OCEANIA FURNITURE LIMITED V DEBONAIRE PRODUCTS LIMITED HC WN CIV-2008-485-1701

OCEANIA FURNITURE LIMITED V DEBONAIRE PRODUCTS LIMITED HC WN CIV-2008-485-1701 24 April 2009IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV-2008-485-1701BETWEEN OCEANIA FURNITURE LIMITED Plaintiff AND DEBONAIRE PRODUCTS LIMITED Defendant Hearing: 22 April 2009 Appearances: J J Delany for the plaintiff R C Laurenson for the defendant Judgment: 24 April 2009JUDGMENT OF CLIFFORD J[1] Oceania Furniture Limited, the plaintiff, was awarded summary judgment against the defendant Debonaire Products Limited by Associate Judge Gendall on 3 December 2008 for $328,572.73. The judgment awarded represented amounts owing by Debonaire to Oceania for furniture product which had been supplied to it under a formal supply agreement entered into between Oceania and Debonaire. [2] At the same time, Associate Judge Gendall stayed Oceania's enforcement of that summary judgment, pending the hearing of Debonaire's counterclaim for damages for what it says are breaches by Oceania of the terms of that supply agreement. That counterclaim is to be heard before me in a trial to commence on Monday 4 May. [3] By interlocutory application of 1 April, the plaintiff Oceania seeks security for costs from the defendant/counterclaim plaintiff Debonaire.The Law[4] Rule 5.45 of the High Court Rules provides for orders for security for costs. I do not think it is necessary to set out the terms of that rule in full. [5] I note, at the outset, that rule 5.45(6) provides that:References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff of defendant.I think it is important to point out, therefore, that contrary to what I took to be Mr Laurenson's very general submissions, there are clearly a range of not unusual circumstances in which courts will order security for costs to be provided by counterclaim plaintiffs who are defendants, even where the effect of that order may be to prevent that counterclaim plaintiff from pursuing that counterclaim. [6] More generally, cases under the former rule 60, which is materially identical to Rule 5.45, established a well-known two-step approach to determining whether security for costs should be granted. First the Court must assess whether the "threshold test" – as relevant, reason to believe a plaintiff will be unable to pay the defendant's costs – has been met. Once this threshold has been passed, a second question arises: should the Court exercise its discretion to order security for costs, in the circumstances of the case. [7] As regards the threshold test, it is necessary that there is something more than mere difficulty to pay to establish "reason to believe" that a plaintiff will be unable to pay a successful defendant's costs: Keeys v Peterson HC WHA CIV-2003-488- 145 20 April 2004 at [12]. On the other hand, the Court would give due weight to a plaintiff's sworn assertion that it will be able to meet any costs awarded, but this will not be decisive: Nikau Holdings Ltd v BNZ (1992) 5 PRNZ 430, 436. [8] As to the Court's discretion, the authorities suggest that the Court's discretion is not fettered by the application of principles but is to be exercised based on a careful assessment of the circumstances of the particular case. Relevant factorsinclude the need to balance the interests of the plaintiff and the defendant, the merits of the plaintiff's case, whether the plaintiff's pecuniosity has been caused by the defendant, and whether other persons interested in the plaintiff's proceeding may have sufficient means to meet the order for security and delay. [9] Particular considerations also apply where security for costs is sought in relation to a counterclaim. Security for costs will not be awarded against a defendant in favour of a plaintiff. Similarly, whereas security for costs may be ordered on what is in substance an independent counterclaim, they will not be ordered where the counterclaim is in effect a defence to the plaintiff's claim. This general principle is usefully summarised by Lord Esher MR and Lord Lindley in Neck v Taylor [1893] 1 QB 560 (CA):Where, however, the counterclaim is not in respect of a wholly distinct matter, but arises in respect of the same matter or transaction upon which the claim is founded, the court will not, merely because the party counterclaiming is resident out of the jurisdiction, order security for costs; it will in that case consider whether the counterclaim is not in substance put forward as a defence to the claim, whatever form in point of strict law and of pleading it may take, and, if so, what under all the circumstances will be just and fair as between the parties; and will act accordingly. Therefore, the Court in that case will have a discretion. (per Lord Esher MR at 562). The matters set out in the counterclaim appear to me to be of such a nature and so closely connected with the cause of action that, whatever according to legal technicalities they may be called, they are, in substance, in the nature of a defence to the action. The plaintiff sues for a debt for which he holds security. The defendant says, 'I owe you nothing give me back my security.' Under these circumstances it does not seem to me just or fair that the defendant should have to give security for costs as the price of being allowed to plead such defence. (per Lindley LJ at 563)[10] Subsequently, in Hutchison Telephone (UK) Ltd v Ultimate Response Ltd[1993] BCLC 307 (CA) Lord Bingham stated the question:as a question of substance, not formality or pleading: is the defendant simply defending himself, or is he going beyond mere self-defence and launching a cross-claim with an independent vitality of its own? (at 317)[11] Although recognising that no "simple rule of thumb" exists to answer this question, factors that may be relevant are whether the counterclaim arises out of the same transaction, whether the amount counterclaimed exceeds that which is claimedand whether the defendant/counterclaim plaintiff would have issued proceedings had the plaintiff not done so (per Lord Bingham at 317). [12] New Zealand cases illustrating this general principle include Onop Properties Ltd v Fallon Properties Ltd (1988) 1 PRNZ 261 and McCracken & Anor v Burt HC AK CIV-2006-404-006027 24 May 2007.Discussion[13] The first issue is whether there is reason to believe that Debonaire will be unable to pay the costs of Oceania if Debonaire is unsuccessful. [14] Oceania's application relies on affidavit evidence provided by its accounting expert. [15] In an affidavit of 1 April, Mr Purcell appended financial information which he had collated from a review of documents discovered by Debonaire which, in his view, indicated that Debonaire was currently most unlikely to be able to pass the solvency test set out in s 4 of the Companies Act 1993. Whilst he could not be sure whether Debonaire was able to pay its debts as they became due in the normal course of business, he was sure that Debonaire would fail the second limb of the insolvency test, namely the requirement that its assets should be greater than its liabilities, including contingent liabilities. He responded to evidence for Debonaire, referred to below, that Debonaire borrowed funds from shareholders in order to meet its cash flow requirements. He commented that whilst this meant Debonaire was able to pay its debts as they fell due, it nevertheless resulted in an overall deterioration of Debonaire's financial position. By his estimate, Debonaire's liabilities exceeded its assets by $2.36 million. [16] Mr Smith provided an affidavit in reply for Debonaire. He averred to: a) Debonaire's long established trading history, Mr Smith having worked with Debonaire in one capacity or another since the early 1980s;b) the strength provided to Debonaire by its substantial shareholder interests associated with the Hubbard Group and Mr Alan Hubbard of Timaru; c) that Debonaire has always paid its debts when they fall due and it is completely up to date with all payments under usual trade terms at the present time; and d) the working capital support provided from time to time to Debonaire by the Hubbard Group since 2000. [17] At the same time, Mr Smith pointed to the fact that Debonaire promptly paid the costs of $10,607 awarded against it on Oceania's successful summary judgment application. [18] My overall assessment, on the balance of the evidence available to me, is that whilst Debonaire may well, as Mr Purcell has identified, have liabilities in excess of its assets – Debonaire denies this but without providing counter evidence – it nevertheless is currently meeting its debts as they fall due, and has for many years. In that it may be relying on shareholder support, a matter as regards to which the directors will no doubt need to exercise ongoing care to ensure that they are in a position to rely lawfully on that support. In this particular situation, however, I am not persuaded that Oceania has established that, as required by r 5.45, there is reason for me to believe that Debonaire will be unable to pay Oceania's costs, if Debonaire is unsuccessful in its counterclaim. [19] I accept, however, there may be some doubt about that, and in that light go on to consider issues that go to the position of Debonaire as a counterclaim plaintiff and my discretion. [20] Mr Laurenson, in opposing the application, placed particular emphasis on the principle, as noted, that a plaintiff is not entitled to be awarded costs against a defendant.[21] In Onop Properties, Justice Barker, in applying the general principle, noted that on the pleadings in that case, if the plaintiffs failed in their claim, then the defendant must succeed in its counterclaim. In my judgment, however, I do not think it is necessary for that criterion to be established for the principle to be applicable. This is indicated in Justice Barker's concluding remarks, in which he stated (at 263):In my view, in the circumstances of this case, it would be unfair and unnecessary to order security for costs against a counterclaimant: the subject-matter of the counterclaim is so inextricably mixed with the subject- matter of the claim; moreover, if the claim were to fail, then the counterclaim would have to succeed. (my emphasis)[22] On the facts here, not only am I not persuaded that the threshold test has necessarily been established, but also there is a considerable degree of inter- connection between the subject matter of Debonaire's counterclaim and the subject matter of the successful claim against it on which summary judgment was based. [23] In granting summary judgment, Associate Judge Gendall placed particular reliance on a contractual clause which provided that Debonaire was not entitled under the contract to set off any amounts owing by Oceania to it, from debts it owed to Oceania. At the same time, Associate Judge Gendall stayed the enforcement of that summary judgment, to enable Debonaire's counterclaim to be prosecuted in a timely manner. [24] I acknowledge that, in this case and putting to one side the fact that summary judgment has already been granted, the claim and counterclaim are not so inextricably linked as it could be said that if Oceania's claim failed, then Debonaire's counterclaim would have to succeed. Both claims could succeed or fail independently of each other. [25] As Associate Judge Gendall's order recognised, however, the two claims are factually and legally interconnected, and arise out of the terms of a single contract. From one perspective, the prosecution of Debonaire's counterclaim will resolve the question of the balance of account, as it were, between Oceania and Debonaire arising out of the original supply agreement, in terms of balancing the amounts owedfor products supplied but not paid for by Debonaire to Oceania, and the amounts, if any, owed by Oceania to Debonaire for breaches of that contract – including, for example, for failing to supply product in a timely manner. [26] Debonaire's counterclaim is not – as a matter of strict legal principle – a defence to Oceania's claim. To some extent it does raise issues independent of those claims. Nevertheless the counterclaim arises out of the same contract, is factually closely – if not inextricably – linked to the factual circumstances on which Oceania succeeded in its application for summary judgment and, moreover, can be seen as providing the legal basis upon which moneys due and owing from Oceania to Debonaire and vice versa are finally to be determined under the supply agreement. In my judgment those considerations count against granting Oceania's application. [27] It remains to mention two further matters which have influenced me in exercising my discretion against awarding security for costs here. [28] Debonaire pointed to the fact that there are outstanding claims by Oceania against it for interest and legal fees under the original supply agreement. In Debonaire's submission, that supported the conclusion that this was at least to that extent an application for costs by a plaintiff against a defendant. I note that were Oceania's application for security for costs to be successful, and if Debonaire's inability to provide such security prevented it from pursuing its counterclaim, it would not be prevented – as a matter of law – from defending Oceania's claim for those amounts. Nevertheless, I am influenced by the fact that, in these proceedings, Debonaire remains a defendant to that extent. [29] I note further that I have taken account of the relatively late stage at which this application has been made. Applications for security for costs, at a very late stage in a proceeding as here, are often not successful. I accept Mr Delany's submissions that the factors which led to this application being made may have only very recently come to the knowledge of Oceania. Nevertheless, the fact remains that these proceedings are now at a very advanced stage and have been brought on expeditiously – Debonaire says at some cost – in terms of the basis upon which theAssociate Judge granted summary judgment but nevertheless stayed it. This is another factor which has influenced me in exercising my discretion in this manner. [30] Accordingly, Oceania's application is declined. Costs can be determined at the end of the substantive proceedings, but I see no reason why they would not follow the event."Clifford J"Solicitors: Cooper & Co, P O Box 13009, Wellington for the plaintiff (Counsel J J Delany – john@terracechambers.co.nz) Gillespie Young Watson, P O Box 30940, Lower Hutt for the defendant (Counsel: R C Laurenson – resultlaw@xtra.co.nz)