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Architecture and Project Management Limited (in liquidatin) v Windowmakers Limited [2014] NZHC 3318 (18 December 2014)

Last Updated: 17 February 2015

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2013-404-003023 [2014] NZHC 3318

_{JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN}

This judgment was delivered by me on

18.12.14 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

_{Date...............}

ARCHITECTURE AND PROJECT MANAGEMENT LIMITED (IN LIQUIDATION) v WINDOWMAKERS LIMITED [2014] NZHC 3318 [18 December 2014]

Introduction

[1] This proceeding was commenced on 29 May 2013. The plaintiff, Architecture and Project Management Ltd (APML) also applied for summary judgment.

[2] On 1 July 2013 the defendants filed a joint application for security for costs.

[3] On 23 November 2013, the day before the security for costs application and summary judgment application were due to be heard, APML was placed in voluntary liquidation.

[4] On 15 May 2014, APML entered into a deed of assignment assigning it’s rights and remedies in the proceeding to its director Mr Terrence John Brown (Mr Brown) for which Mr Brown agreed to pay $20,000 in consideration of the assignment.

[5] The memoranda of Judges subsequently recorded that because the liquidator was unwilling to pursue the proceeding an assignment of the causes of action to Mr Brown was being entering into. The minute of Venning J dated 25 June 2014 recorded his receiving advice that the liquidator had assigned APML’s claim to Mr Brown. Venning J directed that if APML was no longer pursuing the proceeding Mr Brown would have to make an application to be joined as a plaintiff. My minute dated 30 October 2014 recorded that Mr Brown had decided to withdraw his application for joinder as he intended to file new proceedings in his own name.

[6] On 4 November 2014 a notice of discontinuance was filed.

Application for costs

[7] This judgment deals with the defendants’ application for costs and for the Court’s directions that those be paid by Mr Brown. They also seek an order that Mr Brown pay disbursements including those of experts retained to report upon APML’s claims of consequential losses.

[8] The affidavit evidence of Mr Brown provided for the summary judgment application confirms:

(a) Since November 2008 APML had not traded and had no assets or income.

(b) On 15 December 2009 it was struck off the Companies Register.

(c) On 15 July 2011 it was restored to the Companies Register for the sole purpose of pursuing its claim against the defendants.

(d) Mr Brown was funding the litigation from his own resources.

(e) He is the sole director and he and his wife are the shareholders of the company.

(f) In November 2012 Mr Brown engaged a lawyer for APML on a contingency basis.

(g) APML was reliant on Mr Brown’s ability to provide funds to fund the litigation given that it did not have any assets or other source of income.

(h) That Mr Brown had saved sufficient funds to cover anticipated costs and expenses of the litigation.

[9] Counsel for APML has filed a memorandum advising that in view of the position taken by the defendants the liquidator does not wish to make any submissions as to costs as it appeared no order was being sought against APML, but against Mr Brown.

[10] The defendants claim for costs relies on the authority provided in Dymocks

_{Franchise Systems (NSW) Pty Ltd v Todd & Ors}¹_.

¹ [2004] UKPC 39, [2005] 1 NZLR 145.

[11] The defendants case is that APML’s own evidence proves that Mr Brown initiated, controlled and funded the proceeding and that as a substantial shareholder he would have benefitted from the proceeding if successful.

[12] In the Dymocks Franchise Systems Case Lord Brown of Eaton-Underwood at [25(3)] stated that where the non-party not merely funds the proceedings but substantially controls or is to benefit from them, then justice will ordinarily require that, if the proceedings have failed, he will pay the successful party’s costs.

Opposition to application

[13] In opposition to the application for costs against Mr Brown, counsel Mr Maclean submits it is Mr Brown’s position that because he is not the party discontinuing nor played any part in the decision to do so there can be no basis for a costs order to be made against him.

[14] Regarding the authority of Dymocks Franchise Systems Mr Maclean submits the case is “not strictly on point” because it did not concern an issue of costs on discontinuance. Rather that case concerned an application for non-party costs sought after a series of appeals when the merits had been fully canvassed. Mr Maclean submits in this case the merits were never addressed.

[15] Mr Maclean notes the Supreme Court in Mana Property Trustee v James Developments (No 2)² cited with approval of the decision of the Court of Appeal in Metalloy Supplies Limited v M A (UK) Ltd³ wherein the Court said:

It is not, however, sufficient to render a director liable for costs that he was a director of the company and caused it to bring or defend the proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fides and for the benefit of company, the company is the real plaintiff. If in such a case an order for costs could be made against the director in the absence of some impropriety or bad faith on his part, the doctrine of separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

² _{[2010] NZSC 124; [2011] 2 NZLR 25.}

³ [1997] 1 WLR1613 (CA).

[16] In Mana the Supreme Court upheld the decision not to award costs against the liquidators. The Court said there was no impropriety involved.

[17] Mr Maclean’s submission is that there is nothing extraordinary in the circumstances in this case of a director funding his company to pursue a claim in the name of the company. Counsel further submits Mr Brown as the company’s agent was responsible for the conduct of the company’s affairs; that his conduct of directing proceedings to endeavour to recover funds due to the company was a responsible action in the conduct of the company’s affairs; that such are usual incidents “of a one man company with husband and wife shareholders”.

[18] Mr Maclean submits that there must be impropriety or bad faith before a director can be held liable for the company’s costs; that no such conduct has been, in this case, shown on Mr Brown’s behalf.

[19] Mr Maclean emphasises that the funding provided by Mr Brown for the litigation was constrained to payment of filing fees to commence the proceeding and to pay the costs of filing a notice of opposition to the defendants’ security for costs application. As well there were some minor disbursements. Otherwise Mr Maclean notes that the legal fees were covered by a contingency agreement. This he said is to be contrasted with the situation in the Dymocks case where the non-party was pursuing its own interests under an ‘all monies debenture’ in order to recover its

$1.2M investment in a bookstore business. In that case the non-party (that was required to pay costs) had put the funding party into receivership and through the receivers had paid lawyer’s costs on appeals to the Court of Appeal and Privy Council. In that case it was held these appeals would not have proceeded without the non-party’s involvement.

[20] By contrast, Mr Maclean submits Mr Brown was not a “funder” of this

proceeding in that same sense.

[21] Mr Maclean submits it needs also to be borne in mind that APML lacked financial resources because the defendants removed items (they had installed) from the subject property; that this resulted in APML being placed into receivership and

going out of business. Further that the defendants have admitted removing items from the house. An issue for determination in the proceeding involved whether there was legal justification for the defendants removal of those items.

[22] Mr Maclean submits that it was not unreasonable let alone improper for a director to cause a company to bring proceedings in those circumstances.

Considerations

[23] The costs against Mr Brown are sought on the basis that he initiated, controlled and funded the proceedings and had a direct personal financial interest in the result.

[24] In response counsel on behalf of the defendants urges that costs against Mr Brown are not sought on the basis that he initiated, controlled and funded APML’s proceedings nor had a direct personal financial interest in the result. Rather, that the defendants say Mr Brown’s own affidavit evidence makes it clear he initiated the proceeding for his own benefit. Also, that the steps taken in respect of which costs are sought refer to the period before APML was put into voluntary liquidation during when, it is submitted, Mr Brown was undeniably in control of APML; that it is disingenuous of Mr Brown to contend that he “ceased to have any control over the plaintiff company” when it went into liquidation and “played no part in the plaintiff’s decision to discontinue”.

[25] Counsel refers to the fact that Mr Brown filed an application to be joined as a plaintiff but then he elected to withdraw that application and to file proceedings in his own name. Given that those fresh proceedings filed by Mr Brown advance the same causes of action which APML had advanced, APML had no option other than to discontinue.

[26] The Court may make an order for costs against a non-party if it considers that party to be the real party interested in the outcome even though Mr Brown may earnestly be bringing these proceedings for the benefit of his company.

[27] Costs by the defendants are sought against Mr Brown because he is the real plaintiff in this proceeding because following APML’s liquidation Mr Brown paid

$20,000 for an assignment of the relevant causes of action and is now pursuing those in a separate and recently filed proceeding.

[28] It is clear APML was resurrected for the purpose of pursuing this proceeding; for Mr Brown’s ultimate benefit; that those proceedings were issued five years after the cause of action arose and that none of the creditors were then actively pursuing the company for debts owed.

[29] It appears Mr Brown did not pursue the proceedings for the benefit of creditors. Indeed after liquidation of APML he sought an assignment of those causes of action to and for himself.

[30] It was Mr Brown who entered into the contingency fee agreement to facilitate the bringing of the proceeding.

[31] In the background of matters it appears APML could not afford to pay its creditors and in that outcome the defendants took the action they did to retrieve parts of the product they had contributed to APML’s property development.

Conclusions

[32] Usually a director is not liable for the ordinary cause of actions of a company. The propriety of APML pursuing its claim is not in question. What is in question are the actions of Mr Brown in utilising his company as he did to achieve that outcome.

[33] In the Court’s assessment it would likely have granted an order for security in circumstances where the company was being utilised for the purpose of returning value to the shareholders and where otherwise the company clearly had no other value.

[34] It is apparent from Mr Brown’s own evidence that he initiated the proceeding for his own benefit. The Court accepts the assessment of counsel for the defendants that the steps in respect of which costs are sought by the defendants relate almost

entirely to the period before APML was put into voluntary liquidation on 28

November 2013 and during which period Mr Brown was in control of APML.

[35] Mr Brown claims he “ceased to have any control over the plaintiff company” when it went into liquidation and “played no part in the plaintiff’s decision to discontinue”. However as was noted by the Court’s minutes Mr Brown sought to be joined as a plaintiff in substitution of APML and he later filed his own proceeding advancing those same causes of action that had been advanced on behalf of APML.

[36] The Mana decision concerned the distinct question of whether liquidators should be liable for costs. In that case the liquidators continued existing litigation after the company had been put into liquidation.

[37] In the Mana case the Supreme Court agreed the liquidators were acting in the interests of the company rather than in their own interests.

[38] The Supreme Court also said:

That passage [quoted from Metalloy Supplies Limited] has the approval of the Privy Council in what is now the leading case in this country on costs orders against a non-party, Dymocks Franchise Systems... The Privy Council recognised that in some cases where a non-party may have both controlled the proceeding and funded it, or is to benefit from it, justice will require that if the proceeding fails, the non-party 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.

Such a person is the real party to the litigation...

[39] In this case the Court considers Mr Brown was the funder and it makes no difference that he entered into a contingency fee agreement to facilitate bringing the proceeding. As counsel for the defendants submits whether he paid himself or arranged a contingency for the payment, the net effect is the same. Further in answer to Mr Brown’s claim that the actions of the defendants have caused APML’s financial downfall it is equally clear from Mr Brown’s own evidence that the company had “hit the wall” financially well before the defendants took the actions they did.

Conclusion

[40] This is a proper case to award costs against a non-party.

[41] The Court has reviewed counsels’ calculations of costs. In the Court’s view the claims of $3,980 for filing of memoranda and $2,388 for filing of the security for costs application, should be halved. In a number of instances a single document has been filed on behalf of all defendants.

Judgment

[42] The Court orders Terrence John Brown to pay the following costs calculated on a category 2B basis:

(a) To the first defendant the sum of $14,996 inclusive of disbursements;

and

(b) To the second and third defendants the sum of $12,525 inclusive of disbursements.

Associate Judge Christiansen