Bevillesta Pty Ltd v Imagine UN Ltd
[2009] VSC 50
•23 February 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
No. 10291 of 2008
IN THE MATTER OF IMAGINE UN LTD (ACN 009 201 763)
| BEVILLESTA PTY LTD (ACN 008428162) & ANOR | Plaintiffs |
| v | |
| IMAGINE UN LTD (ACN 009201763) & ORS | Defendants |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 29 January 2009 | |
DATE OF JUDGMENT: | 23 February 2009 | |
CASE MAY BE CITED AS: | Re Imagine UN Ltd | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 50 | |
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CORPORATIONS – Charge – Failure to lodge notice of charge – Application by chargee to extend time for lodging notice of charge – Chargor of doubtful solvency – Application granted on basis of reserving liberty to creditors and others to apply to set order aside if chargor, inter alia, wound up within 6 months of lodging of notice – ss 263, 265, 266 Corporations Act 2001
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | G T Bigmore QC | Mills Oakley Lawyers |
| For the Defendants | No appearance |
Campbell Finance v Vivstan Packaging (Aust) [1998] 2 VR 340
Douglas-Brown v Standard Chartered Finance Ltd (1990) 2 ACSR 737
Hewlett Packard v GE Capital Finance (2003) 135 FCR 206
In re Cinema Art Films Ltd [1930] NZLR 500
In re L.H. Charles & Co Ltd [1935] WN (Eng) 15
Re Ace Funding Ltd (2003) 44 ACSR 363
Re Dudley Engineering Pty Ltd [1968] 1 NSWR 483
Re Flinders Trading Co Pty Ltd (1978) 20 SASR 14
Re Guardian Securities Ltd [1984] 1 NSWLR 95
Re Lloyd Anthony Furniture (1996) 19 ACSR 478
Sanwa Australia Finance Ltd v Ground-breakers Pty Ltd (in liq) [1991] 2 Qd R 456
TheCommercial Banking Company of Sydney Ltd v George Hudson Pty Ltd (1973) 131 CLR 605
TABLE OF CONTENTS
INTRODUCTION.............................................................................................................................. 2
THE RELEVANT FACTS................................................................................................................. 3
THE ISSUES........................................................................................................................................ 5
RELEVANT LEGISLATION........................................................................................................... 6
RELEVANT AUTHORITIES........................................................................................................... 8
IS IT JUST AND EQUITABLE TO GRANT THE RELIEF SOUGHT?................................. 13
HIS HONOUR:
INTRODUCTION
In late 2007, Bevillesta Pty Ltd (BPL) subscribed for $2 million in convertible notes in Imagine UN Ltd (IUL), a company listed on the Australian Stock Exchange. The documentation took some time to prepare and, in March 2008, IUL and Bevillesta entered into a convertible note agreement. Under the agreement, which related to three separate issues, the holder of the convertible notes was entitled to convert them into shares by exercising such right on or before 30 November 2009.
The indebtedness under the convertible notes was secured by a charge given by IUL dated 25 March 2008. Six subsidiaries of IUL, who with IUL are defendants to the application, also granted a fixed and floating charge over their assets to secure, inter alia, the indebtedness of IUL to BPL under the convertible note issues.
Under s 263 of the Corporations Act2001, within 45 days of the creation of the charges, the chargors were obliged to lodge notice of the charge with ASIC but failed to do so. That obligation was also imposed on the chargors under the terms of the charge. Notice of the charge was not lodged until 30 October 2008.
BPL and Bluscan Investments Pty Ltd (as trustee for the Bluscan Investment Trust) (BIPL) seek an order, pursuant to s 266(4) of the Corporations Act 2001, that the time prescribed under s 263(1) of the Act for lodging notice of the fixed and floating charge granted by the defendants (IUL and its six subsidiaries) in favour of the plaintiff, BPL, on 25 March 2008 be extended to 30 October 2008. The charge has been assigned to BIPL.
For the reasons that follow, I will extend the time prescribed as requested but on terms.
THE PROCEEDINGS
The application came on before Master Efthim on 24 December 2008 and was referred to me for hearing under Rule 16.2 of the Supreme Court (Corporations) Rules2003. Prior to the hearing, Mr Steven White, solicitor, received instructions to act for IUL and the other defendants from Mr Rodger Johnston, who was appointed a director of IUL on 31 October 2008. Mr White was instructed that Mr Johnston understood that other shareholders and creditors had advanced funds without knowledge of the charge and those parties may be adversely affected by the charge being registered. Mr White was also instructed by Mr Johnston, that IUL is in dispute with BPL over undertakings given by BPL to IUL’s auditor of BPL’s financial support for IUL, which purportedly has now been withdrawn. An appearance was entered on behalf of the defendants.
At the hearing before Master Efthim, the defendants sought an adjournment in order to file affidavits in opposition to the application. However, they filed no material and when the matter came on before me, Mr White sought and was granted leave to cease to act as solicitor for the defendants.
Prior to the hearing, Mr White wrote to the plaintiffs’ solicitors advising them that the defendants agreed to the orders sought. He also advised that he no longer acted for the defendants in this matter and would appear on 29 January 2009 solely to seek leave to file and serve a notice of ceasing to act. He added that the defendants had been notified of the date of the trial and asked the solicitors to forward the consent orders to an email address of Mr Johnston. The solicitors for the applicants emailed Mr Johnston to advise him that they had contacted the court and had confirmed that an appearance is necessary, even though the defendants consented to their client’s application. As it was, however, the defendants did not appear and otherwise took no further part in the hearing of the application.
THE RELEVANT FACTS
Mr Andrew Walker, a solicitor with Mills Oakley Lawyers, the solicitors for the applicants, had the care and conduct of the loan transaction since November 2007 when he was instructed to prepare and advise on the matter. In late 2008, he became aware that notice of the charge had not been lodged with ASIC within the period prescribed under s 263(1) of the Corporations Act2001 when he reviewed a search of the historical records maintained by ASIC in relation to IUL. Previously, he believed that IUL had caused notice of the charge to be lodged in accordance with IUL’s obligations under the charge. On 30 October 2008, notice of the charge was lodged with ASIC.
Mr Sean Edis assisted Mr Walker in the preparation and execution of the loan transaction documents. In May 2008 Mr Edis finally received from IUL the originals of the loan transaction documents which had been dated 25 March 2008. Mr Edis did not search ASIC to determine whether notice of the charge had been lodged pursuant to s 263. He believed that notice had been lodged within the 45 day period because the terms of the charge required that IUL attend to the registration of the charge unless BPL elected to attend to registration of the charge, and BPL had not elected to do so.
Mr Brett Beville is the director of the second plaintiff, BIPL, and was a director of the first plaintiff, BPL, from 3 April 2000 to 1 October 2008. Between 10 November 2006 and 27 October 2008, he was a non-executive director of IUL and each of its subsidiaries. On 27 October 2008, he resigned as a director of IUL and each of its subsidiaries and his resignation was announced to the Australian Stock Exchange.
IUL and its subsidiaries conduct a business principally providing information, technology and distribution of services offering discounted supply of essential services. On 30 September 2008, the Board of IUL released the audited annual financial report for IUL for the year ended 30 June 2008. Though IUL and its subsidiaries recorded a consolidated loss for the financial year, 30 June 2008, of ($10,798,359), the directors of IUL, which, at that time, included Mr Beville, made, inter alia, the following declaration regarding the solvency of IUL:
“In the director’s opinion there are reasonable grounds to believe that the company will be able to pay its debts as and when they become due and payable.”
As at 30 June 2008, the balance sheet of the IUL Group disclosed a deficiency of assets over liabilities of $8,333,485.
On 24 October 2008, the Board of IUL released its cash flow statement for the quarter ended 30 September 2008. The September statement records that IUL’s cash receipts had increased from $803,000 in the previous quarter to $951,000 in the quarter ended 30 September 2008 but, on the other hand, it had a nett operating cash flow deficit of $933,000.
On 7 November 2008, the Board of IUL announced to its shareholders that it would be implementing a restructuring plan, following which, given the growth in sales and gross margin of IUL’s business, IUL would trade profitably. No details were given of the restructuring plan, save that the position of Chief Executive Officer had been made redundant.
On 21 November 2008, the Board of IUL announced to its shareholders that the restructure of IUL’s business was progressing well and that the Board of IUL expected that IUL’s business would be cash flow positive from December 2008.
Mr Beville says the failure to register the charge within the 45 day period prescribed under s 263(1) of the Act was “accidental and due to inadvertence.”
No further evidence of the financial state of the defendants has been tendered.
THE ISSUES
The issues before the Court are –
(1) Have the plaintiffs satisfied the statutory requirements to enable the Court to exercise its discretion to extend time as sought?
(2) Have the plaintiffs provided sufficient evidence of the chargors’ solvency?
(3) If not, should the Court exercise its discretion to extend time and, if so, on what terms?
RELEVANT LEGISLATION
Under Chapter 2K of the Corporations Act2001, a company must ensure that within 45 days of the creation of a charge notice in the prescribed form is lodged with ASIC.[1] A notice of a charge may be lodged after the expiration of the prescribed 45 day period.[2] The order of priorities for charges is provided by the Act and generally is determined by the order of registration.[3] Accordingly, a failure to lodge a notice as required may have adverse priority consequences in relation to other charges.
[1]Section 265(1).
[2]Section 265(2).
[3]Part 2K.3.
Generally speaking, an adverse consequence also may arise from the failure to lodge a notice within the 45 day period where an order is made, or a resolution is passed for the winding up of the company, or an administrator is appointed or the company executes a deed of company arrangement.[4] In those cases, the charge is void as a security as against the liquidator, the administrator or the deed’s administrator, unless the notice is lodged: within the 45 day period; within the period extended by the court under s 266(4) (if that be the case); or within 6 months before the “critical day”. For example, the “critical day” in a winding up is when the winding up begins.[5]
[4]Section 266.
[5]Section 266.
Section 266 (4) provides:
The Court, if it is satisfied that the failure to lodge a notice in respect of a charge, or in respect of a variation in the terms of a charge, as required by any provision of this Part:
(a) was accidental or due to inadvertence or some other sufficient cause; or
(b) is not of a nature to prejudice the position of creditors or shareholders;
or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.
Thus, in this case, taking a winding up for example, unless the period for lodging the notice is extended by order of the Court to the date when it was lodged in October 2008, BPL runs the risk that if IUL or one of its subsidiaries is wound up and the relevant charge was lodged less than 6 months before the commencement of the winding up, the charge will be void as a security against the liquidator. The charge will not lose such priority as it has in relation to other charges, but will in respect of the unsecured creditors represented by the liquidator.
As indicated in the sub-s (4) quoted above, the Court’s power to extend the period for lodging notice of a charge arises if the Court is satisfied that the failure to lodge the notice was accidental or due to inadvertence or some other sufficient cause; or is not of a nature to prejudice the position of creditors or shareholders; or that on other grounds it is just and equitable to grant relief.
In this case, BPL, the chargee, contends that the failure to lodge the notice was accidental or due to inadvertence and, in any event, it is just and equitable that the chargor’s failure to lodge the notice be remedied.
The qualifying circumstances were examined in Campbell Finance v Vivstan Packaging (Aust),[6] where Batt J of this court held that the inadvertence could be that of the mortgagee. In Campbell Finance, a director of the mortgagee under a debenture charge instructed an employee of his to attend to the preparation and execution of the debenture charge. Although the director was aware of the obligation to lodge notice of the charge, the employee was not aware of that obligation. Batt J found that the director’s failure to properly supervise his employee in relation to the preparation and execution of the debenture charge constituted “inadvertence” for the purpose of the sub-section. Batt J relied on Sanwa Australia Finance Ltd v Ground-breakers Pty Ltd (in liq)[7] where the Full Court of the Supreme Court of Queensland (Macrossan CJ, Kelly SPJ and Connolly J) accepted that ignorance by a mortgagee of the requirement to register was sufficient to constitute inadvertence for the purposes of the then relevant sub-section.[8] The Full Court relied on the decision of Street J in Re Dudley Engineering Pty Ltd.[9] There, a chargee applied for an extension of time to register a charge. Street J said that the primary duty was cast upon the chargor to lodge the notice and there was, in the case before him, no evidence of inadvertence on the chargor’s part.[10] Street J held, however, that by reason of the ignorance of the mortgagee, he was “of the view that it is just and equitable to grant to him the extension which he seeks.”[11]
[6][1998] 2 VR 340.
[7](1991) 2 Qd R 456.
[8]Ibid 461.
[9][1968] 1 NSWR 483.
[10]Ibid 485.
[11]Ibid.
In this case, in view of the failure of the chargors to lodge the notice, though required by the Act to do so and by the terms of the charge to do so, and in view of the ignorance of the chargee to discover that failure until October 2008, I consider that the chargee has established the necessary grounds for the Court to exercise its discretion. Adapting the words of Batt J in Campbell Finance v Vivstan Packaging (Aust),[12] I consider the failure of the chargee to ensure that proper notice was lodged is a ground within the words that immediately follow the end of paragraph (b) of the sub-section, on which other things being equal it might be just and equitable to grant relief. The failure might also be “other sufficient cause” within paragraph (a) of the sub-section.
[12][1998] 2 VR 340 at 347-348.
Batt J also described the discretionary powers of the Court under s 266(4). He said that factors going to the Court’s discretion “may be taken into account in reaching a conclusion that the Court is not satisfied that on other grounds it is just and equitable to grant relief, or alternatively, they may, notwithstanding satisfaction of that, be relied on for refusing relief under the discretionary words I have quoted [may … extend].”[13]
[13]Ibid 348.
RELEVANT AUTHORITIES
The relevant authorities establish the following general principles:
(1) The Court must have regard to the interests of all those who might be affected by a grant of relief and not just to the interests of the chargee: Hewlett Packard v GE Capital Finance per Branson J.[14]
[14](2003) 135 FCR 206 at 217.
(2) All those that might be affected include creditors and shareholders as referred to in s 266(4) itself: TheCommercial Banking Company of Sydney Ltd v George Hudson Pty Ltd;[15] Re Flinders Trading Co Pty Ltd.[16]
[15](1973) 131 CLR 605 at 612 per Menzies J and at 621 per Stephen J.
[16](1978) 20 SASR 14 at 46-48 per Mitchell J with whom Walter J agreed
(3) The discretion must be exercised judiciously and not arbitrarily or capriciously: Hewlett Packard per Branson J.[17]
[17](2003) 135 FCR 206.
(4) Any rule of practice or guide to the exercise of the discretion that has evolved over the years should not be lightly disregarded: Hewlett Packard per Branson J.[18]
[18]Ibid.
(5) An extension of time will almost invariably be refused after the commencement of a winding up and will only be granted in exceptional circumstances: Hewlett Packard per Branson J;[19] Douglas-Brown v Standard Chartered Finance Ltd per Malcolm CJ and Rowland J with whom Wallwork J agreed;[20] Re Flinders Trading Co Pty Ltd per Mitchell J with whom Walters J agreed;[21] Re Lloyd Anthony Furniture per Branson J;[22] and Campbell Finance v Vivstan Packaging (Aust) per Batt J.[23]
[19]Ibid.
[20](1990) 2 ACSR 737 at 743.
[21](1978) 20 SASR 14 ; (1978) 3 ACLR 218 at 232-233.
[22](1996) 19 ACSR 478 at 481.
[23][1998] 2 VR 340 at 348.
(6) Even where it is mere inadvertence which leads to the failure to lodge notice of a charge within the prescribed period, the claim of the mortgagee that an extension merely puts the mortgagee in the position in which it would have been had there been no inadvertence, should not prevail over the claims of unsecured creditors where there is a danger that the claims will not be met in full owing to the insolvency or likely insolvency of the company: Re Flinders Trading Co Pty Ltd.[24]
[24](1978) 20 SASR 14 at 49 per Mitchell J with whom Walter J agreed; (1978) 3 ACLR 218 at 233.
(7) The Court should give consideration to the financial position of the company chargor at the time of the application: Re Flinders Trading Co Pty Ltd;[25] Re Guardian Securities Ltd per McLelland J;[26] Re Ace Funding Ltd per Conti J[27] and Hewlett Packard.[28]
[25]Ibid.
[26][1984] 1 NSWLR 95 at 97.
[27](2003) 44 ACSR 363 at 365-366.
[28](2003) 135 FCR 206.
(8) If the company is financially secure, then as it is unlikely that a “critical day” is likely to rise in the foreseeable future, the grant of relief would be unlikely to affect any person adversely: Hewlett Packard per Branson J.[29]
[29]Ibid 217.
(9) If the liquidation or an administration is imminent, then the risk that the unsecured creditors could be adversely affected would be high: Hewlett Packard per Branson J.[30]
[30]Ibid 218.
(10) Imminent includes if a winding up application has already been presented and appears likely to be pursued and likely to succeed: Re Flinders Trading Co Pty Ltd.[31]
[31](1977) 20 SASR 14 at 30 per Sangster J.
(11) An applicant for an extension should bring forth evidence of the solvency of the company and the likelihood of its solvency being maintained into the foreseeable future: In re L.H. Charles & Co Ltd[32] and Re Guardian Securities Ltd per McLelland J.[33]
[32](1935) WN (Eng) 15.
[33][1984] 1 NSWLR 95 at 97.
(12) In the absence of such evidence, an extension should not be granted unless steps are taken to protect the interest of unsecured creditors: Re Guardian Securities Ltd per McLelland J.[34]
[34]Ibid 97.
(13) If insufficient or no evidence of solvency is adduced, then either:
(i) one or more unsecured creditors might be joined as representative parties;
(ii) directions might be given as to notification of unsecured creditors of the application with a view to their being heard in opposition to it, if they so desired; or
(iii) the extension of time might be granted reserving, however, a right to the company or any unsecured creditor or any person representing the interests of unsecured creditors to apply at a later stage to discharge or vary the order: In re Cinema Art Films Ltd;[35] In re LH Charles & Co Ltd;[36] and Re Guardian Securities Ltd.[37]
(14) Finally, the rights of secured creditors inter se are not affected by any order made by the Court as their priorities are established under Part 2K.3: Douglas-Brown v Standard Chartered[38] and Re Guardian Securities Ltd[39]
[35][1930] NZLR 500 at 502-503 per Myers CJ.
[36](1935) WN (Eng) 15 at 16 per Clauson J.
[37][1984] 1 NSWLR 95 at 97-98 per McLelland J.
[38](1990) 2 ACSR 737 at 740.
[39][1984] 1 NSWLR 95.
In addition to setting out these general principles, I should refer to some cases of particular relevance to this case. In In re LH Charles & Co Ltd[40] Clauson J addressed the practice where liquidation was in contemplation and the desirability of protecting the right of the liquidator to challenge the extension to time. The report states:
Clauson J said that, upon application under s 85 of the Companies Act, 1929, it was the practice of the Court to scrutinise carefully the evidence in support of the application, in order to satisfy itself that the company was solvent and that no winding up of the company was impending. The propriety of such practice had been explained in certain reported decisions of the Courts upon applications under that section and the practice was one which ought to be continued. There was prima facie evidence that the omission was due to inadvertence; but where liquidation was, as in the present case, in contemplation, the order extending the time for registration ought to be in such a form as to give the liquidator when appointed an opportunity of challenging the right of the applicant to an order extending the time.[41]
[40](1935) WN (Eng) 15.
[41]Ibid 16
In Hewlett Packard v GE Capital Finance Pty Ltd,[42] Branson J described the approach that should be taken in determining whether it is just and equitable to grant relief. He said:
If an application for an extension of time within which to lodge notice of a charge is made where one of the events referred to in s 266(1)(a), (b) or (ba) has occurred, the starting position is that the security is void. The fact that the legislature has provided for this starting position where one of the events referred to in s 2656(1)(a), (b) or (ba) has occurred reflects, as it seems to me, recognition that each of those events requires a person external to the company to take control of the assets of the company. Those assets must be able to be identified by that person with certainty. However, since s 266(1) has no relevant operation in respect of solvent companies, the provision for voidness also reflects, as it seems to me, the critical interest of unsecured creditors in the assets of an insolvent or potentially insolvent company. Any grant of relief under s 266(4) will either immediately impact on the crystallised rights of unsecured creditors in those assets or impact on the administration of the company or of the deed of company arrangement in a way that is likely to be adverse to unsecured creditors. A determination that it is just and equitable to grant relief in such circumstances will require the identification of factors of sufficient significance to outweigh the adverse impact on unsecured creditors of the grant of relief.[43]
[42](2003) 135 FCR 206.
[43]Ibid 218 [31].
In Re Flinders Trading Co Pty Ltd[44] at first instance Sangster J set out the position the Court faces in dealing with the solvency or doubtful solvency of the chargor. His remarks were made in relation to the former regime where the failure to lodge the notice had the effect of avoiding the security as “against the liquidator and any creditor of the company.”[45] Nevertheless, in my opinion, his observations are still apposite to the current Act and, in particular, to s 266(4). His observations were not contradicted by the Full Court on appeal. He stated:
The court’s concern with the position of the unsecured creditors (or so it seems to me) may be regarded as follows:
(a) At one end of the scale, where the position of the unsecured creditors has been crystallized by the making of a winding up order, the court generally will not extend the time for registration of a debenture ...
(b) Close to that end of the scale, the court will generally be reluctant to extend the time for registration of a debenture if a winding up order appears to be imminent ...
(c) At the other end of the scale, the court will generally regard its concern for the unsecured creditors as satisfied if sufficient evidence is given that the company is solvent and able to pay its debts: Atkin’s Court Forms, 2nd ed vol 10 pp 123-124 and Form 168 and see Re Davleco Equipment Pty Ltd, [1974] Qd R 247, per Wanstall SPJ at 251-252.
(d) In the middle of the scale (to change the metaphor) the course seems not so clearly charted.[46]
[44](1977) 2 ACLR 482.
[45]Douglas-Brown v Standard Chartered Finance (1990) 2 ACSR 737 at 740 per Malcolm CJ and Rowland J.
[46](1977) 20 SASR 14 at 31; (1977) 2 ACLR 482 at 485.
IS IT JUST AND EQUITABLE TO GRANT THE RELIEF SOUGHT?
Turning to the facts of this case, the defendants put forward no information on their financial position as at the date of the application.
No evidence was led on the dispute between BPL and IUL over the alleged undertakings given to the auditor of IUL nor on whether this dispute may have any bearing on the solvency of IUL.
The plaintiffs have filed some information which discloses the accounts of IUL as at 30 June 2008, a quarterly cash flow statement for the quarter ended 30 September 2008 and announcements made in November 2008 of a restructuring plan. The information put before me, in my opinion, suggests that IUL may be in financial difficulties and could be described as being of doubtful solvency.
Mr Bigmore QC, senior counsel for the plaintiffs, submitted that “the defendants are probably able to pay their debts as and when they fall due” and that none of the defendants are under external administration.
Nevertheless, in my view, the position described by McLelland J in Re Guardian Securities Ltd[47] exists and, if the Court is to grant relief, then it ought to protect any adverse impact the order may have on unsecured creditors. In my opinion, the Court ought to, in the case of each defendant company, reserve liberty to the defendant or any liquidator, administrator, deed administrator or creditor of the defendant to apply to discharge or vary this order in the event that any winding up of the defendant commences, or an administrator of the defendant is appointed under ss 436A, 436B or 436C; or the defendant executes a deed of company arrangement, within six months of 30 October 2008.
[47][1984] 1 NSWLR 95.
Subject to that term, I believe it is just and equitable, in the circumstances where each of the chargors failed to carry out its obligations both under the Act and under the charge to lodge the relevant notice, for the Court to order, pursuant to s 266(4) of the Act, that the time prescribed under s 263(1) of the Act for the lodging of notice of the fixed and floating charge granted by each of the defendants in favour of the plaintiff on 25 March 2008 (being ASIC charge number 1713135) be extended to 30 October 2008.
As to the question of costs; the defendants have agreed to consent to the orders extending time for the lodging of notice in respect of a charge as required under s 263(1). The defendants failed in their statutory and contractual obligations to do so and are the cause of this application. In those circumstances I will make an order that the defendants pay the plaintiffs’ costs of the proceeding including all reserved costs.
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