IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2015-404-2184 [2018] NZHC 2504

BETWEEN	OXYGEN AIR LIMITED
Plaintiff	

AND	
LG ELECTRONICS AUSTRALIA PTY LIMITED
Defendant	

Hearing:	2 July 2018	

Appearances:	
M C Black for Plaintiff
R J Hollyman & T D Mahood for Defendant	

Judgment:	
25 September 2018	

JUDGMENT OF PAUL DAVISON J

This judgment was delivered by me on 25 September 2018 at 11:00 am pursuant to r 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Solicitors:
Craig Griffin & Lord, Auckland
Hudson Gavin Martin, Auckland

OXYGEN AIR LTD v LG ELECTRONICS AUSTRALIA PTY LTD [2018] NZHC 2504 [25 September 2018]

Introduction

[1]       On 4 May 2018, Associate Judge Bell ordered the plaintiff, Oxygen Air Ltd, to give security for costs.1   However, he did so by requiring Mr Rotteveel, the director and sole shareholder of Oxygen Air Ltd, to give a binding personal undertaking to the defendant that if the plaintiff is unsuccessful in its claim against the defendant, he will answer for any costs that are awarded against the plaintiff on its unsuccessful claim.

[2]       The plaintiff now applies for review of the Associate Judge’s decision, saying that the Judge’s approach was wrong in principle.

Overview of the proceedings

[3]       The defendant, LG Electronics Australia Pty Ltd (“LG”), is the manufacturer and supplier of various heating, air conditioning and related products in New Zealand and the Pacific Islands.  The plaintiff, Oxygen Air Ltd (“Oxygen Air”), is a company formed in mid-2009. It formerly distributed and installed LG air conditioning and heat pump systems in New Zealand, but is no longer actively trading.

[4]       LG and Oxygen Air signed a written supply and distribution agreement in February 2010.  In September 2015, Oxygen Air brought proceedings against LG.  It alleges, in its first cause of action, that LG breached the 2010 supply and distribution agreement in a number of ways.  Among other things, it says that LG breached an obligation to act in good faith in its dealings with Oxygen Air; failed to deliver products in a timely manner; supplied products to other distributors in breach of the exclusivity clause; failed to remedy or address product warranty claims; and failed to provide training and technical support.

[5]       In its second and third causes of action, Oxygen Air alleges breach of a further agreement by which it says LG granted Oxygen Air distribution rights to LG’s solar panel products.  Finally, Oxygen Air’s fourth cause of action alleges that LG engaged in misleading and deceptive conduct in breach of the Fair Trading Act 1986.

1	Oxygen Air Ltd v LG Electronics Australia Pty Ltd [2018] NZHC 945.

[6]       LG in its statement of defence admits that the parties entered into a supply and distribution agreement in February 2010, but denies having breached that agreement.
It also denies the existence of an agreement granting Oxygen Air exclusive distribution rights for LG’s solar panel products, and breach of the Fair Trading Act.

[7]       LG also raises a counterclaim for breach of contract and breach of fiduciary obligations by Oxygen Air. It says, among other things, that Oxygen Air failed to pay overdue invoices following the supply of goods by LG; failed to hold the proceeds of on-selling LG’s goods on trust for LG; and failed to promote, distribute and market LG’s products.  LG also contends in its counterclaim that a clause in the supply and distribution agreement amounts to an unreasonable restraint of trade.

[8]       Mr Rotteveel is the sole director and shareholder of Oxygen Air.   He is also the sole director and shareholder of Oxygen NZ Ltd, a separate company incorporated in 2015 after Oxygen Air’s business began to decline.2  Oxygen NZ Ltd signed supply and distribution agreements with alternative suppliers, including Panasonic and Fujitsu.

The decision under review

[9]       LG applied for security for costs under r 5.45 of the High Court Rules 2016. It  proposed  that  the  plaintiff,  Oxygen  Air,  should  provide  security  totalling
$112,594.95, to be paid in stages.  Associate Judge Bell heard the application on 4

May 2018 and delivered an oral judgment.

[10]     After setting out the background to the proceedings, Associate Judge Bell discussed the principles relevant to security for costs applications.  He noted that the court has a discretion under which it must weigh, on the one hand, the interest of the plaintiff in having its case heard in court, and the need to protect a defendant from being drawn into unjustified litigation, particularly where it is overcomplicated and

2           As Associate Judge Bell noted at [5] of the judgment under review, the plaintiff (Oxygen Air) has now changed its name to LG Air Ltd. The company initially called Oxygen NZ Ltd now uses the name Oxygen Air Ltd. However, references to Oxygen Air in this judgment are to the plaintiff in these proceedings.

unnecessarily protracted.3  He observed that there is a risk of “irresponsible litigation”

if a party can conduct a proceeding without having to face the costs consequences.4

[11]     The Judge went on to note that Oxygen Air accepted the threshold under r 5.45 had been met, in that there was reason to believe it would be unable to pay costs to LG if its claim failed. He observed that Oxygen Air had suffered financial losses in recent years, and that it was owed $288,000 by Mr Rotteveel.  The Judge noted that Mr Rotteveel’s shareholder’s account liability was possibly the only significant asset of the company. There was also evidence that Oxygen Air had ceased trading.

[12]     Associate Judge Bell went on to consider the evidence in the proceedings, observing that there were large volumes of it and the Court’s task on a security for costs application was simply to “come to a broad overview of the case” rather than to make detailed factual and legal findings.5  In this instance, he did not consider it useful to examine the issues in detail.

[13]     The Judge then considered an alternative order to that sought by the defendant, namely a personal undertaking by Mr Rotteveel. Neither party proposed this approach in their written submissions, and it is unclear how the Judge came to consider it.  His reasoning for making such an order is as follows:

[20]      Now for the order that Mr Rotteveel provide a personal undertaking to pay any costs that Oxygen Air Ltd should pay if Oxygen Air Ltd is unsuccessful in  its  claim  against LG  Electronics. I  am  ordering that  in preference to requiring Oxygen Air Ltd to pay funds into court and to stay the proceeding until that security is provided. Funds paid as security are held to await the outcome of the case, and as such they are frozen. Oxygen Air Ltd has limited resources. Given its legitimate interest in wanting to take its case to court, it is in its interest that it should be able to fund this proceeding. Requiring it to put funds otherwise available for the proceeding into court as security would seriously impede its ability to bring this case to a hearing. In short, an alternative to requiring funds to be paid into court will operate more efficiently for Oxygen Air in running its proceeding. Its access to the court will not be impeded.

[21]      I am looking to Mr Rotteveel to provide that assurance that costs will be paid, because the company is, in effect, his alter ego. He is the sole director and shareholder of the company. The company is no more than his nominee.

3	At [13].
4	At [13].
5	At [18].

Requiring him to give a personal undertaking is consistent with his duties as a director of the company. I refer to s 136 of the Companies Act 1993:

A director of a company must not agree to the company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so.

[22]      When the company began the proceeding in 2015, it  incurred a contingent obligation to pay costs if it lost the case. Mr Rotteveel, as the sole director, must have authorised the proceeding and, in doing so, he came under the obligation in s 136. We now know that the company has a negative equity and does not have the funds to meet any order for costs made against it. As matters now stand, Mr Rotteveel cannot have reasonable grounds to believe that the company will be able to pay any costs order made against the company if its claim against LG Electronics Ltd fails. So, requiring Mr Rotteveel to give his undertaking ensures that he will comply with his obligations under s 136 of the Companies Act. He is not being asked to do anything more than the law requires. A supporting  factor  is  his  overdrawn shareholder’s account  of
$288,000. That is money he is required to put back into the company.

[23]      … If Oxygen Air Ltd were to go into liquidation and Mr Rotteveel had not given an undertaking as to costs, any liquidator would look to him under s 136 to make good under his duty to the company for arranging for the company to conduct the litigation without being able to meet its liability for costs. Requiring Mr Rotteveel to provide an undertaking now short-circuits any need for liquidation of the company and the expenses that would go with that.

[14]     The Judge then addressed a concern expressed by Oxygen Air’s counsel, namely that Mr Rotteveel may not be good for all the costs that might be ordered.  In the Judge’s view, an order that Mr Rotteveel answer for the costs was still valuable, even if he did not have all the funds in hand at present.  Associate Judge Bell also clarified and confirmed that Mr Rotteveel’s undertaking would only apply to Oxygen Air’s liability for costs to LG on Oxygen Air’s claim, and not LG’s counterclaim against Oxygen Air.

[15]     The Judge then dealt with Oxygen Air’s argument regarding delay by LG in applying for security for costs. In his view, LG only became alive to the prospect that Oxygen Air may be unable to pay costs in 2017 and applied within time.

[16]     As for the merits of the case, Associate Judge Bell concluded that all the issues which the parties put up were contestable, and that it would be “ambitious” for him to

make any predictions as to the likely outcome of the case.6   He noted, however, that aspects  of  Oxygen Air’s  case,  particularly  its  claim  for  relief,  appeared  to  be overstated.

[17]     Finally, the Judge noted that he was not required to consider the plaintiff’s argument that LG had caused the impecuniosity of Oxygen Air.  In the Judge’s view, Oxygen Air was independently impecunious because of Mr Rotteveel’s drawings from the company.

[18]    The Judge concluded by adjourning the hearing so that the terms of an undertaking could be discussed and agreed upon by the parties.

Events following Associate Judge Bell’s decision

[19]     Following Associate Judge Bell’s decision, counsel for LG prepared a draft undertaking for execution by Mr Rotteveel. Counsel for Oxygen Air indicated that Mr Rotteveel was not prepared to give an undertaking, no matter the terms.  On 11 May
2018, Associate Judge Bell approved the terms of LG’s draft undertaking with some minor alterations.  The terms of the order required Mr Rotteveel to give a binding personal undertaking to LG that if Oxygen Air was unsuccessful in its claim against LG, he would answer for any costs awarded against Oxygen Air on its unsuccessful claim.

[20]     In his Minute dated 11 May 2018, the Judge clarified how the personal undertaking was to operate. Any matter on which Oxygen Air has a claim against LG for a monetary judgment, which is the subject of its statement of claim, was caught by the undertaking.   However, purely contractual defences which could be made independently of the pleadings in the statement of claim were not caught under the undertaking. The Judge directed Mr Rotteveel to execute the undertaking by 25 May
2018: if he failed to do so, the plaintiff’s claim would be stayed with effect from 2 July

2018, namely the date of hearing of the plaintiff’s review application.

6	At [28].

[21]     On 11 May 2018 the Judge also awarded the defendant costs on its security for costs application.   He considered that the proposals made by Oxygen Air on a Calderbank basis did not match the orders for security that he had made, and that the offers made by the plaintiff were not of “real value”.  The Judge accepted that category
2 was appropriate and that some items were properly classed as band C while others would be band B.  He approved the costs claimed by LG in the sum of $18,340.00 plus disbursements.

[22]     Mr Rotteveel did not sign the undertaking by the required date, and the plaintiff’s claim was accordingly stayed.

[23]     In a further Minute issued on 29 May 2018, on the application of the defendant, Associate Judge Bell ordered the plaintiff to provide further particulars of its statement of claim and further discovery.

The plaintiff’s submissions

[24]     Mr Black for the plaintiff submits that the Associate Judge erred in principle, failed to take into account relevant matters, took into account irrelevant matters and was plainly wrong.

[25]     First, Mr Black submits that the Associate Judge failed to properly consider and apply the principles relevant to security for costs applications, such as the merits of the case, the quantum (if any) of a known cost amount, and the staged approach to providing security.

[26]     Mr Black further notes that the defendants did not seek a personal undertaking by Mr Rotteveel, and that this was an order imposed by the Associate Judge on his own initiative.   He submits that requiring a company director to give a personal undertaking of this nature is wrong in principle, as Mr Rotteveel is not a party to the proceedings and such an order ignores the principles of separate corporate identity and effectively lifts the corporate veil. In his submission, it was wrong to rely on s 136 of the Companies Act as this is a duty owed by the director to the company and is typically raised in the context of liquidation.  He says the Judge was not entitled to pre-determine this issue in the context of security for costs.

[27]     Mr  Black  further  submits  that  the Associate  Judge  relied  on  incomplete information about the extent to which Mr Rotteveel’s shareholder account was overdrawn.  He says that the figure of $288,383 is incorrect and that counsel advised Associate Judge Bell at the hearing that further accounting information was required. Mr Lockhart has now provided a supplementary affidavit dated 18 June 2018 in which he deposes that the previous accounts for Oxygen Air were incomplete.  He says that for the financial year that ended 31 March 2016, Mr Rotteveel’s current shareholder’s account was overdrawn by $23,894.

[28]   Mr Black then submits that there are inconsistencies and contradictory consequences in the personal undertaking ordered and the ancillary orders made.  He says that the current security order and stay prevents Oxygen Air from being able to address in defence the counterclaim and its rights and claims that arise under the supply and distribution agreement.  He refers to the following paragraph in Associate Judge Bell’s minute:

What is not caught under the undertaking are pure contractual defences which could be made independently of the pleadings in the statement of claim.

[29]     Mr Black submits that this effectively prescribes that only the counterclaim can be defended for goods not supplied, goods that did not match their description, defective goods, or delivery that was “short”. This, he says, denies the plaintiff all its rights and claims under the supply and distribution agreement, as pleaded in its second amended statement of claim. The security for costs order and stay therefore denies the plaintiff access to justice.

[30]     Mr Black further submits that the additional orders made by Associate Judge Bell on 11 and 29 May 2018, requiring the plaintiff to file further particulars of its statement of claim and to provide further discovery, are inconsistent with the security for costs order as they require the plaintiff to continue to fully prepare for all matters as pleaded in its statement of claim.

[31]     Mr Black also makes submissions as to matters which he says the Judge did not adequately take into account in making the security for costs order.  He refers to

the merits of the proceeding, which he says includes hearsay evidence for LG; the linkage between LG’s actions and Oxygen Air’s impecuniosity; and delay by LG.

[32]     In summary, Mr Black says that the Judge should have carried out a monetary security for costs assessment based on accepted principles.  There was no basis for requiring Mr Rotteveel to give a personal undertaking, and the result of this approach is that Mr Rotteveel’s personal exposure is essentially unlimited for an amount that far exceeds what ought to have been considered (and staged). He also says that the Judge erred in ordering the plaintiff to pay costs on the defendant’s security for costs application, submitting that the Judge did not have proper regard to the plaintiff’s Calderbank offer, and erred in fixing the quantum of costs at $18,340.

The defendant’s submissions

[33]     Mr Hollyman for LG submits that the Judge recognised and applied the established principles for security for costs applications. He says that the Judge made an appropriate assessment of the merits, concluding that the issues raised by each side were contestable. It was appropriate to admit the hearsay statements in the affidavits, to avoid undue expense and delay on the interlocutory application.  The Judge dealt with the allegation of delay by LG, concluding that it could not have ascertained Oxygen Air’s financial position earlier than it did. The Judge also specifically referred to the parties’ rights and obligations under the supply and distribution agreement.

[34]     Mr Hollyman further submits that the Judge did not consider any irrelevant factors:  Mr Rotteveel’s overdrawn shareholder  account was  before  the  Court in evidence, and the Judge did not make any determination of Mr Rotteveel’s obligations under s 136 of the Companies Act.  The s 136 duty was referred to only by way of analogy.

[35]     In Mr Hollyman’s submission, the Judge had jurisdiction to make the order he did.  He notes that Oxygen Air accepted it was impecunious and would be unable to meet any costs award.  Mr Hollyman further says that costs can be ordered against a non-party to litigation in exceptional circumstances, and submits that where those circumstances can be identified in advance (as he says they can here), an order for security for costs against a non-party is justified.

[36]     More broadly, Mr Hollyman submits that Associate Judge Bell’s order was made in the interests of justice, as it allowed Oxygen Air to bring its claim. However, if the Court considers Associate Judge Bell’s order should be varied, then he says orders should be made in accordance with those sought by LG in its initial application for security for costs before Associate Judge Bell (with some variation as to quantum).

Approach to review application

[37]     This proceeding was commenced before the Senior Courts Act 2016 came into force on 1 March 2017, meaning that the Judicature Act 1908 and the former High Court Rules apply.7

[38]     Prior to the Senior Courts Act, any party to any proceedings who was affected by any order or decision made by an Associate Judge in chambers was entitled to apply to the High Court for review under s 26P of the Judicature Act. On such an application, the High Court was required to review the order or decision in accordance with the High Court Rules and to make “such order as may be just”.8

[39]     A decision to order security for costs is a matter of discretion.9  A discretionary decision will generally be overturned on an application for review only if a Judge has made an error of law, failed to take into account a relevant factor, taken into account an irrelevant factor, or is plainly wrong.10

Did the Judge have jurisdiction to require Mr Rotteveel to give a personal undertaking?

[40]     An order for security for costs may require the plaintiff to pay a sum into Court, or to give, “to the satisfaction of the Judge”, security for that sum.11  In some instances the Court has been prepared to accept a personal undertaking by the plaintiff as security for costs, provided that it is of substance and would result in prompt payment of any costs award.12   By requiring Mr Rotteveel to give a personal undertaking that

7	Senior Courts Act 2016, sch 5, cls 10(1) and 11.
8	Section 26P(1).
9	AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [13].
10	Robinson v Whangarei Heads Enterprises Ltd [2013] NZHC 2247 at [7].
11	High Court Rules 2016, r 5.45(3)(a).
12	See Camelot Hotel Ltd v Square Holdings Ltd [2016] NZHC 82, (2016) 23 PRNZ 121 at [55].

he would answer for any costs that are awarded against Oxygen Air on its unsuccessful claim, and by staying the proceedings until the undertaking is given, the Judge has effectively required Mr Rotteveel to give security for costs.

[41]     Mr Rotteveel is the sole director and shareholder of the plaintiff, but is not himself a party to the proceedings.  The first question for determination is whether Associate Judge Bell had jurisdiction to require Mr Rotteveel, a non-party to the litigation, to give security for costs.

Rule 5.45 and relevant company law principles

[42]     The starting point is the wording of r 5.45 of the High Court Rules, which governs security for costs orders:

5.45 Order for security of costs

(1) Subclause (2) applies if a Judge is satisfied, on the application of a defendant,—

(a) that a plaintiff—

(i)  is resident out of New Zealand; or

(ii) is a corporation incorporated outside New Zealand; or

(iii) is  a  subsidiary  (within  the  meaning  of  section  5  of  the Companies Act 1993) of a corporation incorporated outside New Zealand; or

(b)   that there is reason to believe that a plaintiff will be unable to pay the costs of the defendant if the plaintiff is unsuccessful in the plaintiff’s proceeding.

(2) A Judge may, if the Judge thinks it is just in all the circumstances, order the giving of security for costs.

(3) An order under subclause (2)—

(a) requires the plaintiff or plaintiffs against whom the order is made to give security for costs as directed for a sum that the Judge considers sufficient—

(i)  by paying that sum into court; or

(ii) by giving, to the satisfaction of the Judge or the Registrar, security for that sum; and

(b)		may stay the proceeding until the sum is paid or the security given.

(4) A Judge may treat a plaintiff as being resident out of New Zealand even though the plaintiff is temporarily resident in New Zealand.

(5) A Judge may make an order under subclause (2) even if the defendant has taken a step in the proceeding before applying for security.

(6) References in this rule to a plaintiff and defendant are references to the person (however described on the record) who, because of a document filed in the proceeding (for example, a counterclaim), is in the position of plaintiff or defendant.

[43]     Rule 5.45 therefore entitles the Judge, on the application of the defendant, to make an order for security for costs against the plaintiff.  There is no basis in r 5.45 for making a security for costs order against anyone other than the plaintiff.

[44]     The plaintiff in this proceeding (as defined in r 5.45(6)) is a company, Oxygen Air Ltd. A company is, of course, a legal person in its own right.13  Its legal personality is separate from that of its directors and shareholders.  This means that its directors and shareholders are not personally liable for obligations incurred by the company.14
Prima facie, therefore, the Court may not make a security for costs order under r 5.45 against a director or shareholder of the plaintiff company who is not themselves a plaintiff.

[45]     Associate Judge Bell justified his approach by saying that the company was, in effect, Mr Rotteveel’s “alter ego” and “no more than his nominee”.15  However, the evidence before the Court was that Mr Rotteveel was the sole director and shareholder of the plaintiff company, and therefore effectively controlled the company. That is not an unusual situation, and not enough to give rise to an inference that the company was Mr Rotteveel’s agent.16

[46]     Nor does the duty contained in s 136 of the Companies Act provide any basis for requiring a director to give an undertaking as to costs, even where the director

13	Companies Act 1993, s 15.
14	See Companies Act, s 97(2).
15	At [21].
16	See Salomon v Salomon & Co Ltd [1897] AC 22 (HL); Lee v Lee’s Air Farming Ltd [1961] NZLR
325 (PC); Attorney-General v Equiticorp Industries Group Ltd (in stat man) [1996] 1 NZLR 528 (CA).

causes the company to initiate proceedings knowing that the company may not be able to meet a costs award against it. Associate Judge Bell reasoned that:17

If Oxygen Air Ltd were to go into liquidation and Mr Rotteveel had not given an undertaking as to costs, any liquidator would look to him under s 136 to make good under his duty to the company for arranging for the company to conduct  the  litigation  without being  able  to  meet  its  liability  for  costs. Requiring Mr Rotteveel to provide an undertaking now short-circuits any need for liquidation of the company and the expenses that would go with that.

[47]     If that were so, undertakings of this nature would routinely be required of directors.  While the question of whether or not Mr Rotteveel has breached the s 136 duty may arise and need to be determined in subsequent litigation, it cannot be determined now by way of a shortcut route.  Similarly, the fact that Mr Rotteveel’s shareholder account is overdrawn is a matter between him and the company, and does not provide any justification for ordering him to give security for costs.

Analogy with costs orders against non-parties

[48]     Mr Hollyman points out that costs can be ordered against a non-party to litigation in certain circumstances.18  He cites Knight v FP Special Assets Ltd, in which the High Court of Australia commented:19

… we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party … That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.

That statement accords with the position in New Zealand.20

17	At [23].
18	Relying on Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC)
and Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR
145.
19	Knight v FP Special Assets Ltd [1992] HCA 28, (1992) 174 CLR 178 at 192–193.
20	See Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2004] UKPC 39, [2005] 1 NZLR
145 at [25].

[49]     Mr Hollyman submits that where the circumstances described in Knight are identified in advance, as he says they can be here, a security for costs order may be made against a non-party.  I do not consider that is correct.  Mr Hollyman has not identified any case that is authority for that proposition. On the contrary, there is New Zealand authority to the effect that a third party cannot be made to give security for costs.  The point arose tangentially in Jupiter Air Ltd (in liquidation) v Australian Aviation Underwriting Pool Pty Ltd, where Rodney Hansen J cited the English Court of Appeal decision in Abraham v Thompson21 and observed:22

The same conditions apply in New Zealand. An order for security for costs cannot be made against a third party. But, as in England, after trial an order for  costs may  be  made against a  third  party under r  46:  Carborundum Abrasives Ltd v BNZ (No 2) [1992] 3 NZLR 757…

[50]     I agree with these observations. It is appropriate to draw a distinction between the position after trial, when liability for costs has been conclusively established; and the position before trial, when liability for costs has not yet been established and the Court must weigh up the plaintiff’s right of access to justice and the need to protect the defendant from a potentially barren costs order. Costs orders and security for costs orders are quite separate matters and engage different considerations. Moreover, they are found in different parts of the High Court Rules and are expressed differently. Part
14 of the High Court Rules gives the Court a broad discretion to award costs after the event, which has been interpreted as including a discretion to award costs against non- parties to the litigation in certain circumstances.23    Rule 5.45, on the other hand, is found in Part 5 of the Rules (Commencement of proceedings and filing of documents) and is formulated in more prescriptive language.   I do not consider that the same discretion to make orders against non-parties to the litigation can be read into r 5.45.24

[51]     In the United Kingdom, the Civil Procedure Rules now expressly provide for security for costs orders to be made against someone other than the claimant, if certain pre-conditions are met and the Court is satisfied in all the circumstances that it is just

21	Abraham v Thompson [1997] 4 All ER 362 (CA).
22	Jupiter Air Ltd (in liquidation) v Australian Aviation Underwriting Pool Pty Ltd (2002) 16 PRNZ
702 (HC) at [24].
23	Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757 (HC) at 763.
24	See Matthew Casey and others Sim’s Court Practice (online ed, LexisNexis) at [HCR5.45.4(c)].

to do so.25   It is significant that there is no equivalent provision in the New Zealand

High Court Rules.

Case law supporting the Associate Judge’s approach?

[52]     For completeness, it is necessary to refer to several New Zealand cases which may be read as providing support for Associate Judge Bell’s approach.  First, I note that there is an evolving practice that funders of representative actions brought under r 4.24 will be ordered to give security for costs.26  The basis for this approach appears to be the inherent jurisdiction of the High Court under s 16 of the Judicature Act (not r 5.45), and the Court of Appeal has described it as the “price of the privilege” of bringing representative proceedings funded by a litigation funder.27  In my view these observations do not extend to the present case, which concerns ordinary proceedings brought by one company against another.

[53]     Secondly, McGechan on Procedure28 cites several cases in which a personal undertaking was given by a director/shareholder of the plaintiff company in the security for costs context.29   On closer examination, none provides authority for the approach taken by Associate Judge Bell.   In each case, the director/shareholder voluntarily gave an undertaking to meet any order for costs against the plaintiff
company,30 and no formal order for security for costs was made under r 5.45.

25         Civil Procedure Rules (UK), r 25.14; see Re RBS Rights Issue Litigation [2017] EWHC 1217, [2017] 1 WLR 4635 (Ch) at [18] where Hildyard J observes that r 25.14 “plugs what was previously a gap in the rules (which are intended to be comprehensive) to enable a defendant to obtain an order for security for costs against someone other than the claimant”.
26	Strathboss Kiwifruit Ltd v Attorney-General [2015] NZHC 1596, (2015) 23 PRNZ 69 at [79].
27	Sanders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at [36].
28	JR  Wild  and  others  McGechan  on  Procedure  (online  ed,  Westlaw)  at  [HR5.45.02]  and
[HR5.45.03].
29	See Shalimar Supermarket Ltd v Toulis HC Wellington CP653/90, 15 May 1991; Combined
Logging Co Ltd v Crown Forestry Management Ltd HC Wanganui CP40/91, 30 September 1996;
and Athendale Property Ltd v Western BOP District Council [2014] NZHC 635.
30         Shalimar Supermarket Ltd v Toulis HC Wellington CP653/90, 15 May 1991 is even further from the present case in that the mother of the majority shareholder and director of the plaintiff had
earlier (in the context of an interim injunction application) given a voluntary undertaking to meet
any order for damages if the plaintiff was unsuccessful in its claim, up to a maximum of $25,000. The Court considered that with this undertaking, the plaintiff had effectively already given security for costs.

Conclusions

[54]     In the present case Associate Judge Bell on his own initiative (and with the strong opposition of Oxygen Air and Mr Rotteveel himself) required an undertaking from Mr Rotteveel that he would answer for the costs of the plaintiff.  I consider that there was no jurisdiction to make such an order. The Associate Judge erred in that he disregarded the principle of separate corporate personality and the wording of r 5.45, which only entitles the Court to make security for costs orders against the named plaintiff in the proceeding.

What order(s), if any, should be made?

[55]     Mr Hollyman submits that if the Court finds Associate Judge Bell to have erred, it should order the plaintiff to pay security for costs of $122,006.95 in two stages.

[56]     Although Oxygen Air accepts that the threshold under r 5.45(1)(b) is met, Mr Black maintains that Oxygen Air should not be required to pay security.  He submits that the Judge erred in assessing the merits of the proceedings; in assessing whether Oxygen Air’s impecuniosity was the result of the plaintiff’s conduct; and in assessing delay by LG.  I am not satisfied that the Judge erred in these respects.  Mr Black’s arguments on these points are not applicable to a review application, as they attempt to comprehensively re-litigate matters dealt with by the Associate Judge rather than identifying errors in his approach.  I note that a review application is not a general appeal where parties may revisit all matters argued in the Court below.

Merits

[57]     Where complex factual issues exist, as in this case, the Court is not in a position to form more than an “impression” of the merits of the proceeding at an interlocutory stage.31  Associate Judge Bell reviewed the evidence and concluded that all the issues raised by the parties were contestable, and that both sides seemed to have good arguable cases.  Although he suggested that some parts of Oxygen Air’s claim in relation to relief may be overstated, he emphasised that this was a preliminary view only.  Mr Black now contends that the Judge overlooked certain clauses of the supply

31	AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA) at [21].

and distribution agreement which provide strong support for Oxygen Air’s claim, and that LG submitted hearsay evidence with no more than superficial comment on the matters in issue.   Mr Hollyman submits, on the other hand, that the admission of hearsay evidence at the interlocutory stage was permissible and appropriate.32  I agree. I would not disturb the Judge’s assessment of the merits of the claim.

Impecuniosity as a result of defendant’s actions

[58]     As well as assessing the merits, it was relevant for the Judge to consider whether it is reasonably probable that the plaintiff’s impecuniosity was caused by the defendant’s actions that are the subject of the statement of claim.  Where that is the case, it is a strong consideration against ordering the plaintiff to give security for costs.33

[59]     Mr  Black  submits  that  the  Judge  erred  in  concluding  that  Oxygen Air’s impecuniosity was not caused by LG. He points out that Oxygen Air claims it suffered significant losses as a result of LG’s persistent and wide-ranging breaches of the supply and distribution agreement over a lengthy period.

[60]     Associate Judge Bell did not find it necessary to deal with this argument, concluding that Oxygen Air was independently impecunious because of Mr Rotteveel’s drawings from the company.  The point perhaps merited more detailed consideration.  It is now contended that Mr Rotteveel’s drawings from the company were much less than the evidence before Associate Judge Bell indicated; indeed, Mr Lockhart in his supplementary affidavit states that Mr Rotteveel’s current shareholder’s account is overdrawn by $23,894, not $288,383 as previously stated. In my view it is not clear that Oxygen Air’s impecuniosity was caused by Mr Rotteveel’s drawings from the company.

[61]     However, nor is this a case where Oxygen Air has established such a clear link between allegedly blameworthy conduct by LG and its own impecuniosity as to justify the refusal of an order.34   Oxygen Air asserts that it suffered loss as a result of LG’s

32	Referring to r 7.30 of the High Court Rules 2016 and s 20(1) of the Evidence Act 2006.
33	Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017 at [23].
34	Aerospace Developments Ltd v Altitude Aerospace Interiors Ltd [2012] NZHC 2723 at [30].

actions, but that of itself is not enough.  In any event, Associate Judge Bell’s view of the merits – with which I agree – was that the issues raised by the parties were arguable either way, and aspects of Oxygen Air’s claim to relief were overstated. It follows that any link between LG’s alleged conduct and Oxygen Air’s impecuniosity is not clearly established.

Delay by defendant

[62]     Mr Black submits that LG ought to have been aware of Oxygen Air’s inability to pay costs by mid-2015 following the default notice procedures in 2015 and the fact the disputed counterclaim was not paid for over two years.   He says it was also reasonably known by Ms Soud, an employee of LG, when she prepared her affidavit for the discovery hearing on 27 April 2017 and by the discovery submitted in 2016, which showed that LG had made no sales to Oxygen Air from approximately March
2015.  Mr Black submits that it could be readily inferred from this that Oxygen Air was no longer trading and was impecunious.

[63]     In her affidavit dated 27 April 2017, Ms Soud says that the volume of air conditioning products being ordered by Oxygen Air from LG had “reduced dramatically” and was at that time “almost non-existent”.   She says the last order placed by the plaintiff was for a wireless remote in or about May 2016.   I do not consider that this conclusively demonstrates LG should have been aware that Oxygen Air would be unable to pay costs and therefore that LG should have made its application earlier. Associate Judge Bell made the same point: he noted that discovery showed a tailing off in orders by Oxygen Air, but observed that this “does not, by itself, point to an inability to pay costs if Oxygen Air were unsuccessful at trial”.35   In his view the evidence showed that LG was alive to the issue from about July 2017, and raised  the  matter  in  correspondence  before  applying  for  security  for  costs  in
November.  I see no error in the Judge’s approach to delay.

35	At [26].

Balancing the parties’ interests

[64]     Mr Black submits that it is only where a clear impression can be formed that the plaintiff’s claim is altogether without merit that it is right for security to be ordered, relying on Kós J’s statement to that effect in Highgate on Broadway Ltd v Devine.36
However, Kós J’s statement in full reads:37

Only where a clear impression can be formed that the plaintiff's claim is altogether without merit — so that in the alternative it would be amenable to being struck out — would it be right for security to be ordered where to do so would bring the plaintiff's claim to dead halt.

[65]     It is not clear that ordering Oxygen Air to give security would bring its claim to a “dead halt”.  Kós J also observed in Highgate on Broadway Ltd v Devine that where a plaintiff is impecunious, but can reasonably draw upon resources from associated third parties such as shareholders or other persons interested in the subject matter or litigation, that is a ground for ordering security notwithstanding the difficulties the impecunious plaintiff might otherwise face.38     In my view that is Oxygen Air’s position: it has not disclosed how it is funding the litigation, but it appears to have resources to draw upon.  Oxygen Air itself has confirmed it would be able to secure a loan from Mr Rotteveel’s father in the sum of $50,000.

[66]     I therefore consider that Associate Judge Bell was justified in concluding that an order for security for costs was appropriate in the present case, as the denial of security for costs would in the circumstances of this litigation be oppressive to the reasonable interests of the defendant.   The costs incurred by LG are likely to be significant.

[67]     However, instead of requiring Mr Rotteveel to give an undertaking, I consider that the Judge should have made a conventional order requiring Oxygen Air to make staged payments of security for costs sums into the court.

36	Highgate on Broadway Ltd v Devine [2012] NZHC 2288, [2013] NZAR 1017.
37	At [23](b).
38	At [22](d).

Quantum

[68]     The amount of security is in the Court’s discretion.39  It is not necessarily to be fixed by reference to likely costs awards, although there must be some correspondence between them.40  The amount is to be what the Court thinks fit in all the circumstances, although the Court generally has regard to the following matters:41

(a)	the amount and/or nature of the relief claimed;

(b)	the character of the proceeding, including the complexity and novelty of the issues, and therefore the likely extent of interlocutory disputes;

(c)	the estimated duration of the trial; and

(d)	probable costs payable if the plaintiff is unsuccessful.

[69]     In the present case, LG seeks an order that the plaintiff pay security for costs of $122,006.95, staged as follows:

(a)	$77,406.95 to be paid by 20 July 2018; and

(b)	$44,600 to be paid by 12 October 2018.

[70]     The sum sought by LG includes costs it had incurred prior to its security for costs application, as well as anticipated costs.  LG accepts that security for costs is primarily directed at anticipated costs, and therefore only seeks 25 per cent of the costs it has already incurred (initially calculated at $30,643.95, but now with a further
$9,412 in disbursements for external hosting of documents since the application for security was made). It relies on Camelot Hotel Ltd v Square Holdings Ltd as authority for the proposition that costs already incurred may form part of a security for costs
order.42

39	AS McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
40	Aerospace Developments Ltd v Altitude Aerospace Interiors Ltd [2012] NZHC 2723 at [35]; Taylor v Adair [2018] NZHC 1975 at [35].
41	Aerospace Developments Ltd v Altitude Aerospace Interiors Ltd [2012] NZHC 2723 at [8].
42	Camelot Hotel Ltd v Square Holdings Ltd (2016) 23 PRNZ 121 (HC) at [59].

[71]     The sum sought by LG also includes $37,351 to reflect the anticipated costs in amending pleadings and preparing for trial, and $44,600 for the anticipated costs related to trial and appearances.   The trial is estimated to take 10 days, and LG considers that a Band C allocation will be appropriate for some steps, including preparation for trial.  I agree that the proceedings are likely to be factually complex.

[72]     The position taken by Oxygen Air before Associate Judge Bell was that security for costs should be future looking, and therefore it is inappropriate to make an order for security in relation to costs already incurred.  Oxygen Air offered to pay
$50,000 as security, which it indicated could be obtained by way of a loan from Mr

Rotteveel’s father.

[73]     In my view Oxygen Air is correct in submitting that security for costs is future looking.  Mackenzie J in Pickard v Ambrose observed:43

It would not be appropriate now to make an order for security for costs which have already been incurred by the defendant. The proper objective of an order for security is to protect the position of the defendant for costs to be incurred. What is important are the steps to come.

[74]     On appeal, the Court of Appeal agreed that the costs which had so far been expended were “necessarily sunk” and that it was appropriate to look forward rather than back in determining the amount of security.44    I prefer to adopt the Court of Appeal’s approach, rather than Associate Judge Osborne’s decision in Camelot Hotel Ltd v Square Holdings Ltd to include a proportion of costs already incurred in the sum payable as security.

[75]     Applying that approach to the present case, I consider that it is appropriate to require Oxygen Air to pay the sum of $65,000 by way of security for costs, and to do so by 5.00pm on Friday 12 October 2018.  That sum reflects a proportion of LG’s anticipated costs in relation to trial.

[76]     LG did not seek a stay of proceedings before Associate Judge Bell, maintaining that this would not be in the interests of justice and would exacerbate the ongoing

43	Pickard v Ambrose HC Wellington CIV-2003-091-143, 13 August 2009 at [9].
44	Ambrose v Pickard [2009] NZCA 502 at [42], recently cited and applied in Sisson v IAG New
Zealand Ltd [2014] NZHC 616 at [71]–[72].

prejudice to LG’s commercial position.  Although it is discretionary, the courts will generally stay a proceeding until security ordered is given.45    In the present case, because LG is not seeking a stay, I shall not make an order staying the plaintiff’s claim pending payment of security. However, I shall reserve leave to LG to apply for a stay should the plaintiff fail to comply with the order for the payment of security by the specified date of 12 October 2018.46

[77]     Associate Judge Bell awarded costs of $18,340 on the LG application for security. While the plaintiff has succeeded in the application for review, and the order requiring Mr Rotteveel to give his personal undertaking is to be quashed, LG has nevertheless succeeded in obtaining an order for the payment of security.  In these circumstances I consider that the question of costs applicable to the successful LG application for security, and to the plaintiff’s successful application for review, should be determined following the filing of costs memoranda by the parties.

Result

[78]     I allow the application for review and quash the order made by Associate Judge Bell requiring Mr Rotteveel to give an undertaking that he would meet an award of costs made against Oxygen Air if it is unsuccessful in its claim against LG.

[79]     Oxygen Air is to give security for costs by paying the sum of $65,000 into Court by 5.00pm on Friday 12 October 2018.  Leave is reserved to LG to apply for a stay of the Oxygen Air claim in the event that it fails to pay the sum required for security by the specified date.
[80]     Costs on the present application, and on the LG application for security, are reserved to be determined following receipt of memoranda by the parties as to costs. I direct Oxygen Air to file and serve its memorandum as to costs within five working days from the date of delivery of this judgment, and LG to file and serve its memorandum within five further working days following receipt and service of the Oxygen Air memorandum.

Paul Davison  J

45	High Court Rules 2016, r 5.45(3)(b); Tomanovich Holdings Ltd v Gibbston Community Water Co
2014 Ltd [2018] NZHC 990 at [68] and [85].
46	The trial is presently scheduled to commence on Monday 29 October 2018.