MRL FINANCE LIMITED V PBC LIMITED TRADING AS DIRECT DEALS HC AK CIV 2007-404-5586

MRL FINANCE LIMITED V PBC LIMITED TRADING AS DIRECT DEALS HC AK CIV 2007-404-5586 23 October 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-5586BETWEEN MRL FINANCE LIMITED Applicant AND PBC LIMITED TRADING AS DIRECT DEALS Respondent Hearing: 11 October 2007 Appearances: V Fletcher for Applicant S Eden for Respondent Judgment: 23 October 2007 at 2.30 pmJUDGMENT OF ASSOCIATE JUDGE SARGISSON [ON COSTS]This judgment was delivered by Associate Judge Sargisson on 23 October 2007 at 2.30 pm pursuant to Rule 540(4) of the High Court Rules Registrar/Deputy RegistrarDate:Solicitors: Grove Darlow & Partners, PO Box 2882, Auckland Shieff Angland, PO Box 2180, Auckland[1] At the hearing I made an order by consent on MRL Finance Limited's originating application, setting aside PBC Limited's statutory demand. I reserved costs having heard oral argument from counsel. [2] Counsel for the applicant seeks an order for costs on a 2B basis for the following steps under Schedule 3 to the High Court Rules: a) Item 6 - preparing and filing the application and supporting affidavits b) Item 11 - Appearance at mentions hearing [3] The relevant time allowances are 1.6 days and 0.2 days and the relevant daily recovery rate is $1,600.00. On this basis, scale costs amount to $2,888.00. [4] There is no dispute that MRL is, in effect, the successful party and that it is prima facie entitled to an order for costs or that ordinarily costs on a 2B basis would be appropriate. [5] There is also no dispute that in accordance with the statutory costs regime costs must now be determined as the proceeding is at an end. Costs cannot properly be reserved as counsel for the respondent proposed initially. [6] Counsel for the respondent submitted however that there are factors that would justify the Court's exercising its discretion not to make an award, or making a reduced award. [7] The Court retains a discretion in the matter. Rule 46(1) states:All matters relating to costs of and incidental to a proceeding or a stay in a proceeding are at the discretion of the Court.[8] The key factors counsel raised can be summarised as follows: a) MRL did not send any prior correspondence raising concerns about the debt that is the subject of the statutory demand;b) The nature of the debt arises from the onsale to MRL of PBC's rights under its loan portfolio, and MRL did not raise any queries about the validity of the loans, or challenge the debt or raise any claimed set- off, before PBC served the statutory demand. c) PBC received notice of MRL's concerns when it received the two affidavits sworn by Mr Smith, a director of MRL. d) PBC was not aware of Mr Smith's assertion that it was in breach of contract for failure to follow the correct lending procedures, until it received his affidavits. PBC also did not know MRL had obtained a private investigator's report that purported to show that PBC had not followed correct procedure under the Credit Contracts Act when extending loans to its customers. e) MRL should at the very least have given PBC advice about these concerns as soon as the demand was served, in order to give PBC the opportunity to withdraw the demand. f) PBC acted responsibly by agreeing to an order as soon as it knew about the existence of an alleged set-off that exceeds the amount claimed in the statutory demand. [9] In her response, counsel for MRL rejected the submissions. She submitted that Mr Smith's affidavit evidence shows that MRL had expressed serious concerns about PBC's loan procedures for some time before the statutory demand was served, and had signalled its concern that PBC was not adhering to the terms of its contract when extending loans to its customers. She acknowledged that the correspondence does not identify all of the specific loans that MRL challenges but she pointed to an email dated 11 July 2007 that she said was crucial. In the email Mr Smith advised PBC:You will be well aware that MRL Finance Limited has some significant problems with its loan portfolio. The causes of the problem are well documented but clearly the market in which we both operate, you as the dealer and MRL Finance Limited as the financier, brings with it certainproblems. Our assumptions about collection rates have not been realised and we have a significant percentage of the portfolio in arrears. You will also be aware there is some evidence of fraud and we are not sure how or if this is widespread. As a consequence we have been in discussions with Broadlands concerning the future of the facility we have with them and these discussions are continuing .... Until such time as the position with Broadlands can be resolved MRL Finance Limited is not in a position to accept or settle any further loans. I will let you know as soon as the position with Broadlands is resolved ...[10] Mrs Fletcher submitted that it would have been clear that Mr Smith was concerned about the history of problems with the loan portfolio. She said that although there would have been certain aspects of MRL's claimed set-off which PBC did not know about, PBC would have known that MRL was likely to claim a substantial set-off. [11] Counsel for PBC said, in reply, that there were meetings between the parties before it served the statutory demand when no issue was raised about the amount claimed in the demand. There is no evidence before me to support that particular submission. What evidence there is indicates that MRL complained from time to time about PRB's loan procedures and some loans. It also made known its broader concerns in general terms before the demand was served. It advised it would not accept or settle further loans until the position was resolved. Subsequently, following service of the demand, it provided evidence sufficient to establish a tenable basis for a set-off that exceeds the sum in the demand. It is that evidence which has resulted in PBC's accepting that it should agree to an order setting aside the demand and that the dispute should not be dealt with by the statutory demand procedure. [12] I accept that PBC was not advised of the full extent of MRL's concerns until after the statutory demand was served. However, I do not consider that is a sufficient reason for not allowing costs to the successful party. PBC had a degree of knowledge about MRL's concerns before it served its statutory demand and it would have known, form the correspondence, that the concerns were significant. Counsel for PBC acknowledged that PBC did not take the precaution of sending a letter of demand before it took the formal step of serving the statutory demand. Instead, PBCtook a risk by invoking the statutory demand procedure when it should have known there was the possibility it would have to withdraw it. It should also have recognised that by taking that risk, it also risked a costs award under the statutory costs regime. [13] In these circumstances, I am unable to accept the suggestion that PBC has established sufficiently strong reasons for challenging MRL's prima facie entitlement to costs. The Court has on numerous occasions emphasised the principle that the issuing of a statutory demand is a serious step that imposes considerable strain on the recipient. The recipient of a statutory demand must act within a very short timeframe if it is to avoid committing an act that gives rise to the power to have it placed in liquidation. As a result, the Court has been prepared to make significant awards of costs against persons who invoke the procedure in inappropriate cases: see for example Ebert Construction Ltd v Advanced Windows Ltd (2001) 14 PRNZ 681. [14] In this case there is no suggestion that there should be increased costs over and above costs on the normal 2B basis. Clearly, however there is a case for an order for costs on the usual 2B basis.Result[15] There will be an order for costs against PBC Limited in the sum of $2,880 together with disbursements to be fixed by the Registrar. Dated at Auckland on ___________________________ at __________ am/pm. _________________________ Associate Judge Sargisson