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Tobem Holdings Limited v Kid Country Holdings Limited (in liquidation) [2022] NZHC 3193 (1 December 2022)

Last Updated: 14 December 2022

JUDGMENT OF GORDON J

[As to costs]

This judgment was delivered by me

on 1 December 2022 at 3.30 pm, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors/Counsel:

D Bigio KC, Auckland T Nelson, Auckland

K Cocks, Auckland

Waterstone Insolvency, Auckland

TOBEM HOLDINGS LTD v KID COUNTRY HOLDINGS LTD (IN LIQ) [2022] NZHC 3193 [1 December 2022]

• [1] This is an application for costs.

• [2] On 16 September 2022, I granted Tobem Holdings Ltd (Tobem) leave to continue legal proceedings against Kid Country Holdings Ltd (in liq) (Kid Country) under s 248(1)(c) of the Companies Act 1991 (Act).¹ The appointed liquidators opposed the leave application.

• [3] Costs were reserved. I observed that Tobem, as the successful party, was prima facie entitled to costs. The parties have been unable to agree costs.

• [4] Tobem seeks scale costs on a 2B basis (plus disbursements) with a 33 per cent uplift, totalling $10,024.82 against Kid Country and the liquidators of Kid Country personally (on a joint and several basis).

• [5] The liquidators accept that Kid Country should pay costs to Tobem on a 2B scale basis and undertake to pay accordingly. However, they oppose this application on the basis that nothing further is appropriate and they are not personally liable.

• [6] There are accordingly two issues for determination: whether increased costs should be awarded and whether costs should be awarded against the liquidators personally.

Costs principles

• [7] An award of costs is governed by Part 14 of the High Court Rules 2016 (Rules). Costs are determined at the discretion of the court,² subject to relevant principles. It is well-established that costs follow the event and are paid by the unsuccessful party.³ The determination of costs should be practicable and expeditious.⁴ The same principles apply to costs on interlocutory applications.⁵

¹ Tobem Holdings Ltd v Kid Country Holdings Ltd (in liq) [2022] NZHC 2367.

² Rule 14.1.

³ Rule 14.2(1)(a).

⁴ Rule 14.2(1)(g).

⁵ Rule 14.8.

• [8] The Rules provide that the court may award increased costs if it finds that the party opposing costs has contributed unnecessarily to the time or expense of the proceeding or a step in it by taking an unnecessary step or pursuing an argument that lacks merit.⁶ More generally, the court may award increased costs for some other reason which justifies the order, despite the principle that the determination of costs should be predictable and expeditious.⁷

• [9] Where a court orders costs against two or more parties, costs liability is joint and several unless the court otherwise directs.⁸

Increased costs

• [10] Tobem seeks increased costs under rr 14.6(3)(b)(ii) and (3)(d) of the Rules. Mr Bigio KC, for Tobem, submits that the liquidators unnecessarily and unreasonably caused Tobem to incur the costs of the leave application. He submits the liquidators could have consented to the continuance of the legal proceeding under s 248(c) of the Act and avoided the need for an application to the Court. He says their arguments in opposition lacked merit and ultimately failed. They should have known that the Court would grant the application and should have avoided the time and expense to both parties by consenting.

• [11] Mr Bigio also submits that the liquidators unnecessarily forced a separate application and hearing by taking the position that the leave application should be heard separately from the substantive hearing. This has also increased costs to both parties.

• [12] In response, Ms Cocks, for the liquidators, submits that the liquidators acted reasonably when they decided they were well placed to determine Tobem’s claim, in accordance with their statutory powers and with the best interests of all unsecured creditors in mind. Further, the liquidators sought to have the application for leave determined first so as to avoid the time and cost to both parties of preparing for a full determination of the claim.

⁶ Rule 14.6(3)(b)(ii)

⁷ Rule 14.6(3)(d).

⁸ Rule 14.14.

• [13] I consider that the liquidators were acting within the scope of their statutory powers when they declined to consent to Tobem continuing proceedings against Kid Country. The fact their arguments were ultimately unsuccessful does not mean they were entirely without merit to the extent increased costs are justified. Equally, it was not unreasonable to request that the leave application was heard separately from the substantive hearing. If Kid Country had been successful, and the leave application had been declined, both parties would have been saved the time and expense of preparing for the substantive hearing.

• [14] For the above reasons, increased costs are not justified.

Liquidators’ liability

• [15] Counsel referred the Court to a number of authorities. Before discussing those cases it is relevant to note that in a proceeding such as this, where a Court has granted an application to continue proceedings against a company in liquidation⁹ the party to the litigation is the company, not the liquidator. That is the case even in a proceeding commenced against the company after it is in liquidation.¹⁰

Case law

• [16] In Mana Property Trustee Ltd v James Developments Ltd (No 2) the Supreme Court observed:¹¹

• [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.

• [11] ... 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

⁹ Companies Act 1993, s 248(1)(c).

10. Mana Property Trustees Ltd v James Developments Ltd [2010] NZSC 124, [2011] 2 NZLR 25 at [9].

¹¹ Mana, above n 10 (footnotes omitted).

prepared to take on the role and enter into litigation that may be beneficial for the company and thus for creditors.

• [17] The Court in Mana referred to the English authority Metalloy Supplies Ltd v MA (UK) Ltd,¹² which sets out the approach:

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. ...

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.

• [18] The Privy Council decision Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) clarified that an unsuccessful non-party should pay the successful party’s costs in cases where the non-party has both controlled and funded the proceeding or is to benefit from it, because: ¹³

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.

• [19] The Court in Mana, responding to Dymocks, held that a non-party liquidator can realistically be regarded as acting in the interests of the company (and more especially its shareholders and creditors) rather than in his or her own interests.¹⁴

12. Mana, above n 10, at [10]; citing Metalloy Supplies Ltd v MA (UK) Ltd [1996] EWCA Civ 671; [1997] 1 WLR 1613 (CA) at 1620.
13. Mana, above n 10, at [11]; citing Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR 145 at [25](3).

¹⁴ Mana, above n 10, at [11].

• [20] Mr Bigio referred the Court to the following cases:

(a) In Hoggart v Richworth Properties Ltd this Court granted the applicant leave to continue proceedings against an insolvent company.¹⁵ The Court also awarded costs against the liquidator who had declined to consent to the continuation of legal proceedings, opposed the application for leave to continue, and declined the applicant’s proof of debt claim prior to the leave hearing. The liquidator then failed to appear at the leave hearing but continued to oppose. Master Lang (as he was then) ordered costs against the liquidator on the basis that he ought to have consented to the continuation of legal proceedings “at an early stage” because he “must always have known that the likelihood of the plaintiffs’ proof of debt being accepted was virtually non- existent”.¹⁶

(b) In IH Wedding & Sons Ltd this Court also granted leave to continue legal proceedings against a company in liquidation. ¹⁷ At issue was the lack of available funding for further litigation or inquiries. Justice Allan awarded costs against the liquidators despite acknowledging that they had acted “prudently and responsibly” in providing the Court with information and that it was open to them to oppose the application.¹⁸ The Judge concluded:

[31] Liquidators are empowered to consent to an application for leave. Had that occurred here then no application would have been necessary. There are no circumstances which justify the Court in departing from the usual practice of making an order in favour of a successful party against an unsuccessful party.

¹⁵ Hoggart v Richworth Properties Ltd HC Auckland M146-IM03, 31 March 2003.

¹⁶ At [17].

17. IH Wedding & Sons Ltd v Buy-Sell Realty NZ Ltd HC Auckland CIV-2008-404-5502, 2 December 2008.

¹⁸ At [30].

• [21] Ms Cocks referred the Court to the following two cases:

(a) In Easton Agriculture Ltd v Manawatu-Wanganui Regional Council the Court declined to award costs against a non-party receiver.¹⁹ No security for costs application had been made. The Court commented on the “special position” of non-parties in relation to costs and the role of notice:²⁰

An application on notice is necessary to subject [non-parties] to the Court’s jurisdiction in this proceeding. And the non- party is entitled to respond and be heard. The Court cannot simply assume that the second plaintiff is attending fully to the receiver’s interests, despite the inherent likelihood that that is so.

The Court further held that it was only necessary to consider the appropriateness of a costs award against a non-party (here, a receiver) in circumstances where the unsuccessful party failed to meet the costs themselves. Leave was reserved to apply for costs against the receiver.

(b) However, in Magsons Hardware Ltd v Patel Justice Allan declined to award costs against the liquidator personally following an unsuccessful opposition to an application for leave to continue legal proceedings against a company in liquidation.²¹ The Judge stated:²²

... [Counsel] asserts ... that had [the liquidator] acted in good faith, then he would have granted his consent as liquidator, so obviating the need for the making of any application to the Court at all. In my opinion it would not be proper to make an order for costs against [the liquidator] on that ground. A liquidator is entitled to leave the question of consent to the Court if he or she so chooses. Although I accept that where bad faith on the part of the liquidator is established there may be a case for an award of costs, this is not such a case. In general, liquidators must remain entitled to decline consent without automatically running the risk of incurring personal liability for costs.

19. Easton Agriculture Ltd v Manawatu-Wanganui Regional Council HC Palmerston North CIV- 2008-454-31, 22 December 2011 at [47].

²⁰ At [50] (footnote omitted).

²¹ Magsons Hardware Ltd v Patel HC Auckland CIV-2010-404-2891, 10 September 2010.

²² At [27].

Submissions

• [22] Mr Bigio submits that the liquidators unreasonably and unnecessarily adopted an opposition that lacked merit, and unnecessarily forced a separate hearing. He says that the unreasonableness of their conduct is amplified by the facts that:

(a) Tobem is the only substantial known creditor. It lodged a proof of debt claim of $234,135.35. The only two other proofs were for $6,624.00 and $944.91, respectively.

(b) The liquidators have refused to advise the identity of the other creditors (providing only a bare assertion that they are unrelated).

(c) Kid Country, on the liquidators’ account, has no substantial assets.

• [23] Mr Bigio submits that these matters, taken cumulatively, reach the “exceptional” threshold and justify a personal order.

• [24] In response, Ms Cocks says there has been no impropriety on the part of the liquidators, and an award for costs against the liquidators personally is not justified. The liquidators had yet to make a determination on the proof of debt filed by the plaintiff and the outcome of this was not pre-determined.

Discussion

• [25] The Supreme Court decision in Mana provides the necessary guidance to this Court. I am not assisted by the plaintiff’s references to Hoggart and IH Wedding. Unlike the liquidator in Hoggart, the liquidators in this case have not yet determined the proof of debt claim lodged by Tobem.

• [26] In relation to IH Wedding, the issue of costs was dealt with in two paragraphs at the end of the decision granting leave to the appellants to continue the appeal against the respondent which had been placed in voluntary liquidation. There is no real analysis of the principles regarding costs awards against liquidators. The Court simply said:

[30] Mr Quinn applies for costs. I accept at once that the liquidators acted prudently and responsibly in placing before the Court a good deal of information relating to the conduct of the respondent’s business, and it was open to them to oppose the application. Nevertheless I am satisfied that it is appropriate that costs ought to follow the event in the ordinary way.

• [27] The Judge then referred to Hoggart and another case²³ in which orders for costs against liquidators were made. With respect to the Judge the decision does not seem to accord with the applicable principles.

• [28] I consider that the approach of the same Judge in Magsons Hardware was more consistent with the principles later articulated in Mana. The relevant passage is set out above at [21](b).

• [29] The threshold for awarding costs against liquidators personally is high. Some evidence of bad faith conduct on the part of the liquidators is required.

• [30] For reasons already given above, I do not think that opposing the application was inherently unreasonable. The background facts provided by Tobem provide context but are not sufficient to reach the threshold required. Tobem seeks to recover damages for breach of contract through continued legal proceedings. These amounts cannot be claimed through the liquidation process, which only determines claims for debt. It is clearly in Kid Country’s interests to avoid such legal proceedings. The liquidators can be taken as acting in the interests of Kid Country and its shareholders, rather than their own interests. On this basis, it was reasonable for the liquidators to oppose the leave application. There is no suggestion that the liquidators stood to benefit personally from opposing the leave application.

Notice

• [31] In support of the liquidators’ opposition to costs being awarded against them personally Ms Cocks says that Tobem failed to put the liquidators on notice of its intention to do so. Given my decision, on other grounds, that costs should not be awarded against the liquidators personally, it is not necessary to consider the issue regarding notice.

²³ Clarence Holdings Ltd v Mt Albert TV (1993) Ltd HC Auckland CP12/97, 12 July 1999.

Result

• [32] There is no basis for awarding increased costs or costs against the liquidators personally.

• [33] I have reviewed the annexure to Tobem’s memorandum. I accept that all costs and disbursements set out in the calculations table are reasonable and properly incurred.

• [34] I make an order for costs in favour of Tobem against Kid Country on a 2B basis, totalling $7,050.50 plus disbursements of $647.65 (excluding GST).

Gordon J