Australian Money Exchange Pty Ltd (in liq) v Llewellyn; Keybridge v Llewellyn

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

COMMERCIAL LIST

S ECI 2019 02922

AUSTRALIAN MONEY EXCHANGE PTY LTD (IN LIQUIDATION) ACN 090 388 257	First plaintiff
-and-
PR FINANCE GROUP LIMITED (IN LIQUIDATION) ACN 109 299 390	Second plaintiff
v
JONATHAN HUW ELFYD LLEWELLYN & ORS (in accordance with the schedule)	Defendants

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JUDGE:	DELANY J
WHERE HELD:	Melbourne
DATE OF HEARING:	9 August 2024
DATE OF RULING:	27 August 2024
CASE MAY BE CITED AS:	Australian Money Exchange Pty Ltd (in liq) v Llewellyn; Keybridge & Anor v Llewellyn & Ors
MEDIUM NEUTRAL CITATION:	[2024] VSC 511

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COSTS – Costs of discontinued proceeding – Where each party seeks costs – Where defendant seeks indemnity costs – Where parties failed to seek appropriate advice in relation to exclusion to insurance policy – Chaotic conduct of the plaintiffs marked by failure to comply with procedural orders over a long period of time – No basis to depart from the costs position under the Court rules – Order for costs against the plaintiffs – Whether overarching obligations under Civil Procedure Act 2010 (Vic) ss 7, 19, 22-25 breached – Zhao v Ausin Group (Australia) Pty Ltd (No 2) [2023] FCA 498 – Rule 63.15 of the Supreme Court (General Civil Procedure) Rules 2015 – Section 24(1) of the Supreme Court Act 1986 (Vic).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiffs	Mark Robins KC with Lachlan JS Molesworth	P&B Law
For the Seventh Defendant	Stewart J Maiden KC with Jennifer Collins	Clyde & Co

TABLE OF CONTENTS

The final chapter in an old case...................................................................................................... 1

Costs: the legislation and the principles....................................................................................... 6

The history of this proceeding........................................................................................................ 9

The plaintiffs’ submissions as to costs........................................................................................ 17

The Underwriters’ submissions as to costs................................................................................. 20

Evidence given in cross-examination........................................................................................... 23

Consideration.................................................................................................................................... 26

HIS HONOUR:

The final chapter in an old case

This ruling is the final ruling in this proceeding. It brings to an end litigation that is very old and in which there have been no winners.

The claim was initiated in 2019 by the plaintiff companies, both of which are in liquidation. It was funded throughout by Keybridge Capital Ltd (‘Keybridge’), a listed company which initiated two related proceedings, proceeding S ECI 2019 03619 (‘proceeding 3619’) in which Keybridge Capital Ltd and MB Finance Pty Ltd are the plaintiffs and proceeding S ECI 2019 02921 (‘proceeding 2921’) in which Keybridge and MB Finance Pty Ltd were the plaintiffs and PR Finance Group Limited (‘PRF’) was the defendant.

Proceeding 2921 was dismissed on 4 September 2023.

The trial of the two the remaining proceedings took place together, beginning on 7 May 2024.

Although the trial took place earlier this year, the events with which those proceedings and proceeding 2921 were concerned occurred a long time ago, between 2011 and 2014 with a focus on events that occurred in 2013.

The 2024 trial occupied seven days of Court time, interspersed by a day when a judicial mediation was conducted. The trial time was taken up only with openings, applications to amend pleadings, disputes about the admissibility of evidence and rulings. Neither of the cases for trial advanced to the point of a witness giving evidence.

On the first day of the trial argument was heard on an application by the seventh defendant, (‘the Underwriters’), to amend their defence to rely on an exclusion in the directors’ and officers’ policy of insurance (‘policy’) issued by them (‘exclusion 18’) under which the plaintiffs and their directors and officers are insured persons.

The policy relevantly provides:

5. EXCLUSIONS
The Underwriters shall not be liable for Loss in connection with any Claim:
…

(18)(in the name of the Company or not) or instigated by or on behalf of, or for the benefit of, any person or entity holding beneficially or otherwise more than 25% of the issued share capital of the Company.

The reason exclusion 18 is significant is that since 19 August 2013, the funder, Keybridge, has owned 100% of the issued share capital in PRF. In addition, at all relevant times via its wholly owned subsidiary, MB Finance as its agent, Keybridge holds and has held security over all of the assets of PRF and Australian Money Exchange Pty Ltd (‘AMX’) as security for debts of approximately $6.2m.

The application by the Underwriters for leave to amend their defence to rely on exclusion 18 was first foreshadowed in communications to the plaintiffs’ solicitors on 26 April 2024. The application to amend was opposed. After hearing argument on the application on the first day of the trial the plaintiffs were given the opportunity to file written submissions in opposition by 15 May 2024. On 9 May 2024, the third day of the trial, the plaintiffs advised they did not wish to avail themselves of that opportunity. They requested a ruling on the application to amend as soon as practicable.

On 9 May 2024, I delivered a ruling in which I granted the application by the Underwriters to amend their defence to permit reliance on exclusion 18. The amendment is relevantly in the following terms:

41CFurther or alternatively:
(a)It was a term of the Policies that the Underwriters shall not be liable for Loss in connection with any Claim made (in the name of the Company or not) or instigated by or on behalf of, or for the benefit of, any person or entity holding beneficially or otherwise 25% or more of the issued share capital of the Company.
Particulars
Exclusion 5(c)(18).

(b)All [sic] all material times since 16 August 2013 Keybridge Capital Limited (Keybridge) has held 100% of the issued share capital of PR Finance (being “the Company” as defined in the Policies).
(c)At all material times:
(i)MB Finance Pty Limited (MBF) was, and is, a wholly owned subsidiary of Keybridge;
(ii)MB Finance held (and continues to hold) security (MBF Security), as agent for Keybridge, over the whole of the assets of PR Finance and (relevantly) AMX to secure debts owed to Keybridge by PR Finance and guaranteed by the Group (Keybridge Debts) jointly and severally, pursuant to a loan facility agreement between Keybridge, MBF and PR Finance and the Group (Keybridge Loan Facility).
Particulars
(A)Deed of Charge dated 29 June 2007 over (inter alia) the plaintiffs’ assets, undertaking and rights, both present and future, including all of the (a) the assets, undertaking and goodwill of each business conducted by (inter alia) each of the plaintiffs and (b) the uncalled and called but unpaid capital of (inter alia) each of the plaintiffs (Deed of Charge). The Deed of Charge is at CB-3460 – CB-3504.
(B)Syndicated Facility Agreement between (inter alia) Keybridge, MB Finance, PR Finance and AMX dated 29 June 2007 (Facility Agreement).
(C)The Facility Agreement provides (at clause 20) that the Borrower will on demand by the Facility Agent indemnify each Finance Party against any loss, cost or expenses which the Finance Party may sustain or incur as a consequence of (inter alia) the occurrence of any Event of Default or Potential Event of Default (as defined).
(D)The Deed of Charge secures the “Secured Money”, defined to mean “all money the payment or repayment of which from time to time forms part of the Obligations.” “Obligations” is defined in the Deed of Charge and Facility Agreement to include all liabilities and obligations of any Obliger under or by reason of any Finance Document including any liabilities or obligations which sound in damages only, or which accrue as a result of an Event of Default.
(E)See further the Amended Statement of Claim filed by Keybridge and MBF in Proceeding S ECI 2019 03619 (3619 ASOC) at paragraphs [1], [2], [3], [31] and [64].

(d)If (which is denied):
(i)the matters alleged in paragraphs [56] to [58] of the TFASOC are “Claims” as defined in the relevant Policies;
(ii)the “Claims” arise from “Wrongful Acts” as defined in the relevant Policies;
(iii)the directors are liable to pay “compensatory damages” as that term is used in the relevant Policies’ definition of “Loss”,

the “Claim” is made or instigated for the benefit of Keybridge Capital Limited (Keybridge), being an entity holding, beneficially or otherwise, 25% or more of the issued share capital of the Company within the meaning of Exclusion 5(c)(18).
Particulars
(A)The Annual Administration Return filed by the liquidator of PR Finance and AMX dated 19 June 2020 in Item 4, “Details of liabilities”, states that there is one secured creditor with an estimated liability of $6,276,289.
(B)The 3619 ASOC states at para [64] particulars (d), (e) and (f) that Keybridge’s losses arising from the enforcement of the MBF Security comprises (1) administrator’s and liquidator’s remuneration ($699,878), (2) administrator’s and liquidator’s legal costs, expenses and disbursements ($214,493) and (3) trading losses of the AMX Business for the period between 21 October 2013 and 30 June 2014 ($2,207,143).
(C)Accordingly, if the plaintiffs were to succeed in their claim in this proceeding, all, or substantially all, alternatively the substantial majority of, the proceeds would be paid to or at the direction of Keybridge.

(e)In the premises alleged in the preceding sub-paragraphs, any liability of the Underwriters in respect of any “Claim” made in this proceeding is excluded by Exclusion 5(c)(18).

On 10 May 2024, shortly after the amended defence was served, the plaintiffs applied for leave to discontinue the proceeding. The plaintiffs relied on written submissions in support of that application. The application for leave to discontinue was opposed by the Underwriters. Argument concerning the application for leave to discontinue concluded on 13 May 2024, day five of the trial.

Also on 13 May 2024, I ruled to exclude certain evidence in an affidavit of Mr Bolton dated 22 December 2023 proposed to be relied on by the plaintiffs at the joint trial of the proceedings. I did so for reasons including that the evidence was not relevant to the plaintiffs’ pleaded case in proceeding 3619. Following the exclusion of that evidence the plaintiffs applied for leave to amend their statement of claim in proceeding 3619. In a ruling delivered on 13 May 2020 I refused that application to amend.

Following my refusal of the application to amend the statement of claim in proceeding 3619, senior counsel for the plaintiffs informed the Court his clients would lead no evidence in that proceeding 3619. As a result, proceeding 3619 was dismissed. The dismissal order was made on 14 May 2024.

On 14 May 2024 I granted the plaintiffs leave to discontinue this proceeding. I delivered reasons for that decision.

At the time I granted the plaintiffs leave to discontinue this proceeding the plaintiffs contended I should make costs orders as follows:

(a)the plaintiffs pay the defendants’ costs of and incidental to the proceeding to the date of the first defence filed by the underwriters, being 17 July 2020, such costs to be taxed and paid on the standard basis; and
(b)that the underwriters pay the plaintiffs’ costs and the costs of the first to sixth defendants of and incidental to the proceeding from 17 July 2020 up to and including the date that leave to amend was granted, such costs to be taxed and paid on the standard basis.

In support of the costs orders contended for, the plaintiffs submitted they would never have instituted or, if they had instituted, they would not have prosecuted this proceeding from the time the Underwriters filed their defence on 17 July 2020 had the Underwriters pleaded exclusion 18 at that time.

The Underwriters oppose the costs orders sought by the plaintiffs. They contend I should order their costs of the discontinued proceeding be paid by the plaintiffs as is the standard position pursuant to r 63.15 of the Supreme Court (General Civil Procedure) Rules 2015 (the Rules).

The Underwriters seek an order the plaintiffs pay their costs of and incidental to the proceeding on an indemnity basis, alternatively on a standard basis, as agreed or taxed in default of agreement. They seek an order they are entitled to be paid so much of the money paid into Court as security for costs pursuant to paragraph 4 of the Order dated 17 April 2024 as is required to meet their costs as taxed or agreed.

On 15 May 2024 I made an order for production by the plaintiffs and Keybridge of documents recording or evidencing legal advice relating to exclusion 18, the disclosure of such documents being relevant to the disputed costs questions.

When argument was heard on the costs issues on 9 August 2024 I permitted cross-examination of the liquidator of the plaintiffs, Mr Rathner, and of Mr Bolton, the managing director of the funder, Keybridge.

For the reasons that follow I have determined the appropriate order as between the plaintiffs and the Underwriters is that the costs of discontinuance of the proceeding should be in accordance with r 63.15. The discontinuing plaintiffs must pay the Underwriters’ costs of and incidental to the proceeding including reserved costs on a standard basis. I refuse the plaintiffs’ application for an order the Underwriters pay the costs of the first to sixth defendants from 17 July 2020. I refuse the Underwriters’ application that their costs be paid on an indemnity basis.

Costs: the legislation and the principles

Section 24(1) of the Supreme Court Act 1986 (Vic) provides that costs are in the discretion of the Court. Rule 63.15 relevantly provides:

Unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding … shall pay the costs of the party to whom the discontinuance or withdrawal relates to the time of the discontinuance or withdrawal.

In Re Minister for Immigration and Ethnic Affairs; ex parte Qin,[1] McHugh J explained:

In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties … In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action.

[1][1997] HCA 6; 186 CLR 622 [7].

The principles to be applied in a costs contest such as the present were summarised by Derham AsJ in Soteriadis v Nillumbik Shire Council (‘Soteriadis’):[2]
[2][2015] VSC 363 [8]-[12].

8.The starting point is the court’s general power as to costs. Unless otherwise expressly provided by any Act or by the Rules, the costs of and incidental to all matters in the Supreme Court are in the discretion of the Court, and the Court has full power to determine by whom and to what extent the costs are to be paid.
9.The discretion regarding costs has been described as absolute, unconfined or unfettered, although that discretion must be exercised judicially, that is, not by reference to irrelevant or extraneous considerations, but upon facts connected with or leading up to the litigation. In the exercise of the discretion, practices or guidelines have been developed. These practices or guidelines are not legal rules that confine the exercise of the discretion.
…
11.Rule 63.15 of the Rules provides that, unless the Court otherwise orders, a party who discontinues or withdraws part of a proceeding, counterclaim or claim by third party notice shall pay the costs of the party to whom the discontinuance or withdrawal relates to the time of the discontinuance or withdrawal.
12.By these rules the wide discretion of the Court as to costs is modified. The modification is that the onus is on the party seeking to discontinue the proceeding (in this case the applicant) to satisfy the Court to satisfy the Court that the costs should not be paid by her….
(a) The rule does not give rise to a presumption that costs will be ordered against the discontinuing party;
(b) However, the rule does create a starting position for the plaintiff or discontinuing party to pay the defendant’s costs, subject to a contrary order.
(c) The contrary order itself involves a discretionary decision to be exercised judicially. If there is to be a departure from the starting position, it should be done in a particularised, and principled way. The court is required to make such order as it thinks just in the particular circumstances of the case.
(d)The burden is on the party who seeks to persuade the court that a contrary order should be made. If facts are to be relied upon to found the court making a different order, the plaintiff will bear the onus of proving the relevant facts.
(e)All the relevant circumstances, and not just the fact of discontinuance, should be considered. This may include a consideration of the whole of the proceedings.

In support of the orders contended for the plaintiffs relied on Zhao[3] where the unreasonable conduct of its defence by a respondent led to a late discontinuance by the applicant. Having considered the applicable principles, informed by the ‘overarching purpose’ under s 37N of the Federal Court of Australia Act 1975 (Cth), McElwaine J observed (citations omitted):

The statutory obligation of a party in a civil proceeding is to conduct it in a way that is consistent with the overarching purpose: s 37N(1) of the FCA Act … The lawyer for a party must take account of the duty of a party and assist the client to comply with it. Compliance with the duty must inform all decision-making and steps taken by a party in a civil proceeding in this Court. These are statutory imperatives.

[3]Zhao v Ausin Group (Australia) Pty Ltd [No 2] [2023] FCA 498 [23] (‘Zhao’).

In Zhao, the second respondent had failed to disclose a factor critically relevant to the commerciality of the proceeding — specifically, the worthlessness of the first respondent company, control of which was the primary subject of the proceeding. McElwaine J determined the conduct of the respondent was such that it should pay the costs of the discontinuance. His Honour concluded:[4]

In my view this is an appropriate case to exercise my discretion pursuant to r 26.12(7) of the Rules to depart from the default position. I am of the view that Ausin, acting in accordance with the overarching purpose, ought to have instructed its solicitor at a relatively early stage in this proceeding to disclose to the solicitor for the applicant its net worth and therefore the value of the Shares the subject of the relief sought against it. I am further of the view that Ausin’s solicitor, acting in accordance with the duty imposed by s 37N(2), ought to have given advice to Ausin at a relatively early stage in this proceeding to provide instructions to make that disclosure. In accordance with my causation finding, if that disclosure had been made then it is likely that the applicant would have decided not to continue with this proceeding. It is the failure to make that disclosure which caused considerable costs to be incurred by each party. Ausin’s conduct was unreasonable.

I am also of the view that the applicant acted reasonably in seeking leave to discontinue this proceeding after it became aware of the value of the shares. True it is that there was a period of delay between March and November 2022, but as I have found that delay is explained.

[4][2023] FCA 498 [38].

The Underwriters submit that Zhao is distinguishable, its facts are unusual, and unlike this case. In Zhao, the evidence as to the value of the shares was ‘all available to one side and not to the other’ and Ausin did not explain ‘its silence on this point by the filing of any affidavit of a director’.[5] In this case, the terms of the Policy and exclusion 18 were available to the plaintiffs at all relevant times. The plaintiffs’ solicitors deposed to having reviewed the Policy terms at the time of applying to join the Underwriters in 2020. Unlike the Underwriters, the plaintiffs knew the full facts as to who the proceeding was expected to benefit.
[5][2023] FCA 498 [21].

The Underwriters submit there should be no departure from the costs position in r 63.15. In the context of the history of the proceeding it is reasonable and understandable that they did not identify the potential for the exclusion 18 defence until close to trial. Before then, Mr Rathner’s evidence suggested that the case was being run for the benefit of the client creditors of AMX, and the defendants were focussed on determining whether the case would ever make it to trial.

The history of this proceeding

The somewhat chaotic and unproductive nature of the trial, for which I do not criticise counsel who appeared, was consistent with the manner in which the plaintiffs prosecuted this proceeding, proceeding 3619 and, until its demise, proceeding 2921 from their inception in 2019. The history of delays, changes of solicitors and the plaintiffs’ repeated failure to comply with court orders is discussed at length in my 11 October 2023 ruling in which I refused an application by the Underwriters and by another defendant, Kent James, to dismiss the proceeding for want of prosecution.[6] The history of this and related litigation is relied on by the Underwriters in support of an order that their costs be paid by the plaintiffs.
[6]Australian Money Exchange Pty Ltd (in liq) v Llewellyn; Keybridge Capital Ltd v Llewellyn [2023] VSC 601.

In 2017 Keybridge issued its own claims against PRF in a separate proceeding. It made no claim against the Underwriters in that proceeding.

In March 2017, in response to a letter from the liquidator’s then solicitors, the Underwriters notified the liquidator that they avoided the policy of insurance from 30 June 2012 for fraudulent non-disclosure. Thereafter, the Underwriters’ position was that there was no valid policy which could answer the claims.

The liquidator issued this proceeding against the directors and officers of AMX in June 2019. On 12 June 2020 the Underwriters were joined. The joinder of the Underwriters followed an earlier order requiring Keybridge to provide a corporate guarantee limited to $50,000 on behalf the plaintiffs as security for costs.

On 9 October 2020 in response to a letter from the Underwriters’ solicitors the liquidator provided particulars of the loss claimed against the Underwriters. The particulars identified the loss as cheque cashing fees, said to be illegally charged, which should have been refunded to AMX’s customers.

The Underwriters assert that at no time did the plaintiffs tell them that Keybridge would receive all or a majority of any returns from the claim.

I agree with the Underwriters that the loss claimed and particularised in October 2020 was a liability of AMX to third parties of the kind that would ordinarily answer s 562 of the Corporations Act 2001 (Cth) (‘Corporations Act’), not a loss that might somehow flow to Keybridge. Section 562 is in the following terms:

Application of proceeds of contracts of insurance
(1)Where a company is, under a contract of insurance (not being a contract of reinsurance) entered into before the relevant date, insured against liability to third parties, then, if such a liability is incurred by the company (whether before or after the relevant date) and an amount in respect of that liability has been or is received by the company or the liquidator from the insurer, the amount must, after deducting any expenses of or incidental to getting in that amount, be paid by the liquidator to the third party in respect of whom the liability was incurred to the extent necessary to discharge that liability, or any part of that liability remaining undischarged, in priority to all payments in respect of the debts mentioned in section 556.

….
(3)This section has effect notwithstanding any agreement to the contrary.

In December 2020, the amount of the Keybridge guarantee provided as security for costs was increased to $75,000. No details of any funding arrangement between Keybridge and the liquidator came to light at that time.

In December 2020, upon the updated guarantee being provided or perhaps when first aware that Keybridge had earlier provided a $50,000 guarantee, the Underwriters might reasonably have formed the view that Keybridge had an interest in the litigation. Perhaps as a litigation funder for the liquidator with a view to seeking to recover some or all of the $6.8m claimed in the proceeding. Section 564 of the Corporations Act contemplates such an outcome:

564 Power of Court to make orders in favour of certain creditors
Where in any winding up:
(a) property has been recovered under an indemnity for costs of litigation given by certain creditors, or has been protected or preserved by the payment of money or the giving of indemnity by creditors; or
(b) expenses in relation to which a creditor has indemnified a liquidator have been recovered;

the Court may make such orders, as it deems just with respect to the distribution of that property and the amount of those expenses so recovered with a view to giving those creditors an advantage over others in consideration of the risk assumed by them.

In December 2020, the defendants filed a strike-out application against the plaintiffs.

In July 2021 after several adjournments of the directions hearing originally scheduled to take place on 7 May 2021, the plaintiffs’ then solicitors, MacPherson & Kelley Pty Ltd (‘M & K’) ceased to act.

M & K were replaced as the solicitors for the plaintiffs by Gadens.

On 16 August 2021, the plaintiffs filed a third amended statement of claim. Amongst other things the amended pleading alleged that on 30 March 2013, PRF and Keybridge entered into a scheme implementation agreement to effect the acquisition by Keybridge of 100% of the shares in PRF by way of a scheme of arrangement between PRF and its shareholders. The pleading alleged that on 10 October 2013 the Federal Court made orders approving the scheme of arrangement with effect from 25 June 2013. While not part of the pleaded allegations, following the approval of the scheme of arrangement Keybridge paid approximately $1.5 million to PRF and allotted 2.5 million ordinary shares in Keybridge to PRF in exchange for 100% of the shares in PRF.

The loss and damage claim in the 16 August 2021 third amended statement of claim and the particulars in support of that allegation are in the following terms:

51.By reason of the breaches of the Duties of Care and Diligence and the matters referred to in paragraph 48 above, AMX has suffered loss and damage, and is entitled to recover that loss and damage from the defendants as damages, equitable compensation for breach of fiduciary duty and/or statutory compensation under s 1317H of the Corporations Act.
Particulars
AMX’s loss and damage includes the amount of $6,870,810.61 that represents the liability owed by AMX to creditors in respect of unlawful cheque cashing fees charged by AMX to consumers from 1 July 2011 to 20 October 2013.
The said sum of $6,870,810.61 is the total amount of 73,456 transactions between 1 July 2011 and 20 October 2013 under which customers were charged cheque cashing fees. AMX is liable to repay those amounts to customers as money had and received in circumstances where it did not hold an Australian Credit Licence (ACL) at the time that it charged those fees.
The liquidator of AMX, on 2 May 2016, admitted as debts of or claims against AMX, the company’s liability to repay the cheque cashing fees, without formal proof of such claims being lodged, as contemplated by reg 5.6.47 of the Corporations Regulations.
Further particulars of loss and damage and any loss of profits will be provided following discovery and prior to Trial.

Returning to the chronology of this proceeding, in October 2021, the plaintiffs agreed to increase the guarantee provided by Keybridge as security for costs to $250,000. Once again this increase took place without any disclosure to the Underwriters of the agreement or arrangement between Keybridge and Mr Rathner pursuant to which the guarantee was being provided.

On 22 October 2021, pre-trial orders were made in this proceeding and in proceeding 3619 in anticipation of a joint trial of the two proceedings in 2022.

In 2021 Keybridge initiated proceeding S ECI 2021 03405 against its former solicitors M&K. On 12 January 2022 Mr Bolton made an affidavit in that proceeding. His 12 January 2022 affidavit, without exhibits, formed part of the evidence on the contested costs of discontinuance hearing. The evidence did not disclose when the Underwriters first became aware of this affidavit.

Mr Bolton’s 12 January 2022 affidavit referred to legal advice from Philip Crutchfield QC and Georgie Coleman dated 26 May 2015 (‘Insurance Advice’). Mr Bolton reproduced the following statement from that advice:

For the reasons that follow we consider it likely that the Directors and Officers insurance run off policy will cover the claims to be made by Mr Rathner on behalf of AMX and PR Finance against the respective directors and officers, as identified in the Prospects Advice. We do not consider that cover under the professional indemnity policies will apply.

Mr Bolton’s 12 January 2022 affidavit referred to other legal advice including advice concerning insurance:

(a) The advice of Jonathan Evans QC dated 31 July 2017 part of which is reproduced in the affidavit. Mr Evans QC gave advice concerning a letter dated 15 March 2017 on behalf of the Underwriters to Mr Rathner by which the Underwriters indicated they intend to avoid or have avoided the run-off cover Mr Evans’ advice referred to the earlier Prospects Advice and the Insurance Advice provided by Mr Crutchfield QC and Ms Coleman.

(b) In 2019 M & K briefed Mr Broadfoot QC and Mr Bailey in the directors duty claim and the ACCC claim. Their advices dated 19 August 2019 and 18 May 2020 referred to earlier advice from counsel including advice from Mr Crutchfield QC and Ms Coleman.

Returning to the chronology of this proceeding, on 5 August 2022 the plaintiffs were ordered to file and serve their evidence, and any affidavit in support of their claim of legal professional privilege over a file note dated 23 March 2016 relied on in support of the claim (‘the MK File Note’). The plaintiffs did not comply with that order.

On 21 December 2022, Gadens ceased to act as solicitors for the plaintiffs.

On 15 February 2023, following a period of approximately two months during which the plaintiffs were not legally represented, Gadens was replaced by a third firm, Quinn Emanuel Urquhart & Sullivan (‘Quinn Emanuel’). Quinn Emanuel was not given access to the client file.

On 28 February 2023, the Underwriters and Kent James informed the Court that, despite an adjournment requested by Quinn Emanuel on 14 February 2023, the plaintiffs had proposed no orders to facilitate carrying on the proceeding. The Underwriters sought to strike out the proceedings for want of prosecution.

On 3 March 2023, I made self-executing orders for the filing of the plaintiffs’ evidence, both lay and expert.

On 14 April 2023, the plaintiffs filed their lay evidence – a single affidavit of Mr Rathner. I accept the Underwriters’ submission that Mr Rathner’s affidavit reinforced the impression given by the pleading that funds recovered from the insurance policy due to illegal cheque cashing fees would flow to the benefit of the persons who bore the burden of those fees, the customers of AMX. The relevant paragraphs of the affidavit are in the following terms:

37.Between around 27 July 2015 and 23 March 2016, I obtained legal advice concerning the illegal Cheque Cashing Fees on behalf of AMX from Counsel, Senior Counsel and AMX’s then-solicitors, Macpherson Kelley (MK). Part of that legal advice was provided over a lengthy period of time, culminating in a memorandum dated 1 March 2016 by Jonathan Evans KC (Evans Memo). Finally, on 23 March 2016, in a telephone conversation with Ali Dogan of MK, I determined that I could admit the claims of the affected creditors in accordance with reg. 5.6.47 of the Corporations Regulations 2001 (Cth) (Corps Regs). I made a file note of the conversation (MK File Note). AMX asserts legal professional privilege claims over the advice including the Evans Memo and the MK File Note because they record the provision of legal advice.
38.Having obtained legal advice, on 23 March 2016, I admitted the claims of each of the customers who had been charged the Illegal Fees, as set out in the spreadsheets at Exhibit GIR-12, referred to at paragraph 35, above (Admitted Claims).

Mr Rathner’s affidavit, the only evidence put forward by the plaintiffs in support of their claim, was filed after the close of business on 14 April 2023, the due date. The Underwriters sought dismissal of the proceeding on the basis the plaintiffs had failed to comply with the self-executing orders, alternatively, orders for increased security for costs.

In response to a request for increased security for costs, on 12 July 2023, Mr John Patton of Keybridge swore an affidavit stating:

Keybridge (through subsidiary entities) is the parent company of the plaintiffs, and is funding the plaintiff’s costs of these proceedings, because it has a commercial interest in their outcome.

Once again the nature of Keybridge’s commercial interest, whether by way of a funding agreement between subsidiary entities of Keybridge with the liquidator, and an intention to pursue an application pursuant to s 564 of the Corporations Act, or some other arrangement was not described in the affidavit.

On 25 July 2023, Hetyey AsJ dismissed the applications for dismissal of the proceeding due to the late filing on 14 April 2023 of Mr Rathner’s affidavit.

On 3 August 2023, Quinn Emanuel ceased to act as solicitors for the plaintiffs. The plaintiffs failed to appear at the 4 August 2023 directions hearing. Given the lengthy delays, the constant changes of solicitors and the plaintiff companies both being in liquidation and once again being without legal representation, I invited the defendants to make further applications to dismiss the proceeding for want of prosecution.

On 10 August 2023, the plaintiffs appointed a fourth set of solicitors, Allen & Overy. On 11 October 2023, the summary dismissal applications were heard. I allowed the proceeding to continue subject to conditions. Those conditions included that Keybridge provide an undertaking to the Court to pay the defendants’ costs, including reserved costs, if ordered to do so in this proceeding and in proceeding 3619. I made orders that confined the plaintiffs to their case as then pleaded and particularised. I limited the primary evidence permitted to be adduced by the plaintiffs at the trial of this proceeding to the 14 April 2023 affidavit of Mr Rathner (subject to objection) and to the tender of documents.

On 2 February 2024 I made trial orders, including for the filing of a court book.

In early April 2024 Allen & Overy, the plaintiffs then solicitors, informed the defendants that they had no instructions in relation to the court book. The Underwriters and Mr Kent James filed fresh applications for self-executing orders and for further security for costs. Shortly before those applications were to be heard, the plaintiffs terminated Allen & Overy’s retainer. On 17 April 2024, the day the applications were heard, a fifth set of solicitors were appointed to act for the plaintiffs.

On 17 April 2024, I made self-executing orders regarding the court book and the provision of security for costs by Keybridge in the form of cash.

On 22 April 2024, Keybridge paid $1.8 million into Court as security for costs.

The Underwriters submit the provision of this security; previously Keybridge had provided corporate guarantees which were unsupported; suggested that Keybridge had a significant stake in the litigation. The Underwriters submit they still did not know whether Keybridge held shares in PRF directly, or via subsidiaries (as stated in Mr Patton’s affidavit), or the details of any funding arrangements for the litigation. They issued notices to produce PRF’s share register and any funding agreement, but no documents were produced in response.

On 26 April 2024, ahead of the 7 May trial date and after junior counsel recently retained for the Underwriters identified a potential argument that exclusion 18 was engaged, the Underwriters circulated their proposal to amend their defence to rely on the exclusion.

The plaintiffs’ submissions as to costs

The plaintiffs submit that if they and the funder had known about the intended reliance by the Underwriters on exclusion 18, the funder would never have funded the proceeding. The plaintiffs would therefore not have initiated, or if they had initiated the proceeding, once on notice of the exclusion as should have occurred when the Underwriters filed their defence on 17 July 2020, the plaintiffs would not have maintained the proceeding.

In submissions in support of the application for leave to discontinue the plaintiffs said:

11.In the two weeks since Lloyds first raised the exclusion clause, Mr Rathner and Keybridge have urgently considered the operation of the exclusion clause. They have each reluctantly formed the view that, as contended by Lloyds, the exclusion clause operates as a complete defence to the plaintiffs’ claim against Lloyds. Mr Rathner and Keybridge have concluded that provisions of the Corporations Act averted to in Mr Rathner’s affidavit and in oral opening are incapable of overcoming the legal and practical obstacles posed by the existence of the exclusion clause pleaded in the amended defence.
12.As a result, the proceeding has become futile. It is no longer capable of producing any commercial return for creditors. Mr Rathner considers that the proceeding can no longer be pressed in a way that is consistent with his statutory and general law duties as liquidator. The significant expenditure of costs incurred by Mr Rathner in the proceeding, and his costs incurred as liquidator in this context, have effectively been squandered or thrown away’ as a consequence.

The plaintiffs submit that once the amendment permitting exclusion 18 to be relied on was allowed, they had no choice but to discontinue the proceeding. They blame the failure of the Underwriters to act and rely earlier on exclusion 18 for their wasted costs of the proceeding. They submit the Underwriters have known all of the material facts which would have enlivened exclusion 18 since the time of the first letter denying liability in 2017. The Underwriters considered the exclusion clauses in their policy from as early as 2017 and 2019. The plaintiffs draw attention to letters from the Underwriters’ then solicitors dated 15 March 2017 and 27 November 2019 referring to the exclusion.

I interpolate to record that the 15 March 2017 letter referred to policy exclusion (a)(2)(b) only, a dishonesty exclusion that is expressed to operate where the claim is based upon or arises from fraud, wilful violation of any law and the like. The 27 November 2019 letter enclosed a copy of the 15 March 2017 letter. It referred to the avoidance of the policy for failure to comply with the law that ‘appears to be deliberate and fraudulent’. The letter did not refer to any other exclusions or reasons for the denial of indemnity.

The plaintiffs submit the Underwriters either took no steps to investigate whether the exclusion might be relied on or, if they did take steps, failed to rely on the exclusion, all the while leading the plaintiffs, by omission, to rely on the exclusion, to maintain and prosecute the proceeding. They submit the circumstances are not distinguishable from those in Zhao.

The plaintiffs submit the Underwriters sat on a complete defence for almost four years (July 2020 to April 2024) if not seven years, while the parties were left to incur all the costs of the proceeding and preparing for trial. There is no acceptable excuse for why they failed to undertake a proper review of their own policy.

The plaintiffs submit that Mr Rathner and Keybridge were fairly entitled to run and fund the proceeding on the basis that the Underwriters’ position was what it consistently said it was, in its pleaded case and letters concerning the policy. It would be unjust for the plaintiffs, and by extension, their creditors, to bear the wasted costs stemming from the Underwriters’ unreasonable and unexplained failure to raise a dispositive defence at the earliest opportunity.

While the Underwriters were represented throughout by very experienced commercial litigation practitioners with insurance experience and by senior counsel, it was not until junior counsel newly retained in the lead up to trial identified exclusion 18 that the Underwriters took any steps to rely on or plead exclusion 18.

The plaintiffs submit the Underwriters’ conduct runs contrary to its obligations under the Civil Procedure Act 2010 (Vic) (‘CPA’):

[The Underwriters’] runs counter to its overarching obligations to assist the Court in achieving the overarching purpose under s 7(1) of the Civil Procedure Act 2010: including its obligation to only take steps to resolve or determine the dispute (s 19); its obligation to use reasonable endeavours to resolve the dispute (s 22); its obligation to narrow the issues in dispute (s 23); its obligation to ensure costs are reasonable and proportionate (s 24); and its obligations to minimise delay (s 25). Its conduct has caused this proceeding to run far longer, and with great costs and burden to the parties and the Court.

They submit the allegations of weakness in the plaintiffs’ case relied on by the Underwriters and by other defendants are without foundation.

In any case, whether the plaintiffs’ case was weak or not (which is rejected) is irrelevant. The plaintiffs would never have gone further had the Underwriters promptly pleaded the complete defence in exclusion 18.

The same approach as was taken to costs in Zhao should be taken in this case.

The plaintiffs rely in support of the cost orders for which they contend on Mr Rathner’s 3 May 2024 affidavit filed in opposition to the Underwriters’ application to amend their defence. In that affidavit Mr Rathner gave evidence that:

at the time of making my decision to include the Underwriters as a party to this action, such a claim was to be made on behalf of the unsecured consumer creditors.

In support of that statement Mr Rathner referenced the ‘MK file note’ which reads in part “re D&O claims … s 562 Corps Act”.

The plaintiffs also rely on statements by Mr Bolton in his 3 May 2024 affidavit:

5.On or about 19 August 2013, Keybridge acquired all the shares in PRFG, of which AMX is a subsidiary, in accordance with the terms of the Scheme of Arrangement as set out in the scheme booklet dated 13 May 2013.
…
7.Keybridge, and in particular I, was concerned by the failure of the first to sixth defendants in this proceeding, to abide by their director/officer duties which resulted in PRFG and AMX having Mr Rathner appointed as administrator within weeks of Keybridge’s acquisition of shares in PRFG. Accordingly, Keybridge agreed to meet the Liquidator’s costs incurred in this Proceeding, as well as the costs of the Keybridge Proceeding.
…
14.During the course of this proceeding, and having regard to the fact that Keybridge has been providing the necessary funds to advance the matter, Keybridge has been kept apprised on the progress of this proceeding, and its likelihood of success and prospects of recovery. I maintain privilege over all of those communications.
15.This proposed amendment to the Underwriter’s defence is substantive. Given that the possibility of this defence has not previously been raised, Keybridge has not had the opportunity to seek considered advice on how this defence will impact the likelihood of success in this proceeding. At the moment the plaintiffs’ lawyers are fully committed to trial preparation on the present pleadings, which preparation is already at risk of being disrupted by this application.
16.If this defence had been raised by the Underwriter earlier in this proceeding, then Keybridge would have sought advice in relation to the likelihood of success of this proceeding. In the event that any advice to Keybridge was to the effect that, as a result of the exclusion contained in clause 5(c)(18), the Plaintiffs in this proceeding were unlikely to be successful, Keybridge would not have agreed to pay the legal costs associated with this proceeding.
17.Should the amendment to the Underwriters defence be allowed, and as a result of the amendment the Underwriters can successfully defend this proceeding, Keybridge is at risk of suffering significant detriment as a result of wasted costs in this proceeding.

The Underwriters’ submissions as to costs

The Underwriters submit the plaintiffs and the funder should bear the Underwriters’ costs on an indemnity basis or at least the standard basis, for four reasons:

(a)The plaintiffs and their funder wilfully risked litigating, knowing the terms of the policy, the flaws in their case and the strength of the Underwriters’ defences.
(b)The Underwriters did nothing to disentitle them to costs. It was reasonable for them to have raised the exclusion when they did.
(c)It would be unsafe to conclude that the plaintiffs discontinued the litigation solely because the exclusion had been raised.
(d)The plaintiffs ran the proceeding chaotically and inefficiently, and were the reason why the case took so long to come on and ended the way it did.

The Underwriters submit the plaintiffs bear the onus of persuading the Court there should be a departure from the default position in r 63.15.

The conduct of the parties during the litigation – including their observation of their overarching obligations under the CPA is a relevant factor in determining who bears the costs following a discontinuance.

Considerations sufficient to justify a refusal of costs to a plaintiff are not necessarily sufficient in the case of a defendant, who is brought into litigation against its will.

The Underwriters submit the plaintiffs’ case against them was without merit and was hopeless from the outset. Amongst other things, there was no proof of loss — even if there had been, the policy would not have responded to that ostensible loss. For none of the 73,456 transactions was there any evidence of the purpose necessary to prove that the fees were illegal and refundable (and therefore capable of sustaining a claim against the Underwriters). In the more than 10 years since the last fee was charged, no client had ever made a claim for return of fees, and the law will not compensate for losses which will never be suffered.[7] Appellate authority in Duke Group litigation[8] makes it clear that the liquidator’s unilateral adjudication on which proof of loss hinged, was inadequate to establish loss. Separately, the Victorian Court of Appeal has held that liability to make restitution of illegal fees does not amount to a compensable loss for insurance purposes.
[7]Chapman v Luminis Pty Ltd (No 5) (2001) 123 FCR 62 [850].
[8]Duke Group Ltd (in liq) v Arthur Young (R) (No 2) (1991) 4 ACSR 355, 397 (‘Duke Group litigation’).

The Underwriters submit the plaintiffs willingly risked the litigation. They chose to bring the case to trial knowing the terms of the policy. They should have been aware of the risk of exposure to the exclusion 18 defence.

The plaintiffs do not suggest that the Underwriters deliberately withheld the exclusion 18 defence. It cannot reasonably be suggested the Underwriters unreasonably failed to identify the exclusion 18 defence earlier.

The exclusion 18 defence required the Underwriters to prove two points: (a) the shares in PRF were held by Keybridge; and (b) all, or at least a substantial majority of the proceeds of the claim would be paid to Keybridge. Not only were those facts not manifest throughout the trial period, but for that whole time, the plaintiffs’ position was at odds with (b).

The Underwriters submit that contrary to the plaintiffs’ submission, both as a matter of law and by reason of the manner in which their amended defence was framed to rely on exclusion 18, Keybridge could have continued to fund the proceeding with the prospect of receiving a reward beyond reimbursement of legal costs without falling foul of the exclusion.

The Underwriters referred to the decision of the New South Wales Court of Appeal in Malamit[9] where there was a question whether a claim brought for the benefit of the insured fell within the exclusion clause. The issue turned on whether the claim was ‘brought on behalf of or for the benefit of family members of the insured’. Meagher JA, with whom Bathurst CJ and Beazley P agreed, said:[10]

this conclusion makes it unnecessary to attempt to articulate the limits of the phrases “on behalf of” or “for the benefit of”. Each describes a relationship intended to mark a claim which has been brought as covered or excluded, and to do so once the claim is made .… It is not sufficient to satisfy the latter that as a result of the bringing of the claim some benefit, however small and indirect, might flow to another insured or family member. The claim must be brought for that person’s benefit, which would be the case if the proceeds were to be paid to or at the direction of that insured or family member.

[9]Malamit Pty Ltd v WFI Insurance Ltd [2017] NSWCA 162 (‘Malamit’).

[10][2017] NSWCA 162 [37].

The Underwriters submit that, consistent with Malamit, the amended defence did not contend that if Keybridge recovered any amount in addition to costs that the exclusion would operate. The relevant subparagraph of the particulars is in the following terms:

accordingly, if the plaintiffs were to succeed in their claim in this proceeding, all, or substantially all, alternatively the substantial majority of, the proceeds would be paid to or at the direction of Keybridge

As was put to Mr Rathner and Mr Bolton in cross-examination, it is always open to a secured creditor to accept less than all of what is owed in satisfaction of its debt. It is clear, although perhaps unstated from Mr Bolton’s evidence, that he and Keybridge approached the position after the amendment on the basis that it was an all or nothing situation. The Underwriters submit that in accordance with the decision in Malamit and in accordance with the particulars forming part of the exclusion 18 amendment, that is not the case.

Evidence given in cross-examination

Mr Bolton gave the following evidence in cross-examination:

(a) Keybridge is the only secured creditor of the plaintiffs. Subject to satisfaction of statutory priorities and the liquidator’s fees it expected to receive the proceeds of the action. That is why it agreed to fund the liquidator.

(b) Mr Bolton accepted it would have been open to Keybridge to accept less from the proceeds of the action than what it was owed as a secured creditor. It could forgo part of its recovery, a proposition with which Mr Rathner also agreed when he was later cross-examined.

(c) Mr Bolton was not sure if Keybridge would have forgone part of its recovery if that would mean discontinuance was unnecessary. Keybridge would have considered recovering its costs plus something back. It would not have funded the proceeding just to recover its investment in costs. That would represent an asymmetric risk/return.

(d) Although from late 2023 Mr Bolton knew the plaintiffs’ case would be confined to its existing pleadings and evidence and that in 2022 Mr Broadfoot QC had recommended an application to amend, one was never made. Keybridge and the plaintiffs nevertheless chose to go ahead with the trial.

(e) Although there were risks with the plaintiffs’ case, including from the failure to amend the statement of claim when advised to do so, the sole reason to stop funding was the exclusion 18 amendment. While the decision to cease funding was a ‘nuanced’ decision, after the amendment it made no sense commercially for Keybridge to continue funding.

(f) The case against the directors was only funded because of the parallel case against the Underwriters.

(g) If the exclusion defence had been raised earlier Keybridge would have ceased funding the moment it was raised.

In his 3 May 2024 affidavit Mr Rathner gave evidence he had not incurred the cost of seeking specific legal advice concerning s 526 of the Corporations Act. When he gave evidence-in-chief, Mr Rathner made an important correction to his earlier evidence.

Following the Order made on 15 May 2024 requiring the production of documents recording or evidencing legal advice concerning exclusion 18, Mr Rathner carried out searches in order to ensure compliance with the order. In the course of those searches he found a file note which he had made dated 1 April 2016. His file note of a two-hour conference on that day with Mr J Evans QC, Ms Nomikos, a solicitor from M& K and two other persons includes:

s.562 .. does not apply to claims against directors for D & O
…Therefore priority provisions apply.
… therefore able to have common representation [with Keybridge]…no conflict…
Discussed quantification
(1) As all proceeds go to secured creditor from AMX claim … no funding agreement required
issue KBC/MBF claim first then ask insurer to take over proceeding…

When giving evidence-in–chief, Mr Rathner explained his discovery of the file note and corrected the evidence he had earlier given in his 3 May 2024 affidavit.

I accept that when Mr Rathner made the 3 May 2024 affidavit he had no memory of the 1 April 2016 advice or of the matters recorded in his file note, and that at the time that he made his affidavit he believed the contents to be true and correct.

In cross-examination Mr Rathner accepted that as his file note dated 1 April 2016 referred to s 562 recording ‘therefore priority provisions apply’, he knew from that time as recorded in his diary note ‘all proceeds go to secured creditor from the claim … no funding agreement required’. Mr Rathner confirmed there was no agreement in place between him and Keybridge about what Keybridge would receive if the proceeding were to be successful.

In cross-examination Mr Rathner said that following the application to amend the reliance by the Underwriters on exclusion 18 was regarded by him as devastating to the plaintiffs’ case. He understood after the exclusion 18 amendment was raised that it could be relied on by the Underwriters to defeat the plaintiffs’ claim. Although Mr Rathner had received advice from Mr Crutchfield QC and Ms Coleman in 2015, their advice was concerned with avoidance of the policy. Ms Nomikos of M & K reviewed the policy around the time of the 2020 joinder of the Underwriters. It was Mr Rathner’s evidence that while advice was received concerning coverage from Mr Crutchfield QC, concerning avoidance from Mr Evans QC, from Mr Broadfoot QC regarding the pleadings and from Ms Nomikos regarding the policy and its scope, none of those persons gave advice about exclusion 18. I accept that evidence.

Mr Rathner’s attention was directed to the contention by the Underwriters that in reliance on the decision in Duke Group litigation[11] the plaintiffs would not be able to prove any loss, the decision by the liquidator to admit the claims not giving rise to loss or damage for the purposes of a claim against a third party. Mr Rathner accepted that apart from exclusion 18 the plaintiffs’ case had risks, including from defences relied on by the Underwriters.
[11](1991) 3 ACSR 759, 762-767, affirmed on appeal: Duke Group Ltd (in liq) v Arthur Young (R) (No 2) (1991) 4 ACSR 355, 397.

I accept the evidence of Mr Bolton and Mr Rathner that prior to notice being given of the Underwriters application to amend their defence to rely on exclusion 18 in April 2024, although they had received advice about the policy of insurance, including from a number of members of senior counsel and from various firms of solicitors having the carriage of the proceeding, at no time had they received advice about exclusion 18. At no time had they received advice about or considered the potential scope of operation of exclusion 18 having regard to the position of Keybridge as the holder of all the shares in PRF following the approval of the scheme of arrangement or by reason of the security held by MB Finance Pty Limited referred to in the amended defence. That is the case despite Mr Rathner having received advice from Mr Evans QC, Ms Nomikos and others on 1 April 2016 as recorded in his file note that ‘s 562 does not apply to claim against Directors for D&O therefore priority provisions apply’.

Consideration

It is for the discontinuing plaintiff to persuade the Court that the standard position in r 63.15 concerning costs upon discontinuance should be departed from and that the Court should ‘otherwise order’. As Derham AsJ observed in Soteriadis, if there is to be a departure from the starting position it should be done in a particularised and principled way.[12] The Court is required to make such order as it thinks just in the particular circumstances of the case. As his Honour said, all of the relevant circumstances and not just the fact of discontinuance should be considered.[13]
[12]Soteriadis v Nillumbik Shire Council [2015] VSC 363 [12].
[13]Soteriadis v Nillumbik Shire Council [2015] VSC 363 [12].

The relevant circumstances that must be considered in this case include:

(a) the fact that neither party to the litigation gave active consideration to exclusion 18 until the Underwriters did so shortly prior to trial;

(b) whether the reason one or other of the parties to the litigation did not investigate and become aware of exclusion 18 earlier was due to the conduct of or actions taken by the other party;

(c) whether one or both parties have acted in a manner contrary to the obligations of that party under the CPA;

(d) whether this case is distinguishable from the circumstances in Zhao;

(e) the manner in which the plaintiff and the funder conducted this and related litigation, and what became of the related litigation; and

(f) the existence of apparently bona fide defences and answers to the plaintiffs’ claim relied on by the Underwriters and by Kent James, including issues concerning the ability or otherwise of the plaintiffs to prove loss.

It is abundantly clear that neither side seeking to recover its costs from the other ever gave consideration to the potential impact of exclusion 18 to recover loss and damage from the Underwriters until junior counsel for the Underwriters identified exclusion 18 as a potential defence in April 2024.

Both the liquidator and the funder on the one hand, and the Underwriters on the other have been in possession of sufficient facts from around the time the proceeding was instituted, and in the case of the plaintiffs, from 1 April 2016 enabling them to investigate and understand the potential application of exclusion 18 to the claim made in the proceeding.

I regard Mr Rathner’s late located file note from 1 April 2016 as significant.

As recorded in that note, from 1 April 2016 Mr Rathner and the funder who was kept informed of the legal advice from time to time, and who embarked with funding on the basis that it would recover up to the limit of the secured debt, both knew and expected that any funds recovered in the proceeding would go to Keybridge. Despite knowing that to be the case from 2016, well before the proceeding was issued in 2019 and the Underwriters joined in 2024 and being in possession of a copy of the policy, neither Mr Rathner nor the funder sought or obtained advice concerning exclusion 18. Neither of them turned their minds to the potential application of exclusion 18, a potentially fatal answer to the claim against the Underwriters until the issue was raised by the Underwriters eight years after the 1 April 2016 conference.

If the liquidator or the funder had turned their minds to the issue at any time between 2016 and 2019, given their response to the amendments to the Underwriters’ defence once made, the almost immediate application to discontinue the proceeding, they would most likely have concluded that the proceeding should not be commenced.

It is perhaps not surprising in view of the number of occasions on which advice was received by the plaintiffs from different members of senior and junior counsel from 2015 until the trial in 2024, and the number of times the plaintiffs changed its solicitors that despite the advice from Mr Evans QC and Ms Nomikos of M & K on 1 April 2016 no member of counsel, senior or junior and no solicitor retained to act on behalf of the plaintiff companies ever gave advice to Mr Rathner or to Keybridge about the application of exclusion 18.

No party was critical in submissions of the failure of previous legal advisers to the plaintiffs or the funder to give such advice and the absence of criticism is in my opinion appropriate.

The failure of Mr Rathner and of the funder to obtain advice concerning exclusion 18 in light of the 1 April 2016 advice if not the product of the way the plaintiffs’ legal representation chopped and changed and lacked continuity, is explicable on that basis. However the case is the plaintiffs’ case. The liquidator decided to bring the case. The funder decided to fund that case.

If the liquidator and the funder are correct and exclusion 18 is a complete answer to their claim, as is their understanding, the proceeding was issued without a proper basis in contravention of the overarching obligation in s 18 of the CPA. Section 18 relevantly provides:

Overarching obligation—requirement of proper basis
A person to whom the overarching obligations apply must not make any claim or make a response to any claim in a civil proceeding that—
…
(d) does not, on the factual and legal material available to the person at the time of making the claim or responding to the claim, as the case requires, have a proper basis.

At the time the proceeding was issued the liquidator and the funder had available to them the policy including exclusion 18. The liquidator had received advice and the funder agreed to fund the proceeding on the basis that as secured creditor, Keybridge would receive the fruits of the litigation. The factual and legal material available to the liquidator and the funder was such that if they had sought advice in relation exclusion 18, they would have known the claim did not have a proper basis. Certainly the funder pursuant to s 10(1)(d) of the CPA and probably by operation of the same subsection, the liquidator, are persons to whom the overarching obligations apply.

Had the liquidator or the funder taken the trouble to look at the policy and to obtain advice in relation to exclusion 18, based on the way they acted in 2024 once the amendment was allowed they would not have instituted the proceeding.

I do not consider the fact that the Underwriters took four years after being joined to the proceeding to identify exclusion 18 as a defence constitutes an answer to the plaintiffs’ failure to identify it before issuing the proceeding, or at least before joining the Underwriters in 2020. The proceeding was issued and ultimately discontinued and all of the costs were incurred in the meantime because the liquidator and the funder failed to give proper consideration to and obtain advice concerning exclusion 18. All of the information enabling them to make an informed decision concerning exclusion 18 was available to them at all times.

I do not criticise the Underwriters for their failure to plead exclusion 18 until the eve of the trial. The Underwriters were not joined to the proceeding until 2020. They were joined having given notice three years earlier that the policy was avoided for fraudulent non-disclosure. That position having been adopted in 2017, it is unsurprising, particularly when based on the pleaded case, including the loss claim as particularised by reference to customers of AMX, that the Underwriters did not investigate whether exclusion 18 might be an answer to the plaintiffs’ claim.

Between 2020 when the Underwriters were joined and trial, the loss claimed was framed and particularised by reference to loss sustained by customers of AMX. Reliance was placed on the admission by Mr Rathner of proofs of debt to substantiate loss. When Mr Rathner’s 23 April 2023 affidavit for trial was filed and served it sought to prove the loss as pleaded and particularised.

There was information in the pleadings in this proceeding and in proceeding 3619 that might have prompted the Underwriters to investigate whether the funder was a secured creditor and whether the proceeding was being brought for its benefit.

However in the same way the chaotic conduct of and pursuit of the proceeding by the plaintiffs may have at least contributed to their failure and to the failure of the funder to appreciate the significance of exclusion 18, the same may be said of the impact of the way in which the proceeding was conducted on the Underwriters.

Although the funder guaranteed security for costs the plaintiffs’ prosecution of the proceeding was spasmodic and haphazard. The Underwriters and the other defendants could be forgiven for believing that the case would likely ‘go away’. Proceeding 2921 ‘went away’ in September 2023. No evidence was led in proceeding 3619. This proceeding was the subject of self-executing orders and applications to dismiss for want of prosecution that had substantial merit.

In his 3 May 2024 affidavit Mr Rathner gave evidence that this action has been brought for the benefit of the unsecured consumer creditors. He referred to the M & K file note dated 23 March 2016 and said:

this file note identifies and confirms that, at the time of making my decision to include the Underwriters as a party to this action, such a claim was to be made on behalf of the unsecured consumer creditors.

Given the manner in which loss was pleaded and particularised and sought to be proved, the absence of any information available to the Underwriters about the funding arrangements between the liquidator and the funder, and given the history of the conduct of this proceeding and of the related proceedings, I do not consider that the fact the Underwriters did not give active consideration to exclusion 18 until shortly before trial and shortly after the funder put up cash of $1.8 million as security for costs, is a factor that supports a departure from the standard position in r 63.15.

The plaintiffs referred to the overarching obligations in the CPA in support of the costs orders they seek. The overarching obligation in s 25 of the CPA requires parties and their legal practitioners to use reasonable endeavours to act promptly and to minimise delay. The plaintiffs referred to other overarching obligations in their submissions. I do not consider that reference to the overarching obligations in the CPA assists the plaintiffs to obtain costs orders of the sort for which they contend. The dominant feature of this litigation and of related litigation conducted at the instigation of Keybridge has been protracted delay and failure to comply with court orders and deadlines. Conduct of this proceeding by the plaintiffs from 2019 until the date of trial in 2024 and of the related proceedings at the instigation of the funder was in clear contravention of the overarching obligation in s 25 of the CPA.

I do not consider the circumstances of this case to be similar to those in Zhao. In Zhao the information in question was available to one side only. Once the information was revealed to the opposite party, the applicant, they discontinued. In this case the relevant information was available to both parties but neither of them looked at it. As made clear by Mr Bolton in his evidence, the real case was against the Underwriters, there would likely not have been a case only against the directors and officers, notwithstanding the Underwriters were not joined until 2020.

The manner in which the plaintiffs and the funder prosecuted this proceeding over the course of its extended life cannot be viewed in isolation from what occurred in relation to proceeding 3619 and in relation to the earlier abandoned claim in proceeding 2921.

All three cases involved the funder. That is an important fact to bear in mind in circumstances where the funder has provided substantial security for costs and the costs orders sought by the Underwriters include orders providing them with access to that fund.

It cannot be ignored that in proceeding 3619, one of the related proceedings, a proceeding case managed and fixed for trial at the same time as the trial of this proceeding, that acting responsibly, senior counsel for the plaintiffs informed the Court on 13 May 2024 that the plaintiffs would lead no evidence. In other words, the case was hopeless, the plaintiffs could not win. The same conclusion had been reached by the funder concerning proceeding 2921 in September 2023.

While the factors that motivated the funder to abandon proceeding 2921 and not to lead any evidence in proceeding 3619, were no doubt different to those which motivated the decision to seek leave to discontinue this proceeding, the fact all three proceedings failed is indicative of the failure on the part of the funder to satisfactorily engage at an appropriate time with the cases it was funding and to obtain legal advice about the issues that might be raised.

There are competing submissions by the parties about whether the merits of the defences or issues otherwise raised on behalf the underwriters are relevant to the question of costs. While I have not heard the trial of the proceeding I heard detailed openings and read the opening submissions. I accept that the Underwriters’ defence raised bona fide defences and that genuine issues also arise for proof of the plaintiffs claim by reference to the decisions in the DukeGroup litigation. It is unnecessary and it would not be appropriate at the costs hearing to determine those substantive issues.

While not an argument developed on behalf of the Underwriters, and while also unnecessary to decide there were other reasons why the plaintiffs’ claim faced what were arguably insurmountable obstacles to success, leaving exclusion 18 to one side.

In opening submissions senior counsel for Kent James took me through the legislative scheme that is the National Credit Code (‘the Code’), being Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) (‘NCCP Act’). He drew attention to s 29 of the NCCP Act which prohibits engaging in credit activities without a license, s 5 of the Code which defines the provision of credit to which the NCCP Act applies, the exclusion clause in s 6 of the Code and s 48 of the NCCP Act which imposes the requirement to have adequate compensation arrangements. He also drew my attention to s 333 of the NCCP Act as qualified by s 180.

Contravention of Act does not generally affect validity of transactions etc.333

(1)A failure to comply with any requirement of this Act does not affect the validity or enforceability of any transaction, contract, instrument or other arrangement.
(2)Subsection (1) has effect subject to any express provision to the contrary in:
(a)this Act (including regulations made under this Act); or
(b)…

180 Orders in relation to unlawful credit activities
Court may make orders in relation to unlawful credit activities
(1)If:
(a)a person (the defendant) engages in a credit activity in relation to another person (the plaintiff); and
(b)the engaging in the activity contravenes any of the following:
(i)section 29 (which requires the holding of a licence);
(ii)…

the court may make such order as the court considers appropriate against the defendant:
(c)…
(d)to compensate the plaintiff, in whole or in part, for any loss or damage suffered as a result of the defendant engaging in that activity; or
(e)…

(2)Without limiting subsection (1), examples of orders the court may make include:
(a)…
(d)an order directing the defendant to refund money or return property to the plaintiff; and
(e)an order directing the defendant to pay to the plaintiff the amount of loss or damage the plaintiff suffered; and
(f)…

When order may be made
(3)The court may make the order only if:
(a)…
(b)the application is made within 6 years of the day the cause of action that relates to the contravention or commission of the offence accrued.

Recovery of amount as a debt
(5)If the court makes an order that the defendant pay an amount specified in the order to the plaintiff, the plaintiff may recover the amount as a debt due to the plaintiff.

Counsel for Kent James argued that by reason of the operation of those statutory provisions AMX did not become liable to repay amounts owed to customers as money had and received in circumstances where it did not hold an Australian Credit License at the time it charged those fees. That was said to be the case because no such claim was brought by the customers of AMX in relation to AMX’s unlicensed lending. Further any claims that could have been brought are now time barred.

I accept the proposition that although the plaintiffs allege the cheque cashing fees were illegal, there appears to be substance to the argument advanced by Kent James that the Code does not provide a mechanism for the recovery of those fees by AMX. I also accept that the limitation defence appears to raise issues of substance.

What the defences and answers to the plaintiffs’ claims outlined by the Underwriters and by Kent James show is that if the case had not been discontinued because of exclusion 18, as I have accepted was the case, the case may nevertheless have failed either because of the defences to which I have referred or because the plaintiffs failed to prove loss falling within the policy. Those factors are additional factors why it is not appropriate in this case to depart from the standard costs order for which r 63.15 provides.

As I said at the beginning of these reasons, there are no winners in this litigation. The plaintiffs and the funder have wasted costs on a proceeding which even if it were not for exclusion 18 may well have failed. The Underwriters and the other defendants have been exposed to litigation over a four year period and have so far had to bear their own costs of that litigation which has now been discontinued.

This proceeding has occupied many hours and days of court time. Those days and hours have been wasted by litigation which the plaintiffs, if they and the funder had sought appropriate advice at the time, would probably never have been initiated.

The CPA imposes obligations on the parties, including the obligation in s 23 to ensure that costs are reasonable and proportionate, and in s 25 to minimise delay. Mr Bolton has given evidence that the plaintiffs’ costs of the proceeding exceed several million dollars. I do not expect the Underwriters costs to be much less. Those costs have been incurred unnecessarily.

The appropriate order for costs in this case is that in accordance with r 63.15 the plaintiffs who have discontinued the proceeding shall pay the costs of the Underwriters up to the time of discontinuance including reserved costs. I will also order that the plaintiffs pay the Underwriter’s costs of the proceeding thereafter including the costs of the hearing concerning who should bear the costs of the discontinuance.

I will order that such costs be paid on a standard basis as agreed or taxed in default of an agreement. I do not consider the circumstances of this case warrant an order for indemnity costs in favour of the Underwriters. That is because although I am in no doubt that the Underwriters should have their costs paid by the plaintiffs and ultimately by the funder, the Underwriters were also in a position to seek advice about exclusion 18 at an earlier time and to bring the proceeding to an end by pleading that exclusion.

I will order that the costs of the Underwriters that I have ordered be paid by the plaintiffs shall be paid from so much of the money paid into Court as security for costs pursuant to paragraph 4 of the Order dated 17 April 2024 as is required to meet the amount of those costs as taxed or agreed. Only after the amount of those costs as taxed or agreed has been paid to the Underwriters or to their solicitors, may the balance of the funds remaining, if any, be released to the funder.

The practitioners for the parties should confer and within the next seven days, provide a draft form of order to my chambers to give effect to these reasons.

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SCHEDULE OF PARTIES

AUSTRALIAN MONEY EXCHANGE PTY LTD (IN LIQUIDATION) (ACN 090 388 257)	First Plaintiff
and
PR FINANCE GROUP LTD (IN LIQUIDATION) (ACN 109 299 390)	Second Plaintiff
and
JONATHON HUW ELFYD LLEWELLYN	First Defendant
and
CAMERON ROSS JAMES	Second Defendant
and
~~PETER ELFYD LLEWELLYN~~	~~Third Defendant~~
and
RODERICK WICKHAM JAMES	Fourth Defendant
and
KENT BRUCE JAMES	Fifth Defendant
and
RONALD FRANCIS TONG	Sixth Defendant
and
THE UNDERWRITING MEMBERS OF LLOYD’S SYNDICATE 2468 FOR THE 2012 YEAR OF ACCOUNT SUBSCRIBING TO THE POLICY LAUDO-0000000477	Seventh Defendant

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27 August 2024