IN THE Court of appeal OF new Zealand

I TE KŌTI PĪRA O AOTEAROA	
 CA136/2017
 [2018] NZCA 494

	
BETWEEN	
EDEL METALS GROUP LIMITED
First Appellant

JOHN ANDREW SORENSEN
Second Appellant	
	
AND	
GEIER LIMITED
First Respondent

MICHAEL JOHN JACOMB, TRENA KATHLEEN JACOMB AND PETER REGINALD RICHARDSON AS TRUSTEES OF THE GENSET TRUST
Second Respondents	

 CA490/2017	
	
BETWEEN	
MICHAEL JOHN JACOMB, TRENA KATHLEEN JACOMB AND PETER REGINALD RICHARDSON AS TRUSTEES OF THE GENSET TRUST
Appellants	
	
AND	
EDEL METALS GROUP LIMITED
First Respondent

GEIER LIMITED
Second Respondent

JOHN ANDREW SORENSEN
Third Respondent

DONALD GIBSON
Fourth Respondent	

Hearing:	
17 April 2018	

Court:	
Cooper, Dobson and Toogood JJ	

Counsel:	
D H McLellan QC and J C Adams for Appellants in CA136/2017 and First and Third Respondents in CA490/2017
N W Ingram QC and C F Foote for Appellants in CA490/2017 and Second Respondents in CA136/2017
No appearance for First Respondent in CA136/2017 and Second and Fourth Respondents in CA490/2017 	

Judgment:	
12 November 2018 at 3.30 pm	

JUDGMENT OF THE COURT

A	The appeal in CA136/2017 is allowed.  The High Court is to determine afresh the quantum of the reasonable costs payable to the second respondents on an indemnity basis.
B	The second respondents must pay the appellants costs for a standard appeal on a band A basis and usual disbursements in respect of the appeal in CA136/2017.  We certify for two counsel.  Costs in the High Court are to be determined in that Court. 
C	The appeal in CA490/2017 is allowed in part.  The High Court is to determine what is a reasonable amount for the third respondent to pay as indemnity costs in respect of the application for security for costs made by the appellants against the first respondent.  The appeal is otherwise dismissed. 
D	We make no order for costs in respect of the appeal in CA490/2017.  Costs in the High Court are to be determined in that Court. 
____________________________________________________________________

REASONS OF THE COURT

(Given by Cooper J)

Table of Contents

	Para No
Introduction	[1]
Appeal CA136/2017	[7]
	Background	[9]
The argument on appeal	[30]
	Indemnity costs	[31]
	Costs against a non-party	[50]
	Quantum	[54]
Appeal CA490/2017	[68]
Result	[73]
Introduction
[1]	These two appeals arise out of judgments delivered by Fogarty J on 22 February and 4 August 2017.
[2]	The judgments were delivered after the appellants in CA490/2017 (the Genset Trustees, who were the defendants in the High Court) had applied to strike out the statement of claim filed against them and had also sought increased or indemnity costs against the appellants in CA136/2017.  The first appellant in CA136/2017, Edel Metals Group Ltd (EMG), was the plaintiff in the High Court.  John Andrew Sorensen was its sole director and not named as a plaintiff in the proceeding.
[3]	EMG did not oppose the application for strike-out, nor did it oppose an order that it pay costs on a category 3B basis.  In the first judgment, Fogarty J struck out the claim accordingly but, against the opposition of EMG and Mr Sorensen, ordered them to pay the actual costs and disbursements reasonably incurred by the Genset Trustees.  He reserved the question of interest.
[4]	In the second judgment, Fogarty J quantified the costs payable in accordance with the first judgment as $952,935.29.  A joint memorandum of counsel was filed on 10 August 2017 seeking correction of that figure and in accordance with a minute issued by Lang J on 11 August, the amount was reduced to $847,031.79.  That was the figure the parties agree should have been calculated in the second judgment;  however, EMG and Mr Sorensen continue to dispute liability for indemnity costs.  
[5]	Some costs issues were left unresolved by the second judgment.  Fogarty J referred to an amount of $24,960.75 which had been claimed as costs leading up to and including the hearing on 2 February 2017 which gave rise to the first judgment.  The Judge noted that there was no presumption arising from the first judgment that those costs would be recoverable on an indemnity basis.  He reserved leave for the parties to apply further in respect to those costs.  He took a similar approach to a claim for $39,578.40, for costs incurred following the 2 February hearing.
[6]	The second judgment also rejected a claim by the Genset Trustees for costs against Mr Sorensen in respect of an application for security for costs that had previously been dealt with by Faire J, and allowed a claim by EMG and Mr Sorensen for costs on a 2B basis for attendances in relation to the issues addressed by the second judgment.  The Genset Trustees appeal against those aspects of the second judgment.  If successful, a sum of $170,442.65 would be added to the costs payable by EMG and Mr Sorensen.
Appeal CA136/2017
[7]	In this appeal, the appellants ask the Court to set aside the costs award against Mr Sorensen entirely.  They argue that the Judge made errors of fact and/or principle in holding that the proceeding warranted what was an exceptional remedy of making a non‑party costs order against him, especially on an indemnity costs basis.  Alternatively, they submit that the High Court was wrong to find that legal costs of nearly $850,000 could have reasonably been incurred since they are, on the appellants’ calculations, more than nine times the costs that would have been awarded on a 3B basis.  If the Court accepts that there should be liability for indemnity costs, but that the quantum is unjustified, the appellants seeks that the fee notes be referred to the New Zealand Law Society for consideration under s 132(2) of the Lawyers and Conveyancers Act 2006.  Alternatively, they ask that they be referred back to the High Court for taxation by the Registrar, or for an Associate Judge to consider them as a referee acting under s 25 of the Senior Courts Act 2016.
[8]	Before addressing the substance of the appeal, it is appropriate to set out the background of the litigation and the reasons which Fogarty J gave for the costs award that he made.
Background
[9]	Fogarty J’s judgments must be considered in the context not only of the present litigation, but also in the context of previous proceedings concerning the Genset Trustees and Kenneth David Wikeley.
[10]	The starting point is the judgment of Kós J in Jacomb v Wikeley, in which the Genset Trustees successfully claimed that they had made four advances totalling USD $1.5 million as loans to EMG and that a personal guarantee was given by Mr Wikeley as to 50 per cent of capital and interest payable under the loans.  Mr Wikeley contended that the money was advanced not as a loan but as payments by way of subscription for 23.75 per cent of the shares in EMG.  Mr Wikeley and Mr Jacomb were at one stage friends and business associates.  EMG had been formed to investigate and carry out the mining of minerals in Chile.  The venture was unsuccessful and the company failed to repay the loans.  Demand was made on Mr Wikeley under the guarantees, but the demand was not met.  The Judge found that Mr Wikeley was an unreliable witness and Mr Jacomb was more credible.  He held that the effect of the documentation reviewed “could hardly be clearer” in establishing that the loan had been made.
[11]	Kós J rejected various defences that were raised, except for a finding that Mr Wikeley had transferred a number of shares in another company (Orion Minerals Group Ltd) to the Genset Trustees as security for the loans.  This meant that the whole of the security had to be accounted for against Mr Wikeley’s debt.  It was not possible to ascertain the value of those shares on the evidence, so the Judge ordered that the Genset Trustees must account for the value (if any) on sale in reduction of the judgment debt, and transfer any shares held over and above the value of the judgment debt.
[12]	The judgment debt was not paid and in due course a bankruptcy notice was served on Mr Wikeley.  Mr Wikeley applied to set it aside.  He argued that the bankruptcy notice was an abuse of process, and that as a result of events occurring since the judgment of Kós J he had a cross claim under s 17(1)(d)(ii) and 17(7) of the Insolvency Act 2006 that far exceeded the judgment debt.  In order to understand the basis of Mr Wikeley’s claims it is necessary to say something more about EMG.
[13]	As recorded by Associate Judge Bell in dealing with the application to set aside the bankruptcy notice, EMG was incorporated on 18 November 2008.  Its directors were Mr Jacomb and Mr Donald Gibson, an accountant acting on behalf of Mr Wikeley.  EMG issued 100 million shares, each with a face value of $1.  23,750,000 shares were issued to the Genset Trustees;  76,250,000 were issued to Geier Ltd, a corporate trustee.  Mr Gibson was a director of Geier Ltd.  Geier Ltd held the shares in EMG on trust for Mr Wikeley and interests associated with him.
[14]	EMG was struck off the register in February 2012 and remained struck off  when Kós J heard the claim in November 2012.  However, Mr Wikeley procured its restoration to the register in early 2013, before Kós J delivered his judgment.  The key events from that point were succinctly summarised in this Court’s judgment on appeal from Associate Judge Bell’s decision declining to set aside the bankruptcy notice.  After referring to the restoration of EMG to the register, this Court said:
[12]	Then Mr Wikeley and or his interests took the following actions:
•	On 18 January 2013 Geier Ltd transferred one share in Edel Metals to Mr Wikeley.
•	In March 2013 Mr Wikeley was appointed a director of Edel Metals and Mr Jacomb’s directorship was terminated.
•	On 15 April 2013 Mr Gibson’s directorship of Edel Metals was terminated.
•	On 16 April 2013 Mr Wikeley as director signed a notice to the shareholders advising that the Board had resolved to:
(i)	issue 200 million new shares to a new investor for $0.01 per share in order to provide the company with working capital and satisfy the solvency test under the Companies Act; and 
(ii)	offer a further 200 million new shares to the existing shareholders at an issue price of $0.01 per share.
•	The notice was accompanied by a special resolution of the shareholders excluding the respondents [the Genset Trustees].  The resolution approved the issue of 200 million new shares to the new investor and recorded that these shares would rank pari passu with all existing ordinary shares.
•	On 16 April 2013, 200 million shares were issued to the new investor, a company under the effective control of Mr Wikeley called Sundome Enterprises Ltd (Sundome).  Sundome became the new majority shareholder of Edel Metals.
•	Later in April 2013 Sundome paid $20,000 to Edel Metals for the shares.
•	Sundome appointed a Ms Lan Zhu to be a director of Edel Metals.
•	The respondents not having taken up the offer relating to the additional 200 million new shares, those shares were distributed to the other shareholders (all interests associated with Mr Wikeley) at $0.01 per share.
•	On 22 April 2013, Edel Metals gave notice to the original shareholders (the respondents and Geier Ltd) requiring payment of the unpaid share capital within 14 days.  The notice was signed by Mr Wikeley and Ms Zhu.  In response, the respondents served a minority buy-out notice on Edel Metals under s 111 of the Companies Act.  There is no evidence Edel Metals complied with the notice.
[15]	Associate Judge Bell accepted that the matters raised by Mr Wikeley were capable of constituting an equitable set-off and therefore of coming within the statutory definition of a cross claim.  He considered that it would be sufficient if he could show he had a “genuine triable claim”.  However, he concluded Mr Wikeley did not have such a claim.  He had procured EMG to take various steps from January 2013 onwards so as to engineer a call on shares for the purpose of defeating the Genset Trustees’ rights under the loan, and their rights against Mr Wikeley under the judgment of Kós J.  For these reasons he declined the application to set aside the bankruptcy notice on the basis that it was a foregone conclusion that the Genset Trustees would obtain full relief under s 174 of the Companies Act 1993.
[16]	This Court upheld the Associate Judge’s decision.  The arguments on appeal raised three issues, the first being whether the asserted cross claim satisfied the requirements for an equitable set-off, as the Associate Judge assumed.  The second was whether the Associate Judge had wrongly arrogated to himself a discretion by allowing the bankruptcy notice to stand even though finding that Mr Wikeley had raised issues capable of founding an equitable set-off.  The third issue was whether, having regard to the available evidence, the Associate Judge was entitled to find the respondents would inevitably obtain relief under s 174 of the Companies Act, with the consequence that the matters raised by Mr Wikeley were not genuinely triable.
[17]	This Court held that it was not necessary to consider the prospect of the respondents successfully obtaining relief under s 174.  This was because any cross claim relied on against the bankruptcy notice under s 17(7) of the Insolvency Act must be a “genuine triable claim”:  the debtor must demonstrate the asserted cross claim (whether counterclaim, set-off or cross demand, the three kinds of cross claim mentioned in s 17(7)) is “a claim of true substance that he genuinely proposes to pursue”.
[18]	On this issue the Court was satisfied Mr Wikeley could not demonstrate he had such a claim.  The Court observed:
[43]	The call-up of the shares had its origins in an elaborate and highly contrived series of events engineered by Mr Wikeley.  On the face of it, the steps he took commencing in January 2013 are suggestive of bad faith and impropriety, impacting on the validity of the call-up.  The steps taken call for an explanation from Mr Wikeley, but other than saying the company needed to give itself more working capital, none has been forthcoming.  We refer in particular to the artificial inflating of the shareholding and the highly questionable shareholders’ resolution that shares issued at $0.01 per share would rank pari passu with existing shares of $1 each.  …
[19]	The Court also noted that the Sundome shares were issued in breach of the Genset Trustees’ pre-emptive rights, and referred to other “dubious aspects” of what had taken place, including the restoration of the company to the company’s register at the behest of Mr Wikeley who was not a shareholder or director at the time (contrary to s 328(2) of the Companies Act);  the transfer of one share to Mr Wikeley in breach of the company constitution;  and the removal of Mr Jacomb as a director.
[20]	In the absence of evidence explaining the sequence of events, the Court could not be satisfied that his claim was genuine and triable.  Given that conclusion, it was not strictly necessary to go further.  However, it noted had it been necessary, the Court would also have found that the two claims were not sufficiently interdependent to satisfy the requirements of an equitable set-off.  The bankruptcy notice was issued to recover money advanced by way of loan in 2008 and 2009.  The call on the shares was not made until several years had passed and after both parties had allowed the company to be struck off the register for failing to file a return.  Nor was repayment of the loan dependent on the call.
[21]	Consequently, the appeal was dismissed.  Mr Wikeley was subsequently adjudicated bankrupt, and Mr Sorensen became the sole director of EMG, Mr Wikeley ceasing to be a director.  Mr Sorensen was also the majority shareholder in Sundome Enterprises Ltd (Sundome), holder of the largest number of shares in EMG, those shares having been issued at the value of 1 cent per share.  Its 200 million shares had been issued to Sundome in April 2013, when it was effectively under the control of Mr Wikeley, as found by the Court of Appeal.
[22]	Fogarty J found that on 20 December 2013, a little over a month after Associate Judge Bell’s decision declining to set aside the bankruptcy notice, Mr Sorensen resolved, as the sole director, to revoke Mr Wikeley’s previous call on the 100 million shares allocated initially to Geier Ltd and the Genset Trust.  He then resolved to make a new call of 25 cents per initial share in those shares.  As Fogarty J observed:
[12]	There was no general meeting of shareholders of the company to discuss and approve the calls, nor to authorise the commencement of these proceedings.  It was, therefore, clearly a decision of Mr [Sorensen] the sole director of the company.  It was undoubtedly a serious decision to try to collect on this call.  The case was fought hard procedurally before Mr [Sorensen] abandoned the litigation
[23]	The proceeding before Fogarty J commenced in January 2014.  EMG, which Mr Sorensen controlled, sought judgment from Geier Ltd in the amount of $19,062,500, plus interest.  Geier Ltd did not defend the claim because it was insolvent.  EMG also sought judgment against the Genset Trustees for $5,937,500 together with interest.
[24]	The Genset Trustees denied there was any valid resolution to issue the 100 million shares to the shareholders at $1 per share and they further denied that there was any valid resolution to issue 23,750,000 shares to them and 76,250,000 shares to Geier Ltd.  Faire J ordered EMG to pay security for costs in the sum of $45,000, but the security was never paid.  Since Mr Sorensen was fully in control of EMG it must have been his decision not to pay the costs, and as Fogarty J found, it was he who decided not to pursue the litigation.  But that decision was made only after numerous procedural steps had been necessary, including discovery and the incurring of significant legal costs.
[25]	Coming to the first of the judgments under appeal, since EMG was unlikely to be able to pay significant costs, the Judge saw the key issue as whether Mr Sorensen should be liable for costs in his personal capacity as director, and if so, whether he should be ordered to pay indemnity costs.  The Judge noted that it was “quite an extraordinary step” for Mr Sorensen to call the unpaid capital on the shares.  He observed that that had been done in the face of the “very severe criticism by the Court of Appeal”, aspects of which are described at [17] to [20] above.  Further, that criticism had specifically been drawn to Mr Sorensen’s attention by an email from Mr Jacomb before the present proceeding was commenced.  The Judge commented, “He nonetheless litigated, eyes wide open.”
[26]	In the High Court, it was argued that indemnity costs were inappropriate on the basis that EMG’s conduct and that of Mr Sorensen prior to the commencement of the proceeding in February 2014 should not be taken into account.  It was also argued that it is only in an exceptional case that costs will be awarded against a non‑party such as Mr Sorensen.  It was inappropriate for that step to be taken in circumstances where there was a High Court judgment recording that the defendants owed EMG $23.5 million in unpaid share capital.  If that sum were paid, EMG would be solvent and entitled to rely on the judgment as a set-off.  
[27]	Fogarty J noted that Kós J’s judgment did not bind the Genset parties in the present litigation because the proceeding involved Mr Wikeley and neither EMG nor Geier Ltd were defendants.  Apart from that, Fogarty J considered (in our view correctly) that all Kós J had done was to record the existence of the shareholding and the fact that the capital had not been called.  Fogarty J held: 
There is nothing in the reasoning or decision of that case which creates an issue estoppel, let alone a res judicata, as between EMG, Mr [Sorensen], and the defendants in these proceedings.  As the foregoing analysis demonstrates, the statement “the shares had a face value of NZ$1” was essentially part of a narrative and unrelated to the proof of the advances and the personal guarantee of Mr Wikeley and his subsequent personal liability.
[28]	After discussing submissions and authorities which had referred to the issue of “piercing the corporate veil”, Fogarty J found that Mr Sorensen had no genuine commercial reason for the call on the shares.  He considered it was “opportunistic, deliberate, unfair and unprincipled”.  Further:
It was an abuse of his fiduciary obligations as a director … assuming in his favour that he was lawfully a director.  It was improper.  The absence of a general meeting is tangible evidence that the decision to issue proceedings was taken in the absence of good faith.  In that context, he cannot now resist costs being ordered against him.
[29]	In a later part of the judgment, Fogarty J recorded his conclusions that it would be appropriate to award indemnity costs in the following paragraphs:
[44]	I have been particularly impressed by the fact that conduct of  [EMG’s] directors had been criticised severely by the judiciary.  In the face of that, Mr [Sorensen], without calling a general meeting, and thus without getting the support from the shareholders of the company for the purpose for which he was using the money, made the call “improperly”, as that standard is used in Rule 14.6(a).
[45]	In exercise of the discretion given to this Court in Rule 14.6(1)(b), I order that Mr [Sorensen] and EMG pay the actual costs and disbursements, being reasonably incurred by the defendants.  The question of interest is reserved.
The argument on appeal
[30]	Mr McLellan QC, who appeared for both EMG and Mr Sorensen in support of the appeal, submitted that the High Court made errors of fact and principle when holding that the proceeding warranted the exceptional remedy of a non‑party costs order, let alone one pitched at an indemnity level.  
Indemnity costs
[31]	Mr McLellan submitted that the Judge’s criticism of Mr Sorensen’s actions was based on factual error.  First, the Judge found that he had made a call and issued proceedings in the face of the very severe criticism by the Court of Appeal which had been specifically drawn to his attention by an email from Mr Jacomb.  However, the Court of Appeal’s judgment criticising Mr Wikeley’s conduct, and the original call of the share capital, was only delivered on 16 April 2014, which was four months after EMG had resolved to call up the capital and three months after it commenced proceedings.  The Judge was therefore wrong to find that the appellants entered into the litigation with “eyes wide open” in terms of their knowledge of the Court’s criticism.
[32]	Mr McLellan also noted that in making its criticisms, this Court had referred to the fact that not all the evidence about the unpaid share capital was before the Court, and the findings were made because the Court could not be satisfied that Mr Wikeley had a genuine and triable claim in the absence of any explanation about the events that it had set out and criticised.  Mr McLellan suggested that it was significant that the Court’s criticism had been made in the context of a call on the entire unpaid share capital, not 25 per cent of it as had been called during the period when Mr Sorensen was in control of the company.
[33]	Mr McLellan is of course correct on the chronology.  However, both the call on the share capital and the litigation were commenced after Associate Judge Bell’s decision which itself had been highly critical of the steps which Mr Wikeley had taken.  Associate Judge Bell’s decision has been mentioned briefly above.  For present purposes, it is sufficient to note the following observations of the Associate Judge:
[41]	I regard the steps that were taken as being commercially unusual and explicable only on one proper basis.  Mr Wikeley has contrived matters so that he can get rid of his liability to the Genset trustees by engineering this call on the Genset trustees as shareholders.  But the reality is this.  The new shareholder, Sundome, is now the majority shareholder of the company.  It has become a shareholder by putting $20,000 into the company.  It is under the effective control of Mr Wikeley.  Mr Wikeley has passed all these resolutions without consulting the Genset trustees.  The steps taken are obviously calculated to be to their detriment.  The effect is that they will be required to put $23m into the company while still having no more than a minority interest in the company.
[34]	And he subsequently observed:
In my view, it is a foregone conclusion that the Genset Trust Ltd would obtain full relief under s 174 [of the Companies Act].  This engineering of a call on shares to defeat the trustees’ rights under their loan is nothing more than a device to defeat the Genset Trust Ltd’s rights against Mr Wikeley under the judgment.
[35]	Mr Ingram QC submits on behalf of the Genset Trustees that it is to be inferred that Mr Sorensen knew of the impugning of the earlier call by Associate Judge Bell.  We accept that submission.  In his affidavit of 23 August 2016, sworn in response to the application for costs against him and EMG, Mr Sorensen deposed to having become involved with EMG in about April 2013.  He spoke of being aware of commercial opportunities that existed for EMG at that time and recorded a particular interest in a rock crusher.  Mr Sorensen said he was unwilling to invest a large amount of funds in EMG until issues relating to outstanding amounts owed by EMG to creditors and the significant outstanding unpaid capital had been resolved.  He went on to describe the circumstances in which shares had been issued to his company Sundome and thereafter when “Mr Wikeley’s personal position deteriorated” he became the director of EMG on 27 September 2013.  He became the sole director as we have seen after Mr Wikeley resigned on 2 October 2013.  In his affidavit, Mr Sorensen also acknowledged that at the time he became a director he was aware that a call had been made on the Genset Trustees of all EMG’s unpaid capital.  
[36]	It is inconceivable given his position as the sole director of the company, and his familiarity with the first call on unpaid capital made by Mr Wikeley, that Mr Sorensen would have been unaware of the criticisms made by Associate Judge Bell and his description of the conduct surrounding the call on share capital as being nothing more than a device to defeat the Genset Trustees’ rights.  His affidavit, however, made no mention of Associate Judge Bell’s decision, or of any basis on which making the new call at 25 cents in the dollar would make a difference to the proper characterisation of what had previously occurred.
[37]	Further, Mr Sorensen chose to proceed with the High Court litigation when he must have become aware of the criticisms made by the Court of Appeal.  As to that, on 18 April 2014, some two days after the release of this Court’s decision, Mr Jacomb sent an email to Mr Sorensen which copied verbatim the contents of [43] of the judgment.  
[38]	Mr McLellan submitted that the criticism in the Court of Appeal judgment of the original call procured by Mr Wikeley did not give rise to an implication that the new circumstances represented by the less onerous call on the unpaid capital would also be a less than legitimate claim that should not be pursued.  Mr McLellan noted that this Court’s judgment was given in the context of an interlocutory appeal, without the opportunity for cross-examination and the opportunity to inquire fully into the facts.  He submitted that a mistake had been made by the Court when it said EMG’s constitution mandated a share price of one dollar, in support of its criticism of the price at which the new share issues were made.  The $1 price per share had applied to the original share issue only.  
[39]	We do not consider that is a significant issue.  The point is that as a result of the various machinations of Mr Wikeley, a very substantial number of new shares were issued at a fraction of the value that had been placed on the shares owned by the Genset Trustees.  The result was that with a small outlay, other parties were in a position to control the company and take action to the exclusion of the Genset Trustees.  Sundome, at the relevant time controlled by Mr Wikeley, was the new majority shareholder as from 16 April 2013.
[40]	The position therefore was that knowing what had occurred, Mr Sorensen arranged for the new call to be made, essentially standing on the ground that Mr Wikeley had procured by what this Court described as “the artificial inflating of the shareholding” and the “highly questionable shareholders’ resolution” that the shares issued at $0.01 per share would rank pari passu with existing shares of $1 each.  There has been no challenge to this factual scenario.  Mr Sorensen was in a position to procure the new call on capital as a basis of the steps previously put in place by Mr Wikeley, with which he was well familiar.
[41]	For his part, Mr Sorensen makes no attempt to justify the restructuring which occurred, standing on the somewhat disingenuous ground that he has been advised by his lawyers that the events prior to the issue of the proceedings are “technically irrelevant to the question of increased/indemnity costs or my personal liability to pay costs”.  Although he discusses the history, he offers no explanation of the commercial rationale for it.
[42]	Mr McLellan further submitted that Fogarty J was wrong in holding that EMG’s constitution or the Companies Act required EMG and/or Mr Sorensen to call a general shareholders’ meeting before making a call on capital.  Clause 7.1 of the Constitution gave that power to the Board in broad terms.  Since he was the only member of the Board, there was no requirement that Mr Sorensen should call a meeting.  The fact that he proceeded without a meeting could therefore not be used to show that Mr Sorensen was acting in bad faith.  Again, this submission overlooks the fact that Mr Sorensen was prepared to rely on the state of affairs that Mr Wikeley had created for the purpose of defeating the rights of the Genset Trustees.  While not responsible for what Mr Wikeley had done, he was apparently quite happy to rely on the company structure that had been created by Mr Wikeley, to pursue his own ends.
[43]	Mr McLellan further submitted that Fogarty J had incorrectly found that Mr Sorensen had acted in breach of fiduciary obligations as a director.  Mr McLellan complained that the Judge had not explained in what respect Mr Sorensen had abused his fiduciary obligations as a director, nor why his relationship with the second respondents was fiduciary in nature.  We agree that the basis upon which the Judge made his observations about fiduciary duty is not clear.  We accept, as Mr Ingram submitted, that a sole director exercising powers in a manner that is discriminatory against one group of shareholders may be subject to a fact-based fiduciary duty to those shareholders.  However, we also accept that if the Judge intended to find that in the circumstances as they had arisen Mr Sorensen had a duty to prefer the interests of the Genset Trustees to his own then that should have been specified.  We think there is merit too in Mr McLellan’s point that a finding of breach of fiduciary duty ought not to be made in the context of a costs application and on the basis of contested affidavit evidence.  Nor is it necessary we think to do so.  Indemnity costs can clearly be justified on other grounds.
[44]	Mr Sorensen’s evidence was that he made the call to pursue a valid claim on the unpaid share capital so that the company could explore new business avenues.  Mr McLellan submits that this evidence was entirely disregarded by the Judge.  We do not accept that is so.  In reality, the Judge rejected Mr Sorensen’s evidence:  he found that Mr Sorensen had no “genuine” commercial reason for the call, nor was it a bona fide exercise of his duties as a director.  In this respect we think it is telling that Mr Sorensen was only able to refer in the vaguest of terms to “commercial opportunities for EMG that existed at the time”, as lying behind the call on the unpaid shares.  The only particular example he gave was a prototype rock crusher which EMG had originally acquired in 2009, but which he claimed had been subject to further development by its inventor.  This same business opportunity had been spoken of by Mr Wikeley in his evidence before Kós J.  
[45]	Mr Sorensen claimed he had agreed to invest $20,000 in EMG to pursue the possibility of gaining rights in the rock crusher technology, but no more because of the uncertainty surrounding EMG’s debts and issues concerning its unpaid capital.  Whether or not Mr Sorensen’s interest in the rock crusher was genuine, Fogarty J was justified in taking a sceptical view as to his motives when Sundome’s investment of $20,000 procured it a controlling interest in EMG and, through the call on the shares of the Genset Trustees stood to yield a substantial amount of money.  A calculation made by Mr Ingram put the figure at $2.376 million and we did not understand Mr McLellan to dispute that figure.
[46]	Further, the idea that there was a debt to EMG in respect of unpaid share capital could not properly stand alongside Kós J’s determination that the Genset Trustees had provided money to Mr Wikeley by way of loan and were not subscribing for shares.  As he put it:
[25]	It is I think perfectly clear from the communications thus far that what is being provided for here is a loan.  No shareholder, least of all Mr Wikeley and the other Chilean business interests he was said to represent via Geier, was paying up share capital.  Nor was Mr Jacomb.  His contribution could have been structured as payment of share capital, but that would have been inconsistent with the other shareholders who were making no such contributions to EMG.  So the payment was structured as a loan.
[47]	As noted above, Fogarty J considered and rejected the argument advanced on behalf of Mr Sorensen that the effect of the judgment was that Geier Ltd and the Genset Trustees owed EMG $23.5 million in respect of unpaid share capital.   
[48]	We think it is telling that, while purporting to rely on the $1 face value of the Genset Trustees’ shares, Mr Sorensen can refer to no narrative fitting with the loan findings of Kós J that would explain why the defendants would have become indebted to EMG in this respect.  Nor does he endeavour to explain why Sundome’s shares, ranked pari passu, should have a value so much less than those of the respondents, other than to assert that the price paid was “merely a function of achieving the percentage shareholding that Sundome wanted in return for taking a risk in EMG”.  We consider Fogarty J was right to reject the alleged liability in respect of the unpaid shares as a proper reason justifying the claim.  The Judge also recorded his scepticism about the reasons given by Mr Sorensen about why such a substantial claim was abandoned (concern about removal of assets, the personal nature of the dispute and offensive correspondence) after the order for payment of security for costs was made. 
[49]	Given these various considerations when EMG, under Mr Sorensen’s control, belatedly withdrew its proceeding after the outlay of considerable effort and cost on the part of the Genset Trustees in defending their position, an award of indemnity costs was well justified.  As the Judge found, the circumstances were clearly such as to engage the Court’s jurisdiction to award such costs under r 14.6(4)(a) of the High Court Rules 2016, because the proceeding was improperly commenced and continued.
Costs against a non-party
[50]	Mr McLellan also submitted that the case did not warrant the imposition of a non-party indemnity costs order.  He referred again in this context to evidence by Mr Sorensen that he was not funding the litigation and would not directly benefit from the call on the share capital.  The decision to call up the unpaid capital was one made for genuine commercial reasons and reasonable.  It was also reasonable to have commenced proceedings to recover EMG’s contingent asset of NZD $100 million represented by the unpaid share capital, a matter that had not properly been tested in the courts.  Mr McLellan further relied on the fact that an order for security for costs had been made:  in such circumstances the court should be cautious in exercising its power to also order indemnity costs.
[51]	Most of these points have already been considered in the course of the preceding discussion.  As to the funding of the litigation, Mr Sorensen’s evidence might have been more significant had he said who was funding the litigation, but that point aside, we do not see his claimed non-involvement in funding as being of any significance for present purposes.  As to benefit, if EMG had obtained and executed judgment, the company’s value would have been significantly enhanced.  The argument based on security for costs is unconvincing given that the security ordered was not paid.
[52]	The most important point is that at all relevant times Mr Sorensen was the company’s sole director, and it was as a consequence of his decisions that a claim was advanced which had no realistic prospect of success and ultimately abandoned, but only after a costly interlocutory process.  
[53]	The award of costs against him does not make Mr Sorensen responsible for the actions of Mr Wikeley.  His relevant conduct is in causing EMG to commence the claim in reliance on and taking advantage of the steps previously taken by Mr Wikeley.  We see the circumstances as fully justifying the personal order made against him.
Quantum
[54]	Fogarty J dealt briefly with costs in the first judgment.  He noted that the claim of the Genset Trustees had been supported by copies of all the fee notes, which were in a very detailed form as to the attendances.  He recorded the “general criticism” made on behalf of EMG that the fees were to a level that was simply unjustified, as being far in advance of scheduled costs.
[55]	After referring to the amount of the claim against the Genset Trustees, together with interest and the possibility that the litigation might have taken three years to complete, he envisaged the possibility that liability might exceed $7 million.  In the circumstances, he calculated that the approximate fees charged of $900,000 did not appear excessive, at about 12 per cent of the sum at stake.  He then concluded briefly that he saw no basis for the Court finding there had been any over‑charging, commenting that it was not for the Court to question the fee notes.  He proceeded to order that Mr Sorensen and EMG “pay the actual costs and disbursements, being reasonably incurred by the defendants”.
[56]	In the second judgment Fogarty J quantified the costs payable in accordance with the first and dealt with some other issues related to costs which we have previously described, and will mention again in the discussion of CA490/2017.  The actual quantum of the fees and disbursements dealt with in the first judgment was subsequently corrected by agreement, in the minute of Lang J dated 11 August 2017 (the costs were reduced to $847,031.79).
[57]	In this Court, Mr McLellan submitted that the quantum of the costs was not reasonable for a matter that was struck out before it was set down for trial.  He pointed out that the rules only contemplate recovery of indemnity costs where these were “reasonably incurred”.
[58]	Mr McLellan referred to Bradbury v Westpac Banking Corp where it was said that indemnity costs should be calculated not on the basis of the costs rules, but on the basis of a reasonable allocation of actual costs having regard to the appropriate time taken, the significance and complexity of the work, and a median hourly rate reasonably applicable.  Mr McLellan illustrated his submission that the costs claimed in the present case were too great by noting that Westpac had claimed indemnity costs of $1.683 million together with disbursements of $136,865 for a case that had proceeded to a seven‑day trial in the High Court, all causes of action being withdrawn during closing submissions.  Harrison J made an indemnity costs orders of $996,712.
[59]	Harrison J observed:
[205]	On the other hand, the phrase “reasonably incurred” envisages a degree of judicial oversight of awards of indemnity costs.  The discretion must be exercised in a manner which delivers a just and fair result. … Westpac’s fees are of a magnitude which an objective observer would not have expected for this litigation, however egregious the firm’s conduct may have been.  That observation is not meant as a criticism; the bank is entitled to incur whatever level of legal costs it considers appropriate.  But standing back and adopting an overview for the purpose of assessing … liability, I am not satisfied that all Westpac’s actual costs were reasonably incurred.
[60]	Harrison J’s judgment was upheld on appeal to this Court.  In the course of doing so, this Court noted that the assessment of costs is particularly a matter for the Judge who had the conduct of the case throughout, noted that Harrison J had conducted a careful review of the costs applying the appropriate tests, deducted over $686,000 from the claimed figure, that no affidavit from an expert had been filed challenging the Judge’s appraisal and that counsel for the appellant had not attempted to dissect the judgment in his submissions.  This Court continued:
From such assessment of the case in the round as it has been possible to make in the course of hearing and considering the parties’ submissions in the light of the record we discern no sense of disproportion.  Certainly the experience has reinforced the need to retain, as far as practicable, the control inherent in the scale, which is also the basis for increased costs.  But this case falls clearly within the exception to that rule.  The order for reasonable actual costs was fully justified and there is no basis to challenge its amount.
[61]	The difficulty that this Court faces in the present case is that Fogarty J for whatever reason did not carry out a “careful review” of the costs or, if he did, he has not provided a record of the process that he followed.  
[62]	Both parties have attempted to fill that gap by descending into the detail of the relevant invoices and endeavouring to justify them (counsel for the Genset Trustees) or criticise them (counsel for EMG and Mr Sorensen).  But we do not think it is appropriate for this Court to be engaged in such an exercise where the only reasoning available from the Judge is the proportion he calculated that the fees represented of the potential sum at stake.  We have already referred to the Judge’s observation that it was not for the Court to question the fee notes.  However, it was for the Court to satisfy itself that the costs incurred were “reasonably incurred”.  Here, the Judge seems to have reached his conclusion without the kind of analysis referred to in Bradbury and in the absence of any reference to a proper justification of the amounts claimed.  We are satisfied that his approach was wrong in law.
[63]	Mr McLellan submitted that if this Court considered it was not well placed to assess the reasonableness of the costs claimed there were three possible options.  First, a party can obtain from the Registrar an appointment for taxation of costs under rr 14.18 to 14.23 of the High Court Rules.  Resort to those rules was identified by this Court in Black v ASB Bank Ltd as a possible basis upon which a party who was liable to pay indemnity costs claimed under a contract could challenge the reasonableness of the costs claimed.  This Court observed that while the rules had been little used in recent years, the capacity to tax costs still exists.  However, we doubt whether the Registrar would be the appropriate person to form a judgment in a case of this complexity and we discount that option.
[64]	A second option identified was the possibility of referral to the Law Society.  The Court would refer the fee notes to the Law Society for reasonable review under s 132(2) of the Lawyers and Conveyancers Act 2006.  Mr McLellan in fact advised that the appellants had referred the fee notes to the Law Society in a complaint dated 28 September 2017.  The Law Society had rejected the complaint on the basis that the appellants were not parties chargeable under s 132(2) and suggested, contrary to dicta in Black v ASB Bank Ltd, the reasonableness of a costs order made against a losing party in favour of a winning party was not properly the concern of the Law Society.  In any event, this Court as presently constituted considers that the fixing of costs ought to be a matter carried out by the court.  Where there is a dispute as to the reasonableness of indemnity costs, the trial court should make a decision on the reasonableness of the costs claimed.
[65]	The third option, which we prefer, is to refer the matter back to the High Court for that Court to reconsider and fix the amount properly claimable as indemnity costs reasonably incurred, giving appropriate reasons for its decision.  We did not hear any detailed submissions on the form in which such reconsideration should occur, in the event that it was ordered.  Mr McLellan proposed that the reference back should be to an Associate Judge to consider the costs as a referee. 
[66]	Fogarty J’s retirement since delivery of the judgment means that the option of referring the matter back to the first instance judge is unavailable.  Another judicial officer needs to be involved at this point.  While it will be for the High Court to decide how the matter should be progressed, given the nature of the task it may well be considered appropriate that the reasonableness of the quantum of  the indemnity costs now be assessed by an Associate Judge, acting under s 20(4) of the Senior Courts Act 2016.
[67]	Before leaving this issue we add these observations.  Although we are allowing the appeal we are not to be taken as determining that the costs sought by the Genset Trustees are in fact unreasonable.  Nor do we underestimate the time and costs involved in ensuring that the interlocutory processes necessary in a case of this nature are appropriately attended to, having regard to the conduct of those associated with the management of EMG.  But it will be apparent from our reasoning that we are simply not satisfied that Fogarty J adequately addressed the issue of whether the costs were reasonable.  It will now be for the High Court to do so, in accordance with a process that it considers appropriate.  Whether for that purpose either party will seek to rely on expert opinion or the Court will look for such assistance is a matter to be determined by that Court.  But the sums at stake warrant a more thorough approach than can appropriately be conducted by this Court on appeal. 
Appeal CA490/2017
[68]	This appeal, by the Genset Trustees, was against two aspects of Fogarty J’s second judgment.  As noted earlier, in that judgment the Judge declined to award costs against Mr Sorensen in respect of the Genset Trustees’ application for security for costs against EMG.  That is the first issue appealed.  The second focus of this appeal is the Judge’s decision declining to award costs to the Genset Trustees in respect of the costs judgment itself.
[69]	The Genset Trustees complained that Fogarty J declined to order costs against Mr Sorensen in respect of the application for security for costs on the basis that there was an opportunity at the time the application for security for costs was made against EMG to join Mr Sorensen as the subject of the order for security.  Mr Ingram argued that there was no jurisdiction to make an order for security against Mr Sorensen while he remained a non-party, but that should not prevent him being required to meet the costs of the application for security at this stage.  The sum of $105,903.50 is sought, those being the actual costs incurred in relation to the security for costs application pursued against EMG.
[70]	Mr McLellan accepted that there is no jurisdiction to seek security for costs against a non-party and that the existence of a sealed costs order against a party does not exhaust the Court’s jurisdiction to make a costs order against a non-party, where the latter is “supplemental” to the former and in no way varies it.  He also accepts that even though a sealed order has been made against a party the court retains jurisdiction to make a non-party costs order.  However, he submitted that even if an order can be made, it should not exceed in quantum the amount of the costs order that Faire J made against EMG, that is $10,721.50, a sum fixed on a category 3 band B basis).  He argues that where a Judge has already fixed an appropriate amount of costs in respect of a particular step in the litigation, the question of the appropriate quantum has already been the subject of an earlier determination.
[71]	We do not see this issue as having been necessarily determined by the order made by Faire J in July 2015, which the Genset Trustees do not seek to reopen.  Obviously, his order was made prior to the determination that indemnity costs were payable, and since Mr Sorensen’s liability falls to be determined now we do not consider Faire J’s order prevents a determination that in respect of this matter reasonable costs should be paid by Mr Sorensen on an indemnity basis.  It was only as the litigation was disposed of by the strike-out that the true character of the claim was able to be determined.  The quantum of these costs should now be determined by the High Court.
[72]	The final issue revolves around the fact that Fogarty J awarded costs on a 2B basis to EMG and Mr Sorensen in respect of issues dealt with in the second judgment.  We have already summarised those matters at [5] and [6] above.  The Judge considered that overall, the orders he made in that judgment favoured EMG and Mr Sorensen, and we do not think it appropriate to arrive at a different view.  To the extent that the issues included the question Mr Sorensen’s liability for costs on the security for costs application, that issue will now be assessed by the High Court in accordance with our previous determination.
Result
[73]	The appeal in CA136/2017 is allowed.  The High Court is to determine afresh the quantum of the reasonable costs payable to the Genset Trustees on an indemnity basis.
[74]	The Genset Trustees must pay EMG and Mr Sorensen costs for a standard appeal on a band A basis and usual disbursements in respect of the appeal in CA136/2017.  We certify for two counsel.  Costs in the High Court are to be determined in that Court.
[75]	The appeal in CA490/2017 is allowed in part.  The High Court is to determine what is a reasonable amount for Mr Sorensen to pay as indemnity costs in respect of the application for security for costs made by the Genset Trustees against EMG.  The appeal is otherwise dismissed.
[76]	Given each party has had a measure of success in respect of the appeal in CA490/2017, we make no order for costs in respect of that appeal.  Costs in the High Court are to be determined in that Court.

Solicitors:
Lowndes Jordan, Auckland for Appellants in CA136/2017 and First and Third Respondents in CA490/2017
Kendall Sturm & Foote, Auckland for Appellants in CA490/2017 and Second Respondents in CA136/2017