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Concrete Structures (NZ) Limited v Smith [2019] NZHC 2572 (2 October 2019)

Last Updated: 18 October 2019

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Badcock Law, Rotorua, for the Applicant

Dyer Whitechurch (S Bhanabhai), Auckland, for the Respondent

Copy for:

Paul F Dalkie, Auckland, for the Respondent

CONCRETE STRUCTURES (NZ) LIMITED v SMITH [2019] NZHC 2572 [2 October 2019]

[1] On 2 August 2019 on the application of Concrete Structures (NZ) Ltd, I ordered that NMHB Ltd be put into liquidation. I made an order for costs later in August. That was an order for costs to be paid out of the assets of NMHB Ltd to Concrete Structures (NZ) Ltd. Concrete Structures (NZ) Ltd now applies for Mr Smith, the director and shareholder of NMHB Ltd, to pay the costs.

Background

[2] NMHB Ltd, a building contractor, had a contract to erect a building in Rabone Street, Henderson, Auckland, for Rabone Estates Ltd. Concrete Structures manufactured and supplied concrete panels for NMHB Ltd for the Rabone Street job. The manufacture and supply of the concrete panels was relevant construction work under the Construction Contracts Act 2002.¹ Almost all of the panels were supplied. NMHB Ltd did not pay Concrete Structures (NZ) Ltd.

[3] Concrete Structures (NZ) Ltd served two payment claims under the Construction Contracts Act on NMHB Ltd. NMHB Ltd did not provide any payment schedules in time and it did not make any payments. Concrete Structures then served a demand under s 289 of the Companies Act 1993 on NMHB Ltd for the total amount of the payment claims, $206,391.94. NMHB Ltd applied under s 290 of the Companies Act 1993 to set aside the statutory demand. Associate Judge Sargisson dismissed the application and ordered NMHB Ltd to pay the amount of the statutory demand within five working days. She also ordered NMHB Ltd to pay Concrete Structures its actual and reasonable costs on the application to set aside the statutory demand.² She later fixed those costs at $14,095.65 plus disbursements.³ Those were not scale costs but actual costs under s 23(2)(b) of the Construction Contracts Act.

[4] NMHB Ltd appealed against the decision of Associate Judge Sargisson. At the same time, Concrete Structures began a liquidation application relying on non-

¹ Construction Contracts Act 2002, s 6(1)(f)(iv).

² NMHB Ltd v Concrete Structures (NZ) Ltd [2018] NZHC 2436.

³ NMHB Ltd v Concrete Structures (NZ) Ltd [2018] NZHC 3082.

compliance with Associate Judge Sargisson’s order to pay the amount of the statutory demand. The non-compliance with the order gave rise to a presumption of insolvency.

[5] NMHB Ltd applied for a stay of the liquidation proceeding pending the appeal. I heard the stay application. It became something of a case management exercise, with issues identified and directions given for a way forward. I dismissed the stay application and held that the proceeding could be advertised. I held that at a defended hearing NMHB Ltd would be entitled to raise, by way of defence under s 310 of the Companies Act, matters of counterclaim or set-off. NMHB Ltd was alleging that there were matters of counterclaim or set-off which extinguished its indebtedness to Concrete Structures. Because of s 79 of the Construction Contracts Act, it could not have raised those matters earlier. With that, NMHB Ltd abandoned its appeal. I am advised today that on the appeal being abandoned, part of the sum which NMHB Ltd had paid by way of security for costs, was paid to Concrete Structures and applied in part-reduction of its indebtedness under the costs order of Associate Judge Sargisson on the s 290 application.

[6] I heard the opposed liquidation application. NMHB Ltd alleged three matters which it said extinguished its indebtedness to Concrete Structures. It said that six panels were defective; there were delays in supply which resulted in extra costs; and an email by a director of Concrete Structures sent to Rabone Estates Ltd gave it a claim in tort for wrongful interference in the contractual relationship between NMHB Ltd and Rabone Estates Ltd.

[7] I was satisfied that the defence was not adequate to eliminate NMHB’s indebtedness to Concrete Structures. While I thought there was something in the delay complaint, I considered that the amount claimed was over-stated. The defects complaint was withdrawn. I found that the claim relating to the email of 28 February 2018 was not reasonably arguable. I made a liquidation order on 2 August 2019. Before then, Mr Smith had made a shareholders’ resolution to put the company into liquidation but that was ineffective under s 241AA of the Companies Act. On 13 August 2019, I fixed costs. That was costs both on the stay application and on the liquidation proceeding. On both matters, I awarded Concrete Structures actual and reasonable costs under the Companies Act Schedule 7, clause 1(1)(c).
Concrete Structures also maintained it was entitled to actual and reasonable costs under s 23(2)(b) of the Construction Contracts Act, but I did not consider that necessary. Concrete Structures says that the total costs awards come to $64,956.53. When $3,000 is taken off that for the payment after the appeal was abandoned, the net unpaid costs are $61,956.53.

[8] Evidence for NMHB Ltd was given by Mr Tolich. He was described as the manager of the company. While Mr Smith is a director of the company and its sole shareholder, he did not take any visible part in the proceeding.

[9] Concrete Structures has some priority for its costs order in the liquidation of NMHB Ltd. While it is a non-preferential unsecured creditor for the amounts in the payment claims, it is a preferential creditor for the costs order under the Companies Act, sch 7 cl 1(1)(c) for the reasonable costs of a person applying to the court for an order that the company be put into liquidation, including the reasonable costs between lawyer and client in procuring the order. Concrete Structures’ costs in obtaining the order include all the costs: that is, in successfully opposing the application under s 290 of the Companies Act, its costs on the stay application as well as the costs on the opposed liquidation application. In this liquidation, its claim comes second after the costs of the liquidator and ahead of any other claims in the liquidation.

[10] Mr Badcock advises that he understands that Concrete Structures may be the only creditor in the liquidation. It is early days in the liquidation but Mr Badcock understands from the liquidator that there may be little prospects of recovery from the liquidation. I add one rider to that. Even if the company does not have any tangible assets, there may be recovery by pursuing the directors for breach of their duties to the company, a common method of recovery for liquidators today. I do no more than note that possibility. It is obviously for the liquidator to investigate and establish whether there are any grounds for recovery from Mr Smith.

[11] Concrete Structures applies for an order for costs against Mr Smith on the assumption that any recovery in the liquidation may well be taken up with the costs of the liquidator and there may be nothing for Concrete Structures, even though it comes second in priority.

Respondent’s role in the proceeding

[12] I said that Mr Smith did not take any visible part in the proceeding. It was open to him to take an active part in the proceeding if he wished to. A director has standing to apply to the court for a company to be put into liquidation.⁴ He also has standing to oppose a liquidation application. Equally, shareholders have standing to apply for a liquidation order and to oppose a liquidation order. In the case of shareholders that can be done by filing a statement of defence or an appearance under r 31.19 of the High Court Rules. It can be important for a director or shareholder to consider carefully whether they should become a party to a liquidation proceeding. It may be necessary to preserve appeal rights. If only the company is a party to the liquidation proceeding, and a liquidation order is made, the company will come under the control of the liquidator and only the liquidator will be able to take any proceedings in the name of the company.⁵ That is, the liquidator will decide whether there should be an appeal from the liquidation decision. In my experience, liquidators never appeal against orders appointing them. Accordingly, if Mr Smith wanted to preserve any right of appeal from a liquidation order, he would have had to become a party to the proceeding.

[13] But any director or shareholder who does become a party to the proceeding exposes themselves to an order for costs as a party. An example is the costs decision of Courtney J in Reserve Bank of New Zealand v CBL Insurance.⁶ In that case, a shareholder actively opposed a liquidation application. While there was a costs order against CBL Insurance, Courtney J also ordered the shareholder to pay costs, but limited them to 20 per cent of the costs ordered against the company. I mention that because one of the considerations on an application for costs against non-parties is to check whether the non-parties made themselves a party to the proceeding, in fact if not in law. A director who avoids becoming a party to the proceeding does, to a certain extent, avoid costs. However, they do so at some expense, as their appeal rights are thrown away as well.

⁴ Companies Act 1993, s 241(2)(c)(ii).

⁵ Section 248(1)(a), s 260(2) and sch 6, cl (a).

⁶ Reserve Bank of New Zealand v CBL Insurance Ltd [2019] NZHC 737.

Non-party costs

[14] In New Zealand, the court’s power to order non-parties to pay costs was first recognised in Tompkins J’s decision in Carborundum Abrasives Ltd v Bank of New Zealand (No.2).⁷ For his decision, Tompkins J relied on s 51G of the Judicature Act 1908 and on r 46 of the former High Court Rules. Those provisions have now been replaced by s 162 of the Senior Courts Act 2016 and r 14.1 of the High Court Rules 2016. While there are changes in drafting, there is no difference in substance. Tompkins J held that s 51G of the Judicature Act conferred jurisdiction to award costs in the absence of any other express provision allowing the court to award costs. That reasoning appears to apply in this case. I do not regard Schedule 7 of the Companies Act as ousting the court’s general power to award costs. That can be seen in Courtney J’s decision in Reserve Bank of New Zealand v CBL Insurance Ltd where she made orders for costs, not only for costs to be paid out of the assets of the company but also for other parties to pay the Reserve Bank’s costs. ⁸ If costs orders can be made against other parties to a proceeding, then Tompkins J’s reasoning, allowing costs orders against non-parties, can also be applied. In this case, the court retains the power to order costs against a non-party, notwithstanding the provisions of Schedule 7 of the Companies Act.

[15] In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No.2), the Privy Council stated in general terms the principles for ordering costs against non-parties:⁹

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 as ... “those with no personal interest in the litigation, who do not stand to benefit from it, and are not funding it as a matter of business and in no way seek to control its course”. ...

⁷ Carborundum Abrasives Ltd v Bank of New Zealand (No.2) [1992] 3 NZLR 757 (HC).

⁸ Reserve Bank of New Zealand v CBL Insurance Ltd [2019] NZHC 737.

9. Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No.2) UKPC 39, [2005] 1 NZLR 145 at [25] and [29].
   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” in the litigation, a concept repeatedly invoked throughout the jurisprudence. ...

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. ...

And:

In the light of these authorities, their Lordships were told that, generally speaking, where a non-party promotes and funds proceedings by an insolvent company solely or substantially for his own financial benefit, he should be liable for the costs if his claim or defence or appeal fails. As explained in the cases, however, that is not to say that orders will invariably be made in such cases, particularly, say, where the non-party is himself a director or liquidator who can realistically be regarded as acting rather in the interests of the company (more especially with shareholders and creditors) than in his own interests.

[16] That leads to the point that New Zealand courts have recognised: special considerations arise in the case of directors of closely-held companies. A forerunner of the approach can be seen in Tompkins J’s decision in Carborundum ¹⁰ where he referred to a dictum of Lloyd LJ in Taylor v Pase Developments Ltd that ¹¹

... in the great majority of cases the directors of an insolvent company which defends proceedings brought against it should not be at personal risk of costs.

[17] Similarly, in another decision of the English Court of Appeal, Metalloy Supplies Ltd v MA UK Ltd, Millett LJ said:¹²

The Court has a discretion to make a costs order against a non-party. Such an order is, however, exceptional, since it is rarely appropriate. It may also be made in a wide variety of circumstances where the third party is considered to be the real party interested in the outcome of the suit. It may also be made where the third party has been responsible for bringing the proceedings, and they have been brought in bad faith or for an ulterior purpose or there is some other conduct on his part which makes it just and reasonable to make the order against him. 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

¹⁰ Carborundum Abrasives Ltd v Bank of New Zealand (No.2) [1992] 3 NZLR 757 (HC) at 764.

¹¹ Taylor v Pase Developments Ltd [1991] TLR 228, [1991] ECC 406 (CA).

¹² Metalloy Supplies Ltd (in liquidation) v MA (UK) Ltd [1996] EWCA Civ 671; [1997] 1 All ER 418 at 424 - 425.

proceedings which he funded and which ultimately failed. Where such proceedings are brought bona fide and for the benefit of the company, the company is the real plaintiff. If in such a case an order for costs could be made against a director in the absence of some impropriety or bad faith on his part, the doctrine of the separate liability of the company would be eroded and the principle that such orders should be exceptional would be nullified.

[18] New Zealand’s Court of Appeal has picked that up. In Kidd v Equity Realty (1995) Ltd it said:¹³









and

[17] Where a closely held company is a litigant, those who control it necessarily control its conduct of the litigation. Since benefits derived directly by such a company are in most instances indirectly derived by those who own and control it, it is almost always going to be possible to say that such litigation is conducted by them for their personal benefit. Further, because such a company will almost always fund its litigation with either its own funds applied to the litigation by direction of those who control it or with advances from them, they can likewise be said to have funded the litigation.

[20] Where a company litigant was insolvent at the time of the litigation, a court may well be easily persuaded that its directors were acting for their own purposes rather than those of the company and its creditors. If so, the court will conclude that they therefore were the “real parties” and ought to pay costs accordingly. The same conclusion is likely to be reached where those promoting litigation have sought to take advantage of the insolvency of the company by taking, either expressly or by implication, a “heads I win, tails you lose” approach. In circumstances where the claim was speculative and/or devoid of merit, the court may well conclude that this was the approach of the director or directors concerned. But, and in respectful disagreement with the judgment of Morgan J, we consider that the sort of circumstances which are routinely present when closely held companies litigate do not in themselves warrant an order for costs against those who control them.

[19] Downs J recognised the point in the Botany Downs Secondary College case where he said:¹⁴

[43] ...New Zealand cases emphasise the need for “something more” by the non-party, otherwise the rule could be overbroad in an economy populated by smaller, closely held companies, especially when a director (and owner) uses her or his own capital to fund litigation their insolvent company could not otherwise conduct.¹⁵ The “something other” element is not closed. Impropriety suffices but is unnecessary.

¹³ Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [17] and [20].

¹⁴ Minister of Education v H Construction North Island Ltd [2019] NZHC 1459 at [43].

¹⁵ Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [14] –[20].

Application to this case

[20] This case is unusual for an application for non-party costs because it is against a person associated with the defendant. That is, it is against the party opposing the proceeding, not the person in the claimant position. By far, most cases where the courts have ordered non-party costs are where a plaintiff /applicant has sought relief. In this case, NMHB Ltd did apply to set aside a statutory demand. It was therefore an applicant in that proceeding. But the point remains that it was still challenging a step taken by the creditor who was trying to obtain recovery from it by way of a statutory demand. While the debtor company makes the application, it is nevertheless a responsive step. NMHB Ltd was always in the defendant’s position. The only case I am aware of where a person associated with a defendant has been ordered to pay non- party costs is Downs J’s decision in Botany Downs Secondary College.

[21] In this case, Concrete Structures relies on these matters to say that this is an exceptional case and there is “something more” that warrants the court making an order against Mr Smith. First, it says that all the steps taken by NMHB Ltd were ill- conceived. There was no reason to bring the application under s 290 of the Companies Act because the statutory demand could not be defeated. Here, I note that the statutory demand was based on two payment claims. In the stay application, I recognised that there seemed to be an arguable point for the first payment claim because that was based on a requirement to make payment before there had been delivery of any panels on site. There was an issue whether payment claims were in issue before there had been any performance under the contract. I did not consider that the second payment claim could not be reasonably challenged.

[22] Second, it was said that the application for the stay proceeding was misconceived. But on that, I comment that the matter was resolved in the stay hearing and I ended up giving guidance to both parties as to how the case could be conducted. The appeal was withdrawn as a result.

[23] Then it was said that the three matters raised by way of defence to the liquidation application were all unsuccessful.
[24] Concrete Structures also alleged an unreasonable failure by NMHB Ltd to resolve the proceeding ahead of a defended hearing. There, it relied on the correspondence between counsel up to the hearing put in evidence by Concrete Structures’ Auckland plant manager.

[25] I am not satisfied that when all these matters are taken together they give grounds for treating this case as exceptional and that there is “something more” warranting costs. First, there is no suggestion of impropriety on the part of Mr Smith. Mr Badcock relied on Downs J in Botany Down Secondary College¹⁶ to support his application, but in my view that decision can be distinguished. That was a damages claim against a construction company for building defects in a secondary school in Auckland. The defendant was the head contractor on the job. A holding company was ordered to pay costs. The essence of Downs J’s decision can be seen in paragraph [64] where he said, in respect of the holding company, that-

[64] In summary McConnell (the holding company) authorised Hawkins to vigorously defend a claim that should have been settled, knew that Hawkins Group Ltd was paying Hawkins’ legal fees and disbursements because Hawkins could not, was complicit in wielding Hawkins’ likely insolvency as a weapon and guaranteed representation for its subsidiary when Hawkins would otherwise have been unrepresented. In combination this constitutes the “something other” required for non-party costs to be just.

[26] I have some experience of that decision myself, having dealt with interlocutory matters before trial from September 2017 to early 2018. Immediately before the close of pleadings date and down to trial, Hawkins ran an aggressive campaign of interlocutory applications directed at slowing down the plaintiffs and diverting them from preparation for the hearing. It caused the plaintiffs to incur markedly increased costs. That was done as part of a deliberate strategy to make life difficult for the plaintiffs. Hawkins’ insolvency was not established at the time, although threats of going into liquidation were used to try to induce the plaintiffs to settle at a figure which, in Downs J’s view, was unreasonably low. The case was fully fought despite, in Downs J’s view, clear and obvious liability on the part of Hawkins. Downs J’s decision may be one of those rare exceptions where a non-party has been ordered to

¹⁶ Minister of Education v H Construction North Island Ltd [2019] NZHC 1459 at [64].

pay costs where the non-party has been associated with a defendant rather than the plaintiff.

[27] This case is more mundane. This was very much an insolvency proceeding, right from the time when Concrete Structures served its statutory demand. It was unmistakably an insolvency case once NMHB Ltd failed to pay within the time ordered by Associate Judge Sargisson. The liquidation application was based on the insolvency ground. The parties dealt with each other against a background where insolvency was the issue for the court and where Concrete Structures was asserting insolvency as its basis for obtaining a liquidation order. Against that background, it cannot be said that NMHB Ltd was weaponizing insolvency. It was a plain fact against which both parties had to deal with each other.

[28] The defence was unsuccessful. In hindsight it can easily be said that NMHB Ltd should have done better than by putting up a fruitless defence. But I caution against imposing personal liability on directors because a company defends unsuccessfully. The Court of Appeal’s caution against imposing personal liability on directors is required so as not to undermine the separate identity of a company. The case is unremarkable: the company was without funds, the director tried to ward off liquidation, but with measures that were ultimately unsuccessful. But defending a hopeless case is not, in my view, enough to condemn the director to pay costs personally.

[29] There were efforts to try to resolve the matter out of court. The correspondence records efforts by counsel for NMHB Ltd to see if the matter could be resolved. Concrete offers of settlement were made. These were not for the full amount of the claim. The source of the funds was not within the company itself. Closer to the hearing, Mr Smith himself offered to guarantee payments. Those offers were not necessarily unreasonable given the insolvency of the company. A creditor pursuing liquidation has to evaluate whether it is better to carry on to a hearing and obtain a liquidation order knowing that there may be limited prospects of recovery from a liquidation, or to accept an offer which may be less than the full amount of the claim. The fact that the parties were not able to reach an agreement does not mean that
Mr Smith should be condemned when he tried to find some resolution short of liquidation.

[30] In summary, this matter is not an exceptional case and I do not find the “something more” that would be required for me to make an order for costs against Mr Smith. Accordingly, the application against Mr Smith is dismissed.

[31] I make an order for costs in favour of Mr Smith. That will be under category 2, band B. I trust that counsel will be able to confer and agree costs, but if they cannot memoranda may be filed.

.....................................

Associate Judge R M Bell

Postscript - Costs

[32] The parties were not able to agree costs. Memoranda were filed. The case is category 2 for costs. Counsel disagreed on all the steps for which costs could be ordered, and the time required for those steps.

[33] I fix costs as follows:

[34] I address matters where the applicant did not agree with the respondent.

[35] While no affidavit evidence was filed in opposition, I accept that 0.6 of a day was reasonable time to allow for preparing the opposition to the application for costs. That would have included working out strategy. In the event, the decision not to provide evidence was vindicated.
[36] I accept that the time for preparing a memorandum for the subsequent conference is correctly 0.2 of a day (not 0.4 as claimed by the respondent).

[37] I allow 0.3 of a day for the telephone conference on 26 September 2019 as claimed. While the conference was short, the issue required preparation before – whether the applicant could file affidavit evidence when the respondent had not adduced evidence himself. The time allocation is accordingly appropriate.

[38] The respondent does not have costs for preparing the bundle. While the respondent provided a bundle of authorities, that goes as part of preparation of written submissions. When that is considered, the time for preparing written submissions, 1.5 days, is appropriate.

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Associate Judge R M Bell