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Public Trust v Silverfern Vineyards Limited [2016] NZHC 1656 (20 July 2016)

High Court of New Zealand

Public Trust v Silverfern Vineyards Limited [2016] NZHC 1656 (20 July 2016)

Last Updated: 29 August 2016

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV-2014-441-38 [2016] NZHC 1656

CIV-2014-441-39

BETWEEN SOUTHLAND BUILDING SOCIETY Plaintiff

AND SILVERFERN VINEYARDS LIMITED Defendant

GROV HOLDINGS LIMITED

_{Second Defendant (Costs purposes only)}

_{COSTS JUDGMENT (NO 2) OF MUIR J}

PUBLIC TRUST v SILVERFERN VINEYARDS LIMITED [2016] NZHC 1656 [20 July 2016]

This judgment was delivered by me on Wednesday 20 July 2016 at 4.00 pm

Pursuant to Rule 11.5 of the High court Rules.

Registrar/Deputy Registrar

Date:..............................

Counsel/Solicitors:

Wynn Williams, Christchurch, for Public Trust

Cavell Leitch, Christchurch, for Southland Building Society

Lee Salmon Long, Auckland, for Silverfern Vineyards Limited

Brown and Bates Limited, Napier

Background

[1] On 17 May I issued a costs judgment in favour of Southland Building Society (SBS) in the amount of $48,884.75 plus disbursements of $5,644 and in favour of Public Trust (PT) in the amount of $49,762.25 plus disbursements of $6,418.23.¹ I did so against both Silverfern Vineyards Limited (Silverfern) and a non-party, Grov Holdings Ltd (GHL).

[2] The award against GHL was made on the assumption that it had been served with SBS and PT’s costs applications and I noted in my judgment that I had received no submissions from it opposing the award.

[3] That assumption proved incorrect and an application was made to recall the judgment against GHL on the basis of non-service. I granted that application on 8

June 2016. Simultaneously, I re-issued my earlier judgment against Silverfern only.

[4] I have now received submissions and evidence from GHL together with submissions in response from PT and SBS.

Relevant principles

[5] There is no substantial argument between the parties as to the principles I should apply. These are set out in the leading authority Dymocks Franchise Systems (NZW) Pty Ltd v Todd (No2) in terms:²

(a) Costs awards against non-parties are confined to “exceptional” cases.

This point was emphasised in Caborundum Abraising Ltd v Bank of New Zealand (No 2)³ where at 425 it was noted that in the majority of cases it will be inappropriate to make such an award.

(b) Costs will not ordinarily be awarded against a pure funder who does not stand to benefit from litigation.

¹ _{Public Trust v Silverfern Vineyards Ltd [2016] NZHC 1002.}

² _{Dymocks Franchise Systems (NZW) Pty Ltd v Todd (No2) [2005] 1 NZLR 145 (PC) at [25]-[27].}

³ Caborundum Abraising Ltd v Bank of New Zealand (No 2) [1992] PRNZ 418 (HC).

(c) Where a funding party either stands to benefit from the litigation or controls it, justice will ordinarily require that, if the proceedings fail, such party should pay the successful party’s costs. In such cases the funder is not so much facilitating access to justice as gaining access to justice for its own purposes.

(d) Where a non-party promotes and funds proceedings by an insolvent party substantially for its own financial benefit, that non-party should ordinarily be liable for costs if the claim fails.

[6] Pure funders will not generally be liable for costs. In Hamilton v Al-Fayed

(No2)⁴ such parties were described 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.

[7] In the same case the Court recognised the public interest in a funder enabling a funded party to pursue what the funder perceived to be a genuine case. This point was also emphasised in Capital and Merchant Finance Ltd (in rec and liq) v Vision Securities Ltd (in rec)⁵ where the fact that the issues on appeal were finely balanced formed part of the Court’s decision not to award costs against a non-party.

[8] Particularly in my view where litigation involves an insolvent defendant, the Court should always be vigilant to the chilling effect of a non-party costs order and the fact that, if not sparingly invoked, the jurisdiction may force capitulation in a case where a strongly arguable defence nevertheless arises.

The plaintiff ’s arguments

[9] SBS and PT refer to the following facts, identified in my recalled judgment and deposed to in the proceedings:

⁴ _{Hamilton v Al-Fayed (No2) [2002] EWCA Civ 665, [2003] QB 1175 at [40].}

⁵ Capital and Merchant Finance Ltd (in rec and liq) v Vision Securities Ltd (in rec) [2011] NZCA

657 at [17] – [18].

(a) After the start of the global financial crisis trusts associated with the wider O’Connor family provided “extensive finance” to Silverfern. Such trusts included the Grosvernor Trust (of which GHL is the corporate trustee) which injected $168,500 into Silverfern in

2011/2012 and which by 31 March 2014 had loaned the Seamar

Property Trust (of which Silverfern is the Trustee) $575,007.00.

(b) Mr O’Connor is a discretionary beneficiary of various family trusts that have funded Silverfern and other businesses associated with the O’Connor family and from which he “received capital distributions and/or loans from time to time to cover living expenses as a discretionary beneficiary”.

(c) Mr O’Connor’s former wife Rosemary was (but no longer is), a beneficiary of various family trusts associated with Mr O’Connor including the Myoak Trust, the Seamar Property Trust and relevantly the Grosvenor Trust.

(d) Lee Salmon Long, as solicitors for Silverfern held an all obligations guarantee and indemnity in its favour against Mr O’Connor and various associated entities, including GHL, and as such GHL benefitted from the Compromise challenged in the substantive proceedings.

[10] They place particular emphasis on the fact that in his affidavit dated 29 May

2015 Mr O’Connor stated in relation to the Compromise:

There were benefits to the O’Connor family trusts in me avoiding bankruptcy. I manage the businesses associated with the trusts and my involvement in those businesses was important in order to maximise the value of assets and earnings.

[11] They say that there is an analogy to be had between the position of GHL and the Myoak Trust (which funded the payments made in terms of the Compromise) in that the Compromise allowed Mr O’Connor to continue to manage GHL’s affairs in his capacity as its sole director when such would not be possible if he were

adjudicated bankrupt (as he was at risk of becoming in the absence of the

Compromise).

[12] They further submit that as GHL’s sole director Mr O’Connor was its directing mind and will and that, because he was also a director of Silverfern, control of the proceedings can be attributed not only to Silverfern but to GHL.

[13] In terms of GHL’s suggested benefit from the litigation they say that loss of Mr O’Connor’s control would be detrimental to GHL’s interests and that because of possible creditor attacks on Mr O’Connor’s interest as a discretionary beneficiary of the Grosvernor Trust it was in GHL’s best interests to fund Silverfern’s litigation in an attempt to avoid Mr O’Connor’s bankruptcy.

[14] They also say that because Mr O’Connor was the directing mind and will of

GHL, personal benefits to him can be equated to benefits in GHL’s favour.

[15] Finally, they submit that control of the proceedings by GHL is implicit in its funding.

GHL’s evidence

[16] The evidence now filed by GHL is in terms that:

(a) GHL did not have any right to direct or control Silverfern’s defence and never attempted to do so.

(b) Without GHL’s funding Silverfern could not have been in a position to continue with its defence.

(c) Mr O’Connor is a discretionary beneficiary of the Grosvernor Trust and GHL’s only motivation in funding the litigation was to assist a beneficiary by attempting to uphold the release from guarantees provided for in the Compromise.

(d) GHL is a non-trading entity with no business to manage. As such it did not benefit from Mr O’Connor remaining out of bankruptcy in the same way as the Myoak Trust (for example). Although it would be “convenient” for him to remain as a director of GHL, in the event of his adjudication the Official Assignee would likewise be obliged to act in terms of the Grosvernor Trust’s Trust Deed so that any advantage was not “material” or “commercial”.

(e) The direct benefit to GHL in terms of its release from the Lee Salmon Long guarantee (which was joint and several with another solvent party) and which related to a total debt of $609.50 is de minimis in the context of the case and was “never a consideration or motiviation”.

Discussion

[17] In light of the evidence and submissions now received from GHL I am not persuaded that a costs order is appropriate against it. My reasons are as follows:

(a) As my substantive judgment records, this litigation raised novel issues in the context of the New Zealand legislation and difficult arguments. It could never be suggested that Silverfern’s defence of the litigation was other than bona fide. Nor could that defence have been advanced without GHL’s support. Considerable care must be taken in the exercise of any jurisdiction which may have the result of inhibiting an insolvent party from defending a legitimate case.

(b) It cannot be that control of litigation for the purposes of the Dymocks⁶ test is established merely by the fact of funding. If litigation cannot be advanced without the assistance of a third party some element of de facto control by the funder is inevitable, but only in the sense that, without support, the claim or defence will, in most cases, necessarily

_{be abandoned. Something more is, in my view, required. In the}

⁶ Dymocks Franchise Systems (NZW) Pty Ltd v Todd (No2) above n 2.

present case GHL deposes that it had no rights to direct or control

Silverfern’s defence.

(c) I cannot accept that because Mr O’Connor was the directing mind and will of GHL, the personal benefits to him from an order upholding the Compromise can be equated to benefits in GHL’s favour. That to my mind ignores GHL’s very specific role which is as a corporate trustee governed by a Trust Deed. There is no direct benefit to GHL from Mr O’Connor remaining out of bankruptcy. I accept it is a convenience only.

(d) I accept Mr O’Connor’s evidence that there is a distinction between the tangible benefits which would have flowed to trading trusts (like the Myoak or Taurus Trusts) from his not being adjudicated and the minimal benefits which would flow to GHL given that any directorship of that company is controlled by the Trust Deed. So explained, the concession in Mr O’Connor’s affidavit of 29 May 2015 is not decisive in terms of the analysis I must undertake.

(e) I agree that the direct benefit to GHL by virtue of its release from the Lee Salmon Long guarantee may be considered de minimis in the context of the proceedings. Mr O’Connor deposes that the Compromise having been set aside, GHL’s co-guarantor Myoak Trust can and will satisfy the debt without contribution from GHL. Moreover, under ordinary contribution principles such exposure was

$304.75 only.

(f) Given that Mr O’Connor is a discretionary beneficiary of the Grosvernor Trust it is predictable and reasonable that its Corporate Trustee would wish to support a Compromise which had the effect of exonerating Mr O’Connor from personal liability under his guarantees. It is predictable that it would do so without directing or controlling the proceedings and as a pure funder wishing simply to support a beneficiary.

Result

[18] Having regard to these considerations I do not regard the case as sufficiently exceptional to justify an award of non-party costs against GHL and I accordingly decline the application by SBS and PT.

[19] If GHL is minded to make an application for costs it may do so by memorandum filed within seven days and with any reply by SBS and PT within a further seven days. On a provisional basis I would have thought it appropriate that

_{costs lie where they fall.}

Muir J