Fern Ltd ((in Liquidation)) v Financial Trust Ltd and Anor
| Jurisdiction | New Zealand |
| Judge | Venning J |
| Judgment Date | 30 November 2010 |
| Neutral Citation | [2010] NZHC 2119 |
| Docket Number | CIV-2009-404-004055 |
| Court | High Court |
| Date | 30 November 2010 |
And
[2010] NZHC 2119
Venning J
CIV-2009-404-004055
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
Catchline: Application by the defendant for costs against non-parties who were either associated with or had dealings with the plaintiff — defendant held a mortgage over the only asset held by the plaintiff and issued mortgagee sale proceedings — plaintiff gained an interim injunction preventing the mortgagee sale and sold the property to an associated company which was sold back to the defendant and then to a family trust — whether the conduct was designed to prevent the defendant from exercising its right of a mortgagee sale and recovering its costs — whether the injunction was used for an improper purpose — whether causation was required for costs against non-parties.
M Sandelin and N A Chamberlain for Defendant/Applicants
B Clode in person for himself, J Cooper and Wanganella Trustee Ltd L Gilbertson in person and for LJK Investments Ltd
JUDGMENT OF Venning J
This judgment was delivered by me on 30 November 2010 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date……………
The defendants seek costs against non-parties who were either associated with or who had dealings with the plaintiff company, Fern Limited. Fern is itself now in liquidation. The application is opposed by the non-parties.
Fern owned a property at 4 Wanganella Street, Birkenhead, Auckland. Mr Clode and his partner Ms Cooper were formerly shareholders and directors of Fern. More recently, Ms Cooper has been the sole shareholder and director. Fern was the trustee of Mr Clode and Ms Cooper's family trust. Mr Clode, Ms Cooper and their family live in the Wanganella Street property.
Financial Trust Ltd (FTL) and Matrix Custodians Ltd (Matrix), a company closely associated with FTL, provided funding to a number of companies associated with Mr Clode and Ms Cooper (the Clode interests).
As part of the security for the funding Fern granted a second mortgage over the Wanganella Street property to Securities Registry Ltd (SRL), a company associated with FTL. SRL subsequently assigned the mortgage to FTL.
During 2006 the Clode interests sought to substitute an alternative security for the Wanganella property. An issue arose between the parties as to whether the terms upon which substitution of security was permitted were those contained in an email sent on 22 April 2005 or a later facsimile of 1 July 2005.
The issue was not resolved. The Clode interests fell into default under the loan agreements. Mr Clode was adjudicated bankrupt on 12 February 2009.
In May 2009 FTL's solicitors advised Fern it intended to proceed to mortgagee sale. It had previously issued a Property Law Act notice demanding in excess of $5,457,000, the sum owing by the Clode interests. Fern then issued proceedings seeking an interim injunction to prevent FTL's mortgagee sale.
On 23 July 2009 Mortgage Holding Trust Company Ltd (MHTCL), the first mortgagee, also served a Property Law Act notice on Fern. FTL was served with a copy of the notice.
In a judgment delivered 23 September 2009 Asher J granted an interim injunction restraining the defendants from taking steps to enforce the mortgage. The Judge accepted there was a serious question whether the 22 April email applied and that, by insisting it did not apply and seeking to enforce the terms of the 1 July facsimile, FTL may have repudiated the security agreement and mortgage. As the Wanganella Street property was Mr Clode and Ms Cooper's family home, the Judge also accepted the balance of convenience favoured the grant of an injunction. The Judge directed a hearing of the substantive issue.
After obtaining the injunction, Fern and Ms Cooper took no further steps to pursue the substantive proceedings. Ms Cooper and Mr Clode did, however, take a number of other steps. On 10 November 2009 Ms Cooper became a shareholder and director of another company, and changed its name to Wanganella Trustee Ltd (WTL). Also during November 2009 Mr Clode met with a friend and business associate of his, Mr Gilbertson, to discuss the options for the Wanganella Street property. Mr Clode suggested that LJK Investments Ltd (LJK), a company controlled and operated by Mr Gilbertson, might purchase the first mortgage to avoid the mortgagee sale by MHTCL. LJK was itself owed approximately $315,000 by other entities associated with Mr Clode.
LJK subsequently agreed to purchase, by way of assignment, the MHTCL first mortgage from MHTCL. The assignment was apparently settled on 20 January 2010 for $1,096,627. With legal costs LJK paid out $1,100,000 in total.
Having purchased the first mortgage security LJK then immediately, the same day, exercised the power of sale to sell the Wanganella Street property to WTL for $1,562,500. The purchase price was to be settled by $1,100,000 cash with the balance of $462,500 left in as vendor finance.
At the time, there were a number of valuations in existence for the Wanganella Street property: a QV valuation of $2,800,000, a registered valuation of$2,600,000, and a fire sale valuation of $1,250,000.
Ms Cooper had previously arranged to borrow $1,250,000 from a solicitor's nominee company to fund WTL's purchase of the property. The nominee company registered a first mortgage, with priority of $1,562,500.
Although a balance of $462,500 remained owing by WTL, LJK and Mr Gilbertson took no steps to secure that sum against the Wanganella Street property (or otherwise).
WTL subsequently granted a second mortgage over the Wanganella Street property in favour of Ms Cooper. The second mortgage was stated to have a priority amount of $1,500,000.
As Fern had taken no further steps to advance the substantive proceedings and had breached timetable orders, the substantive proceedings were struck out on 30 March 2010. The file was then referred to Asher J to determine the status of the interim injunction order.
On 7 May 2010 Asher J awarded indemnity costs in favour of FTL and Matrix against Fern in the sum of $68,283.42. At the time Asher J also observed that it may be a case for the Court to consider whether costs should be ordered against those persons who had dictated the conduct of the proceedings. This application followed.
Fern was placed into liquidation by shareholders’ resolution on 2 August 2010.
A number of preliminary matters arose, including representation and the status of the proceedings given Fern's liquidation. The preliminary matters were dealt with at the outset of the hearing and are recorded in a minute issued on the day. In short, Mr Clode satisfied the Court he had authority to act for and represent his partner Ms Cooper. Leave was also granted to Mr Clode to represent the interests of WTL and to Mr Gilbertson to represent the interests of LJK for the limited purposes of the application for non-party costs.
The Court also confirmed that the fact Fern had been placed into liquidation did not affect the defendant's application for non-party costs, as the application was not directed at Fern. The application did not seek any relief against Fern or its property.
The Court has a general jurisdiction to award costs: s 51G Judicature Act 1908, Part 14 High Court Rules. There is nothing in the section or Rules to restrict the Court's jurisdiction to control proceedings before it. In appropriate cases and for proper reasons the Court may require a person who is not a party to the proceedings to make a payment towards the costs incurred by a party: Carborundum Abrasives Ltd v Bank of New Zealand (No. 2) 1 and Aiden Shipping Co Ltd v Interbulk Ltd. 2
In Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No. 2) the Privy Council considered the principles by which the discretion to order costs to be paid by a non-party would generally be exercised and summarised the position as follows: 3
(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 in para [40] of Hamilton v Al Fayed [(No. 2)
[2002] 3 All ER 641] as “those with no personal interest in the litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course”. In their case the Court's usual approach is to give priority to the public interest in the funded party getting access to justice over that of the successful unfunded party recovering his costs and so not having to bear the expense of vindicating his rights.(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” to the litigation, a concept repeatedly invoked throughout the jurisprudence – see, for example, the judgments of the High Court of Australia in Kn...
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