T A O’BRIEN AND ANOR v MODERN BUILT INVESTMENTS [2021] NZHC 1203

T A O'BRIEN AND ANOR v MODERN BUILT INVESTMENTS [2021] NZHC 1203 [27 May 2021]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYI TE KŌTI MATUA O AOTEAROAKIRIKIRIROA ROHECIV-2019-419-125[2021] NZHC 1203UNDER Sections 174 and 241 of the Companies Act1993BETWEEN T A O'BRIEN AND MCCAW LEWISTRUSTEES (T A O'BRIEN) LIMITED ASTRUSTEES OF THE T A O'BRIENFAMILY TRUSTFirst PlaintiffAND T A O'BRIENSecond PlaintiffAND MODERN BUILT INVESTMENTSLIMITEDDefendantHearing: On the papersAppearances: P J Morgan QC & Z T Mora for PlaintiffsC T Gudsell QC & R J Southall for DefendantJudgment: 27 May 2021JUDGMENT OF PAUL DAVISON J[Re: Costs]This judgment was delivered by me on 27 May 2021 at 11:30 ampursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors:Nielsen Law, HamiltonMcCaw Lewis, HamiltonBackground[1] This case was heard over 24 – 26 June 2020. The plaintiffs, who claimed tobe shareholders of the defendant, Modern Built Investments Ltd (MBI), sought ordersfor the rectification of the company's share register, and an order putting the companyinto liquidation on the grounds that it was just and equitable to do so by reason of theunfairly prejudicial conduct of the company by its sole director, Mr Russell Spiers.MBI and Mr Spiers denied that the plaintiffs were shareholders in MBI and submittedthe plaintiffs had no standing to seek the orders sought.[2] By judgment dated 16 December 2020, I determined that the plaintiffs wereshareholders of MBI and further, that they had been subject to prejudicial conduct byMr Spiers.1 I observed that the plaintiffs, having succeeded, were entitled to an awardof costs and directed the filing of memoranda.2[3] The plaintiffs submit that they are, at minimum,3 entitled to 2B costs andreasonable disbursements. However, they submit that this case warrants the award ofindemnity, or increased, costs. Further, that the costs order should be made againstMr Spiers.[4] The defendant and Mr Spiers acknowledge that the plaintiffs are entitled to 2Bcosts and disbursements, however, submit this case does not warrant an award forincreased or indemnity costs. Further, that the costs award should be made againstboth MBI and Mr Spiers.The steps taken in the proceeding[5] The plaintiffs' costs schedule calculates their scale 2B costs at $70,146.50.This sum includes:(a) $7,170 for an additional three days, beyond the standard four days, fordiscovery and inspection; and1 O'Brien v Modern Built Investments Ltd [2020] NZHC 3349.2 At [208].3 And consistent with Associate Judge Smith's Minute dated 12 November 2019.(b) $4,182.50 for second counsel.[6] Mr Morgan QC for the plaintiffs submits that the additional three days fordiscovery and inspection is justified by the considerable work required for those stepsfollowing their receipt of five substantial affidavits filed and served by MBI andMr Spiers. Counsel submits there should be no dispute in respect of this uplift ascounsel for the defendant and Mr Spiers sought the same uplift in his costs submissionsdated 9 July 2020.[7] Mr Gudsell QC for the defendant submits that costs for an additional three daysfor discovery as sought by the plaintiffs is not justified. Counsel acknowledges thatthe defendant and Mr Spiers also sought three additional days in their submissions.They did so because "considerable work was required to obtain, review and listhistoric files from Lyon O'Neale Arnold, Mr Williams and KPMG" and because MBIand Mr Spiers had thereby "assumed the burden of discovery". Counsel submits thatMs O'Brien filed one affidavit which listed 74 documents in part 1 of the schedule andclaimed privilege over eight categories of documents. Further, that not only was thevolume of the defendant's and Mr Spiers' discovery material significantly greater thanthe plaintiffs', but the work required to obtain it was greater.[8] MBI and Mr Spiers are content to leave the plaintiffs' claim for second counselto the Court's discretion and take no issue with the disbursements listed in theplaintiffs' schedule, which amount to $9,454.61.[9] I am satisfied that it is appropriate for the plaintiffs to receive costs for theadditional three days for discovery and inspection. The defendant and Mr Spiersaccept that they also took an additional three days for discovery and inspection. I donot accept that they thereby "assumed the burden" of the step. The step is fordiscovery and inspection. I am satisfied that if the defendant and Mr Spiers took thisadditional time to complete discovery, the plaintiffs will have had to undertake acorresponding amount of work in inspection.[10] In relation to costs for second counsel, I observe Justice Gault's recentcomments in SKP Inc v Auckland Council:4Allowance for second counsel is not automatic. It requires specific allowance.The key question is whether the nature of the proceeding was such as to justifyrequiring the losing party to contribute to the winning party's costs in havinga junior counsel present.5 There will usually need to be some unusual featureto the litigation to warrant allowances for second counsel.6[11] I do not consider this proceeding to have been of the nature that justifies theaward of costs for second counsel. There was no special complexity or unusualvolume of evidential material. Accordingly, I do not certify costs for second counselfor the plaintiffs.Quantum of costs order: scale, increased or indemnitySubmissions[12] Without costs for second counsel, the plaintiffs' 2B scale costs reduce to$65,964. The plaintiffs seek either their actual costs, being $242,165.18, or anincrease in their scale costs to 80 per cent of their actual costs, being $193,732.14.[13] Counsel for the plaintiffs submits this Court should award indemnity costsbecause Mr Spiers acted improperly and/or unnecessarily in defending theproceeding.7 In particular, counsel submits that Mr Spiers did not act in the bestinterests of MBI, but rather pursued a self-serving and unmeritorious defence.Counsel has highlighted the following excerpts from the judgment:8[75] Mr Spiers' conduct in relation to the tax imputation credits and theprovision of misinformation regarding the share transfer documents, informsmy assessment of his credibility, and demonstrates that when motivated byfinancial advantage he is prepared to provide whatever version of events hethinks will best suit his objectives....4 SKP Inc v Auckland Council [2020] NZHC 2215 at [5].5 Nomoi Holdings Ltd v Elders Pastoral Holdings Ltd (2001) 15 PRNZ 155 (HC) at [21]; and Taov Strata Title Administration Ltd [2016] NZHC 1821 at [52].6 Tao v Strata Title Administration at [52]. See also ZYXCBA Developments Ltd v Auckland Council[2015] NZHC 2224 at [16].7 High Court Rules 2016, r 14.6.(4)(a).8 O'Brien v Modern Built Investments Ltd [2020] NZHC 3349.[141] Mr Spiers' self-serving reconstruction of past events.[175] Mr Spiers' evidence was an elaborate and rather desperate attemptto 'shoehorn' his case into a state where it would satisfy the requisite elementsof the defence of mistake which he has advanced.[199] I consider that Mr Spiers' assertion to be the sole shareholder ofMBI on the strength of the 2015 KPMG conclusion, and his denying of thevalidity of the shareholdings of the plaintiffs was an opportunistic and cynicaladoption of that conclusion in order to suit his own interests and which hassince resulted in significant prejudice to the plaintiffs as shareholders in MBI.The fact that Mr Spiers has continued to maintain his reliance on KPMG'sconclusion regarding the MBI shareholding despite Mr Lyon himselfsubsequently acknowledging that the information he provided to KPMG wasincorrect, further illustrates the untenable nature of Mr Spiers' position, anddemonstrates the nature and extent of the prejudicial conduct of Mr Spiers assole director of MBI and that the plaintiffs' claim for relief is founded on.(emphasis added).[14] Counsel for MBI and Mr Spiers submits that the plaintiffs bear the onus ofestablishing that indemnity costs should be awarded, and that, by not citing anyauthority, they have not met the threshold.[15] Counsel for the plaintiffs submits that should the Court not be minded to awardindemnity costs, it should nevertheless award increased costs on the grounds thatMr Spiers contributed unnecessarily to the time and expense of the proceeding by:(a) pursuing an argument that lacked merit;9(b) failing, without reasonable justification, to admit facts, evidence,documents and the legal argument advanced by the plaintiffs;10 and(c) failing, without reasonable justification, to accept offers of settlement.11[16] In relation to the claimed failure of Mr Spiers to accept offers of settlement,counsel for the plaintiffs has outlined the following correspondence:9 High Court Rules 2016, r 14.6(3)(b)(ii).10 High Court Rules 2016, r 14.6(3)(b)(iii).11 High Court Rules 2016, r 14.6(3)(b)(v).(a) On 9 May 2019, immediately prior to the filing of the proceeding,Mr Spiers made a without prejudice save as to costs settlement offer. Itincluded the statement, "Our client will purchase your client's shares".The plaintiffs submit that the statement demonstrated Mr Spiers'acceptance that the plaintiffs owned shares in MBI. The plaintiffs didnot accept this offer. They responded by letter dated 20 May 2019,saying that the offer was "totally unacceptable" as it involved apayment plan lasting more than five years, rather than offering a cleanbreak, and was conditional on the sale of a property, and MBI obtaininga bank loan. Counsel for the defendant and Mr Spiers submits that thisletter is not relevant as it was sent in the context of relationship propertynegotiations, and before this proceeding commenced.(b) On 25 September 2019, counsel for the defendant and Mr Spiers sent awithout prejudice except as to costs letter, which invited the plaintiffsto set out a settlement proposal.(c) On 18 November 2019, the plaintiffs made a without prejudice exceptas to costs offer. The plaintiffs say that if this offer had been accepted,it would have saved the parties substantial costs and time.(d) On 2 December 2019, counsel for the defendant and Mr Spiers wroteto the plaintiffs to communicate that the plaintiffs' settlement proposalof 18 November 2019 was not acceptable to them.(e) On 6 December 2019, the plaintiffs repeated their without prejudiceexcept as to costs offer and stated:5. If your clients are open to settlement discussions asclaimed, then we suggest we immediately engage insettlement discussions/ negotiations.8. If this offer is not acceptable to your clients, then wesuggest your clients either counter offer or agree to attendmediation.The plaintiffs did not receive any response to their letter of 6 December2019, much less a counter-offer or agreement to attend mediation. Theparties did not engage in settlement discussions.[17] Counsel for MBI and Mr Spiers submits there is no basis for an award ofincreased costs on the basis of Mr Spiers' failure to accept the offers of settlement,because the settlement offers did not relate solely to this proceeding, but also to aseparate, undetermined proceeding. In relation to the correspondence exchangedbetween the parties commencing 25 September 2019, counsel submits it concerned aglobal settlement of issues in this proceeding as well as entitlements under the Property(Relationships) Act 1976, which were the subject of an, as yet undetermined, FamilyCourt proceeding.[18] Further, counsel for MBI and Mr Spiers submits that the plaintiffs are incorrectto seek an increase in their scale costs to 80 per cent of their actual costs.12 Counselnotes that McGechan on Procedure describes the correct approach as:13The court uplifts from scale, it is not a question of awarding a percentage ofactual costs.Discussion[19] This Court's power to award increased or indemnity costs derives from r 14.6of the High Court Rules 2016. The Court of Appeal commented on the distinctionbetween the three broad options in Bradbury v Westpac Banking Corp:14(a) standard scale applies by default where cause is not shown to departfrom it;(b) increased costs may be ordered where there is failure by the payingparty to act reasonably; and(c) indemnity costs may be ordered where that party has behaved eitherbadly or very unreasonably.12 For rationale see Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [41].13 AC Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.02(2)(a)].14 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] NZLR 400 at [27] and [28].[20] The Court of Appeal also endorsed Goddard J's adoption in Hedley v Kiwi Co-operative Dairies Ltd15 of Sheppard J's summary in Colgate-Palmolive Co v CussonsPty Ltd16 of conduct which has given rise to orders for indemnity costs:17While recognising that the categories in respect of which the discretion maybe exercised are not closed (see 14.6(4)(f)), [the Federal Court of Australia]listed the following circumstances in which indemnity costs have beenordered:(a) the making of allegations of fraud knowing them to be false and themaking of irrelevant allegations of fraud;(b) particular misconduct that causes loss of time to the court and to otherparties;(c) commencing or continuing proceedings for some ulterior motive;(d) doing so in wilful disregard of known facts or clearly established law;(e) making allegations which ought never have been made or undulyprolonging a case by groundless contentions, summarised in FrenchJ's "hopeless case" test.18[21] As is apparent from my credibility findings in respect of Mr Spiers, quoted at[13], I consider Mr Spiers' conduct to have approached, if not entirely risen to, the bador very unreasonable behaviour which the Court of Appeal has signalled warrants theaward of indemnity costs. In terms of the Colgate-Palmolive circumstances, I considerMr Spiers to have continued proceedings to pursue his financial objectives in whatwas very close to wilful disregard of known facts. While I am not wholly persuadedthat his conduct fell neatly over the threshold warranting an award of indemnity costs,I am nevertheless satisfied that the plaintiffs are entitled to an award of increased costs.[22] In Holdfast NZ Ltd v Selleys Pty Ltd, the Court of Appeal held that "[a]nincrease of 50% on scale costs should grant the costs-claiming party a fair recoveryfor the step unnecessarily forced on it, assuming that the time allocated to the step has15 Hedley v Kiwi Co-operative Dairies Ltd (2002) 16 PRNZ 694 (HC) at [11].16 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225.17 Bradbury v Westpac Banking Corp [2009] NZCA 234, [2009] NZLR 400 at [29]; AC Beck andothers McGechan on Procedure (online ed, Thomson Reuters) at [HR14.6.03(1)(c)].18 J Corp Pty Ltd v Australian Builders Labourers Federation Union of Workers (WA Branch) (No2) (1993) 46 IR 301 at 303.been reasonably calculated".19 The Court of Appeal noted however that it should not"be taken as saying that an uplift of more than 50 per cent can never be justified".20[23] Justice Dunningham considered that Wayne Graham Realty Ltd v Brook21 wasan appropriate case for a greater uplift and she ordered the scale 2B costs to be upliftedby 100 per cent. She said: 22While I acknowledge that very few cases contemplate an uplift of more than50 per cent, in this case I consider a 100 per cent uplift is warranted. Myreasons for concluding this are:(a) this will still be a long way short of the appellant's actual costswhich were incurred post settlement;(b) the appellant's legal costs reasonably included protracted attempts toprogress the settlement which the appellant considered had beenreached;(c) the scale costs award will only reflect the formal steps taken of filingthe application to strike out the plaintiff's claim and attend thehearing and costs awarded for in those steps do not fairly reflect theadditional cost prompted by the plaintiff's stance;(d) the respondent was clearly on notice that her stance would prompt anapplication for increased or indemnity costs; and(e) while I have not found this case meets the high threshold required anaward of indemnity costs, I nevertheless consider the respondent'sstance was not reasonable, by some margin. This is a case where thebehaviour sits close on the spectrum to the kind of behaviour whichmight warrant indemnity costs.(emphasis added).[24] Another example is Mueller v Hendren, where Justice Heath ordered an upliftof 75 per cent of the 2B costs. He said:[25] In my view, Ms Hendren's conduct in maintaining a (legally)unsupportable caveat for a collateral purpose brings the case squarely withinthe category of proceeding for which indemnity costs might be ordered underr 14.6(4). I consider that she acted "improperly or unnecessarily" in opposingthe application for probate when no proper grounds to do so existed. Inreaching that conclusion, I accept that the use of the word "unnecessarily" inr 14.6(4)(a) involves a connotation of "distinctly bad behaviour": seeBradbury v Westpac Banking Corporation (CA) at para [26].19 Holdfast NZ Ltd v Selleys Pty Ltd (2005) 17 PRNZ 897 (CA) at [47].20 At [48].21 Wayne Graham Realty Ltd v Brook [2016] NZHC 1135.22 At [53].[26] While indemnity costs may be ordered, I retain a discretion to awardsomething less.[27] The factors I consider are most important to the exercise of thediscretion are:a) The pursuit of a hopeless defence to the application for a grant ofprobate;b) The modest size of the estate;c) The ability for Ms Hendren to pursue claims of the type mentionedin the caveats, even after probate was granted;d) The possibility of some duplication of costs incurred by MsMueller, in relation to the general administration of the estate (on theone hand) and the application for probate (on the other).[28] As a matter of discretion, I prefer to make an order for increased coststo ensure no double counting of costs occurs[25] In the light of these authorities and the credibility findings I made concerningMr Spiers in the substantive judgment, I consider it appropriate that the plaintiffs beawarded an uplift of 100 per cent from 2B scale costs in respect of all steps, resultingin a costs award of $131,928.[26] It is not necessary for me to deal with Mr Spiers' refusal to accept the plaintiffs'settlement offers, as I consider his response to the proposed settlement, including hisfailure to respond at all to the last proposal, has been sufficiently taken account of inmy discussion and assessment of his conduct in the proceeding. I note however, thatI am not persuaded by his submission that the settlement offers were not relevant tothe issue of costs in this proceeding by reason of them also encompassing the FamilyCourt proceedings between him and Ms O'Brien. The two proceedings involvedsubstantially similar issues and concerned largely the same factual background.Ms O'Brien acknowledged that her claim in the Family Court, in which she said thatthe shares in MBI should be divided between the parties as relationship property, wasbrought on an alternative basis, and was effectively brought as a backstop to the HighCourt proceeding.Against whom should the costs order be made?Submissions[27] Counsel for the plaintiffs submits that any costs order should be made againstMr Spiers, as a non-party. Counsel notes that in Asset Building M Pritchard Ltd vHambeg Ltd, Justice Asher summarised factors relevant to costs awards againstnon-parties.23 These included: whether the non-party controlled the litigation; whetherthe non-party stood to benefit from the outcome; and the merits of, and steps taken in,the litigation under the non-party's control or influence. In that case, the plaintiffsought an order for costs against Mr Begley, who was the sole director of the defendantand one of its two shareholders. Justice Asher said:24Mr Begley had control of the litigation and stood to benefit from it. Thesefactors alone do not persuade me to order costs against him. However, MrBegley's late filings, when considered with Hambeg's spurious defences,suggest an attempt to manipulate the Court system by delaying the making ofa liquidation order. It must be borne in mind that Mr Begley's actions haveput Asset Building to considerable legal costs which are likely to considerablyexceed scale costs. They have significantly delayed the date of liquidation,which can have important consequences for creditors in regard to relationback. These factors in my view combine to put this case outside the ordinaryrun of cases, and into that category where an order of costs against a non-partyshould in the interests of justice be made. I am therefore satisfied that it isappropriate to make an order that Mr Begley personally pay the costs of AssetBuilding in this proceeding.[28] Here Mr Morgan submits that Mr Spiers controlled the litigation on behalf ofthe defendant, not just as sole director, but also in his personal capacity. Counsel notesthat every document from 17 June 2019 on was filed on behalf of both the defendantand Mr Spiers. Further, counsel submits that Mr Spiers' defence was meritless andself-serving. Counsel further submits that it would be unjust to make the costs orderagainst the defendant as the plaintiffs own 50 per cent of the shares in the defendant.Such a costs award would therefore reduce the money available to the plaintiffs uponliquidation, and would effectively mean the plaintiffs would be paying for half of thecosts award made in their favour.23 Asset Building M Pritchard Ltd v Hambeg Ltd HC Auckland CIV-2008-404-3781, 21 November2008.24 At [33].[29] Counsel for the defendant and Mr Spiers notes that Mr Spiers was a party tothe proceeding, noting that r 1.3(1) of the High Court Rules 2016 defines a party as"any person who is a plaintiff or a defendant or a person added to a proceeding."Pursuant to an order made by Associate Judge Andrew, Mr Spiers was served "in hispersonal capacity and also in his capacity as a trustee of the R D Spiers FamilyTrust".25 Further, counsel submits that the relevant principle applicable to costsawards for s 174 applications is that:26Where the true interest in the benefit of the litigation is an individualshareholder(s) rather than the company, then the shareholders should meet thecosts.[30] The defendant and Mr Spiers accept that, while the relief sought by theplaintiffs included liquidation of the defendant company, the shareholding dispute wasa matter between the plaintiffs and Mr Spiers. Counsel submits that given thedifficulty of differentiating between costs associated with the liquidation andshareholding issues, the costs award should be made against both the defendant andMr Spiers. Counsel submits awarding costs against them together should not impactupon the plaintiffs' interests in the defendant.Discussion[31] In my view, Mr Spiers was clearly a party to the proceeding. Rule 1.3 defines"defendant" as "a person served or intended to be served in a proceeding", and "party"as "a person who is a plaintiff or a defendant or a person added to the proceeding".Further, r 18.6 provides that "A person who becomes a defendant to a proceeding bybeing served under a direction of the court need not be named as defendant."[32] Whether Mr Spiers was or was not a party to the proceeding however in termsof the High Court Rules, it is clear to me that MBI's participation in the litigation wascontrolled by Mr Spiers for the benefit of Mr Spiers. Accordingly I shall make anorder for costs against Mr Spiers solely and personally.25 Minute of Associate Judge Andrew dated 27 May 2019 at [12].26 Totara Properties Whangarei Ltd v Cochrane [2013] NZCA 283 at [37].Result[33] Mr Spiers is to pay the plaintiffs:(a) $131,928, being the plaintiffs' 2B scale costs (per the plaintiffs'schedule, less the amount sought for second counsel) uplifted by 100per cent; and(b) $9,454.61, being the plaintiffs' disbursements._____________Paul Davison J