FINNIGAN v ELLIS [2018] NZHC 2440

FINNIGAN v ELLIS [2018] NZHC 2440 [17 September 2018]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2016-404-001590[2018] NZHC 2440BETWEEN PERI MICAELA FINNIGAN and BORISVAN DELDENPlaintiffsAND BRIAN ROBERT ELLISFirst DefendantGERALD NORMAN WILLIAMSSecond DefendantJAMES NEIL BLACKThird DefendantHearing: 12 September 2018Appearances: J K Boparoy for PlaintiffsW C Pyke for First DefendantG N Williams in personJ N Black in personJudgment: 17 September 2018RESERVED JUDGMENT OF WYLIE J[COSTS]This judgment was delivered by Justice WylieOn 17 September 2018 at 12.30 pmPursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/counsel:Shieff Angland, AucklandEllis Law/W C Pyke, AucklandCopy to:G N WilliamsJ N BlackIntroduction[1] I refer to my reserved judgment of 22 May 2018.1 I found in favour of theplaintiff liquidators and held that the first, second and third defendants, as directors –whether de jure, de facto or shadow – of Wenztro Co-operation Limited (in liquidation)(Wenztro), had breached ss 135, 136 and 137 of the Companies Act 1993. I madeorders requiring them to repay to the company the amount claimed by the liquidatorsin the fourth amended statement of claim together with interest. Further, I recordedthat the plaintiff liquidators, as successful parties, were entitled to costs and I put inplace a timetable for the filing of memoranda in that regard.[2] On 6 June 2018, the liquidators through counsel filed a lengthy memorandumwith voluminous schedules seeking costs on a 2B basis, together with a 50 per centuplift. The amounts sought were as follows:(a) the costs of the proceeding – $134,676 (including uplift);(b) disbursements – $19,709;(c) costs incurred by the liquidators in the administration of Wenztro'saffairs – $236,409.84;(d) disbursements incurred by the liquidators – $3,343.73;(e) the liquidators' costs in reconstructing the financial accounts ofWenztro – $1,495; and(f) interest on the judgment debt from the date of liquidation and post-judgment – $216,682.08.The total amount the liquidators sought to recover by way of a costs order, includinginterest as at 6 June 2018, amounted to $612,315.65.1 Finnigan v Ellis [2018] NZHC 1146.[3] Mr Pyke filed a memorandum in reply on behalf of the first defendant,Mr Ellis, on 21 June 2018. Nothing was filed by either Mr Williams or Mr Black.[4] Given the scope of the orders sought, and some of the concerns raised byMr Pyke, I directed a further hearing in relation to costs.[5] The liquidators then filed yet a further memorandum through counsel, withmore voluminous schedules, seeking to clarify some of the sums sought.[6] The hearing proceeded on 12 September 2018.[7] I deal first with the costs of the proceedings, then with the costs of theliquidation and then with interest.Costs of the proceeding[8] Costs of a proceeding are, of course, at the discretion of the Court – r 14.1(1)of the High Court Rules. That discretion is not unfettered. It is qualified by thespecific costs rules contained in rr 14.2 to 14.10.[9] In this case, the starting point is r 14.2(1)(a). It provides that the party whofails with respect to a proceeding should pay the costs of the party who succeeds.[10] Here, the liquidators succeeded in their proceeding. The amount theyrecovered on behalf of Wenztro was only part of the sum when the hearingcommenced. However, in such situations, success, even on more limited terms, is stilltreated as success.2 I do not consider that the liquidators are disentitled to costs as aresult of the fact that they only partially achieved the result they set out to achieve.[11] There is no dispute that costs should be fixed on a 2B basis. There is a helpfulschedule setting out the amount claimed. It is Schedule 1 to the memorandum filed2 Weaver v Auckland Council [2017] NZCA 330 at [26].on behalf of the liquidators dated 6 June 2018. The only matters disputed in thecalculation of costs set out in that schedule were as follows:3(a) Item 3 – the liquidators claimed separately but against all defendantsfor the filing of replies to the statements of defences filed by each ofthe three defendants.(b) Item 9 – the liquidators claimed separately but also against alldefendants for filing responses to the amended pleadings filed by eachof the defendants.(c) Items 34 and 35 – the liquidators claimed for nine days of hearing time.[12] I agree with the defendants in relation to these matters.[13] Each defendant should only be expected to bear the costs properly payable byhim, and each should not be jointly and severally liable for costs properly attributableto others. Items 3 and 9 claim costs jointly, where the costs are attributable to eachdefendant individually. By way of example, in my judgment, Mr Ellis should not beliable to meet the costs of the liquidators in filing replies to the statements of defencefiled by Mr Williams and by Mr Black.[14] I also agree with the assertion that there should be a reduction in the hearingtime to reflect the significant reduction in quantum between the amount claimed at thestart of the hearing and the amount in respect of which judgment was awarded.[15] As I recorded in my substantive judgment, the amount claimed varied – startingat $773,135.26, rising to $2,778,124.80, and finally being fixed at $765,692.81.4 Thebackground to these changes of stance by the liquidators is relevant. Initially, theysought to recover amounts said to be owed by the company, including a judgment debtwhich had been obtained by Wenzhou Hongliang Trading Co Ltd (WHT) of3 In his memorandum, Mr Pyke did dispute item 1 – commencement of proceedings – as well, butthis was not pursued at the hearing, and I cannot see that there can be any argument taken withthis item in any event.4 Finnigan v Ellis, above n 1, at [4].$617,396.61. They then added in two large unsecured claims – one made by WHTand the other by Sunlucky Style NZ Ltd. These additional amounts were said to beconsequential losses following on from Wenztro's breach of contract. This took thetotal claim to approximately $2,750,000. It became clear in the course ofMs Finnigan's evidence that WHT had already obtained judgment against Wenztrofor its breach of contract. It seemed to me that WHT might be belatedly seeking torecover additional damages, and that the rule in Henderson v Henderson might apply.5I raised this issue with counsel. Mr Crossland, appearing for the liquidators, filed amemorandum disputing the application of Henderson v Henderson, and arguing thatthere were circumstances which meant that the rule set out in that case was notapplicable. The case then proceeded (although fatuitously the liquidators' expert, whowas to deal with the consequential losses claimed, was unavailable and it was agreedthat he could give his evidence after the defendants had called their evidence).Sometime later, Mr Pyke opened the defence for Mr Ellis. In the course of his opening,he also referred to the rule in Henderson v Henderson and to more recent authoritiesupholding the rule. Shortly thereafter, Mr Crossland abandoned the claim to theconsequential losses and filed a fourth amended statement of claim reducing theamount claimed to $765,692.81. The liquidators obtained judgment in this sumtogether with interest.[16] Had WHT – as the party funding the liquidators – been aware that its claimwas limited to this lesser sum from the outset, it may be that it would not have fundedand pursued the litigation. As a matter of commercial common sense, any return fromthe proceedings might not have justified the outlay. The liquidators did not, however,abandon the claim. Rather, they proceeded, but they did not call expert evidence inrelation to the consequential losses claimed.[17] I consider that the change of position by the liquidators did increase the costsof the defendants. Ms Finnigan gave evidence of the consequential losses claimed.So did Ms Wang. Other than this, much the same evidence would have been requiredregardless of the amount claimed. The defendants, and in particular Mr Ellis, did incur5 Henderson v Henderson (1843) 3 Hare 100 (Ch) at 115.some cost in dealing with the Henderson v Henderson issue because they had toresearch the matter. Some time was taken at the hearing dealing with this issue.[18] Pursuant to r 14.7(d), I have a discretion to refuse costs or to reduce the costsotherwise payable, given that the liquidators failed in relation to an issue, if that issuesignificantly increased the costs of the defendants opposing costs.[19] In my judgment, the liquidators' initial mistake as to quantum did significantlyincrease the costs for the defendants. It required additional pleadings. Unnecessarytime was taken with witnesses who gave evidence in relation to the issue. Legalargument was required. The time taken for the hearing was extended by – in my broadestimate – one day. As a result, I reduce the number of hearing days the liquidatorscan seek costs for to eight days.[20] There was no dispute about the disbursements claimed.[21] The total costs claimed by the liquidators in Schedule 1 to the 6 June 2018memorandum, calculated on a 2B basis, without uplift, were $100,419. I deduct fromthat sum the costs claimed for items 3 and 9, and reduce the number of days from nineto eight. That reduces the costs properly claimable against all defendants on a jointand several basis to $89,423. In addition, each of the defendants is liable for $2,922individually – being the total of the item 3 and item 9 costs attributable to eachdefendant. The defendants will also be jointly and severally liable for thedisbursements claimed – $19,709.[22] I now turn to the claim for increased costs.[23] I agree with the liquidators that the defendants unnecessarily contributed to theduration and expense of the proceeding. By way of example, they put the liquidatorsto proof of every aspect of the claim, and failed to respond to a notice from theliquidators to admit facts, most, if not all of which were non-controversial. Theybrought applications to increase the security for costs, even though the time for makingsuch applications had expired. They failed to comply with discovery orders in a timelyfashion. They chose not to liaise with the liquidators on the proposed index for thedocuments to be included in the common bundle. Some of the matters pursued at thehearing by the defendants were irrelevant – for example, an allegation that WHT hadstolen the intellectual property in the Promax brand, when the evidence was clear thatthat brand had never been registered in China by Wenztro. They attempted to relitigatein part matters already dealt with in WHT's summary judgment proceedings. All ofthese matters put the liquidators to additional costs.[24] In addition, there were some matters particular to individual defendants. Forexample, Mr Ellis attempted to belatedly lodge an amended proof of debt which helater withdrew. Some of Mr Williams' cross-examination was not well-directed.Mr Black made various allegations against Mr Lin and Ms Taylor which were notcauses of action open to him.[25] Pursuant to r 4.6(3)(b)(i) to (iii), I can award increased costs if the partiesopposing costs have contributed unnecessarily to the time or expense of theproceeding, for example by failing to comply with the Rules or directions of the Court,taking or pursuing unnecessary steps or matters that lacked merit, and failing withoutreasonable justification to admit facts, evidence or documents.[26] I am satisfied that costs were increased as a result of the defendants' conductnoted above, that r 4.6 is engaged, and that an award of increased costs is appropriate.[27] The correct approach in such cases6 is to first categorise the proceeding underr 14.3. Here, that has been done. These proceedings are 2B proceedings. There is nolonger any dispute as to what is a reasonable time for each step in the proceeding underr 14.5. No extra time for any particular step is claimed. I am satisfied that it isappropriate to award increased costs of 25 per cent of the costs for which thedefendants are jointly and severally liable. I do not make any uplift for mattersparticular to each defendant. They were not of any great moment, they werecompensated for by other matters, for example Mr Ellis acknowledged that thesecurities he held were voidable, and Messrs Williams and Black were by and largeeconomical in their respective contributions to the hearing.6 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA).[28] I award costs in favour of the liquidators and against the defendants as follows:(a) the defendants are jointly and severally liable for costs in the sum of$111,778.75 (being the base costs award of $89,423, plus a 25 per centuplift);(b) Mr Ellis is liable for an additional $2,922;(c) Mr Williams is liable for an additional $2,922;(d) Mr Black is liable for an additional $2,922; and(e) the defendants are jointly and severally liable for the disbursements inthe sum of $19,709.Liquidators' claims for the costs of the liquidation[29] Ms Boparoy, for the liquidators, acknowledged that the costs of the liquidationwere not specifically sought in the pleadings. She nevertheless asserted that they fellwithin the prayers for relief to each cause of action. Relevantly, each of the prayersfor relief sought the following:A. An order under s 301(1)(b)(ii) of the Companies Act 1993 that [thedirectors] contribute to the assets of the company in the amount of$765,692.81 or such other sum as the Court thinks just.C. Costs and disbursements.[30] I do not accept Ms Boparoy's argument. Nowhere in the statement of claim isthere any express reference to the costs of the liquidation. Nor was any evidenceadduced in the course of the hearing detailing the liquidators' costs. Rather, theliquidators have belatedly sought to recover their costs from the defendants by filingvoluminous schedules to memoranda filed on their behalf and by making factualassertions as to those costs through counsel. The end result is that the defendants werenot on notice of the claim for the liquidators' costs at the relevant time. They did notknow that they had to meet a claim for the liquidators' costs. They did not callevidence in relation to the issue. They did not cross-examine on the issue.[31] Ms Boparoy referred me to various authorities where liquidators have beenawarded either in whole or in part the costs of liquidations under either ss 300 or 301of the Companies Act.[32] I have considered the various authorities. They do not assist her. In each, it isclear that the liquidators' costs in the liquidation were sought as part of the substantiveproceedings.7 There is no dispute that the costs of a liquidation can be recovered ascompensation under ss 300 or 301, although the position is not straightforward,8 butonly where they are sought as part of the substantive proceedings. Ms Boparoy couldnot point me to a single case where the liquidators' costs of a liquidation have beenordered as part of the costs of the proceedings, in situations where the liquidators'costs of the liquidation were not sought in the substantive proceedings.[33] I do not consider that the liquidators can now properly claim the costs of theliquidation as part of the costs of the proceeding. To hold otherwise would be unfairto the defendants and a breach of the rules of natural justice because the defendantshave not been heard on the quantum of those costs. I observe that the position is notaltogether lost for the liquidators. They can still recover their costs – not as againstthe defendants by way of compensation, but rather from the company, pursuant to ss276 to 278 of the Companies Act and pursuant to the Companies Act 1993 LiquidationRegulations 1994. That may be scant comfort for WHT, but any complaint it mayhave as a consequence should not be visited on the defendants. The position is not oftheir making.7 Hansa Ltd (in liq) v Hibbs [2017] NZHC 2014 at [3](a), [8], [61], [67] and [69](b); Grant v Gifford[2018] NZHC 26 at [5], [28], [42]; TGM Trading Ltd (in liq) v Drever [2018] NZHC 1788 at [1],[5], [9] and [25]; GL Investment & Development Ltd (in liq) v Gao [2018] NZHC 868 at [7], [52]and [66]; EBR Holdings Ltd v van Duyn [2017] NZHC 1698 at [171]; Madsen-Ries v Petera [2015]NZHC 538 at [3] and [110]-[114]; Madsen-Ries v Twine [2015] NZHC 227 at [1], [9] and [10];Shaw v Owens [2017] NZCA 315 at [8], [9], [16] and [17]; Willburn Furniture & Restorations Ltd(in liq) v Gledhill [2016] NZHC 331 at [16](d)(iii) and [78]; Central Tyres Waipukurau Ltd (in liq)v Pallesen [2016] NZHC 146 at [2], [3], [4](d) and [45]; Grant v Guo [2015] NZHC 2480 at [2]and [55]; Richard Geewiz Gee Consultants Ltd (in liq) v Gee [2014] NZHC 1483 at [7](d)(v) and[122].8 Shaw v Owens, above n 7, at [18].[34] Accordingly, I make no award in respect of the costs of the liquidation or inrespect of the disbursements incurred by the liquidators in the course of the liquidation.Nor do I make any award for the costs of reconstructing the financial accounts ofWenztro.Interest[35] I have already made orders in the substantive judgment in respect of interest.The calculation of interest is a matter for the parties. The Court will only becomeinvolved if the parties cannot agree. Interest on the judgment should not be put inissue in the context of a costs application.Conclusion[36] I award the costs of the proceedings to the liquidators in the sums set out aboveat [28]._____________________________Wylie J