The recent High Court decision to award costs against the receivers of Five Mile Holdings Ltd, in addition to the company against which the proceeding was taken, has implications both for receivers and for stakeholders in a receivership.1 This Brief Counsel backgrounds the case and comments on its wider relevance.
The plaintiffs in the court proceeding had agreed to purchase units in the proposed Five Mile township in Queenstown and had paid deposits to Five Mile's solicitor, Cousins & Associates, as stakeholder.
When the development was cancelled, they asked for their money back and were referred to the receivers by Cousins & Associates. The receivers said they could not authorise release of the deposits as they had an incomplete set of documents and also that their duties and obligations required that:
"...they do not invest time and resource for the benefit of purchasers where to do so does not result in a better recovery for parties that appointed them."
As the Court pointed out:
"[i]n short, the receivers did not wish to erode the money which would be available to their appointor by undertaking the research and analysis of documents which might clearly inform them as to the correct contractual position."
The plaintiffs were left with little alternative but to issue a proceeding against Five Mile and Cousins & Associates seeking return of the deposits. The receivers did not oppose that application, so the Court did not hesitate to order Cousins & Associates to release the deposits and to direct Five Mile to pay the plaintiffs' costs. That is quite uncontroversial.
It is the decision to also award costs against the receivers personally which is significant to receivers generally.
Five Mile and the receivers required to pay costs
Awards of non party costs are unusual. They are ordinarily only made if a non party has been funding litigation where the funded party is a "man of straw". The overarching principle is whether, in all the circumstances, it is fair to make an order for such costs.
The plaintiffs argued that the receivers should pay costs because, by failing to authorise release of the deposits, the plaintiffs were left with no alternative but to go to Court.
The receivers advanced two arguments:
- that the Court's discretion to award non-party costs can only be exercised where a non-party had promoted, funded or controlled litigation, and the receivers had done none of these things, and
- that they had acted reasonably because they did not have all the necessary information to assess the position and could not be compelled to seek that information if there was nothing in it for their appointing creditor.
The Court disagreed. The financier who appointed the receivers stood to benefit from the litigation if the Court refused to grant relief to the plaintiffs. The receivers also had a "distinct degree of control" over the proceeding – both as to whether it was necessary in the first place and as to how it was resolved.
The Court saw the plaintiffs' contractual entitlements as "uncomplicated" and the outcome reached by the Court (ordering payment of the deposits to the plaintiffs) could have been reached by the receivers "with little effort or time."
The receivers "chose to sit on their hands" and this was not reasonable. The receivers (rightly) put the interests of their appointing financier first, but "modest enquiries" researching the plaintiffs' position could have avoided the need for litigation.
The receivers were ordered to pay costs and disbursements of $8,633.33 to the plaintiffs. The Court concluded by stating that:
"Other cases may exist where the conduct of receivers in effectively forcing a matter to go to Court is found to be reasonable because of greater complexity or cost of private resolution. This is not such a case. The correct answer to the plaintiffs' request was straight-forward. It should not have required resolution through Court proceedings."
The result was a pragmatic balancing of the role of the receivers to promote the interests of the appointing creditor, and their role in managing the company. Ultimately it seems that the balance will be struck according to what the Court perceives to be reasonable. In some cases that will be clear, but in some it will be much less apparent.
Position of the stakeholder
The Court ordered no costs against Cousins & Associates. It acknowledged that they had been in a difficult position, "... caught in the middle with no agreement between vendor and purchaser as to the parties' rights". In these circumstances, a stakeholder does not need to take a risk and pay out the money, even where the arguments favouring payment might be strong.
What does the case mean?
Receivers will, in some cases, have to look beyond the duties they owe to their appointor when dealing with parties affected by the receivership of a company. If "little effort or time" (or perhaps a "reasonable" amount of effort or time) is needed to address the concerns of a third party, then receivers will need to make sure they make reasonable enquiries, or risk being ordered to pay costs for wasteful litigation.
Stakeholders should feel reassured by this decision. It emphasises that they do not need to go out on a limb when parties are fighting over who is entitled to a stake.
For further information, please contact the lawyers featured.
Poh v Cousins & Associates & Five Mile Holdings Ltd (in Rec) HC Christchurch, CIV 2010-409-2654, 4 February 2011
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.