KEEMATI LIMITED v MR CIVIL LIMITED & ORS [2020] NZHC 3496

KEEMATI LIMITED v MR CIVIL LIMITED & ORS [2020] NZHC 3496 [22 December 2020]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2019-404-000967[2020] NZHC 3496BETWEEN KEEMATI LIMITEDPlaintiff/First Counterclaim DefendantAND MR CIVIL LIMITEDFirst Defendant/First Counterclaim PlaintiffAND JIE GAOSecond DefendantAND QNZ LIMITEDThird Defendant/Second CounterclaimPlaintiffAND KEEMATI LAL ANGURALASecond Counterclaim DefendantHearing: 17 November 2020Appearances: Keemati Angurala in Person for the Plaintiff/First CounterclaimDefendantWilliam Cheyne and Zared Wall-Manning for the Defendants andCounterclaim PlaintiffsJudgment: 22 December 2020JUDGMENT OF MOORE JThis judgment was delivered by me on 22 December 2020 at 10:30 ampursuant to Rule 11.5 of the High Court Rules.Registrar/ Deputy RegistrarDate:Introduction[1] The defendants, MR Civil Limited ("MR Civil"), Jie Gao and QNZ Limited("QNZ") apply for an order for security for costs against the plaintiff, Keemati Limited("Keemati").[2] They do so on the basis that Keemati's 2019 financial statements show that ithas only approximately $10,000 in net assets. The defendants claim that any award ofcosts in this proceeding is likely to significantly exceed $10,000 and there is thus asignificant risk that Keemati will be unable to meet an award of costs out of its assets.[3] Keemati opposes the application. It says the merits of its case mean it is likelyto be successful and, in any event, there is no reason to believe it will be unable to paythe costs if unsuccessful. It owns plant, machinery and vehicles with values well inexcess of any likely award of costs and it is involved in ongoing projects which, whencomplete, will realise several million dollars in profit. Additionally, Mr Angulara,Keemati's sole director and shareholder holds considerable assets in his own name andis presently in the process of selling property. If sold, Mr Angulara's equity wouldmore than cover any costs award.Factual background[4] The following summary is taken from Associate Judge Paulsen's judgment onKeemati's application that certain caveats not lapse,1 the voluminous evidence filedby the parties, the pleadings and the parties' oral and written submissions.[5] The third defendant, QNZ, is a property development company. Mr Qiu isQNZ's sole director and CEO.[6] The first defendant, MR Civil is a construction contractor. It is a wholly ownedsubsidiary of QNZ. Mr Qiu is MR Civil's sole director and CEO.[7] The second defendant, Ms Gao, is Mr Qiu's wife. She was formerly a directorof MR Civil and QNZ. She is not a party to the present application.1 Keemati Limited v QNZ Limited [2020] NZHC 299.[8] In late 2016 QNZ2 employed Mr Angurala to carry out construction work onits residential subdivision at Flat Bush School Road.[9] Shortly after this, Mr Angurala was made a director of MR Civil. QNZ engagedMR Civil as the construction contractor to carry out earthworks at Flat Bush SchoolRoad. MR Civil also carried out other construction projects which Mr Anguralasupervised. These included two large earthwork projects on Matua Road.[10] In November 2017, 40 per cent of the shares in MR Civil were transferred toKeemati. The circumstances and purposes of this transfer are disputed. Mr Angularasays the shares were gifted. Mr Qiu says they were a loan to enhance Mr Angulara'scredibility with suppliers and contractors.[11] The relationship between Mr Angurala and Mr Qiu soured. Each attributes thebreakdown to the other. In any event, on 3 September 2018, the two men met to discussthe basis on which Mr Angurala would exit MR Civil's business. Mr Angurala tooknotes of what he claims was agreed between them. The notes were signed by Mr Qiu.Notwithstanding the notes, it appears to be common ground that they do not reflecteverything which was agreed between the parties. In material respects, Mr Qiu doesnot accept the agreement as claimed by Mr Angurala. It is, however, accepted that itwas agreed Keemati would relinquish its shares in MR Civil and Mr Angulara wouldresign as director. But there is a dispute as to the terms on which the shares would betransferred. Mr Angulara says that certain properties were to be transferred to Keematiin consideration for Keemati shares and upon titles becoming available. Mr Qiu saysthat QNZ was to pay nothing. The shares were, as they always had been, on loan toKeemati.[12] The relationship between Mr Qiu and Mr Angurala remains hostile.Mr Angurala claims Mr Qiu made it impossible for Keemati to complete the MatuaRoad projects. And on 5 May 2019 Mr Angurala wrote to the Matua Road developerstelling them he was quitting the projects and, as a consequence, the developercancelled the contract with MR Civil.2 At this time QNZ was called Chimbusco International Limited.[13] There is also a dispute relating to whether the terms of the 3 September 2018agreement were breached. Keemati claims that MR Civil did not pay the sums due asa result of the 3 September 2018 agreement. MR Civil disagrees. It says it has paidall the sums owing. Keemati sues MR Civil and QNZ in breach of contract. Mr Gaois sued in breach of trust and breach of directors' duties. To a considerable extent thedetermination of these proceedings will turn on credibility findings.Procedural background[14] Keemati filed the proceedings on 22 May 2019. Contemporaneously, it soughtfreezing orders. The freezing orders were ultimately resolved by consent withMR Civil providing undertakings.[15] Keemati then lodged caveats over two properties owned by QNZ. QNZapplied for those caveats to lapse. Keemati filed an application to sustain the caveats.Associate Judge Paulsen granted the application on the basis that the proceedingswould be pursued with due diligence. Leave was reserved for QNZ to apply if theywere not.3[16] In May 2020, MR Civil withdrew its undertakings relative to the freezingorders and the application for freezing orders was set down for hearing. Again, thiswas resolved by consent before the hearing, with orders being granted overapproximately $1.5 million of MR Civil's assets.4[17] Since at least that time the parties have been in discussions about how securityfor costs might be set but no agreement has been concluded. In the absence of anagreement, this matter came before me for determination.Legal principles[18] Rule 5.45 of the High Court Rules 2016 ("the Rules") provides that the Courtmay, if it thinks it would be just in all the circumstances, order a plaintiff to give3 Keemati Limited v QNZ Limited [2020] NZHC 299 at [45].4 Minute of Hinton J dated 14 July 2020.security for costs where there is reason to believe that a plaintiff will be unable to paythe costs of the defendant if the plaintiff is unsuccessful in its claim.[19] There are four questions the Court should ask:(a) Is there reason to believe that the plaintiff will be unable to pay the costsof the defendant if the plaintiff is unsuccessful? There is no onus orstandard of proof; the rule simply requires the Court to be satisfied ofthe plaintiff's inability to meet such an award.(b) Is it "just in all the circumstances" to make an order for security forcosts?(c) In what form and quantum should the security be ordered?(d) Should a stay be ordered if security is not paid?[20] Whether an order for security for costs would be "just in all the circumstances",whether or not to order security and, if so, what quantum should be paid, are alldiscretionary considerations.5 The Court's discretion is not to be fettered byconstructing principles from the facts of previous cases.6 The followingconsiderations may, nonetheless, be relevant:7(a) balancing the interests of the plaintiff and defendant is the overridingconsideration.8 This includes the plaintiff's right to access to justice;(b) as far as possible, bearing in mind the early stage of the proceeding, theCourt will endeavour to assess the merits and prospects of success ofthe claim.9 However, there is a very real limit as to how far such anenquiry can go, particularly at an early stage in the proceeding;10 and5 AS McLachlan Limited v MEL Network Limited (2002) 16 PRNZ 747 (CA) at [15].6 At [15].7 Andrew Beck and others McGechan on Procedure (online looseleaf ed, Brookers) at [HR5.45.03].8 Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [24](c).9 McGechan on Procedure, above n 7, at [HR5.45.03(2)].10 Meates v Taylor (1992) 5 PRNZ 524 (CA); Lee v Lee [2019] NZCA 345 at [73].(c) where the plaintiff's impecuniosity results from the defendant's actions,it may be unjust to order security for costs.11[21] Setting the quantum of security involves the exercise of a discretion. The Courtmay consider the relief claimed, the estimated duration and complexity of theproceedings, and the probable costs if the plaintiff is unsuccessful.12[22] As for the manner of giving security this, too, may vary; again dependent onthe type of security. Orders for staged, staggered or deferred security are nowfrequently made. Typical procedural stages are up to the completion of discovery, upto the close of pleadings date, the date for serving the plaintiff's briefs of evidenceand, finally, up to a date shortly before the trial.[23] The Court will generally direct a stay of the proceedings until the securityordered is given.13 The Court may also make a pre-emptive order to stay a proceedingif payment is not made by the date ordered.14[24] I now turn to each consider each of the four questions relevant to thedetermination of an application for security for costs.Is there reason to believe that the plaintiff will be unable to pay the costs of thedefendant if the plaintiff is unsuccessful?[25] This was the most hotly contested aspect of the application. Mr Cheyne, forthe defendants, submits that there is credible, circumstantial evidence which supportsthe inference Keemati will be unable to pay costs if unsuccessful.[26] First, he says that Keemati's 2019 financial statements show that it has onlyapproximately $10,000 in net assets, an amount which would be wholly inadequate tomeet any adverse costs order in the event Keemati is unsuccessful.11 Bell-Booth Group Limited v Attorney-General (1986) 1 PRNZ 457 (HC).12 McGechan on Procedure, above n 7, at [HR5.45.03].13 Tomanovich Holdings Limited v Gibbston Community Water Company 2004 Ltd [2018] NZHC990 at [68] and [85].14 Westpac New Zealand Limited v Adams [2013] NZHC 3112 at [92](c).[27] In meeting Mr Cheyne's submission on this point, Mr Angurala relies onKeemati's strong asset position. It owns various items of earthmoving and relatedheavy machinery and vehicles totalling over $280,000. He claims these are allunencumbered. Additionally, he says that Keemati is presently involved in threeongoing construction and development projects. These include the subdivision andconstruction of three houses at 48A Seacliffe Road, Hillsborough for which a resourceconsent was lodged by Keemati on 5 June 2020. No consent has yet been issued byAuckland Council.[28] The second and third projects relate to properties on Dominion Road and inBlockhouse Bay which appear to be owned by Mr Angurala and his wife personally.In his affidavit Mr Angurala states that his intention is that both of these propertieswill be subdivided and new houses built on them. However, from his submissions itseems that the Dominion Road property is now on the market. Mr Angurala advisesthat he expects to sell it for a minimum of $1.7 million which would release equity inthe order of $700,000. The development of the Blockhouse Bay property is apparentlyexpected to provide a gross profit of between $350,000 and $400,000.[29] Additionally, Mr Angurala says he has jewellery which valuations attached tohis affidavit place at $132,500.[30] Mr Angurala also deposes that in the course of discussions with the defendants'solicitors, he proposed that a chattel security be placed over two items of heavymachinery owned by Keemati; a bulldozer valued at $115,000 plus GST and a rollervalued at $36,000 plus GST. Annexed to his affidavit are valuations from a reputableauctioneer for these machines which support these figures.[31] Despite these assets, I am satisfied that there is good reason to believe that ifunsuccessful, Keemati will be unable to pay the defendants' costs. As noted, onKeemati's own balance sheet, the net value of the assets is wholly inadequate to satisfyan adverse costs order. It is artificial to all but ignore Keemati's liabilities, which whentaken into account reveal a net asset position of just over $10,000.[32] Mr Angurala claims that he and Keemati earned a net income of $227,230.This figure does not appear anywhere in the accounts. I agree with Mr Cheyne that inany event that figure is irrelevant. It does not take account of expenses. When brokendown the accounts reveal the following:(a) Keemati's net profit was $10,598;(b) Keemati paid Mr Angurala a salary of $190,000; and(c) Mr Angrala loaned Keemati $262,954.[33] In other words, in 2019 Keemati earned a very modest profit and the salary itpaid Mr Angurala was loaned back to it.[34] As for Mr Angurala's submission that Keemati has future projects which it isundertaking, I agree with Mr Cheyne that those will require funding. It is not readilyapparent on the material before me from where that funding will be sourced but,inevitably, any borrowings will need to be secured.[35] This leads to Mr Angurala's personal financial position. He has providedevidence he currently owns the two properties referred to earlier. There is some equityin them and as noted in his submissions, Mr Angurala advises that one is on the market.It may well release the amount of equity he claims. These, however, are personalassets and although Mr Angurala insists that he will stand behind any award of costsand, "if necessary", will give a personal undertaking "if required", I agree withMr Cheyne that these promises do not operate to relieve the defendants' concern thatKeemati is in an apparently poor financial position. Neither can it be overlooked thatKeemati is the corporate vehicle through which Mr Angurala conducts his projectmanagement work.[36] Furthermore, no work on any of the property development projects has beencommenced apparently because consents are still outstanding. When and if thenecessary consents will be granted is speculative.[37] The jewellery would appear to be capable of releasing substantial funds if soldbut, again, these are the personal property of Mr Angurala and not Keemati.[38] Other than Mr Angurala's assurances he would personally meet Keemati'sliability in the event of an adverse costs order, there is insufficient evidence ofKeemati's ability to meet costs for present purposes.[39] I am thus satisfied there are reasonable grounds to believe Keemati will beunable to pay the defendants' costs if they succeed.Is it "just in all the circumstances" to make an order for security for costs?[40] Under this question the Court may consider the merits of the plaintiff's caseand assess its prospects of success. However, given the early stage of theseproceedings, despite Keemati filing its fourth amended statement of claim, any suchassessment will, inevitably, be limited. No first case management conference has beenconvened. Discovery has not yet commenced and, certainly, no trial date has beenfixed.[41] Mr Cheyne claims Keemati's case is weak. He submits it continues to changein ways which are inconsistent with the initial allegations. For example, Keematiinitially pleaded that it remained a shareholder of MR Civil, but now claims that theact of giving up its shareholding in MR Civil was the consideration for the transferfrom properties from QNZ to Keemati.[42] Mr Cheyne also places considerable weight on what the defendants say is alack of any commercial reality in Keemati's claim. This was described by Mr Qiu inhis affidavit for the caveat proceedings in the following way:"Keemati did not invest any of his own money in MR Civil, or otherwise takeon any risk associated with MR Civil's business. As I have said in my previousaffidavits, Keemati just carried out project management services and was paida good salary for these services and offered various incentives if he completedthe projects on time. However, Keemati claims I also agreed to invest$2 million into the business and then give him a 50% shareholding in thatbusiness (i.e. $1 million equity and 50% of the profits of all future projects)for nothing. Keemati then claims that to purchase the shareholding back, Iagreed to give him two sections, allow him to build brand new houses on thosesections at my cost, and also pay him '400,000' as an initial sum, with no otherstrings attached. I obviously didn't agree to this. No commercial party wouldever agree to this. All Keemati has to rely on is a couple of his handwrittennotes that record his version of discussions between us, but are not expressedto be agreements."[43] Mr Cheyne also submits that the defendants are incurring ongoing burdens asa consequence of their undertakings as to damages in respect of the freezing ordersand, potentially, damages arising out of the caveats lodged by the plaintiff. He submitsthat these are factors which further diminish the likelihood that Keemati will havefunds available to pay costs should it be unsuccessful.[44] Unsurprisingly, Mr Angurala asserts that Keemati's claim is a strong one. Hepoints to the freezing orders made and the plaintiff's success on the caveat litigation,noting that this proves Keemati's case is "not hopeless and meritless".[45] While I accept that assessing the merits of any case at this very early stage islikely to be fraught, I agree with Mr Cheyne that Keemati's claims do seem to lackcommercial viability. However, it would be premature to venture comments muchfurther than that.[46] Mr Angurala also claims that the defendants have delayed making theapplication and should thus be denied the relief they seek. The plaintiff's assets havenot materially changed since the proceedings were issued and, contrary to the directionof Whata J that any application for security of costs should be filed by 26 June 2020,15the defendants did not do so. Instead, they undertook searches of the Personal PropertySecurities Register and explored alternative means of obtaining security.[47] Mr Angurala also says that the defendants, through their actions, have deniedhim his only source of income from MR Civil and now seek to take further funds onthe present application in order to deny him relief. He says that the application is thusbrought in bad faith and should be dismissed. To grant the application will have theeffect of encouraging their "wrong conduct", Mr Angurala asserts.15 Minute of 26 May 2020.[48] I am satisfied there is weight in Mr Cheyne's submission that the pre-judgmentsecurity obtained by Keemati will, in the event of the defendants' success, furtherdiminish the likelihood Keemati will have sufficient funds to pay costs. That operatesin favour of making the order.[49] A further relevant consideration under this head is whether such an order mightinterfere with the plaintiff's right to access justice. Plainly it would not. The essenceof Mr Angurala's submissions is that he, personally, has ample funds to pursue thelitigation and is committed to doing so. Furthermore, he did offer to give personalundertakings to the defendants' solicitors which he later withdrew. This is not a casewhere making an order for security would effectively deny the plaintiff's ability topursue the remedies it seeks.[50] Furthermore, I do not accept Mr Angurala's complaints regarding delay. Delayin applying for security may be relevant if it causes unfairness to a plaintiff.16Mr Angurala has not pointed to any unfairness or prejudice and I am satisfied there isnone for the following reasons. First, as noted, the proceedings are at a very earlystage. Secondly, at or about the time of Whata J's orders there were extensivenegotiations designed to reach an agreement over security. While these ultimatelyproved fruitless, they are sufficient, in my view, to answer Mr Angurala's complaint.And finally, if there is any delay it can be measured in just a few weeks or months atthe most.[51] I am thus satisfied it is just in all the circumstances to make an order forsecurity for costs.When and in what form and quantum should the security be ordered?[52] The defendants seek an order for security in the sum of $130,000. This is basedon an estimate of the costs and disbursements which might be awarded to thedefendants in the event they succeed. Certain assumptions have been made. Theseinclude an assumption the proceedings would require only one judicial conference, thetrial will last two weeks, scale costs would be awarded for just one counsel, expert16 Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 945 at [26].witness fees will be of the order of $50,000 and the judgment will not need to beenforced. The security sought is in accordance with 2B scale costs with the exceptionof discovery, which is calculated on a 2C basis.[53] I agree these assumptions are conservative. In the event the defendants succeedany costs order is likely to exceed the figure sought by the defendants. I am thussatisfied the quantum is fair and appropriate.[54] The next question is when security should be paid. Mr Cheyne suggests thatthe security be paid in the following tranches:(a) $27,404 immediately to cover costs up to the end of discovery andinspection;(b) $63,742.50 to be paid following the completion of discovery andinspection; and(c) $38,837.50 to be paid two months in advance of trial.[55] Mr Cheyne submits this staging provides an appropriate mechanism to ensurethe security is reasonable and should mitigate any risk that Keemati will be unable tomeet the order. I agree with Mr Cheyne for the reasons he gives. Any order framed inthis fashion will reduce the burden on Keemati.[56] As for the form of security, Mr Cheyne submits that Keemati's offer of a chargeover the bulldozer and roller will be of limited value. There are a number of securedcreditors which have registered security interests over Keemati's present and after-acquired property. The defendants would rank behind those secured creditors. Healso expresses reservations relative to Mr Angurala's suggestion that the jewellery beplaced in a safe deposit box in the name of his solicitors. The defendants haveconcerns that the valuations are unlikely to represent the proceeds of any sale.[57] For these reasons, Mr Cheyne submits that security should be provided in theform of cash paid into Court or into a solicitor's trust account. Any other mechanismwould be insufficient to provide adequate security.[58] In the course of oral submissions, Mr Angurala pointed to three classes of assetwhich could be realised if sold. These are:(a) the bulldozer and roller owned by Keemati with a combined valuationof $151,000;(b) the residential property owned by Mr Angurala which he advises is onthe market, which when sold is expected to realise equity of $700,000;and(c) the jewellery owned by Mr Angurala valued at $132,500.[59] For the reasons advanced by Mr Cheyne, I am not satisfied that any ofMr Angurala's proposals provides sufficient certainty. At the end of the hearing Iexplored with Mr Cheyne and Mr Angurala whether the most appropriate coursewould be for the parties to consult with a view to reaching agreement as to what formany security held by this Court would take. My preliminary view is that securityshould take the form of either a cash payment into Court or, alternatively, security tothe satisfaction of the Registrar. As for the latter option, it would be for the Registrarto satisfy himself that the security, in whatever alternative form, would be appropriateas an alternative to a cash payment. For example, if the Registrar was satisfied that thejewellery provided adequate security, he might order the plaintiff to obtain a securesafe deposit box and deliver its only key to the Registrar's custody. There may beother workable options.[60] Accordingly, I invite the parties to consult and file a joint memorandum nolater than 5:00 pm on 19 February 2021 as to the form of security or, in the eventof disagreement, separate memoranda addressing the issue. I shall then makewhatever orders I consider appropriate on the papers.Should a stay be ordered if security is not paid?[61] Although discretionary, r 5.45(3)(b) of the Rules, the Court generally stays aproceeding until the security ordered is given.17[62] Mr Angurala did not attempt to persuade me that in the event security isordered, it would be inappropriate to stay the proceedings until the security is paid. Inall the circumstances of this case, I do not regard a departure from the usual approachto be justified.Result[63] The first and third defendants' application for security for costs is granted.[64] The plaintiff is ordered to provide security of $129,984 for this proceeding inthe amounts and on the dates set out below:(a) subject to the filing of the further memoranda and in accordance withany order of the Court as to when payment is due – $27,404;(b) following the completion of discovery and inspection (includingsecurity for expert witness fees) – $63,742.50; and(c) two months in advance of the trial date – $38,837.50.[65] The proceedings are to be stayed until the relevant security in terms of [64] ofthis judgment is paid.Costs[66] The parties did not address me on the question of costs on the presentapplication. The defendants, having been successful, are entitled to costs. I invite theparties to confer with a view to reaching agreement on the question of costs but, in theevent there is no such agreement, the parties are to file memoranda as to costs no later17 Tomanovich Holdings Limited v Gibbston Community Water Company 2014 Ltd, above n 13 at[68] and [85]; McGechan on Procedure, above n 7, at [HR5.45.11(1)].than 5:00 pm on Friday, 26 February 2021. No memorandum is to exceed threepages.Moore JSolicitors:Chapman Tripp, AucklandCopy to:The Plaintiff