TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 3193

TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 3193 [1 December2022]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2020-404-000987[2022] NZHC 3193UNDER Section 248 of the Companies Act 1993BETWEEN TOBEM HOLDINGS LIMITEDPlaintiffAND KID COUNTRY HOLDINGS LIMITED (INLIQUIDATION)DefendantHearing: On the papersCounsel: D Bigio KC and T Nelson for the PlaintiffK Cocks for the Defendant and the liquidators of the DefendantJudgment: 1 December 2022JUDGMENT OF GORDON J[As to costs]This judgment was delivered by meon 1 December 2022 at 3.30 pm, pursuant tor 11.5 of the High Court RulesRegistrar/Deputy RegistrarDate:Solicitors/Counsel:D Bigio KC, AucklandT Nelson, AucklandK Cocks, AucklandWaterstone Insolvency, Auckland[1] This is an application for costs.[2] On 16 September 2022, I granted Tobem Holdings Ltd (Tobem) leave tocontinue legal proceedings against Kid Country Holdings Ltd (in liq) (Kid Country)under s 248(1)(c) of the Companies Act 1991 (Act).1 The appointed liquidatorsopposed the leave application.[3] Costs were reserved. I observed that Tobem, as the successful party, was primafacie entitled to costs. The parties have been unable to agree costs.[4] Tobem seeks scale costs on a 2B basis (plus disbursements) with a 33 per centuplift, totalling $10,024.82 against Kid Country and the liquidators of Kid Countrypersonally (on a joint and several basis).[5] The liquidators accept that Kid Country should pay costs to Tobem on a 2Bscale basis and undertake to pay accordingly. However, they oppose this applicationon the basis that nothing further is appropriate and they are not personally liable.[6] There are accordingly two issues for determination: whether increased costsshould be awarded and whether costs should be awarded against the liquidatorspersonally.Costs principles[7] An award of costs is governed by Part 14 of the High Court Rules 2016 (Rules).Costs are determined at the discretion of the court,2 subject to relevant principles. Itis well-established that costs follow the event and are paid by the unsuccessful party.3The determination of costs should be practicable and expeditious.4 The sameprinciples apply to costs on interlocutory applications.51 Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2022] NZHC 2367.2 Rule 14.1.3 Rule 14.2(1)(a).4 Rule 14.2(1)(g).5 Rule 14.8.[8] The Rules provide that the court may award increased costs if it finds that theparty opposing costs has contributed unnecessarily to the time or expense of theproceeding or a step in it by taking an unnecessary step or pursuing an argument thatlacks merit.6 More generally, the court may award increased costs for some otherreason which justifies the order, despite the principle that the determination of costsshould be predictable and expeditious.7[9] Where a court orders costs against two or more parties, costs liability is jointand several unless the court otherwise directs.8Increased costs[10] Tobem seeks increased costs under rr 14.6(3)(b)(ii) and (3)(d) of the Rules.Mr Bigio KC, for Tobem, submits that the liquidators unnecessarily and unreasonablycaused Tobem to incur the costs of the leave application. He submits the liquidatorscould have consented to the continuance of the legal proceeding under s 248(c) of theAct and avoided the need for an application to the Court. He says their arguments inopposition lacked merit and ultimately failed. They should have known that the Courtwould grant the application and should have avoided the time and expense to bothparties by consenting.[11] Mr Bigio also submits that the liquidators unnecessarily forced a separateapplication and hearing by taking the position that the leave application should beheard separately from the substantive hearing. This has also increased costs to bothparties.[12] In response, Ms Cocks, for the liquidators, submits that the liquidators actedreasonably when they decided they were well placed to determine Tobem's claim, inaccordance with their statutory powers and with the best interests of all unsecuredcreditors in mind. Further, the liquidators sought to have the application for leavedetermined first so as to avoid the time and cost to both parties of preparing for a fulldetermination of the claim.6 Rule 14.6(3)(b)(ii)7 Rule 14.6(3)(d).8 Rule 14.14.[13] I consider that the liquidators were acting within the scope of their statutorypowers when they declined to consent to Tobem continuing proceedings against KidCountry. The fact their arguments were ultimately unsuccessful does not mean theywere entirely without merit to the extent increased costs are justified. Equally, it wasnot unreasonable to request that the leave application was heard separately from thesubstantive hearing. If Kid Country had been successful, and the leave applicationhad been declined, both parties would have been saved the time and expense ofpreparing for the substantive hearing.[14] For the above reasons, increased costs are not justified.Liquidators' liability[15] Counsel referred the Court to a number of authorities. Before discussing thosecases it is relevant to note that in a proceeding such as this, where a Court has grantedan application to continue proceedings against a company in liquidation9 the party tothe litigation is the company, not the liquidator. That is the case even in a proceedingcommenced against the company after it is in liquidation.10Case law[16] In Mana Property Trustee Ltd v James Developments Ltd (No 2) the SupremeCourt observed:11[10] A non-party like a director or liquidator is not at risk of a costs award inother than exceptional circumstances, that is, circumstances outside theordinary run of cases where parties pursue or defend claims for their ownbenefit and at their own expense. In the case of a liquidator that is a principleof very long standing. There is certainly jurisdiction to order a liquidator as anon-party to pay costs personally but such an order will not be made unlessthere has been some relevant impropriety on the part of the liquidator. Thecourts recognise that the other party can protect its position, should it besuccessful, through its ability to seek in advance an order for payment ofsecurity for costs.[11] ... The reluctance of courts to make awards against liquidators who arenon-parties is for the very good reason that otherwise they may not be9 Companies Act 1993, s 248(1)(c).10 Mana Property Trustees Ltd v James Developments Ltd [2010] NZSC 124, [2011] 2 NZLR 25 at[9].11 Mana, above n 10 (footnotes omitted).prepared to take on the role and enter into litigation that may be beneficial forthe company and thus for creditors.[17] The Court in Mana referred to the English authority Metalloy Supplies Ltd vMA (UK) Ltd,12 which sets out the approach:The court has a discretion to make a costs order against a non-party. Such anorder is, however, exceptional, since it is rarely appropriate. It may be madein a wide variety of circumstances where the third party is considered to bethe real party interested in the outcome of the suit. It may also be made wherethe third party has been responsible for bringing the proceedings and they havebeen brought in bad faith or for an ulterior purpose or there is some otherconduct on his part which makes it just and reasonable to make the orderagainst him. ...The position of a liquidation is a fortiori. Where a limited company is ininsolvent liquidation, the liquidator is under a statutory duty to collect in itsassets. This may require him to bring proceedings. ... If he brings theproceedings in the name of the company, the company is the real plaintiff andhe is not. He is under no obligation to the defendant to protect his interests byensuring that he has sufficient funds in hand to pay their costs as well as hisown if the proceedings fail. It may be commercially unwise to instituteproceedings without the means to provide any security for costs which maybe ordered, since this will only lead to the dismissal of the proceedings; but itis not improper to do so. Nor (if he considers only the interests of the company,as he is entitled to do) is it necessarily unreasonable.[18] The Privy Council decision Dymocks Franchise Systems (NSW) Pty Ltd v Todd(No 2) clarified that an unsuccessful non-party should pay the successful party's costsin cases where the non-party has both controlled and funded the proceeding or is tobenefit from it, because: 13The non-party in these cases is not so much facilitating access to justice bythe party funded as himself gaining access to justice for his own purposes.[19] The Court in Mana, responding to Dymocks, held that a non-party liquidatorcan realistically be regarded as acting in the interests of the company (and moreespecially its shareholders and creditors) rather than in his or her own interests.1412 Mana, above n 10, at [10]; citing Metalloy Supplies Ltd v MA (UK) Ltd [1997] 1 WLR 1613 (CA)at 1620.13 Mana, above n 10, at [11]; citing Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004]UKPC 39, [2005] 1 NZLR 145 at [25](3).14 Mana, above n 10, at [11].[20] Mr Bigio referred the Court to the following cases:(a) In Hoggart v Richworth Properties Ltd this Court granted the applicantleave to continue proceedings against an insolvent company.15 TheCourt also awarded costs against the liquidator who had declined toconsent to the continuation of legal proceedings, opposed theapplication for leave to continue, and declined the applicant's proof ofdebt claim prior to the leave hearing. The liquidator then failed toappear at the leave hearing but continued to oppose. Master Lang (ashe was then) ordered costs against the liquidator on the basis that heought to have consented to the continuation of legal proceedings "at anearly stage" because he "must always have known that the likelihoodof the plaintiffs' proof of debt being accepted was virtually non-existent".16(b) In IH Wedding & Sons Ltd this Court also granted leave to continuelegal proceedings against a company in liquidation. 17 At issue was thelack of available funding for further litigation or inquiries. Justice Allanawarded costs against the liquidators despite acknowledging that theyhad acted "prudently and responsibly" in providing the Court withinformation and that it was open to them to oppose the application.18The Judge concluded:[31] Liquidators are empowered to consent to an applicationfor leave. Had that occurred here then no application wouldhave been necessary. There are no circumstances whichjustify the Court in departing from the usual practice ofmaking an order in favour of a successful party against anunsuccessful party.15 Hoggart v Richworth Properties Ltd HC Auckland M146-IM03, 31 March 2003.16 At [17].17 IH Wedding & Sons Ltd v Buy-Sell Realty NZ Ltd HC Auckland CIV-2008-404-5502, 2 December2008.18 At [30].[21] Ms Cocks referred the Court to the following two cases:(a) In Easton Agriculture Ltd v Manawatu-Wanganui Regional Council theCourt declined to award costs against a non-party receiver.19 Nosecurity for costs application had been made. The Court commentedon the "special position" of non-parties in relation to costs and the roleof notice:20An application on notice is necessary to subject [non-parties]to the Court's jurisdiction in this proceeding. And the non-party is entitled to respond and be heard. The Court cannotsimply assume that the second plaintiff is attending fully tothe receiver's interests, despite the inherent likelihood thatthat is so.The Court further held that it was only necessary to consider theappropriateness of a costs award against a non-party (here, a receiver)in circumstances where the unsuccessful party failed to meet the coststhemselves. Leave was reserved to apply for costs against the receiver.(b) However, in Magsons Hardware Ltd v Patel Justice Allan declined toaward costs against the liquidator personally following an unsuccessfulopposition to an application for leave to continue legal proceedingsagainst a company in liquidation.21 The Judge stated:22 [Counsel] asserts that had [the liquidator] acted in goodfaith, then he would have granted his consent as liquidator, soobviating the need for the making of any application to theCourt at all. In my opinion it would not be proper to make anorder for costs against [the liquidator] on that ground. Aliquidator is entitled to leave the question of consent to theCourt if he or she so chooses. Although I accept that wherebad faith on the part of the liquidator is established there maybe a case for an award of costs, this is not such a case. Ingeneral, liquidators must remain entitled to decline consentwithout automatically running the risk of incurring personalliability for costs.19 Easton Agriculture Ltd v Manawatu-Wanganui Regional Council HC Palmerston North CIV-2008-454-31, 22 December 2011 at [47].20 At [50] (footnote omitted).21 Magsons Hardware Ltd v Patel HC Auckland CIV-2010-404-2891, 10 September 2010.22 At [27].Submissions[22] Mr Bigio submits that the liquidators unreasonably and unnecessarily adoptedan opposition that lacked merit, and unnecessarily forced a separate hearing. He saysthat the unreasonableness of their conduct is amplified by the facts that:(a) Tobem is the only substantial known creditor. It lodged a proof of debtclaim of $234,135.35. The only two other proofs were for $6,624.00and $944.91, respectively.(b) The liquidators have refused to advise the identity of the other creditors(providing only a bare assertion that they are unrelated).(c) Kid Country, on the liquidators' account, has no substantial assets.[23] Mr Bigio submits that these matters, taken cumulatively, reach the"exceptional" threshold and justify a personal order.[24] In response, Ms Cocks says there has been no impropriety on the part of theliquidators, and an award for costs against the liquidators personally is not justified.The liquidators had yet to make a determination on the proof of debt filed by theplaintiff and the outcome of this was not pre-determined.Discussion[25] The Supreme Court decision in Mana provides the necessary guidance to thisCourt. I am not assisted by the plaintiff's references to Hoggart and IH Wedding.Unlike the liquidator in Hoggart, the liquidators in this case have not yet determinedthe proof of debt claim lodged by Tobem.[26] In relation to IH Wedding, the issue of costs was dealt with in two paragraphsat the end of the decision granting leave to the appellants to continue the appeal againstthe respondent which had been placed in voluntary liquidation. There is no realanalysis of the principles regarding costs awards against liquidators. The Court simplysaid:[30] Mr Quinn applies for costs. I accept at once that the liquidators actedprudently and responsibly in placing before the Court a good deal ofinformation relating to the conduct of the respondent's business, and it wasopen to them to oppose the application. Nevertheless I am satisfied that it isappropriate that costs ought to follow the event in the ordinary way.[27] The Judge then referred to Hoggart and another case23 in which orders for costsagainst liquidators were made. With respect to the Judge the decision does not seemto accord with the applicable principles.[28] I consider that the approach of the same Judge in Magsons Hardware was moreconsistent with the principles later articulated in Mana. The relevant passage is setout above at [21](b).[29] The threshold for awarding costs against liquidators personally is high. Someevidence of bad faith conduct on the part of the liquidators is required.[30] For reasons already given above, I do not think that opposing the applicationwas inherently unreasonable. The background facts provided by Tobem providecontext but are not sufficient to reach the threshold required. Tobem seeks to recoverdamages for breach of contract through continued legal proceedings. These amountscannot be claimed through the liquidation process, which only determines claims fordebt. It is clearly in Kid Country's interests to avoid such legal proceedings. Theliquidators can be taken as acting in the interests of Kid Country and its shareholders,rather than their own interests. On this basis, it was reasonable for the liquidators tooppose the leave application. There is no suggestion that the liquidators stood tobenefit personally from opposing the leave application.Notice[31] In support of the liquidators' opposition to costs being awarded against thempersonally Ms Cocks says that Tobem failed to put the liquidators on notice of itsintention to do so. Given my decision, on other grounds, that costs should not beawarded against the liquidators personally, it is not necessary to consider the issueregarding notice.23 Clarence Holdings Ltd v Mt Albert TV (1993) Ltd HC Auckland CP12/97, 12 July 1999.Result[32] There is no basis for awarding increased costs or costs against the liquidatorspersonally.[33] I have reviewed the annexure to Tobem's memorandum. I accept that all costsand disbursements set out in the calculations table are reasonable and properlyincurred.[34] I make an order for costs in favour of Tobem against Kid Country on a 2Bbasis, totalling $7,050.50 plus disbursements of $647.65 (excluding GST)._____________________________Gordon J