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High Court backs quick costs payment
A decision last week from the Auckland High Court has held that debtors cannot rely on solvency alone to defeat a liquidation application and has confirmed a new requirement that costs orders be paid immediately.
The key rulings come in the case of Spencer v Jed Rice Building Contractors Limited, in which the defendant company applied to stay liquidation proceedings arising from two unpaid costs orders from the District Court.
A statutory demand for payment of the costs had expired, but the defendant sought to stay the liquidation proceedings, arguing that it was both solvent and had the debt set aside in its bank account.
These defences have often been successful, with the courts proving reluctant to allow liquidation proceedings to continue where a defendant company demonstrates solvency. However, this approach has drawn increased criticism in recent years, with commentators noting that it effectively entitles a solvent company to simply refuse to pay, in defiance of a statutory demand and any subsequent liquidation proceedings.
The statutory demand procedure is designed to provide a fast-track method of proving a company's insolvency and proceeding to a liquidation hearing if the demand remains unsatisfied. It can be a matter of some considerable frustration to creditors when debtors simply refuse to pay, relying on their solvency as the basis for resisting any attempt to enforce the debt with a statutory demand.
In the Spencer case, the High Court agreed that some debts simply must be paid, and that costs orders were in that category. The court noted that where a debt is undisputed, as was the case in this instance, something more than proof of solvency would be required to stay a liquidation proceeding.
The case provides comfort to both litigants and creditors. It imparts a welcome degree of certainty to litigants, in confirming that the court will recognise that they are entitled to be paid their costs (even though the substantive claim might be undecided). It also offers comfort to creditors, who can invoke this debt recovery procedure with increased confidence that, absent a bona fide dispute, the courts will act to uphold their entitlement to be paid.
* Josh McBride acted for the plaintiff in the High Court.
