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Fern Limited (in liq) v Financial Trust Limited HC Auckland CIV 2009-404-4055 [2010] NZHC 2119 (30 November 2010)

Last Updated: 8 December 2010

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2009-404-004055}

BETWEEN FERN LIMITED (IN LIQUIDATION) Plaintiff

AND FINANCIAL TRUST LIMITED First Defendant

AND MATRIX CUSTODIANS LIMITED Second Defendant

Hearing: 11 November 2010

Appearances: M Sandelin and N A Chamberlain for Defendant/Applicants

B Clode in person for himself, J Cooper and Wanganella Trustee Ltd

L Gilbertson in person and for LJK Investments Ltd

Judgment: 30 November 2010 at 3.30 p.m.

_{JUDGMENT OF VENNING J}

This judgment was delivered by me on 30 November 2010 at 3.30 pm, pursuant to Rule 11.5 of the

High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors: Minter Ellison Rudd Watts, PO Box 3798, Shortland Street Auckland 1140

Mark.sandelin@minterellison.co.nz Nikki.chamberlain@minterellison.co.nz

Copy to: Hughes Robertson Law Partnership, PO Box 1956, Palmerston North Central, Palmerston North 4440 Hughesrob_chris@xtra.co.nz

Fern Limited (in liquidation) 44 Dominion Avenue Cambridge 3434 billritchie@orcon.net.nz

L Gilbertson lancegilbertson@gmail.com

Non-parties, C/- PO Box 91328, Auckland 1142 brent@dekko.co.nz

FERN LIMITED (IN LIQUIDATION) V FINANCIAL TRUST LIMITED AND ANOR HC AK CIV-2009-

404-004055 30 November 2010

Introduction

[1] The defendants seek costs against non-parties who were either associated with or who had dealings with the plaintiff company, Fern Limited. Fern is itself now in liquidation. The application is opposed by the non-parties.

Background

[2] Fern owned a property at 4 Wanganella Street, Birkenhead, Auckland. Mr Clode and his partner Ms Cooper were formerly shareholders and directors of Fern. More recently, Ms Cooper has been the sole shareholder and director. Fern was the trustee of Mr Clode and Ms Cooper’s family trust. Mr Clode, Ms Cooper and their family live in the Wanganella Street property.

[3] Financial Trust Ltd (FTL) and Matrix Custodians Ltd (Matrix), a company closely associated with FTL, provided funding to a number of companies associated with Mr Clode and Ms Cooper (the Clode interests).

[4] As part of the security for the funding Fern granted a second mortgage over the Wanganella Street property to Securities Registry Ltd (SRL), a company associated with FTL. SRL subsequently assigned the mortgage to FTL.

[5] During 2006 the Clode interests sought to substitute an alternative security for the Wanganella property. An issue arose between the parties as to whether the terms upon which substitution of security was permitted were those contained in an email sent on 22 April 2005 or a later facsimile of 1 July 2005.

[6] The issue was not resolved. The Clode interests fell into default under the loan agreements. Mr Clode was adjudicated bankrupt on 12 February 2009.

[7] In May 2009 FTL’s solicitors advised Fern it intended to proceed to mortgagee sale. It had previously issued a Property Law Act notice demanding in excess of $5,457,000, the sum owing by the Clode interests. Fern then issued proceedings seeking an interim injunction to prevent FTL’s mortgagee sale.

[8] On 23 July 2009 Mortgage Holding Trust Company Ltd (MHTCL), the first mortgagee, also served a Property Law Act notice on Fern. FTL was served with a copy of the notice.

[9] In a judgment delivered 23 September 2009 Asher J granted an interim injunction restraining the defendants from taking steps to enforce the mortgage. The Judge accepted there was a serious question whether the 22 April email applied and that, by insisting it did not apply and seeking to enforce the terms of the 1 July facsimile, FTL may have repudiated the security agreement and mortgage. As the Wanganella Street property was Mr Clode and Ms Cooper’s family home, the Judge also accepted the balance of convenience favoured the grant of an injunction. The Judge directed a hearing of the substantive issue.

[10] After obtaining the injunction, Fern and Ms Cooper took no further steps to pursue the substantive proceedings. Ms Cooper and Mr Clode did, however, take a number of other steps. On 10 November 2009 Ms Cooper became a shareholder and director of another company, and changed its name to Wanganella Trustee Ltd (WTL). Also during November 2009 Mr Clode met with a friend and business associate of his, Mr Gilbertson, to discuss the options for the Wanganella Street property. Mr Clode suggested that LJK Investments Ltd (LJK), a company controlled and operated by Mr Gilbertson, might purchase the first mortgage to avoid the mortgagee sale by MHTCL. LJK was itself owed approximately $315,000 by other entities associated with Mr Clode.

[11] LJK subsequently agreed to purchase, by way of assignment, the MHTCL

first mortgage from MHTCL. The assignment was apparently settled on 20 January

2010 for $1,096,627. With legal costs LJK paid out $1,100,000 in total.

[12] Having purchased the first mortgage security LJK then immediately, the same day, exercised the power of sale to sell the Wanganella Street property to WTL for $1,562,500. The purchase price was to be settled by $1,100,000 cash with the balance of $462,500 left in as vendor finance.

[13] At the time, there were a number of valuations in existence for the

Wanganella Street property: a QV valuation of $2,800,000, a registered valuation of

$2,600,000, and a fire sale valuation of $1,250,000.

[14] Ms Cooper had previously arranged to borrow $1,250,000 from a solicitor’s nominee company to fund WTL’s purchase of the property. The nominee company registered a first mortgage, with priority of $1,562,500.

[15] Although a balance of $462,500 remained owing by WTL, LJK and Mr Gilbertson took no steps to secure that sum against the Wanganella Street property (or otherwise).

[16] WTL subsequently granted a second mortgage over the Wanganella Street property in favour of Ms Cooper. The second mortgage was stated to have a priority amount of $1,500,000.

[17] As Fern had taken no further steps to advance the substantive proceedings and had breached timetable orders, the substantive proceedings were struck out on

30 March 2010. The file was then referred to Asher J to determine the status of the interim injunction order.

[18] On 7 May 2010 Asher J awarded indemnity costs in favour of FTL and Matrix against Fern in the sum of $68,283.42. At the time Asher J also observed that it may be a case for the Court to consider whether costs should be ordered against those persons who had dictated the conduct of the proceedings. This application followed.

[19] Fern was placed into liquidation by shareholders’ resolution on 2 August

2010.

Preliminary matters

[20] A number of preliminary matters arose, including representation and the status of the proceedings given Fern’s liquidation. The preliminary matters were

dealt with at the outset of the hearing and are recorded in a minute issued on the day. In short, Mr Clode satisfied the Court he had authority to act for and represent his partner Ms Cooper. Leave was also granted to Mr Clode to represent the interests of WTL and to Mr Gilbertson to represent the interests of LJK for the limited purposes of the application for non-party costs.

[21] The Court also confirmed that the fact Fern had been placed into liquidation did not affect the defendant’s application for non-party costs, as the application was not directed at Fern. The application did not seek any relief against Fern or its property.

Principles

[22] The Court has a general jurisdiction to award costs: s 51G Judicature Act

1908, Part 14 High Court Rules. There is nothing in the section or Rules to restrict the Court’s jurisdiction to control proceedings before it. In appropriate cases and for proper reasons the Court may require a person who is not a party to the proceedings to make a payment towards the costs incurred by a party: Carborundum Abrasives Ltd v Bank of New Zealand (No. 2)[1] and Aiden Shipping Co Ltd v Interbulk Ltd.[2]

[23] In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No. 2) the Privy Council considered the principles by which the discretion to order costs to be paid by a non-party would generally be exercised and summarised the position as follows:[3]

(1) Although costs orders against non-parties are to be regarded as “exceptional”, exceptional in this context means no more than outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. The ultimate question in any such “exceptional” case is whether in all the circumstances it is just to make the order. It must be recognised that this is inevitably to some extent a fact-specific jurisdiction and that there will often be a number of different considerations in play, some militating in favour of an order, some against.

(2) Generally speaking the discretion will not be exercised against “pure funders”, described in para [40] of Hamilton v Al Fayed [(No. 2)

[2002] 3 All ER 641] as “those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”. In their case the Court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.

(3) Where, however, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is “the real party” to the litigation, a concept repeatedly invoked throughout the jurisprudence – see, for example, the judgments of the High Court of Australia in Knight [Knight v FP Special Assets Ltd 10

ACLC 1, 129] and Millett LJ's judgment in Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 WLR 1613. Consistently with this approach, Phillips LJ described the non-party underwriters in TGA Chapman Ltd v Christopher [1998] 1 WLR 12 as “the defendants in all but name”. Nor, indeed, is it necessary that the non-party be “the only real party” to the litigation in the sense explained in Knight, provided that he is “a real party in . . . very important and critical respects” – see Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, referred to in Kebaro at pp 32 – 33, 35 and 37. Some reflection of this concept of “the real party” is to be found in CPR 25.13(1)(f) which allows a security for costs order to be made where “the claimant is acting as a nominal claimant”.

(4) Perhaps the most difficult cases are those in which non-parties fund receivers or liquidators (or, indeed, financially insecure companies generally) in litigation designed to advance the funder's own financial interests.

[24] The issue most often arises where non-parties effectively fund or direct litigation. However, an order can also be made in circumstances where the non- party who has the ability to control the proceedings takes steps to frustrate a party’s claim to relief or its ability to recover costs: Total Spares & Supplies Ltd & Anor v

Antares SRL & Anor.[4]

[25] While there is jurisdiction for orders for costs to be made against non-parties, the jurisdiction is exercised rarely and only in exceptional circumstances. In Mana Property Trustee Ltd v James Developments Ltd the Supreme Court confirmed:[5]

A non-party like a director or liquidator is not at risk of a costs award in other than exceptional circumstances, that is, circumstances outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense. [Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25](1). In TGA Chapman Ltd v Christopher [1998] 1 WLR 12 (CA) at 20, Phillips LJ said that the test is whether the case’s characteristics were “extraordinary in the context of the entire range of litigation that comes to the courts.”].

[26] I approach the application for non-party costs against the defendants in this case with those principles in mind.

Decision

The basis of the application

[27] The present case is not one where the application is based on the non-parties funding and promoting the proceedings, but rather is a case where the applicant says Mr Clode and Ms Cooper controlled and directed Fern’s actions in the proceedings, and took advantage of the injunction obtained in the proceedings to ensure that Fern was not in a position to pay any order for costs in the proceeding. The applicant says Mr Gilbertson and LJK assisted them.

[28] To the extent that the actions of the non-parties may have led to other loss, or damage, for instance by reason of breach by LJK of its obligations under s 176 of the Property Law Act 2007, the appropriate way to pursue such a claim is in separate proceedings (which have been issued by FTL). This application is only directed at, and can only relate to, the costs of the current proceedings.

The extinguishment of FTL’s security

[29] Prior to the purchase of the first mortgage by LJK and the contemporaneous transfer of the property to WTL the defendants were protected for their costs against Fern in these proceedings. Fern had provided an undertaking to obtain the injunction. The undertaking was supported by the property at Wanganella Street, owned by Fern. Quite apart from the second mortgage FTL held, there was ample

equity to meet any costs award. The property was valued at between $2,600,000 to

$2,800,000 (I return to the issue of the fire sale valuation shortly). While there was a first mortgage securing just under $1,100,000 approximately, there was equity available to meet any costs award in FTL’s favour.

[30] The actions of the non-parties (taken while the proceedings were on foot and the injunction in force) have, however, removed the property from Fern and Fern itself has been placed into liquidation so that there is now no prospect of recovering the costs award from Fern.

[31] It is necessary to examine the steps the parties have taken and the transaction that has led to this position in more detail.

[32] The application for injunction was filed in early July and was for call on 13

July 2009. It was adjourned by consent to a fixture on 7 September 2009. On 2

September Ms Cooper applied to a solicitors’ firm for first mortgage funding seeking

$1,150,000. She enclosed with the application for finance a valuation from Quotable Value Ltd dated 15 May 2009 recording a valuation of $2,800,000 for the Wanganella Street property. The valuation recommended a first mortgage security of up to $1,400,000.

[33] The solicitors required an independent valuation. On 3 November 2009 they obtained a valuation from an independent registered valuer at $2,600,000 with a first mortgage recommendation of up to 50 per cent of that figure. The solicitors invited Ms Cooper to indicate how much funding Fern required. By then, Fern had obtained the injunction.

[34] On 13 November 2009 the solicitors made a formal offer to Ms Cooper and

Fern of $1,250,000 to be secured by a first mortgage.

[35] The advance of $1,250,000 would have been sufficient for Ms Cooper and Fern to have settled Fern’s obligations to MHTCL as first mortgagee, leaving a surplus of approximately $150,000. With the injunction in place Fern and Ms Cooper would have been in a position to have the merits of its dispute with Fern in

relation to its security determined, as Asher J had anticipated would occur when granting the injunction.

[36] However, rather than pursuing the proceedings, Ms Cooper, Mr Clode and Mr Gilbertson then embarked on a course of action which, on the current information before the Court, can only be explained as a deliberate attempt to defeat the interest of FTL under its second mortgage and also to put Fern in a position where it could not pay costs.

[37] As early as July 2009 Mr Clode had told Mr Gilbertson of the demand by FTL. Then in November, in Mr Gilbertson’s words, he and Mr Clode met “to discuss the options” for the Wanganella Street property. In his affidavit Mr Gilbertson said that Mr Clode suggested to him that LJK purchase the MHTCL mortgage to avoid the mortgagee sale. But by November $1,250,000 was available from the solicitors’ nominee company. That would have enabled Fern to repay MHTCL and avoid its threatened mortgagee sale without the need to involve Mr Gilbertson and LJK.

[38] Despite that, the non-parties pursued a course of action which had the effect of defeating FTL’s interest in Fern’s property. The first step was the purchase by LJK of the first mortgage. On 17 December 2009 Fern authorised the assignment of the first mortgage to LJK. On 21 December 2009 the solicitors for MHTCL emailed the solicitors then acting for LJK a draft version of an assignment deed for the first mortgage. Curiously, prior to receiving that assignment deed LJK had, on 18

December, purported to enter an unconditional agreement for the sale of the Wanganella property to WTL for $1,100,000. Both LJK and WTL executed the agreement. The agreement was unconditional with the settlement date being the date of the exercise of the power of sale.

[39] The solicitors for the first mortgagee sought settlement of the assignment on

23 December 2009 but Mr Gilbertson said LJK delayed settlement to “redocument the sale” – presumably a reference to redrawing the unconditional agreement between LJK and WTL for $1,100,000. Ultimately the assignment was completed and registered on 20 January 2010. On the same day LJK exercised its power of sale

and sold the Wanganella Street property to WTL for the revised price of $1,562,500 pursuant to a second, “redocumented” agreement for sale and purchase. The purchase price was to be settled by $1,100,000 cash and $462,500 vendor finance. The sum of $1,562,500 was exactly the same as the priority sum required by the solicitors’ nominee company for its first mortgage advance as arranged by Ms Cooper.

[40] Mr Gilbertson, Mr Clode and Ms Cooper are silent in their affidavits made for the purposes of this application as to the source of funding for LJK’s purchase of the first mortgage. The inference which I draw is that the source of the funding for LJK to pay the $1,100,000 to buy the first mortgage was the $1,250,000 borrowed by Ms Cooper and WTL from the solicitor’s nominee company.

[41] As noted, although WTL owned LJK a balance of $462,500, LJK took no steps to secure that sum. Nor for that matter did it take any steps to secure or improve its position in relation to the $315,000 which Mr Gilbertson had suggested was the reason LJK had acted to purchase the first mortgage. Instead, Ms Cooper was permitted to register a second mortgage over the property with a priority sum of

$1,500,000 purporting to secure advances she has made to WTL. That second mortgage in favour of Ms Cooper was registered on 7 April 2010.

The fire sale valuation

[42] Mr Gilbertson purported to support the sale of the property for $1,562,500 on the basis of a valuation addressed to the first mortgagee, which valued the property at $1,250,000 on a “forced sale” basis. A number of issues arise in relation to that valuation. First, the copy annexed to Mr Gilbertson’s affidavit is undated. That is surprising, because a valuation obviously relates to a particular date. Further, at the conclusion of the valuation the valuer certifies that:

As at the date of the valuation, the valuer has professional indemnity insurance ...

[43] There is a space on the front page of the document where the date would usually be inserted. It seems the actual date of the valuation has been deleted from the valuation presented to the Court.

[44] It is, however, probable the valuation was provided in early 2009. The only comparative sale for 2009 referred to in the valuation was a sale in January 2009. By contrast, the valuation obtained by the solicitors to support the valuation of

$2,600,000 included five additional sales as comparisons. That valuation recorded comparative sales in April, May (2), June and August 2009. The inference is that the forced sale valuation was prepared in early 2009, before May 2009, at a time when the other comparisons were not available.

[45] Of equal relevance is that at the time of the sale by LJK, there was no apparent pressure to sell Fern’s property. The first mortgage to MHTCL had been paid out. Fern had an injunction preventing FTL from taking further steps to enforce its security pending a substantive hearing in this Court. There was no apparent reason to sell a property that had only the month before been valued at $2,600,000 for $1,562,500 (leaving in unsecured vendor finance of $462,500).

LJK and Mr Gilbertson’s position

[46] Mr Gilbertson sought to justify his actions and the actions of LJK on the basis he was acting in the best interests of LJK in a “normal commercial” transaction.

[47] Mr Gilbertson suggested that he believed his actions were in the best interests of LJK and that purchasing the first mortgage gave priority to LJK’s own loan. But on the face of the documentation and the information before the Court that is plainly not the case. Mr Gilbertson could not explain why, after LJK had bought the first mortgage for $1,100,000, it agreed to sell the Wanganella Street property for

$1,562,500 and further, left $462,500 owing by way of unsecured advance when

LJK was already owed an additional $315,000 by the Clode interests.

[48] Further, it was clearly in LJK’s interests to sell the property for the best possible price. While Mr Gilbertson says he relied on the forced sale valuation, he must have been aware of the other valuations. Mr Gilbertson was a very close associate and friend of Mr Clode and Ms Cooper. They had a number of closely related business ventures. Ms Cooper refers in her affidavit to her detailed knowledge of LJK’s dealings with the first mortgagee. I infer that the parties were acting together and shared relevant information including the various valuations for the property. As noted, there was no apparent commercial reason for LJK to sell the property on the terms it did in the exercise of its powers as a mortgagee.

[49] Next, on the very day that Ms Cooper and WTL drew down $1,250,000 from a solicitor’s nominee company as a first mortgage on the basis of a valuation of

$2,600,000, LJK bought the first mortgage for $1,100,000 (using the proceeds available from Ms Cooper and WTL) and immediately sold the property to WTL for

$1,562,500 but only received $1,100,000 cash.

[50] Even accepting for the moment Mr Gilbertson’s explanation that he relied on the forced sale valuation and that there was a window of opportunity, as he put it, to sell to WTL, there was no commercial reason to enable Ms Cooper to take a second mortgage over the property in priority to the balance owing to LJK nor to waive or forego the opportunity of improving LJK’s position by taking security for the existing debt of $315,000. There was just no commercial benefit to LJK in the transaction. It paid $1,100,000 to purchase the first mortgage and gain control of the property. It received $1,100,000 from the sale. It failed to take any steps to secure the $777,500 owing by the Clode interests to it when it had control of the property.

[51] During the course of discussion with Mr Gilbertson about these points he conceded at one stage that he was trying to assist a friend and perhaps he had been “naïve”.

[52] To the extent that LJK and or Mr Gilbertson acted in breach of s 176 of the Property Law Act the appropriate forum for redress is in the separate proceedings issued by FTL. This is an application for costs against non-parties. Mr Gilbertson is neither a shareholder nor director of WTL, nor was he involved in Fern. He did not

direct or control either WTL or Fern. He had no role or personal interest in the Court proceedings and did not control them. In those circumstances I do not consider it just or necessary to make an order for costs against Mr Gilbertson and LJK in these proceedings.

Mr Clode and Mr Cooper’s position

[53] The position is, however, different in relation to Mr Clode, Ms Cooper and WTL. Although Ms Cooper was the sole director and shareholder of Fern at the material time, Mr Clode has also been actively involved in the Court proceedings and in the transaction which is the subject of the above review.

[54] While not currently a director or shareholder of Fern (as noted he has been adjudicated bankrupt) Mr Clode swore an affidavit in support of Fern in relation to the injunction. The affidavit discloses he had full knowledge of Fern’s financial affairs. His affidavit for this application confirms that he has assisted Ms Cooper, Fern and WTL throughout. He continues to do so. Mr Clode has, for example, recently corresponded with FTL on Ms Cooper’s behalf regarding the recent issue of a Property Law Act notice by Ms Cooper.

[55] Mr Clode and Ms Cooper have a personal interest in the litigation. They, together with their family, live at the Wanganella Street property. As Ms Cooper referred to in an earlier affidavit for the purposes of the injunction it is their family home. They have a real interest in remaining in the property.

[56] Mr Clode submitted that neither he nor Ms Cooper were beneficiaries of the Wanganella Trust. The current beneficiaries are the children of Mr Clode and Ms Cooper. However, the trust document provides the trustee with power to add any person or class or persons to the class of beneficiaries. Ms Cooper controls the trustee. She and Mr Clode could be added as beneficiaries at any time.

[57] Both Mr Clode and Ms Cooper were closely connected with and controlled the proceedings, Ms Cooper through her shareholding and directorship of Fern and Mr Clode through the provision of instructions to the lawyers and advice to Ms

Cooper. WTL is also connected with these proceedings as the transferee of the Wanganella Street property, the only asset owned by Fern and which was the subject of the interim injunction proceedings.

[58] For the reasons given above that transfer was, I am satisfied, made in circumstances that were intended to achieve two aims, one to defeat FTL’s position as second mortgagee and, relevantly for present purposes, to transfer property from Fern’s control to defeat any subsequent claim by FTL for damages or costs in the proceedings before this Court, despite the undertaking given to the Court.

[59] Through its director Ms Cooper, WTL took the transfer of the property with full knowledge of the purpose of the transfer. Ms Cooper and Mr Clode’s actions have directly led to FTL’s inability to enforce the costs order against Fern. They did so by removing the only asset Fern had from its ownership and then by Ms Cooper placing Fern into voluntary liquidation.

[60] I am conscious that similar issues will arise for determination in the related proceedings. I am also conscious that this application is being dealt with on the basis of the affidavits and without cross-examination. But the evidence, including the evidence of the non-parties themselves, particularly the evidence of Mr Gilbertson and Ms Cooper, taken with the documents that have been presented to the Court, provide strong circumstantial evidence to support the inference that I have drawn, for the purposes of this application, namely that one at least of the purposes of the transfer of the Wanganella Street property to WTL (which both Mr Clode and Ms Cooper were directly involved in) was to prevent FTL executing any costs order against Fern.

[61] The fact there are separate proceedings with possibly alternative remedies does not, of itself preclude an order for costs: Total Spares and Supplies Ltd v Antares.[6]

[62] Prima facie, I am satisfied that it is just to make costs orders against Mr

Clode, Ms Cooper and WTL.

Causation

[63] The next issue is the relevance of causation particularly whether causation is required for a costs order to be made against a non-party, particularly in this case, WTL. The defendant applicants must accept that the majority of costs incurred in the proceedings were incurred prior to Ms Cooper taking control of WTL in November 2009. To that extent at least, WTL’s subsequent actions have not had a causative effect on the costs that were incurred in relation to the injunction. It cannot be said that the costs in opposing the injunction would not have been incurred but for the actions of WTL.

[64] The Commentary to McGechan on Procedure at 14.09(4) notes a requirement to establish that the non-party “caused” the proceeding to be brought or continued and that a non-party generally cannot be held liable for costs that would have been incurred without that non-party’s involvement. Although authority is not cited for that proposition, there are a number of cases that support it: Hamilton v Al Fayed;[7]

Globe Equities Ltd v Globe Legal Services Ltd;[8] Byrne v Sefton Health Authority;[9]

Goodwood Recoveries Ltd v Breen.[10]

[65] However, the issue of whether causation is required, particularly where a number of non-parties act together to defeat the interests of a party to the proceeding, was left open by the Privy Council when Their Lordships considered the issue in Dymocks Franchise System (NSW) Pty Ltd. Lord Brown, giving the judgment of the

Board said:[11]

Although the position may well be different when a number of non-parties act in concert, Their Lordships are content to assume for the purposes of this application that a non-party could not ordinarily be made liable for costs if those costs would in any event have been incurred even without such non- party's involvement in the proceedings.

(emphasis added)

[66] In the case of Total Spares and Supplies Ltd v Antares SRL Richards J

concluded that:[12]

... it cannot in my judgment any longer be said that causation is a necessary pre-condition to an order for costs against non-party. Causation will often be a vital factor but there may be cases where, in accordance with principle, it is just to make an order for costs against a non-party who cannot be said to have caused the costs in question.

[67] The comments of Lord Brown and Richards J support the proposition that, in an appropriate case, strict causation will not be required as a pre-condition to an order for costs against a non-party, particularly where the application is not based on the funding of the litigation.

[68] In the Total Spares and Supplies Ltd case the plaintiffs had pursued Antares SRL for wrongful termination of a franchise agreement. Approximately two weeks before the start of trial Antares SRL transferred its business and related assets and liabilities to another company, AWL. Antares SRL was left with no funds to meet the costs application that followed its unsuccessful defence of the proceedings. The Judge concluded that the transfer by Antares SRL’s business to AWL was intended to insulate Antares SRL’s business from an adverse result in the proceedings as to damages and/or costs, was made at an undervalue and was made under the direction of a person, G, who controlled Antares SRL.

[69] Richards J concluded that the individuals who controlled Antares SRL knew and intended the transfer to have that purpose. AWL was not an independent third party but was closely connected with Antares. While accepting that orders for costs against non-parties were exceptional the Judge concluded the facts of the case were exceptional and justified the making of an order for costs against AWL. He ordered it to pay costs incurred after the date of the transfer – which in that case included the substantial costs of trial. The Judge also ordered G to pay a percentage of the costs of the entire proceedings.

[70] In the present case Mr Clode and Ms Cooper have acted to transfer Fern’s only asset to WTL, free of any claim by FTL. The transfer of Wanganella Street to

WTL and the subsequent liquidation of Fern has deprived the defendants of any realistic opportunity of recovering their costs in these proceedings against Fern. I am satisfied on the material before the Court that Mr Clode and Ms Cooper intended that effect (amongst others).

[71] While I accept that initially Mr Clode, Ms Cooper and Fern may have had genuine reasons to seek the injunction, once the injunction was obtained they used its existence and thus converted the legal proceedings and the injunction for an improper purpose.

[72] Having obtained the injunction Fern, Ms Cooper and Mr Clode misused the process of the Court by taking steps to defeat FTL’s substantive claim in the substantive proceedings while FTL was subject to the injunction. They deliberately left the injunction and proceedings on foot to achieve that purpose even though they no longer had any intention to pursue the substantive claim or to have their case determined on its merits. In the circumstances I do not consider there is any justification to restrict the order for costs to the costs incurred after the injunction hearing.

[73] To do so would be artificial and contrary to the interests of justice. It would permit Mr Clode and Ms Cooper and, through them, WTL to achieve their purpose of using the proceedings (or at the least continuing the proceedings) for an improper purpose. A party having obtained equitable relief from the Court owes a duty of candour to the Court and other parties. Mr Clode, Ms Cooper and WTL have breached that obligation.

[74] Similarly, while the majority of the costs were incurred before the transfer to WTL, in the circumstances of this case I do not consider that WTL should only be liable for costs incurred after November 2009. It now holds the asset, formerly owned by Fern, which was the subject of the proceedings and application for injunction. WTL is controlled by Ms Cooper. Mr Clode and Ms Cooper’s objectives could not have been achieved without using WTL. It should also be subject to the full costs order.

[75] I conclude that the circumstances of this case place it outside the ordinary run of circumstances and that it is just to make costs orders against Mr Clode, Ms Cooper and WTL.

Quantum

[76] Mr Clode raised an issue of quantum on behalf of the non-parties. He suggested the fees charged were generally excessive but also made the point that a number of accounts totalling $9,452 appeared to relate to the review of files that were not specifically related to the injunction proceedings. While Mr Sandelin did not accept that proposition, rather than argue the matter, he conceded for present purposes the costs sought could be reduced by that amount.

Result

[77] The non-party’s application for costs against Mr Gilbertson and LJK is dismissed. There is no order for costs.

[78] The application for non-party costs against Mr Clode, Ms Cooper and WTL

is granted. There will be an order for costs against those parties in the sum of

$58,831.40. The non-parties are jointly and severally liable for those costs.

Costs on this application

[79] The applicants are to have costs on the application against Mr Clode, Ms

Cooper and WTL. They are to be costs on a 2B basis plus disbursements as fixed by the Registrar.

Venning J

[1] _{Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) [1992] 3 NZLR 757.}
[2] _{Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965.}
[3] Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No. 2) [2005] 1 NZLR 145 at [25].

[4] _{Total Spares & Supplies Ltd & Anor v Antares SRL & Anor (2006) EWHC 1537 (Ch).}

[5] Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 124 at [10].

[6] At [49].
[7] _{Hamilton v Al Fayed (No. 2) [2002] 3 All ER 641.}
[8] _{Globe Equities Ltd v Globe Legal Services Ltd [1999] EWCA Civ 3023; [1999] BLR 232.}
[9] _{Byrne v Sefton Health Authority [2002] 1 WLR 775.}
[10] Goodwood Recoveries Ltd v Breen [2006] 1 WLR 2723.

[11] At [20].

[12] At [54].