ACN 060477830 in Liq Formerly T/A David Koo & Assoc P/L v K Koo & Ors No 2 - [2009] SADC 64

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
ACN 060477830 IN LIQ FORMERLY T/A DAVID KOO & ASSOC P/L v K KOO & ORS NO 2
[2009] SADC 64
Judgment of Her Honour Judge Shaw
5 June 2009
PROCEDURE - COSTS
Application for indemnity costs.
District Court Act 1991 s 42(1), referred to.
Colgate Palmolive Co and Another v Cussons P/L (1993) 118 ALR 248; Casley-Smith & Ors v Evans & Sons (1989) 149 LSJS 483; Fountain Selected Meats (Sales) P/L v International Produce Merchants P/L (1988) 81 ALR 397; Sheahan v Northern Australia Land and Agency Co Ltd (1995) SCSA Full Court (Unrep) No S.5363; Emanuele and Others v Hedley (No 2) 19 December 1997 BC 9707399; Bent v Gough Anor (1992) 108 ALR 131; Macks v Hedley (1999) 94 FCR 188, considered.

ACN 060477830 IN LIQ FORMERLY T/A DAVID KOO & ASSOC P/L v K KOO & ORS NO 2
[2009] SADC 64

This is an application by the defendants for indemnity costs against the plaintiff company (“DKA”) for the whole of the proceedings. DKA was placed into voluntary administration on 28 April 2004. On 25 May 2004, DKA was placed into liquidation. Mr Nicholas David Cooper and Mr John Irving were appointed joint and several liquidators of DKA (“the liquidators”). On 8 December 2005, proceedings were commenced in this action. On 16 September 2008, Mr Irving resigned as joint and several liquidator of DKA.[1] DKA claimed that the first and second defendants (“Mr and Mrs Koo”), breached their duties as directors of DKA. It was alleged, inter alia, that Mr and Mrs Koo gave instructions for the making of payments to associated companies of DKA in circumstances where they knew that such payments were contrary to the interests of DKA.
[1] See affidavit of Nicholas David Cooper dated 14 May 2009
On 10 April 2008, the hearing of this action commenced. During the opening on behalf of DKA, counsel for DKA alleged that Mr and Mrs Koo had acted dishonestly in their capacity as directors of DKA. In particular, it was alleged that Mr Koo had instructed Mr Gordon, the internal accountant for DKA, to record payments and expenses of DKA in such a way so as to disguise the true nature of the payments to associated companies of DKA.
DKA’s claim, insofar as it alleged dishonesty, relied substantially, upon the evidence of Mr Gordon. However, during the cross-examination of Mr Gordon, a serious question arose as to his credibility.
On 18 April 2008, counsel for DKA advised the court that DKA’s case did not depend on the evidence of Mr Gordon.
At the conclusion of the case for DKA, Mr Koo gave evidence disputing the critical aspects of Mr Gordon’s evidence. He explained that Mr Gordon was primarily responsible for recording the transactions in issue, for preparing draft accounts and for preparing taxation returns. On 18 June 2008, at the conclusion of the defendants’ case, counsel for DKA advised the court that he would not be pursuing certain parts of DKA’s claim. On 20 June 2008, DKA applied to amend the Statement of Claim. This application resulted in additional hearing days.
The defendants made a further application for security for costs. On 2 September 2008, the defendants gave notice of an intention to seek indemnity costs.
On 17 December 2008, I refused the application to amend the Statement of Claim and published my reasons.[2]
[2] [2008] SADC 170
On 14 April 2009, judgment was entered for the defendants by consent.
Submissions on Behalf of Defendants
The defendants submitted that the liquidators of DKA instituted the proceedings having regard to the books of account and records of DKA, and the proposed evidence of Mr Gordon in relation to the recording of the transactions in question. It was submitted that before commencing the action, the liquidators ought to have sought an explanation from Mr and Mrs Koo for those transactions.
Alternatively, it was submitted that at least from the time that DKA’s counsel informed the court that its case did not depend on Mr Gordon’s evidence, DKA should have realised it was unreasonable to continue with the action.
In the further alternative, it was submitted that the application by DKA to amend its Statement of Claim at the conclusion of the defendants’ case was doomed to failure and unreasonably pursued.
Submissions on Behalf of DKA
Senior counsel for DKA submitted that the defendants had the opportunity to provide an answer to the liquidators’ concerns prior to the commencement of the hearing. By letter dated 14 July 2004, DKA gave notice of its intended claim against the defendants pursuant to Rule 6A of the District Court Rules. The notice was lengthy and detailed. It was submitted that the response on behalf of the defendants in the letter dated 6 September 2004, did not include the explanations given by Mr Koo in evidence in these proceedings.
In addition, the defendants had filed a defence which failed to reveal the explanations which were subsequently given by Mr Koo in evidence.
Prior to the commencement of proceedings, the liquidators obtained the written opinion of counsel dated 16 September 2005.
In about March 2008, Mr Gordon was proofed as a prospective witness for the purposes of the trial. It was believed that he was a witness of truth.[3]
[3] Cooper affidavit supra para 10-11
The trial commenced on 10 April 2008. On 18 April 2008, following the cross-examination of Mr Gordon, the liquidators obtained the further advice of counsel. That advice is set out in the affidavit of the liquidator, Mr Nicholas Cooper.[4] That advice had regard to the apparently contradictory evidence given by Mr Koo in relation to the same subject matter in District Court Action No. 707 of 2003.[5] Upon the basis of that advice and in the light of the evidence of Mr Koo in the other action, it was decided to pursue the action and cross-examine Mr Koo.
[4] Supra at paras 9-12
[5] Cooper affidavit supra paras 9-12-14
Following the cross-examination of Mr Koo on 18 June 2008, the liquidators received further oral advice from counsel as to their prospects of success. They were advised that the claim ought to continue but limited to the negligence claim pleaded in paras 18-20 of the Statement of Claim. Counsel for DKA at the hearing, informed the court accordingly. However, following the unsuccessful application to amend the Statement of Claim, DKA consented to judgment for the defendants.
It was submitted on behalf of DKA that the court was required to have regard to the role of liquidators in the conduct of court proceedings and further, that at all times, the liquidators had acted on legal advice.
Legal Principles
Section 42(1) of the District Court Act 1991, provides for an unfettered discretion to determine the question of costs, including whether costs ought to be awarded on an indemnity basis. The discretion is unfettered, but must be exercised judicially.
In the determination of the present application, it is necessary to consider whether there is some special or unusual feature to justify an award of indemnity costs.[6] The categories of cases in which indemnity costs might be awarded are not closed.[7]
[6] Colgate Palmolive Co Pty v Cussons P/L (1993) 118 ALR 248
[7] Casley-Smith & Ors v Evans & Sons (1989) 149 LSJS 483
Circumstances which might warrant the exercise of the discretion to order indemnity costs include the commencement of proceedings in wilful disregard of known facts or clearly established law, and the making of allegations that ought never to have been made. Further, the undue prolongation of a case by groundless contentions, and commencing proceedings for some ulterior motive, might justify an order for indemnity costs.[8] Persistence with a hopeless case and the raising of improper or unfounded allegations might support a finding of an improper motive.[9] Unreasonable conduct is sufficient to enliven the discretion. Vexation need not be proved.[10]
[8] Colgate Palmolive Co Pty v Cussons P/L supra
[9] Fountain Selected Meats (Sales) P/L v International Produce Merchants P/L (1988) 81 ALR 397, 400-401
[10] Sheahan v Northern Australia Land and Agency Co Ltd (1995) SCSA Full Court (Unrep) No S.5363
A liquidator owes a duty to the court as well as to the creditors and shareholders to act responsibly in commencing or supporting litigation.[11] Liquidators are in a special position. Courts must be careful not to discourage liquidators from performing their public duty in pursuing litigation.[12]
[11] Emanuele and Others v Hedley (No 2) 19 December 1997 BC 9707399 at p30
[12] Bent v Gough Anor (1992) 108 ALR 131; Macks v Hedley (1999) 94 FCR 188, 216
Findings
It is necessary to determine the question of indemnity costs at three separate stages of the proceedings.
A. Commencement of the Action
I am satisfied that prior to the commencement of these proceedings, the liquidators of DKA investigated the matter appropriately and obtained the advice of counsel. The liquidators commenced this action in the discharge of their statutory duties on the basis of proper information. They sought to make recoveries for a substantial number of unsecured creditors.
In the circumstances of the present case, I regard it as significant that when the liquidators provided a detailed notice of DKA’s claim by way of the Rule 6A Notice, the defendants chose not to give a full response in the nature of the evidence adduced at the hearing.
The liquidators were entitled to rely on the information contained in the books and records of DKA which, on their face, proved the various transactions in question. In addition, the liquidators were entitled to rely upon the proposed evidence of Mr Gordon to the effect that he was instructed by Mr Koo to record the specific transactions pleaded in the Statement of Claim in the manner alleged and which supported DKA’s claim of breaches of directors duties. Mr Gordon’s proposed evidence was not necessarily inconsistent with the pleaded defence of Mr Koo and of the other defendants.[13] However, in his evidence at trial, Mr Koo said that he did not instruct Mr Gordon in the manner alleged by Mr Gordon and that he did not have knowledge of the precise way in which the transactions were recorded in the accounts of DKA.[14] He said that he left those matters to Mr Gordon.
[13] at para 43 of Defence
[14] T p543-544
In my view, DKA could not have reasonably foreseen the response by and concessions of Mr Gordon, during cross-examination by senior counsel for the defendants.[15]
[15] T p384-389; 396-406
I am satisfied that in deciding to commence the proceedings, there was no wilful disregard of known facts or clearly established law. The proceedings were not pursued for an ulterior purpose.
I am not satisfied that any of the facts or circumstances upon which the defendants rely ought to enliven the court’s discretion to order costs on an indemnity basis from the commencement of the action.
B. From 18 April 2008
On 18 April 2008, counsel for DKA informed the court that even if Mr Gordon’s evidence was ignored, DKA would be able to prove its case. I accept that this decision was based partly upon the anticipated cross-examination of Mr Koo in respect of his alleged prior inconsistent statements on oath in District Court Action No. 707 of 2003.[16]
[16] Cooper affidavit 14 May 2009 Exhibit NC3
I accept that the liquidators relied upon counsel’s advice in relation to the merits of the case proceeding after 18 April 2008. In my view, these circumstances do not warrant a finding that the action continued “from some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law”.[17]
[17] Fountain Selected Meats v International Produce Merchants supra at p401
I am not satisfied that any of the facts or circumstances upon which the defendants rely ought to enliven the court’s discretion to order costs on an indemnity basis from 18 April 2008.
C. From 18 June 2008
In my view, different considerations apply to DKA’s decision to pursue the action after the close of the defendants’ case on 18 June 2008. DKA’s counsel failed to cross-examine Mr Koo upon the alleged prior inconsistent statements in the separate District Court action. Mr Koo remained unshaken in his evidence that he had no knowledge of Mr Gordon’s manner of recording the relevant transactions.
On 18 June 2008, counsel for DKA informed the court that DKA’s case based upon dishonesty, would not be pursued. However, for the first time in the hearing, DKA sought to agitate a case in negligence. Whatever claims may have been available based on the pleadings, DKA chose at trial to allege dishonesty, not negligence. The history of the proceedings in this respect, was the subject of my earlier ruling where I refused DKA’s application to amend the Statement of Claim.[18] I will not repeat those findings.
[18] [2008] SADC 170
In my view, the decision to attempt to pursue a case in negligence at the completion of all of the evidence and to seek to amend the Statement of Claim for that purpose, resulted in an unnecessary prolongation of the proceedings. In particular, I have regard to the content of the opening on behalf of DKA, the defendants’ cross-examination of Mr Gordon and DKA’s failure to give notice to the defendants of its intention to pursue the alternative basis for liability prior to the close of the defendants’ case.
In my view, DKA’s application to amend the Statement of Claim at that late stage was an attempt to salvage a case in circumstances where the case upon which DKA had opened in precise detail, had collapsed. I find that from this point in time, DKA, properly advised, ought to have known that it had no prospect of success and that it was unreasonable to continue to pursue the action. Accordingly, in the exercise of my discretion, I find that there are grounds for departing from the usual course of ordering costs on a party/party basis from 18 June 2008.
The application by the defendants for indemnity costs from 18 June 2008 is granted.
Order
The plaintiff will pay the defendants’ costs of action to be taxed on an indemnity basis from 18 June 2008.
Prior to that date, the plaintiff is to pay the defendants’ costs of action to be taxed on a party/party basis.