced $101,000.00 to Carmel. The sum is made up of five advances made between 15 July and 22 November 2003. Cheques drawn on Mona Vale were banked to Carmel's account. The accounts of Mona Vale, albeit unsigned, record an advance to Carmel. On the basis of this material, without more, one could conclude the advance was an inter company advance. The two companies had a common factor, a Mr Maitland, who was a shareholder and director of both companies. [15] Although there was no contemporary documents suggesting, or recording, an advance was made to Mr Maitland personally, it was he who was initially sued by Mona Vale by way of summary judgment to collect the debt due to Mona Vale. [16] That claim of Mona Vale was supported by an affidavit provided by its other director, Mr Clark. The claim was not defended and judgment was entered against Mr Maitland. In Mr Maitland's bankruptcy Mona Vale collected a dividend of about ten per cent on its judgment. That occurred about three years ago. At that time Mona Vale had sued to recover about $45,000.00, it then acknowledging that the sum of about $56,000.00 had been repaid to it. Now three years later the liquidator of Mona Vale considers there is insufficient evidence that, indeed, any part of its advances have been repaid. Mona Vale's liquidator wants the full amount of its advance, namely $101,000.00, recognised as a claim upon Carmel's assets.[17] Mr Fagerlund has resisted this claim for the reason that Mona Vale has previously cast its claim for repayment against Mr Maitland personally, indeed has succeeded in doing so. Not unnaturally, Mr Fagerlund has the suspicion this is an attempt by Mona Vale to take a "second bite of the cherry", this time firing its shot in a different direction altogether. Of course, Mona Vale is no longer in the control of Mr Clark, but for Mr Fagerlund the reasons for his suspicion are understandable. Mr Clark swore an affidavit asserting Mona Vale's advance was a personal one to Mr Maitland. Mr Maitland did not contest that claim. Mona Vale's solicitors were adamant their instructions were that Mona Vale's advances were to Mr Maitland personally. In the result, that claim was successful and in part recognised in Mr Maitland's bankruptcy. [18] Why should Mr Fagerlund now recognise a claim against Carmel, notwithstanding that is was the beneficiary of the advances said to be made to Mr Maitland. There are obviously a number of reasons why advances made to an officer of the company might ultimately be received by the company of which he is an officer. That does not mean the lender to an officer of a company becomes thereby a creditor of his company. [19] When Mona Vale's application to this Court was filed, it was supported only by the affidavit of Mr Jenkins of the same company from which Carmel's liquidator was appointed. He opined that Mr Maitland was pursued for recovery of Mona Vale's advances because recovery was more likely to be obtained against him personally than from his company, Carmel. Mr Jenkins acknowledged that view was speculative. Indeed, there is no evidence of it. But it was another reason why Mr Fagerlund rejected Mona Vale's claim in Carmel's liquidation. Nonetheless, when Mona Vale's application to this Court was filed, there was only Mr Jenkin's affidavit in support. On its face value, his evidence was not without foundation, speculation notwithstanding. That said, and for the reasons I have identified, there was good reason for Mr Fagerlund to have rejected Mona Vale's claim to this time. [20] That position changed somewhat with the recent filing of Mr Maitland's affidavit. That affidavit was filed 2½ months after Mona Vale's application. MrMaitland states he was a director of Mona Vale until he resigned in April 2004. He says he was, and still is, a director of Carmel. [21] His affidavit evidence supports Mona Vale's claim. He says their advances totalling $101,000.00, were made not to him, but to Carmel. Further, he denies the sum of $56,000.00 was repaid of that debt. I need not examine the particulars, save to record that he says he did not oppose the summary judgment application made against him personally because of his 'personal and financial state' at the time. He provided additional particulars of this. Overall, Mr Maitland considered he took no steps to oppose the claim because he was not interested in doing so, and there was no benefit for him in the outcome. [22] It will, of course, remain a matter of curiosity why Mr Maitland's affidavit did not accompany Mona Vale's original application to this Court. Instead, it has only been given once Carmel's opposition, and its security for costs application, was filed. [23] In my assessment, and without Mr Maitland's affidavit, Mona Vale's application faced considerable hurdles. In issue in this application is the reasonableness of the view held by Mr Fagerlund in refusing to acknowledge Mona Vale's application. Supported, as it was then, only by Mr Clark's affidavit in the summary judgment proceedings and in the correspondence from Mona Vale's solicitors, Mona Vale had clearly posted its colours in support of a claim against Mr Maitland, and not against Carmel. [24] Mr Maitland's affidavit changes the landscape. Inference may support an alternative conclusion to that adopted by Mr Fagerlund. Also, no question of issue estoppel can arise because Carmel was not a party to the judgment in favour of Mona Vale against Mr Maitland. [25] My purpose in this over view is to explain why, on my assessment of the merits overall, it cannot be considered Mona Vale's application is without foundation or prospect of success. Unavoidably, it seems to me, no final conclusioncan be made without the Court possessing an ability to address the directly conflicting sworn evidence of Mr Clark and Mr Maitland. [26] Immediately, this Court is concerned with an issue of security for costs. For the reasons I have explained, there may well be merit in Mona Vale's application for its creditor's claim to be recognised in Carmel's liquidation. That conclusion supports my reasons for refusing to make an application for security for costs. In adopting that position, I support the principle that an award of security should only in exceptional circumstances be made against a liquidator of a company acting in the interests of the general body of unsecured creditors – as opposed to the interests of one, or a few creditors only.Judgment[27] The application for security for costs shall be dismissed. [28] Costs upon the application shall be determined in the cause.Other matters[29] It will be quite apparent from this judgment that I am of the view that the real matters in issue between the parties cannot be resolved by reference to the affidavit evidence alone. Therefore, and although it is not a matter presently before me for consideration, I have my concerns about this matter proceeding further by way of an originating application. [30] Perhaps, the only alternative to Mona Vale would have been to proceed by way of ordinary process. This could not happen unless the consent of the respective liquidators was obtained. In default, the consent of the Court would have been required. The Court would not have been surprised if the liquidators did not consent to that process. For the reasons I have already expressed I should not be surprised if, in that event, the Court was to provide the necessary consent.Next event[31] This matter is adjourned to a telephone conference at 9am on Monday 28 July 2008 for the purpose of scheduling a fixture upon the appeal application. Solicitors Layburn Hodgins, Christchurch for Applicant Cunningham Taylor, Christchurch for Respondent