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Rahman Investments Limited (in liq) v Bailey [2021] NZHC 3249 (30 November 2021)

Last Updated: 5 December 2021

COSTS JUDGMENT OF ASSOCIATE JUDGE SUSSOCK

This judgment was delivered by me on 30 November 2021 at 4pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors:

Principle Liquidation Ltd, Auckland Doug Cowan, Solicitors, Auckland

RAHMAN INVESTMENTS LTD v BAILEY (costs) [2021] NZHC 3249 [30 November 2021]

Introduction

• [1] This is an application for costs by the respondent against the liquidator of the applicant company, Mr Kevin Davies, personally.

• [2] An originating application was filed in the High Court in Tauranga in July 2021 in the name of Rahman Investments Limited (in liquidation) seeking an order pursuant to s 266 of the Companies Act 1993. The s 266 order sought was that the respondent, Mr Ryan Bailey, the director of Clear Cut Tiling Limited, comply with a request under s 261 of the Companies Act to provide a producer statement for waterproofing (PS3). The producer statement related to tiling work at 4a Ada Street, Remuera, Auckland, a property that had belonged to the applicant company on liquidation.

• [3] The application was transferred to the Auckland registry where a notice of opposition was filed on behalf of the respondent together with an extensive affidavit in support and an application for security for costs.

• [4] The notice of opposition recorded that Mr Bailey opposed the orders sought and was seeking costs against the liquidator personally. The grounds of opposition included that:

(a) the application was misconceived and unmeritorious including because:

(i) the respondent did not contract with the applicant company in respect of works to which the PS3 related, but instead with Ms Farhana Samin Mohammad (also known as Ms Rahman) personally;

(ii) the producer statement is not a document of the company so cannot be ordered to be produced under s 266 of the Companies Act;

(b) Clear Cut Tiling had not been paid for the tiling works; and

(c) the liquidator was using s 266 of the Companies Act oppressively, vexatiously or unfairly.

• [5] When the matter was first called, there was no appearance for the applicant. Counsel for the respondent applied orally to strike out the application on the basis that there was no jurisdiction for the Court to make the orders sought by the applicant.

• [6] Lang J was not prepared to strike out the proceeding in the absence of the applicant. His Honour instead directed the applicant to file and serve a memorandum within 21 days setting out the jurisdiction for the Court to make the orders sought and its grounds for opposing the respondent’s application for an order that the proceedings be struck out.¹

• [7] Instead of the memorandum directed, the applicant filed a notice of discontinuance.

• [8] The respondent now seeks a costs award of $5,565.00 plus $269.56 in disbursements against the liquidator personally.

• [9] The applicant does not dispute that on discontinuance the applicant must pay the respondent’s costs up to the time of discontinuance. But the applicant resists any costs award against the liquidator personally.

• [10] The issue is whether costs should be awarded against the liquidator personally in this case.

Background

• [11] The applicant, Rahman Investments Limited (“RIL”), was placed in liquidation on 5 February 2019 by special resolution of the company’s shareholders, Mr Mohammad Rahman and Ms Farhana Mohammad.

• [12] The liquidator, Mr Davies, filed an affidavit in support of the opposition to the personal costs orders sought. Mr Davies’ evidence is that, on his appointment as liquidator, RIL had no funds in its bank account and no monies owing to it. Its only significant asset was a partially completed residential property at 4a Ada Street,

¹ Rahman Investments Limited (in liquidation) v Bailey HC Auckland CIV2021-404-1501, 20 August 2021 (Minute of Lang J).

Remuera. The property had not passed its final building, plumbing or drainage inspections and not all of the producer statements had been provided. As a result, there was no Code Compliance Certificate (“CCC”).

• [13] Mr Davies deposes that the “mortgagees were not willing to complete construction of the Property so it was sold in its uncompleted state” with both mortgagees suffering substantial shortfalls on the sale and leaving no surplus funds for unsecured creditors.

• [14] Mr Davies continues that shortly “after the sale” he was approached by the purchaser seeking the plaintiff’s documentation in relation to the construction of the property. He says that he then:

.. negotiated an agreement with the purchaser whereby, in consideration for a payment of $40,000 (including GST) [he] would obtain the producer statements relating to the house construction and apply for a CCC on behalf of the plaintiff.

• [15] An email from Mr Davies to the purchaser of the property dated 25 June 2020 is attached to Mr Davies’ affidavit and expressly records that the $40,000 will be paid to the liquidator’s company, Principle Liquidation Ltd, rather than the company in liquidation. The email states:

Great to talk last week. The agreement is that Principle Liquidation Ltd will receive $40,000 including GST on settlement of 4a Ada Street, in exchange for the paperwork it holds and warranting to apply for Code Compliance Certificate in the name of Rahman Investments Limited (in liquidation) at the direction of the new owners or Tony Parkes under the conditions outline in our agreement.

• [16] The liquidator’s reports record that by 5 February 2020 Mr Davies had incurred expenses of $54,261.82² in the liquidation with this increasing by a further $84,128.17 for a total of $138,389.99³ by 5 August 2020. Over this same time period the total realisations recorded were “$0.00”.⁴ Both these liquidator’s reports record that the liquidation is out of funds and is being “cash-flowed by the Liquidator”.⁵

² Kevin Davies “Liquidator’s Third Report” (29 February 2020) at [12].

³ Kevin Davies “Liquidator’s Fourth Report” (18 August 2020) at [12].

⁴ Liquidator’s Third and Fourth Reports, above n 3 and 4, at [12].

⁵ Above n 3 and 4 at [11].

• [17] The reason for this level of expenses is because proceedings were filed by Tempest Litigation Funders Limited in July 2019 seeking to replace Mr Davies as liquidator and for a number of other orders.⁶ Associate Judge Andrew dismissed the application in April 2020⁷ and later awarded indemnity costs to Mr Davies of 80 per cent of the costs claimed.⁸

• [18] One of the reasons for refusing the orders sought by Tempest was because of the lack of utility in the orders as RIL was hopelessly insolvent, its directors were bankrupt and living in Australia and RIL’s sole asset, the Ada Street property, had been sold for merely $665,000 while the secured mortgage debt was nearly $2 million.⁹ Associate Judge Andrew recorded at the time the judgment was delivered in April 2020 that “the liquidation was almost complete”.

• [19] Considering the facts in relation to Mr Bailey, the respondent in these proceedings, the liquidator first wrote to him seeking a copy of the PS3 and other warranty information in March 2019. Mr Davies stated that Mr Bailey was compelled to provide a producer statement pursuant to s 88 of the Building Act 2004. Mr Bailey’s solicitor replied that Clear Cut Tiling’s contract was with Ms Rahman personally and that Clear Cut Tiling had brought a claim in the Disputes Tribunal against Ms Rahman. Furthermore, s 88 did not require the production of producer statements.

• [20] The second liquidator’s report records that a number of parties had entered into contracts with Mr Rahman or Ms Rahman (or Ms Mohammad as she was also known) in their individual names, not with RIL, and that some of these creditors had brought claims in the Disputes Tribunal.¹⁰

• [21] The next letter from Mr Davies appears not to have been until 25 June 2021, followed by a second on 3 July 2021 when he stated that unless he received the PS3 by 5 July 2021 he would immediately file an application with the High Court in Tauranga.

⁶ Tempest Litigation Funders Limited v Davies [2020] NZHC 809 and see liquidators’ reports.

⁷ At [50].

⁸ Tempest Litigation Funders Limited v Davies [2020] NZHC 1790 at [15].

⁹ Tempest Litigation Funders Limited v Davies, above n 7 at [40].

¹⁰ Kevin Davies “Liquidator’s Second Report” (6 August 2019).

• [22] Mr Davies attempted to file the application in the Tauranga Registry on 6 July 2021.

• [23] Mr Bailey’s solicitor wrote to Mr Davies on 7 July 2021 repeating the points made in the March 2019 letter and inviting Mr Davies to withdraw the proceedings as Tauranga was not the proper registry, there was no right to the PS3 because the contract was not with the company in liquidation and that Mr Davies’ position in respect of s 88 of the Building Act was not correct.

• [24] The letter set out the relevant term from the contract between Mr Bailey and Ms Rahman in relation to the provision of the PS3:

All documents including PS3 and product warranties all [sic] be all supplied once final invoice has been paid.

• [25] The letter finished by saying if Mr Davies did not withdraw the proceedings then Mr Bailey would seek costs on an increased or indemnity basis for bringing an unmeritorious or vexatious claim.

• [26] Mr Davies replied on 9 July 2021 saying that he had interviewed Ms Rahman under oath and she had revealed that she had entered into the contract with Clear Cut Tiling in her capacity as a director of RIL. It is quite difficult to follow some of the further points in Mr Davies’ letter but he states that he has “suffered hugely in the liquidation with huge fee write-downs”, he has a duty to wind up the affairs of the company and Mr Bailey is preventing him from doing this. Mr Davies says that he will be using counsel at any hearing that occurs and will seek indemnity costs “on the basis that your client has not taken the five (5) minutes or so of his time to complete the attached PS3 ... as legally required.” He then makes various threats including that he will report the alleged breach of s 261 to the Registrar of Companies and the alleged breach of s 88 of the Building Act 2004 to the “Auckland Council approved authors manager”.

• [27] Following this letter, Mr Bailey filed his notice of opposition together with his affidavit in support. The affidavit included copies of the quote which included the terms of the contract agreed, copies of the invoices addressed to Ms Rahman’s email

address, copies of the text conversations with the Rahmans, copies of the liquidator’s reports and copies of the correspondence between the liquidator and Mr Bailey’s solicitor.

• [28] In addition to the notice of opposition Mr Bailey filed an application for security for costs.

Legal principles – costs against liquidators

• [29] The starting point is that all matters in relation to the costs of a proceeding are at the discretion at the Court.¹¹

• [30] Counsel for the applicant submits that a non-party liquidator will not be personally liable for costs other than in exceptional circumstances. The Courts are reluctant to make awards against liquidators who are non-parties because they may not be prepared to take on the role.

• [31] The Supreme Court discussed the award of costs against liquidators personally in Mana Property Trustee Ltd v James Developments Ltd (No 2):

• [10] 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. In the case of a liquidator that is a principle of very long standing. There is certainly jurisdiction to order a liquidator as a non-party to pay costs personally but such an order will not be made unless there has been some relevant impropriety on the part of the liquidator. The courts recognise that the other party can protect its position, should it be successful, through its ability to seek in advance an order for payment of security for costs. In Metalloy Supplies Ltd v MA (UK) Ltd Millett LJ summarised the position:

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 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

¹¹ High Court Rules 2016, r 14.1.

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.

The position of a liquidation is a fortiori. Where a limited company is in insolvent liquidation, the liquidator is under a statutory duty to collect in its assets. This may require him to bring proceedings. ... If he brings the proceedings in the name of the company, the company is the real plaintiff and he is not. He is under no obligation to the defendant to protect his interests by ensuring that he has sufficient funds in hand to pay their costs as well as his own if the proceedings fail. It may be commercially unwise to institute proceedings without the means to provide any security for costs which may be ordered, since this will only lead to the dismissal of the proceedings; but it is not improper to do so. Nor (if he considers only the interests of the company, as he is entitled to do) is it necessarily unreasonable.

• [11] That passage 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 (NSW) Pty Ltd v Todd (No 2). 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. But that is not ordinarily the position of a liquidator, although it may be the position of a creditor or shareholder who funds a liquidator. As the Privy Council remarked, where the non-party is a liquidator, he or she can realistically be regarded as acting rather in the interests of the company (and more especially its shareholders and creditors) than in his or her own interests. The reluctance of courts to make awards against liquidators who are non-parties is for the very good reason that otherwise they may not be prepared to take on the role and enter into litigation that may be beneficial for the company and thus for creditors.

• [32] Importantly, for this case, the Supreme Court added a footnote to paragraph 10 above as follows:¹²

... It is different when the liquidator is required, or chooses, to bring a proceeding or application in his or her own name, for example an application to set aside an insolvent transaction under s 292 of the Companies Act 1993, which is a right given to the liquidator and not to the company in liquidation. In such a case, if the liquidator is unsuccessful, he or she may be exposed to a costs award personally — whether or not he or she is able to obtain

¹² At n 6.

reimbursement from available company assets — as happened, for example, in Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 (Ch) and in Hart v Stiassny (1998) 12 PRNZ 240 (HC).

• [33] The Supreme Court in Mana Property Trustee referred to non-party awards against liquidators being exceptional. The Privy Council in Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) held that:¹³

... 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.

• [34] Dymocks was referred to by the Court of Appeal in its recent decision: TheCircle.Co.Nz Ltd v Trends Publishing International Ltd (in liq and rec).¹⁴ The Court relied on the reasoning of the High Court to confirm that costs were payable by two non-parties, Mr Johnson and TheCircle.co.nz, including the following passage:¹⁵

[84] ... Instead, it is abundantly clear that in this case the principal potential beneficiaries of the counterclaim given the quantum sought ($61 million) and the lack of creditors other than The Circle, were clearly Mr Johnson and The Circle and it is artificial to attempt to draw a distinction between the two. Mr Johnson through his ability to control both Trends and The Circle controlled both the direction of the litigation and the funding of it, with The Circle willingly providing the funds to enable the counterclaim to proceed. This clearly took them into the category identified by the Privy Council in Dymocks as non-parties who “promote and fund proceedings by an insolvent company solely or substantially for [their] own financial benefit” and who “should be liable for the costs if [their claim] fails”.¹⁶

(emphasis added)

Discussion

• [35] Section 266 of the Companies Act provides that the Court may make orders “on the application of the liquidator”, not the company in liquidation.¹⁷ The

¹³ Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25].

¹⁴ TheCircle.co.nz Ltd v Trends Publishing International Ltd (in liq and rec) [2021] NZCA 235 at [29].

¹⁵ Mr Johnson and The Circle’s application for leave to appeal to the Supreme Court was recently declined: TheCircle.co.nz Ltd v Trends Publishing International Ltd (in liq) [2021] NZSC 144.

¹⁶ Dymocks, above n 15, at [29].

¹⁷ Companies Act 1993, s 266(1).

application should therefore have been brought in the name of the liquidator rather than RIL. This is similar to s 292 as referred to in Mana Property Trustee above where the power is given to the liquidator.

• [36] If the application had been filed in Mr Davies’ name, there would be no question that the liquidator is liable for costs. A liquidator cannot avoid such an award simply by filing the application in the name of the company in liquidation, rather than his own name. If the application were for the benefit of RIL then the liquidator could have expected to be reimbursed by RIL if there were any funds.

• [37] From the irregularities with the form and filing of the s 266 application, Mr Davies does not appear to have taken legal advice prior to filing the application. These irregularities include that the application was brought in the name of RIL rather than his name, no lawyer was recorded as representing the company and it was filed in the Tauranga Registry when it clearly should have been filed in Auckland. The taking of legal advice was a factor that the Supreme Court held in Mana Property Trustee was relevant to the Court’s finding that there was no impropriety in the circumstances of that case.¹⁸

• [38] Furthermore, at the time the proceeding was brought, the property which the PS3 related to had already been sold by RIL in its uncompleted state. Mr Davies’ evidence is that it was only after the sale that the purchaser approached the liquidator seeking the plaintiff’s documentation in relation to the property’s construction. The liquidator voluntarily entered into the agreement in June 2020 “for the paperwork it holds and warranting to apply for a Code Compliance Certificate in the name of Rahman Investments Limited (in liquidation)”. Mr Davies ought not to have warranted to apply for the CCC in the name of RIL until he knew whether he had or could obtain all of the documents required.

• [39] The most recent liquidator’s report filed with the Companies Office on 9 September 2021 refers to this proceeding as follows:

¹⁸ Mana Property Trustee Ltd v James Developments Ltd (No 2), above n 2 at [13].

(p) I held documents and producer statements of the Company that would help the new purchaser obtain CCC, so I undertook to provide these and assist to obtain CCC for the building, in exchange for monies to the Company. There is just one producer statement for an item of physical “building work” that has not been provided at this time. I have had to obtain legal advice and also engage a barrister to assist me as Liquidator to obtain these documents from the Company. As Liquidator I made these requests as this producer statement author was engaged by the Company, to do work for the Company, on the property owned by the Company, for the building consent applied for by the Company. On checking with a building surveyor and person in the same trade, it would have taken less than ten minutes to complete the one-page producer statement and email this to me. Therefore despite my numerous requests, and having every other tradesperson provide these to me as Liquidator of the Company without any need to engage lawyers, in order to comply with my undertaking I have needed to file in the High Court an application to seek a court order for the producer statement and engage a senior barrister. Unfortunately the monies I receive from the current owner of the property will go towards paying (all or most) my legal and consultant’s fees.

• [40] The final sentence that the money received will go to legal and consultant’s fees must include the fees of the earlier proceedings because it does not appear that Mr Davies has taken legal advice in these proceedings. Even if he had, it would be unlikely to amount to $40,000 given the simple nature of the documents filed.

• [41] In my view it is clear that the s 266 application was filed against Mr Bailey for the liquidator’s personal benefit, not for the benefit of RIL. Mr Davies entered into an agreement after RIL had sold the property to the purchaser in its uncompleted state. The agreement was that his company, not RIL, would receive $40,000 if Mr Davies was able to supply the new owner of the property with copies of the producer statements and obtain a CCC in RIL’s name.

• [42] Counsel for the applicant submits that the liquidator acted responsibly in bringing the proceeding and then discontinuing because he was not able to provide security for the defendant’s costs. It was submitted that it is in the public interest that a liquidator obtain documents and relevant information with as little expense as possible and that a liquidator should not be exposed to costs simply where they act for insolvent companies. The Courts however are prepared to allow proceedings to continue without making a security for costs order where proceedings are in the public interest. In my view, the decision to discontinue by Mr Davies does not therefore change the position.
• [43] When the matter was first called, however, there was no appearance for the company in liquidation which cannot be described as responsible. Although it is difficult to assess the merits of the s 266 application itself in the absence of a full hearing, there is undisputed evidence that:

(a) Clear Cut Tiling succeeded against Ms Rahman personally in the Disputes Tribunal, confirming that the contract was with her personally;

(b) the terms of the contract were that the PS3 would be provided once all invoices were paid; and

(c) not all invoices have been paid.

• [44] In addition, counsel for the applicant accepts in submissions filed that s 88 of the Building Act does not oblige Mr Bailey to provide the PS3 contrary to Mr Davies’ assertions in correspondence.

• [45] All of these points were made in correspondence with the liquidator and yet he continued with the application.

• [46] For all these reasons the award of costs ought to be made personally against Mr Kevin Davies as liquidator.

Quantum

• [47] The costs sought by Mr Bailey of $4,452.00 are calculated on a 1A basis except for two steps at 1B. A 50 per cent uplift is sought, but only a 25 per cent uplift appears to have been applied, for a total of $5,565.00.

• [48] In correspondence between the parties, sent on a without prejudice save as to costs basis, Mr Bailey’s solicitor proposed costs of $4,780.00 calculated on a 2B basis except for the preparation of the notice of opposition and affidavit which was calculated on a 2A basis. The affidavit filed in support of the notice of opposition was extensive, as detailed above, and so I consider 2B is more appropriate for that step.

The schedule in the without prejudice correspondence also did not include a claim for the application for security for costs which adds a further 0.6 of a day.

• [49] Calculating costs on a 2B basis amounts to a total of $9,082.00. If 2A is used, the total is $5,019.00. The applicant does not make any submissions as to the appropriate category or band. I am not prepared to award a higher amount of costs than sought without hearing further from the parties and that would only add further costs for all parties. In the circumstances, therefore, I award the costs and disbursements sought as they are lower than the appropriate category and band in my view which ought to be a combination of 2B and 2A.

Result

• [50] I award costs in favour of Mr Bailey against the liquidator, Mr Kevin Davies, personally in the amount of $5,565.00 plus disbursements of $269.56 for a total of

$5,834.56.

Associate Judge Sussock