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Robbies Bar and Bistro Limited v Robbies Bar and Bistro Franchising Limited (in liquidation) [2020] NZHC 3484 (21 December 2020)

Last Updated: 15 January 2021

JUDGMENT OF ASSOCIATE JUDGE PAULSEN

This judgment was delivered by me on 21 December 2020 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

ROBBIES BAR AND BISTRO LTD v ROBBIES BAR AND BISTRO FRANCHISING LTD (in liq) [2020] NZHC 3484 [21 December 2020]

The application

• [1] The first plaintiff obtained judgment against the defendant (a company in liquidation).¹ The plaintiffs seek a non-party costs award against the respondents (Mr and Mrs Kofoed) who are the shareholders and directors of the defendant.

• [2] The plaintiffs claim Mr and Mrs Kofoed should pay non-party costs because:

(a) the defendant cannot satisfy the judgment;

(b) the Kofoeds funded the conduct of the defendant’s defence;

(c) the Kofoeds conducted the defence for their own personal business interests, to frustrate the plaintiffs and prolong the litigation; and

(d) the Kofoeds, as the directing minds of the defendant, failed without reasonable justification to accept or negotiate potential settlement based on a without prejudice except as to costs offer made on 13 July 2018.

• [3] The Kofoeds argue the defendant had valid grounds to defend the claim and was not insolvent when the proceeding began but ran out of funds during the course of the proceeding. Anticipating an improvement in the defendant’s trading, they helped with defence costs but when things did not improve the defendant was liquidated. They argue none of this was improper or even unusual and does not warrant an award of non-party costs against them.

Background

• [4] The second plaintiffs established the Robbies’ chain of restaurants in the early 1990s and franchised the business. It was based on a Scottish-themed logo and setup. Mr Roberts formed a connection with Mr Kofoed. Mr Kofoed expressed an interest in getting involved in the business. This culminated in an agreement for the sale and

¹ Robbies Bar and Bistro Ltd v Robbies Bar & Bistro Franchising Ltd (in liq) [2020] NZHC 2258.

purchase of the business dated 21 December 2007 (the agreement). The Kofoeds incorporated the defendant to purchase the franchise rights to the business from the first plaintiff.

• [5] The most significant feature of the agreement was that the purchase price was to be paid over 10 years, including a fixed percentage of franchise fees, to the first plaintiff as vendor to a maximum of $1,500,000.

• [6] After the defendant acquired the business things went well for some time. However, the financial accounts confirm the defendant steadily lost franchisees from 2014 and entered a slow period of decline leading, ultimately, to liquidation in January 2020.

• [7] In March 2018, on the 10^th anniversary of the agreement, the plaintiffs requested what they considered to be the balance owing of the purchase price under the agreement. When the defendant declined to pay anything further, proceedings were issued on 26 April 2018.

• [8] The essential question in dispute between the parties has always been the meaning to be attributed to what is cl 10 of the agreement. The plaintiffs contended that cl 10 provided for a fixed sum purchase price of $1,500,000. The defendant argued the purchase price was a maximum of $1,500,000 and provided it met the obligation to pay the correct percentage of franchise fees to the first plaintiff during the 10 year period, then whatever sum those payments totalled became the purchase price.

• [9] This proceeding has not been efficiently pursued by the first plaintiff as the following chronology should reveal.

• [10] The statement of claim has been subject to several amendments. Parties have been added and removed. In its first iteration the claim was originally filed on behalf of only the first plaintiff but against the defendant and the Kofoeds.
• [11] When first filed the claim was accompanied by an application for summary judgment which the defendants (at that stage including the Kofoeds) opposed. On 7 June 2018, the parties agreed the summary judgment application would be withdrawn, the parties would mediate, the proceedings would be stayed until 31 July 2018 and the plaintiff would discontinue its claim against the Kofoeds.

• [12] Mediation on 4 July 2018 was unsuccessful. Following mediation the first plaintiff issued a without prejudice except as to costs offer in settlement but that was not accepted.

• [13] The first plaintiff has had difficulty settling its pleadings, which is not what should be expected for a straightforward claim. By the time the case was heard the plaintiffs were relying on a fourth amended statement of claim. The statement of claim, amended statement of claim, revised amended statement of claim and second amended statement of claim were all filed in short order between 4 September 2018 and 25 October 2018.

• [14] On 12 December 2018, the defendant applied for security for costs which was opposed by the first plaintiff. The parties agreed to a stay of the proceedings pending determination of that application. There was then a change of position. On 21 March 2019, the Court made an order by consent that the first plaintiff was to pay $10,000 into Court as security for the defendant’s costs. The defendant was subsequently awarded costs on that application on 17 April 2019.

• [15] On 8 May 2019, the Court issued a minute with directions relating to discovery, adding Mr and Mrs Roberts as additional plaintiffs and timetabling further amended pleadings.

• [16] The plaintiffs then filed a third amended statement of claim on 21 May 2019 and a fourth amended statement of claim on 5 June 2019.

• [17] During June 2019, the parties gave discovery of documents. On 6 August 2019, counsel filed memoranda for case management directions to set the case down for trial. On 8 August 2019, the Court issued a minute with pre-trial directions.
• [18] From that point the defendant took no part in the proceeding.

• [19] The plaintiffs provided briefs of evidence on 26 September 2019. On 4 November 2019, Corcoran French, who had been acting for the defendant, advised the Court there were difficulties in obtaining instructions and advised of its intention to withdraw. The defendant’s evidence was timetabled to be exchanged on 15 November 2019, but it was not provided. On 19 November 2019, Corcoran French made application for leave to withdraw as solicitor on the record and on 22 November 2019 leave was granted.

• [20] The plaintiff sought amended directions. On 19 December 2019, an unless order was made requiring the defendant to provide briefs and bundle nominations on or before 20 January 2020 otherwise its defence would be struck out.

• [21] The defendant was placed into voluntary liquidation on 16 January 2020.

• [22] On 18 February 2020, the plaintiff made this application for non-party costs, although the substantive proceeding had not been determined. Mr and Mrs Kofoed promptly filed notices of opposition to that application.

• [23] The defendant’s liquidators did not give consent under s 248(1)(c) of the Companies Act 1993 to the plaintiffs to continue with the proceeding, thereby requiring the plaintiffs to seek the Court’s leave to do so, which they obtained on 30 June 2020.

• [24] The plaintiffs’ claim proceeded unopposed and was determined by Osborne J on 1 September 2020 without a hearing. On 18 September 2020, he recalled and reissued his judgment.

• [25] Judgment was entered for the first plaintiff against the defendant for $436,998 plus interest of $181,695.38 and costs and disbursements. In respect of costs, Osborne J considered a 30 per cent uplift on a 2B award was fair to take account of the without prejudice except as to costs offer which the defendant had not accepted.
• [26] With the substantive proceeding determined, the plaintiffs’ application for non- party costs was brought on for hearing.

The principles

• [27] Rule 14.1 of the High Court Rules 2016 affords the Court broad discretion to make an order for costs against a non-party in an appropriate case.² The leading authorities are the decision of the Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2)³ and the New Zealand Court of Appeal in Kidd v Equity Realty (1995) Ltd.⁴

• [28] Non-party costs orders are exceptional in the sense they are outside the ordinary class of cases where parties pursue claims for their own benefit and at their own expense. That a cost award has already been made against a defendant to the proceeding, does not preclude an award against a non-party.⁵ The ultimate question is whether in all the circumstances it is just to make the order, thereby requiring a fact specific inquiry.

• [29] A director of a company engaged in litigation will often have a personal interest in the matter which operates alongside the duty to creditors and shareholders. Costs will not normally be ordered where a non-party director is genuinely acting in the interests of the company, rather than their own interests.⁶ So, the facts of directorship and their financial involvement in the conduct of the proceeding are insufficient on their own to make a director, who has not been named as a party to the claim, personally liable for costs.⁷ In the words of William Young P in Kidd “[s]omething more is required”.⁸

2. S H Lock (NZ) Ltd v New Zealand Bloodstock Leasing Ltd [2011] NZCA 675 at [14] citing Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25].

³ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 2.

⁴ Kidd v Equity Realty (1995) Ltd [2010] NZCA 452 at [14]- [20].

⁵ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2), above n 2, at [17].

6. Asset Building M Pritchard Ltd v Hambeg Ltd HC Auckland CIV-2008-404-3781, 21 November 2008 at [13].

⁷ Metalloy Supplies Ltd (In liquidation) v MA (UK) Ltd [1996] EWCA Civ 671; [1997] WLR 1613 (CA) at 1620.

⁸ Kidd v Equity Realty (1995) Ltd, above n 4, at [16].

• [30] In Kidd the Court of Appeal suggested that the “something more” requirement might be regarded as satisfied if:⁹

(a) There was a relevant impropriety on behalf of the non-party director; or

(b) The director was not acting in the interests of (the company) but rather in his/her own interests, and was thus the real party.

• [31] After referring to overseas authorities William Young P observed:

[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, a 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.

• [32] Minister of Education v H Construction North Island Ltd (in rec and in liq) (Botany Downs) is an example of an award against the directing mind of the insolvent defendant, formerly part of the Hawkins Group, who unsuccessfully defended the claim at trial.¹⁰ Downs J awarded non-party costs against the corporate non-party, noting that Hawkins had sought to exploit its possible insolvency as a negotiating tactic, whilst at the same time funding a gold-plated defence the company itself could not otherwise afford. His Honour observed:¹¹

This lies at the heart of William Young J’s observation about adopting a “heads I win, tails you lose approach” to litigation, and is something approaching a moral precept: a litigant should not speak with two tongues ...”

• [33] Tyrion Holdings Ltd v Infrastructure NZ Ltd, concerned an unsuccessful claim by the plaintiff, Tyrion, in respect of which costs were awarded against it.¹² The costs were not paid and the defendant applied for costs against two non-parties who had

⁹ At [16] (footnotes omitted).

10. Minister of Education v H Construction North Island Ltd (in rec and in liq) [2019] NZHC 1459, (2019) 24 PRNZ 549.

¹¹ At [53].

¹² Tyrion Holdings Ltd v Infrastructure NZ Ltd [2019] NZHC 2864.

acquired shares in the company and funded the litigation in exchange for a share of any damages that might be recovered. The non-parties denied liability for costs saying that each acquired one-third of the shares in Tyrion and their stake in the success of the litigation reflected the shareholding. They also said Tyrion was not insolvent when they took their shareholdings. Associate Judge Smith ordered the non-parties to pay costs because they had promoted and funded the litigation substantially for their own benefit and not the benefit of Tyrion. He said:

• [80] The non-parties acknowledge that they injected money into INZ following their acquisition of their shares, and the only purpose of them doing that was to pursue the claim against the defendants. The litigation would not have proceeded without that funding, ... INZ was not then carrying on any business, and it has apparently not done so since 2008. It apparently had no remaining creditors to pay and no goodwill or ongoing business undertaking to protect. Its only activity since 2008 appears to have been the commencement and prosecution of the claim against the defendants. In those circumstances, the non-parties could only have been acting in their own personal interests when they acquired their shares and funded the litigation.

• [81] ... The situation is squarely within the category of case described by the Board in Dymocks, where a non-party promotes and funds proceedings by a company substantially for his or her own financial benefit.

Discussion

• [34] The Kofoeds were at all material times the directing minds of the defendant and personally involved in the decision-making for the conduct of its defence and directing the litigation strategy. There is nothing unusual about that as the defendant was a closely held company and they its directors.

• [35] At some stage after the proceeding was commenced the defendant was unable to pay defence costs and Mr and Mrs Kofoed made advances for that purpose. The defendant’s financial accounts to the year ending 31 March 2019 show that the company incurred legal fees totalling $42,651 and that Mr and Mrs Kofoed had introduced capital by way of advances of $36,474. When exactly those advances were made is not entirely clear. Mr Johnstone submits that it is open to the Court to take the view the Kofoeds started paying legal fees in 2018. Ms Biggs submits the advances were made in early 2019. I am prepared to accept Mr Johnstone’s submission as the Kofoeds have not provided evidence as to when the advances were made and they must have that information.
• [36] However, it is relevant, but not acknowledged by counsel, the claim was originally filed against the Kofoeds as second defendants on the basis they had guaranteed the defendant’s obligations under the agreement. Although counsel filed a memorandum with the Court on 6 June 2018 recording the plaintiff would discontinue the claim against the Kofoeds, that was only after the summary judgment application was made, opposed and then agreed to be withdrawn. The Kofoeds were therefore parties to that point and could be expected to personally bear some portion of the defence costs.

• [37] I also accept the defendant was insolvent, certainly by 31 March 2019. The accounts to 31 March 2019 show the defendant had traded at a loss of $17,407 in that year and when one takes account of the debt found to have been owed to the plaintiff and what appears to be a questionable value attributed to ‘goodwill’, the value of its liabilities exceeded the value of its assets by a sizeable margin.

• [38] But the authorities establish something more will be required justifying the Court making an order of non-party costs. Here, Mr Johnstone advances the contentions that the “something more” is to be found in the following matters:

(a) a questionable defence advanced on behalf of the defendant;

(b) Mr and Mrs Kofoed operated a deliberate strategy to delay the proceeding;

(c) Mr and Mrs Kofoed conducted the defence to avoid the liquidator clawing back franchise release fees that were distributed to them as drawings; and

(d) the Kofoeds spoke with ‘two tongues’ promoting and advancing a defence of the claim when all the while being silent the defendant had ceased trading.

The questionable defence

• [39] Mr Johnstone and Ms Biggs addressed the merits of the defendant’s defence to the claim. Mr Johnstone argued the defence relied on an unnatural reinterpretation of the agreement’s wording which the Kofoeds and their advisors should have known was never going to be successful. He countered Mr Kofoed’s assertion that the defendant had a strong defence based on legal advice by noting that no such advice has been disclosed. He also submitted that Osborne J had little difficulty dismissing their interpretation.

• [40] It is not for me to delve into the merits in a substantive way or take a different view than the one Osborne J arrived at. It is enough to say I consider the defence advanced by the defendant as to the interpretation of cl 10 was fairly arguable. The apparent ease with which Osborne J dismissed the defence must be considered in the context that the claim proceeded on the papers and was unopposed. As Ms Biggs said, the defendant did not present evidence that had a bearing on the issue the Court had to decide and the plaintiffs were presented with an open goal. However, importantly, the plaintiffs’ position there was no arguable defence is not congruent with the decision to withdraw the first plaintiff’s summary judgment application.

Strategy of delay

• [41] Mr Johnstone argues the Kofoeds’ strategy was to delay the inevitable judgment and cause the plaintiffs to commit more effort and costs to the litigation. He contends that with the benefit of the defendant’s disclosed financial statements there was never any interest in settlement and the plan must have been to extend out the litigation. This strategy was reflected, he says, in the following:

(a) the assertion of a specious defence to defeat the summary judgment application and failure to go to dispute resolution;

(b) failure to accept or to effectively engage in negotiations following the plaintiffs’ without prejudice except as to costs offer;

(c) unnecessary, or at least tactical, interlocutory applications such as applying for security for costs and request for further particulars or revised pleadings;

(d) non-compliance with case management directions specifically when the statement of defence was struck out for non-compliance with pre- trial timetable directions;

(e) withdrawal of instructions to Corcoran French on the eve of the timetable date for providing evidence.

• [42] I am unable to accept these submissions.

• [43] I have dealt with the submission concerning the ‘specious’ defence which I do not accept.

• [44] The submission the defendant failed to go to dispute resolution was not developed but the evidence of Mr Kofoed is that it was the first plaintiff that failed to engage the dispute resolution procedure in the agreement which was a reason the proceeding was first stayed. In any event, as the defendant attended mediation there was no failure on its part to attempt settlement.

• [45] The defendant did not accept the plaintiffs’ offer of settlement, nor did it, I understand, engage in negotiations in response to it but that offer was made very shortly after a mediation which had proven unsuccessful. The defendant’s position was that it owed the plaintiffs nothing at all but the plaintiffs’ offer was to settle for

$150,000. The defendant was entitled to take the view it was better off going to trial and risk costs consequences if it failed in its defence.

• [46] Mr Johnstone suggests the interlocutory process was hard fought with the defendant unnecessarily pursuing interlocutory applications, such as requests for particulars and security for costs, and the plaintiffs often adopting the course of least resistance to keep the case moving towards a hearing. Having considered the file I do not accept this characterisation of events. The plaintiffs’ application for summary

judgment was withdrawn on what must have been an assessment of its merits. The defendant’s requests for particulars were not frivolous and amendments to the plaintiffs’ pleadings were required notwithstanding those requests. The defendant’s application for security for costs was well made and it was awarded costs on that application. None of this demonstrates a strategy of the delay.

• [47] Mr Johnstone argues that the defendant’s withdrawal of instructions to Corcoran French at a late stage and its failure to exchange evidence in accordance with the Court’s timetable were “calculated”. I do not agree. Up to that stage the defendant had complied with timetable directions and there appears to have been a high degree of cooperation between counsel. The impression is that it was the defendant’s solicitors who often drove the case forward. However, as Ms Biggs submits, by November 2019 the ‘wheels had fallen off’ and the defendant could not afford legal representation. Mr Kofoed says it became clear around this time that the defendant may have to be put into liquidation and he details the steps taken to get advice in relation to this, ultimately leading to the decision to liquidate on 16 January 2020. That was a prudent decision in the circumstances.

• [48] There really is nothing, in my view, to support a view that anything the Kofoeds did or did not do at this time was calculated to cause delay. In fact, if that had been the Kofoeds’ strategy the decision to put the defendant into liquidation is inexplicable as it allowed for the plaintiffs’ pursuit of judgment to be accelerated.

• [49] The plaintiffs also complain that they were put to the time and cost of obtaining the leave of the Court to continue with this proceeding but that had nothing to do with the Kofoeds. It was the liquidators who would not give their consent to the plaintiffs continuing the proceeding.

Conduct of defence for their own purposes

• [50] Between 2014 and 2018 the defendant received negotiated release fees from franchisees. The plaintiffs consider the defendant should have accounted to it for a share of these payments under cl 10 of the agreement but did not do so. The payments were:

(a) 2014 – Elmwood Robbies $45,000;

(b) 2015 – Cranford Street Robbies $45,000;

(c) 2016 – Robbies 305 Limited $100,000;

(d) 2017 – Queenspark Robbies $45,000;

(e) 2018 – Washdyke Robbies $45,000.

• [51] Mr Johnstone asserts it is more than coincidental that Mr and Mrs Kofoed resolved to put the defendant into voluntary liquidation after the second anniversary of receipt of the last franchise release fee. He referred to a liquidator’s power to impugn an insolvent transaction under s 292 of the Companies Act 1993 where it involves related parties and is entered into within two years of the date of commencement of the liquidation. He argues the second anniversary of receipt of the Washdyke Robbies’ release fee, which he says was ‘no doubt’ distributed as drawings or salary to Mr and Mrs Kofoed, fell comfortably before the decision to liquidate. Mr and Mrs Kofoeds’ ‘game plan’ was, he submits, to ensure that franchise release fees were received and distributed in gross without accounting for the percentage due to the first plaintiff under cl 10 of the agreement so they could be protected from claw- back by the liquidators. He boldly submits:

The course of steps taken in the latter part of 2019, leading up to the 16 January 2020 resolution to liquidate, were conceived to financially defeat this Plaintiff and protect their drawings and salaries, financed by those release fees.

• [52] The allegation made is a serious one. It is similar to an allegation that was advanced in Botany Downs and rejected for lack of evidence. There, Downs J noted the seriousness of the allegation, that there was no material to support it, it had been denied and the plaintiffs could have cross-examined the non-party in relation to it but did not.¹³ Similar considerations apply here.

¹³ Botany Downs, above n 10, at [48].

• [53] I do not need to consider whether the requirements for the making of a claim by the liquidator under s 292 could ever have been made out in this case, noting, however, Ms Biggs’s submissions they could not. This is because I consider the assertion made is fanciful.

• [54] Again, if Mr and Mrs Kofoed wished to protect themselves from a claim by a liquidator they would not have put the defendant into liquidation. They could easily have further delayed the proceeding putting much greater distance between the receipt of franchise release fees and the date of liquidation.

• [55] Furthermore, if the defendant had taken no steps at all to defend the claim the plaintiffs might have obtained an order liquidating the defendant at the earliest sometime in late 2018. The only release fees received in the two preceding years were ones from Queenspark Robbies and Washdyke Robbies. I do not consider that Mr and Mrs Kofoed would have continued to trade and defend the plaintiffs’ claim, with all the costs and inconvenience involved in that, to protect themselves from a claim by a liquidator to recover relatively modest amounts.

• [56] Furthermore, the timing of the application to liquidate the defendant has been adequately explained. In reliance upon statements in the liquidators’ reports Mr Johnstone submitted the defendant ceased trading in early 2019. However, Mr Kofoed says that although in the 2019 year the defendant suffered a loss from trading for the first time, it was decided to continue trading because there was optimism about a new Riccarton Robbies franchise as well as plans for future expansion. He says by late 2019, the Riccarton franchise was not flourishing and the hospitality market had tightened and the decision was made to liquidate. I accept that evidence. Mr Kofoed was not cross-examined on this evidence. It is not clear upon what the liquidators based their statements and my attention was not taken to anything else to contradict Mr Kofoed.

Speaking with two tongues

• [57] The final argument advanced by the plaintiffs relies upon observations of William Young P in Kidd,¹⁴ and Downs J in Botany Downs ¹⁵ of a non-party adopting a “heads I win, tails you lose” approach to litigation. In Botany Downs that involved Hawkins robustly defending at great cost the case against it while exploiting its possible insolvency.¹⁶

• [58] Mr Johnstone argues that Mr and Mrs Kofoed continued the strategy of defending the plaintiffs’ claim whilst remaining silent that the defendant had ceased to trade. By doing so, he submits, they weaponised the defendant’s insolvency and unnecessarily caused the plaintiffs to incur costs.

• [59] I do not accept that submission. This case is very different from Botany Downs. Mr and Mrs Kofoed were originally parties to this proceeding. The assistance they provided to the defendant was limited. They did not advance a gold-plated defence or take the case to trial. I am satisfied the defendant did not cease to trade until late 2019 when the decision was made to liquidate. I am also satisfied that it was very soon after the Kofoeds realised the defendant could not continue to trade and upon taking appropriate accounting advice that it was put into liquidation. In short, there is nothing to suggest there was ever an attempt to exploit the defendant’s insolvency position.

Result

• [60] The plaintiffs have failed to satisfy me there is “something more” justifying an award of non-party costs. There was no relevant impropriety on the part of Mr and Mrs Kofoed and nothing to suggest that the decision to continue the defence was made to serve their own interests and not the interests of the defendant. The plaintiffs’ application is accordingly refused.

¹⁴ Kidd v Equity Realty (1995) Ltd, above n 4.

¹⁵ Botany Downs, above n 10.

¹⁶ At [53].

• [61] Counsel should confer and seek agreement on costs. If agreement is not possible any party seeking costs may apply by memoranda by no later than 3 February 2021 with any reply to be filed by 10 February 2021.

O G Paulsen Associate Judge

Solicitors:

First Law Limited (John Shingleton), Christchurch Corcoran French, Christchurch

cc: The Director, Robbies Bar & Bistro Franchising Ltd, Christchurch

email: robbiesfranchising@actrix.co.nz