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Petterson v Chan Mow & Co Ltd [2024] WSCA 2 (7 June 2024)

IN THE COURT OF APPEAL OF SAMOA
Petterson v Chan Mow & Co Ltd & Anor [2024] WSCA 2 (07 June 2024)

CA06/23

IN THE COURT OF APPEAL OF SAMOA
HELD AT MULINUU

BETWEEN:

DAVID ROSS PETTERSON, of Levin, New Zealand, forensic accountant and insolvency practitioner

Appellant

A N D:

CHAN MOW & COMPANY LIMITED, a duly incorporated company having its registered office at Matafele and carrying on business as a wholesale and retail trade company

First Respondent

A N D:

PROGRESSIVE INSURANCE COMPANY LIMITED (in liquidation), a duly incorporated company having its registered office at Level 2, Chandra House, Convent Street, Vaimauga Sisifo, Apia, Samoa, formerly an insurance company

Second Respondent

Counsel: B Gustafson & S Ainuu for the Appellant

M Kersey, S Jones & T Lamb for the Respondent

P. Chang for the Second Respondent

Judgment: 07 June 2024

JUDGMENT OF THE COURT
(Costs)

The issues

1. On 21 April 2023, the Chief Justice removed David Ross Petterson (the appellant) as liquidator of Progressive Insurance Co Ltd (Progressive). This was on the application of Chan Mow Ltd (CML), the major creditor of Progressive. On 28 November 2023, we dismissed the appellant’s appeal to this Court. The Chief Justice had directed that costs in the Supreme Court should follow the event but, pending the hearing of the appeal, those costs were not fixed. CML now seeks orders as to costs in respect the proceedings in both the Supreme Court and this Court. An issue as to the appellant’s remuneration has now also arisen, albeit somewhat indirectly.
2. In this judgment we resolve current issues as to costs and also address briefly and non-determinatively the outstanding remuneration issue.

Personal liability of the appellant for costs and whether he is entitled to an indemnity

3. Where liquidators have been unsuccessful in litigation, disputes sometimes arise as to costs, particularly as to whether the liquidator has a right of indemnity against the assets of the insolvent company. There are several relevant authorities as to this, one of which, Sing Tel Optus Pty Ltd v Weston (Costs),^[1] was heavily relied on by counsel for the appellant.
4. The indemnity principles that apply were first developed in relation to trustees. The rule is that a trustee is entitled to indemnity from the trust estate for costs properly incurred and this includes costs that a trustee is ordered to pay in relation to unsuccessful litigation. For these purposes, costs are properly incurred if the trustee acted honestly and reasonably when incurring them. All of this is explained in Re Beddoe; Downes v Cottam.^[2] In applying these principles to an unsuccessful defence by a liquidator to an application for removal, judges must recognise that:
   • (a) Litigation is an occupational hazard for liquidators;
   • (b) It is in the public interest that insolvency practitioners should be willing both to accept appointment as liquidators and to resist what may be unmeritorious demands that they stand-aside; and
   • (c) Liquidators can be expected to have at least some regard to their own commercial and reputational interests.

As the cases reviewed in Sing Tel Optus show, and as that judgment itself illustrates, it is rare for courts to deny a liquidator an indemnity for costs associated with unsuccessful litigation. In that case, a liquidator who had been removed for reasons that reflected badly on his conduct was held to be entitled to an indemnity in respect of the costs that he was ordered to pay the applicant. In his judgment, the Judge focussed primarily on whether the liquidator’s litigation position in the removal proceedings was reasonable, an issue that was not controlled by the adverse findings in respect of the way he had conducted the liquidation.

5. As will become apparent, we see the present case in a rather different light.
6. The background to the litigation is fully discussed in the judgments of 21 April and 28 November 2023. For present purposes, only limited explanation, repetition and supplementation are required.
7. Prior to its liquidation, Progressive was controlled by Mr Murray Drake. The way that Progressive had operated, and the circumstances of its liquidation raised questions as to his conduct. It was Mr Drake who was responsible for the appointment of the appellant as liquidator. The appellant and Mr Drake had previously had a longstanding business association which had extended to the appellant providing services to Mr Drake (or associated companies) in ways there were material to Mr Drake’s control of Progressive. The appellant had also provided professional services to members of Mr Drake’s family. In our judgment, we recorded that we could “see no obvious rationale for [the appellant] to have accepted appointment” as liquidator of Progressive.
8. The appellant’s appointment as liquidator was opposed by CML but he insisted on remaining in office. His conduct of the liquidation was subject to serious question in a number of respects. These are discussed in our substantive judgment. One of these involved voidable preference proceedings against CML of which we were critical. In our substantive judgment, we accepted that some of the appellant’s questionable actions, at least when looked at in isolation, might be seen as being of limited moment. However, we went on to say:
   • ... some of the actions to which we have referred are less easy to explain away. The ones we have in mind will be apparent from what we have already said. But more significantly, what is primarily important is the totality of his actions and the reality that the errors and questionable assessments all go one way, to the disadvantage of CML and the advantage of Mr Drake.

We then added:

The appellant should not have accepted ... appointment as liquidator and, having done so, should have resigned when first challenged by CML. His errors of judgment in taking office and not resigning were substantially compounded by the way he conducted the liquidation and defended the application for his removal. ... [W]e conclude that the appellant’s associations with Mr Drake and his family and his conduct of the liquidation provide a substantial basis for a reasonable apprehension of bias.

9. As to the appellant’s conduct of the litigation, there was a marked lack of transparency in his dealings with the Court and his counsel’s responses (and non-responses) to legitimate questions as to his relationship with Mr Drake, a lack of transparency that was not acceptable given the appellant’s fiduciary responsibilities. His conduct of the litigation was also unsatisfactory in the more general sense of being an attempt to defend the indefensible.
10. The case was heard in the Supreme Court between 28 November and 1 December 2022. In the aftermath of that hearing, the solicitors for CML wrote to the appellant’s legal representatives. The correspondence was without prejudice save as to costs. There were two letters, one of 2 December, and the other of 8 December 2022. The latter letter offered a compromise involving the appellant resigning and appointing replacement liquidators, CML discontinuing its application for his removal (without costs), CML not opposing the appellant receiving WST 150,000 “in additional costs and expenses including remuneration” and the voidable preference proceedings against CML being discontinued (without costs). The appellant did not accept this offer. The reasons later proffered by his counsel for not doing so – along the lines that if the appellant had accepted the offer, the allegations that had been made against him in the Supreme Court would have been left unresolved – do not make much sense; this because by this stage adverse findings of the kind ultimately made were practically inevitable. From this point on, his opposition to his removal became even more unreasonable than it had previously been.
11. It may be that some of the appellant’s time and attendances in relation to the liquidation were of some value and may conceivably warrant remuneration, a point to which we will return later. But this is of little moment in the present costs context – a context in which we must focus on the honesty and reasonableness of his resistance to the removal proceedings. That resistance was not in the best interests of Progressive and there was no rational basis upon which he could have thought that it was. Indeed, as time went by, we think it clear that it was his perception (wrong as we think it was) of where his personal interests lay that primarily motivated his actions. This is apparent from the reasons proffered by his counsel for his refusal of the 8 December 2022 settlement offer. It was an offer that he would have been wise to have accepted.
12. Despite recognising the general force of the three considerations referred to at [4], we see them as being of little moment in the context of what happened here. Accordingly, we propose to order costs direct against the appellant and hold that in resisting removal, the appellant did not act honestly and reasonably and is therefore not entitled to an indemnity in relation to such costs.

Quantification of costs

Positions of the parties

13. For the Supreme Court proceedings, CML’s costs as incurred total WST87,300 and NZ$163,889 and disbursements WST873.60 and NZ$15,283.69.^[3]. CML seeks a two thirds recovery of costs incurred in New Zealand dollars less an adjustment of NZ$10,000 which we will explain shortly (NZ$99,259 and a full recovery of disbursements. For costs incurred in tala, the amount claimed is WST58,202.91 (WST87,300 x 2/3).
14. CML costs as incurred in relation to the proceedings in this Court are:
    • (a) WST13,500 (costs) and WST873.60 (disbursements);
    • (b) NZD95,523.86 (costs) and NZD$5,592.42 (disbursements).

It seeks a full recovery of all costs and disbursements.

15. Counsel for the appellant contended that we should not address costs in respect of the Supreme Court proceedings, and any order for costs in this Court should be confined to WT5,000, or, at worst should be calculated in accordance with the approach adopted by the New Zealand Court of Appeal, which would result in an order of around NZ$20,000. The appellant also challenged the reasonableness of the time spent by, and the hourly rates of, counsel for CML and maintained that the absence of confirmation that the costs claimed for had been paid by CML is material.
16. Each party was critical of the litigation conduct of the other. The criticisms by the appellant of CML relate primarily to the Supreme Court proceedings and include what he claims was a misconceived application to appoint an interim liquidator, pursuit of a number of grounds for removal that were either not ultimately pursued or rejected (relating generally to the appellant’s suspected role in relation to companies associated with Progressive) and the non-updating by CML of the affidavits/evidence of its expert witnesses prior to the hearing in the Supreme Court. We note that CMIL accepts the criticism in relation to the non-updating of affidavits/evidence and it is for this that it proposes the adjustment of $10,000 already referred to.
17. CML’s criticisms of the appellant’s litigation conduct extended to the general lack of transparency that we have already mentioned, a range of issues raised on appeal by the appellant but not pursued and the pursuit of arguments at the hearing that had not been signalled in the notice of appeal.

Our approach

18. As we are familiar with all issues in the litigation, we propose to fix costs (and make all other necessary associated orders) in relation the Supreme Court proceedings as well as the appeal.
19. We do not see the absence of proof that CML has paid the costs incurred as critical. Even if it is the case that CML has not paid, there is no basis for inferring that the costs claimed on its behalf are not due and owing. That is enough to mean that they have been relevantly incurred to warrant awards of costs.
20. As between CML and the appellant, responsibility for this unhappy litigation rests entirely on the latter. This is for reasons that are discussed at length in our judgment dismissing the appeal and there is no need to repeat them. As well, as already explained, we consider that the appellant’s conduct of the litigation was not both reasonable and proper. We see the case as well outside the circumstances in which scale or conventional costs (or anything similar) would be appropriate.^[4]
21. As to the criticism of CML’s conduct of the litigation and the reasonableness of the costs for which recovery is sought, as we have noted, CML accepts the validity in the complaint relation to the non-updating of affidavits/evidence prior to the Supreme Court hearing. That aside we see the criticisms as having little weight:
    • (a) The case arises out of the failure of an insurance company, the appointment of the appellant as its liquidator by the person who had been in control of that company, and the appellant’s independence or otherwise, in light of his prior associations and questionable actions. All of this meant that there were important public interest considerations involved. The case for CML thus warranted the careful and thorough preparation it received.
    • (b) The circumstances of suspicion that attended the appellant’s appointment as liquidator and the lack of transparency to which we have referred mean that he is not well-placed to criticise the time it took CML to understand fully the evolution of the convoluted shareholding structure of Progressive and thus the extent to which the appellant had been involved in companies associated with it.
    • (c) As well, as we commented in judgment dismissing the appeal, the criticism of an application to appoint an interim liquidator was “pretty technical”.
    • (d) It may be, as counsel for the appellant maintained in submissions addressed to costs in the Supreme Court, that a simple challenge confined to the early decision of the appellant not to call a creditors meeting may have resolved matters more economically. The appellant had been in plain of default of his legal obligations when he did not call a meeting of creditors, and it is true that his default could have been challenged in relatively simple proceedings in the Supreme Court. However, this default was only one of many issues raised by his appointment to, and continuation in office as, liquidator of Progressive, issues that gave to rise the public interest considerations to which we have referred.
22. We as accept that the quantification methodology proposed by CML provides appropriate starting points:
    • (a) For the Supreme Court, a two thirds recovery of costs less an adjustment of NZD10,000 in respect of counsel’s fees and full recovery of disbursements; and
    • (b) For the Court of Appeal, indemnity costs and a full recovery of disbursements.
23. Given the public interest considerations the case raised and the lack of transparency by the appellant, we are not much moved by the complaints of counsel for the appellant as to charge out rates and the reasonableness of the attendances to which those charge out rates were applied. But, in the absence of a process akin to a formal taxation of costs, we are not able to dismiss them entirely. The expense of anything approaching a line-by-line analysis of the costs for which recovery is sought being disproportionate to what is at stake, we propose to recognise the possibility that there may be some substance to the complaints by reducing the costs referred to in [13] and [14] by ten percent.
24. This means that we make orders for costs and disbursements as follows:
    • (a) For the proceedings in the Supreme Court:
      • (i) costs of NZ$89,333 and WST52,382.62; ^[5] and
      • (ii) disbursements as claimed of NZ$15,283.69 and WST873.60 and
    • (b) For the appeal to this Court:
      • (i) costs of NZ$85,971.47 and WST12,150;^[6] and
      • (ii) disbursements as claimed of NZ$5,592.42 and WST 873.60.

Remuneration for the appellant

25. On 13 March 2024, the appellant invoiced the current liquidators of Progressive seeking payment of NZ$113,626.42 for his professional services in relation to the liquidation. The current liquidators have rejected this invoice. This was the subject of complaint by counsel for the appellant in his reply submissions filed on 17 May 2024, albeit that we do not read that submission as invitation for us to review the decision of the current liquidators.
26. The appellant undoubtedly did provide professional services in relation to the liquidation, including in relation to voidable transaction proceedings against the Insurance Commissioner. It may be that in this and perhaps other respects, the appellant has provided services for which he ought justly to be remunerated. If there is any further issue as to this, it will fall to be determined in the Supreme Court in due course.

Formal orders

27. We order the appellant to pay costs and disbursements specified in [24] together with costs of NZ$2,500 in relation to the argument as to costs.
28. We declare that the appellant is not entitled to an indemnity in relation to these costs and disbursements.

JUSTICE FISHER
JUSTICE BLANCHARD
JUSTICE YOUNG

^[1] Sing Tel Optus Pty Ltd v Weston (Costs) (2012) NSWSC 1002.

^[2] Re Beddoe; Downes v Cottam [1892] UKLawRpCh 180; [1893] 1 Ch 547.

^[3] The NZ$15,283.69 includes costs associated with expert witnesses.

^[4] See the discussion as to costs in Apia Construction & Engineering Ltd v Samoa National Provident Fund [2017] WSCA 6.

^[5] Being 90% of the NZ$99,259 and WST58,202.91 referred to in [13].

^[6] Being 90% of the NZ$95,523,86 and WST13,500 and referred to in [14]