Bluechip Development Corporation (Gladstone) Pty Ltd v Sunstruct Pty Ltd and Ors (No.2)
[2013] FCCA 1898
•20 November 2013
FEDERAL CIRCUIT COURT OF AUSTRALIA
| BLUECHIP DEVELOPMENT CORPORATION (GLADSTONE) PTY LTD v SUNSTRUCT PTY LTD & ORS (No.2) | [2013] FCCA 1898 |
| Catchwords: COSTS – Costs of related proceedings – DOCA – costs of successful respondent in defence and cross claim – costs of defence not compromised by DOCA. COSTS – Cross claim – costs associated with protection and enforcement of charge over funds in solicitor’s trust account – costs not compromised by DOCA. COSTS – DOCA – definition of ‘claim’ in DOCA – costs not a present, future or contingent claim under DOCA. COSTS– Indemnity costs – Calderbank offers – unreasonable rejection of offer. COSTS – Against non-party – director – mala fides – exceptional circumstances warranting pursued order against director/shareholder of applicant corporation. |
| Legislation: Bankruptcy Act 1966 (Cth), Building and Construction Industry Payments Act 2004 (Qld), ss.31, 100 Corporations Act2001 (Cth), s.444D Federal Circuit Court of Australia Act 1999 (Cth), ss.8, 79 |
| Australian Competition & Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192 Dal Pont, Giacomo E., Law of Costs (LexisNexis Butterworths Australia, 2013) Sykes, Edward I. and Sally Walker, The Law of Securities (The Law Book Company Limited, 5th ed, 1993) |
| Applicant: | BLUECHIP DEVELOPMENT CORPORATION (GLADSTONE) PTY LTD |
| First Respondent: | SUNSTRUCT PTY LTD |
| Second Respondent: | LORENZO MARIO REGINATO |
| Third Respondent: | ANTONY JAMES SCHOFIELD |
| File Number: | BRG 327 of 2009 |
| Judgment of: | Judge Burnett |
| Hearing date: | 13 August 2013 |
| Date of Last Submission: | 13 August 2013 |
| Delivered at: | Brisbane |
| Delivered on: | 20 November 2013 |
REPRESENTATION
| Counsel for the Applicant: | Dr R. O'Hair and Mr P. Hackett |
| Solicitors for the Applicant: | Hemming & Hart |
| Counsel for the First Respondent: | Mr J. Peden |
| Solicitors for the First Respondent: | Gadens Lawyers |
| Counsel for the Second Respondent: | Mr J. Peden |
| Solicitors for the Second Respondent: | Gadens Lawyers |
| Counsel for the Third Respondent: | Mr J. Peden |
| Solicitors for the Third Respondent: | Gadens Lawyers |
ORDERS
That the parties jointly submit within seven days of today a minute of order giving effect to the judgment in the principal proceeding and this application.
| FEDERAL CIRCUIT COURT OF AUSTRALIA AT BRISBANE |
BRG 327 of 2009
| BLUECHIP DEVELOPMENT CORPORATION (GLADSTONE) PTY LTD |
Applicant
And
| SUNSTRUCT PTY LTD |
First Respondent
| LORENZO MARIO REGINATO |
Second Respondent
| ANTONY JAMES SCHOFIELD |
Third Respondent
REASONS FOR JUDGMENT
Introduction
Following a lengthy trial, reasons for judgment in this matter were delivered on 26 April 2013. The parties were directed to agree terms of orders to give effect to those reasons. Despite considerable discussion and debate between them, no agreement as to the final terms of order could be reached. The matter returned before me to resolve that dispute.
At the outset it is fair to note that both parties agree that an order should be made dismissing the applicant’s claim. Orders in those terms will be made.
However the parties cannot agree as to:
a.Orders to be made concerning the first respondent’s success on its counter-claim; and
b.Costs.
Orders on the first respondent’s claim
A preliminary issue arose which the applicant contends affects the orders to be made. On 11 March 2011 the applicant entered into a deed of company arrangement (the DOCA). This even occurred after the hearing had been concluded but before judgment was delivered. The matter was formally raised in an amended application filed on 3 October 2011.
The applicant asserted that its claim was in no way impaired by its administration and the subsequent DOCA. However, it contends that all unsecured claims against it were compromised by operation of covenant 7 of the DOCA and s.444D of the Corporations Act2001 (Cth). The significance of this is that the applicant thereby laid claim to a sum of money (the fund) which had earlier been paid into a solicitors’ trust account pending resolution of the underlying dispute between these parties. That dispute had been the subject of an interim adjudication determination in favour of the first respondent pursuant to the Building and Construction Industry Payments Act 2004 (Qld) (BCIPA). The applicant contended that the fund was not secured in the first respondent’s favour, notwithstanding the first respondent’s contention that the fund had been set aside in respect of its successful adjudication awards made under the BCIPA. Accordingly, the applicant submitted, there should be no order made in respect of the respondent’s counterclaim and the fund should be directed to be returned to the applicant as, in its contention, it was the only party with a beneficial interest in the fund. It contended that the relationship between the applicant and the first respondent was solely one of debtor and creditor with no proprietary interest in the funds attached thereto.
The fund was established by agreement between the parties pending resolution between them of the substantive issues. For the applicant it was contended that while it was open for an equitable charge to have been created in respect of the fund, in this instance the fund was in dispute; accordingly, no proprietary interest in the fund was created by merely agreeing to place the disputed funds into a trust account.
The applicant contended that the circumstances of this case were addressed by the principles in Harmer v Federal Commissioner of Taxation (1991) 173 CLR 264, and in particular by the remarks of the Court at 272, where it stated:
“In such a case [where trust moneys are paid into court] the funds paid into court remain subject to any pre-existing trust notwithstanding the payment in. If some person or persons were presently entitled to the corpus or income before payment in, the fact of payment in to await the orders of the court will not, of itself, displace that present entitlement. If entitlement is disputed, the function of the court will be to identify existing interests in the money paid into court rather than to create new ones.”
It submitted that in this instance the dispute was not over ownership of the fund but liability to pay a debt, and accordingly at the time of payment in the applicant remained ‘presently entitled’ to the fund.
The fund was established pursuant to orders made by Wilson FM. Initially the first respondent had succeeded in obtaining two BCIPA awards in its favour following adjudications. Adjudication certificates were issued. They were then capable of being filed as judgments for debt and, indeed, a judgment was obtained on the first certificate as provided for by BCIPA s.31(1).
Broadly, the first respondent contends that the applicant parted outright with the money by establishing the fund in respect of the judgment, but that the fund was held conditionally in trust for the benefit of whichever party was successful in these proceedings.
The history of the undertakings was that these proceedings[1] were commenced by the applicant to prevent the first respondent from enforcing a judgment of the District Court of Queensland obtained by it against the applicant for payment of the money. The applicant foreshadowed bringing a substantial damages claim against the first respondent in which it contended it would seek a set-off in respect of any liability under the District Court judgment. Accordingly, on 5 June 2009 a consent order was made by Wilson FM providing for directions for the further conduct of these proceedings. Those orders were made upon undertakings given by each party to the other. The order reflected the undertaking, noting:
“AND UPON the undertaking of the Applicant to pay the adjudicated amount of $203,907.64 into the trust account of Garland Waddington Solicitors by the close of business on Wednesday 10 June 2009 to be held on trust and invested on behalf of the Applicant and Respondent to abide the outcome of this proceedings or other order.”
[1] As opposed to the principal proceedings, being BRG327/2009. The primary judgment was delivered on 12 April 2013: Bluechip Development Corporation (Gladstone) Pty Ltd v Sunstruct Pty Ltd & Ors [2013] FCCA 141.
A further order was made by Wilson FM on 31 July 2009 of a similar kind. It was in respect of the second adjudication award. It provided as follows:
“THE COURT NOTES
The undertaking of the applicant by its counsel to pay the sum of $120,649.08 to the trust account of GARLAND WADDINGTON SOLICITORS on or before 10 August 2009, on the same terms as the undertaking contained in the order made 5 June 2009.”
Further orders were made on 20 October 2009, again by consent. They included orders providing:
“12. That these orders are made:
(a) on the undertaking of the respondent not to enforce its entitlement under the BICPA [sic] Determinations pending the making of final orders in these proceedings;
(b) on the undertaking of the respondent to apply to set aside the judgments in its favour in the Maroochydore District Court;
…
13. That one half of the monies presently held in the respondent solicitor’s trust account be released to the applicant forthwith.”
Accordingly, there is currently held in the trust account of Garland Waddington the sum of $162,278.00 plus accretions by reason of the investment of those funds (since June 2009 until October 2009 on the sum of $203,907.64 increased to $324,556.00, which was reduced to $162,278.00 in late October 2009). Allowing for interest at 5.00%, that sum is submitted to now be worth approximately $190,000.00.
For its part the applicant contends that these orders merely confirmed that the fund was in dispute and did not give rise to a security interest in favour of the first respondent.
The first respondent contends that the starting point for the analysis of the status of the moneys is to be found in the terms upon which the moneys were paid into the account and how they were to be held. It contends that the establishment of the fund involved the applicant unconditionally parting with the moneys, leaving the ultimate title to be resolved by this application.
Before proceeding to determine the question, it should be first observed that the styling of the stakeholder is not material. That is to say it does not matter whether the funds are paid to the trustee to hold on trust or that the funds are paid into court. What is important is that the funds are held by an independent stakeholder pending resolution of the dispute. To whom or where moneys are paid does not impact the underlying issue of entitlement: Brava Trading Pte Ltd v Leybourne Nominees Pty Ltd [2012] QSC 328 at [43]. The question for resolution is the identification of the party with beneficial interest to the fund at the time the trust is settled or payment is made into court.
The first respondent acknowledges that the applicant’s argument is based upon an assertion that the relationship between the parties is one of alleged debtor and creditor based upon comments in Harmer v Federal Commissioner of Taxation. However, it contends that the applicant’s reliance on that decision is misconceived because:
a.Harmer concerned a situation where money was paid into court on interpleader proceedings by a party with no interest in the funds;
b.The funds in court were withdrawn and invested with a building society in the names of the three claimants, “and that such moneys be held on trust by them pending the determination of these proceedings”;[2]
c.Interest was earned on the funds invested;
d.The question that arose for consideration was “whether the interest constituted income to which there was no beneficiary “presently entitled” for the purposes of s 97(1) of the [Income Tax Assessment Act 1997 (Cth) (ITAA)]”;[3]
e.The question for determination was “whether any one or more of the claimants either were “presently entitled” in that sense to the interest earned on the funds deposited with the Building Society or had a “vested and indefeasible interest” in that interest”;[4]
f.It was held that none of the claimants were “presently entitled” to the interest for the purposes of the ITAA.
[2] Harmer at 268.
[3] Harmer at 271.
[4] Harmer at 271.
Premised upon those matters, the first respondent contended that the applicant seeks to develop an argument by reference to comments by the High Court about various beneficiaries’ “present entitlement” under the ITAA to the broader, and different, question of the status of the funds in court.
The issue of the status of funds in court, particularly in circumstances where the payer has paid moneys into court in order to forestall execution of a judgment and subsequently entered into some form of insolvency, is the subject of direct authority in both Australia and England. The first respondent helpfully referred to the decision of the South Australian Supreme Court in Duncan (As Trustee for the Bankrupt Estate of Averil Gay Garrett v National Australia Bank Ltd (2006) 95 SASR 208, which examined and summarised the relevant authority on the point, including Harmer, the authority relied upon by the applicant. It was also submitted that the facts in Duncan provide a helpful analogy for the present case.
In Duncan, a dispute arose between a mortgagor and a mortgagee which resulted in the mortgagors offering undertakings to a court as to damages in exchange for an injunction restraining the mortgagee from exercising its rights. Orders were conditional upon the mortgagors paying all outstanding interest on the mortgage into court as and when it fell due pending determination of the case. The mortgagors made certain interest payments before falling into default, at which time the injunction was discharged and the mortgagee took possession of the security and sought to exercise its sale rights over the security. In the meantime, one of the mortgagors filed a notice of bankruptcy and abandoned the proceedings. The mortgagee then applied for the money paid into court by the mortgagors to be paid out to it. At first instance the mortgagee was successful in obtaining an order in its favour. The mortgagor’s trustee-in-bankruptcy appealed.
The decision was appealed to the Full Court of the Supreme Court of South Australia. The lead judgment was delivered by White J, with whom Vanstone and Layton JJ concurred. In his judgment, after relating the relevant facts and the reasons of the applications judge at first instance, White J noted that the question considered at first instance was whether the moneys paid into court as a condition of a grant of an interlocutory injunction ought to be paid to the mortgagee or, as the mortgagor’s trustee claimed, to him. His Honour, in conclusion, determined that the mortgagee had an equitable interest in the moneys paid into court. However, he was careful to note that his conclusion was not intended to foreclose any argument available to the bankrupt mortgagor concerning the moneys which might arise under the provisions of the Bankruptcy Act 1966 (Cth). Plainly his Honour’s intent was to address solely the question of beneficial interest.
After noting the circumstances in which moneys may be paid into court, his Honour continued:
“… the decision by the court as to payment out in a particular case is to be determined by a consideration of the relevant statutory or rule regime governing the payment in, the rule regime concerning the holding of the moneys in court, the purpose for which the moneys have been paid in, any relevant decision of the court concerning the legal or beneficial ownership of the moneys or the entitlement to them, and any relevant event in the litigation in relation to which the moneys have been paid, rather than by reference to any rule of general application.”[5]
[5] Duncan at [30].
After discussing a number of authorities which considered Harmer, his Honour noted at [40]:
“… In Bird v Barstow Lord Esher held that the effect of a payment into court by a defendant of the amount claimed by a plaintiff as a condition of leave to defend the action was to provide a security to the plaintiff for that amount. In Re Gordon; Ex parte Navalchand the plaintiff in similar circumstances was described as a secured creditor with a charge over the money paid in. Statements to similar effect appear in Re Ford; Ex parte the Trustee. The effect of these decisions was that upon the defendant becoming bankrupt after the payment in, the security of the plaintiff entitled it to payment in full to the extent of the entitlement proved. After an extensive review of the authorities in WA Sherratt Ltd v John Bromley (Church Stretton) Ltd this position was confirmed by the Court of Appeal. Oliver LJ, with whom the other members of the court agreed, did hold that a party paying into court as a condition of leave to defend “parts outright” with his money, but held that the plaintiff is a secured creditor in the liquidation of the defendant to the extent of the money paid in.” (Citations Omitted)
His Honour came to that conclusion by distinguishing Harmer on the basis that in that case the facts involved competing claims in circumstances where an interpleader with no claim to the money had paid moneys into Court. As the interpleader itself had no legal or beneficial interest in the moneys, it followed that the parties themselves had no “present entitlement” to the interest. That was so while their moneys were held in court.[6]
[6] Duncan at [33].
In deciding Duncan, White J also considered the analogous circumstances in Pilmer v HIH Casualty & General Insurance Ltd (No 2) (2004) 90 SASR 465. In that case HIH presented the same arguments advanced by the applicant in this case. Mullighan J rejected those arguments by reference to English authority and by distinguishing Harmer. On appeal, the Full Court in Duncan did criticise a statement by Mullighan J that “… a claimant may never have an equitable interest in the moneys until the order for payment out is made …” However, it accepted the underlying principle that upon payment into court on condition of leave to defend, the payer parts outright with his moneys.
In this case, the first respondent had the benefit of two BCIPA adjudications together with the adjudicated costs. Each was formalised by entry of judgment in the District Court of Queensland. Bluechip paid the judgment amounts into the trust account of Garland Waddington Solicitors on Sunstruct’s undertaking not to take further enforcement steps in respect of its judgment on the first adjudication award. It paid a second sum into the solicitors’ trust account on the same terms as the first payment. That is, on the basis that the respondent would not proceed to enforce its award. It was agreed to set aside the judgment and the first respondent did so. That agreement, as reflected in the consent orders, was conditional. The initial purpose of the payment was to secure to the first respondent’s payment of the adjudication awards subject to the applicant’s rights to pursue its civil remedies as provided for by s.100 of the BCIPA.
Given the then existing judgment, there is no question that at the time of the creation of the fund the applicant was indebted to the first respondent and the sum paid by the applicant was an amount paid in answer to its demands. The applicant was not prepared to admit this matter in this application but I am satisfied of this fact. I make that finding in light of the following facts: the sum paid was calculated by reference to the quantum of the first adjudicated award judgment. The sum was paid after the judgment was obtained; the applicant was trading as a property developer and the quantum of the judgment would have presented significant risk to its credit rating; and, lastly, no stay of execution had been obtained on the judgment. Subsequent payments in were made in the context of the first payment, as the subsequent orders noted.
In response to first respondent’s contentions relying on Duncan, the applicant contended that its submissions were supported by the reasons of Philippides J of the Supreme Court of Queensland in Brava Trading. It contends that in light of her Honour’s reasoning, particularly at [41] and [42], it follows that there is no secured interest in the first respondent’s favour in respect of the moneys held in the trust account.
Respectfully, I do not agree. The facts in Brava Trading are significantly different to those in this instance, but that difference is not material for this argument. The debate in that case particularly concerned the form and time of crystallization of a fixed and floating charge held by the creditor in respect of moneys advanced to the debtor. The critical facts were not in dispute; they were that the creditor held a charge over the funds held in the debtor’s account at a bank. Another creditor (Leybourne) succeeded in obtaining a judgment and commenced execution. Leybourne’s judgment was set aside on terms which included returning a sum of $67,000.00 which had been paid by the debtor’s bank to it. That fund was paid into a trust account pending resolution of the issue of title. In that instance, her Honour did not accept that payment into court saw the party making the payment part outright with its money, or that by that fact the court “effectively creat[ed] a security in favour of the successful party in the proceeding …”[7]
[7] At [37].
While her Honour noted the creditor’s reliance upon Harmer, she added:
“… that in Harmer, the court observed that the moneys paid into court were not trust moneys and recognised that, in circumstances where trust moneys are paid into court, the funds “remain subject to any pre-existing trust notwithstanding the payment in.””[8]
[8] At [39].
Her Honour continued at [42]:
“[42] Counsel for Brava Trading [the applicant creditor] also referred to statements of Wilcox J in Cmr of Taxation v Government Insurance Office (NSW) (1992) 36 FCR 314, quoted by McMurdo J in Hansen Yuncken Pty Ltd v Ian James Ericson trading as Flea’s Concreting at [41], dismissing the notion that a payment into court created new interests or derogated from existing interests.
[43] I do not consider that the authorities relied upon by Leybourne advances its claim to the moneys over Brava Trading. When the Charge crystallised, Brava Marine [the debtor] became a trustee of the moneys for Brava Trading. Neither the subsequent payment of the moneys into Leybourne’s account en route to their solicitors’ trust account, nor the payment into the solicitors’ trust account to give effect to the order of Judge McGill on 24 July 2009, derogated from Brava Trading’s then existing entitlement pursuant to the crystallised Charge. After the making of the order on 24 July 2009, the funds paid into the solicitors’ trust account remained subject to any pre-existing beneficial interest of Brava Trading arising from the crystallisation of its Charge which rendered Brava Marine a trustee of the debt: Harmer. The payment of the moneys into the solicitors’ trust account, albeit that it was made pursuant to a court order, did not alter the entitlement that Brava Trading already had to the moneys.”
Although, as I have noted, the facts in Brava Trading differ from those before me, the fact remains that the right to the funds subsequently paid into the solicitors’ trust account pre-dated the insolvency event and the payment of the sum into the trust account.
In this case the applicant contends that the fact that the fund was created following the order of Wilson FM, and then directed to be held for both parties subject to the outcome of these proceedings, meant that the title to it vested in neither. That submission ignores the fact of the first respondent’s judgment. It was immediately enforceable. The sum paid by the applicant was parted with outright, but conditionally, into the trustee’s hands to forestall the first respondent’s execution. As with Duncan, the moneys here were paid into trust to secure an entitlement of the first respondent. It is no answer to say that the applicant also had an entitlement. It had only an inchoate right, if anything. Ultimately I concluded that it had no right, but for resolution of this matter I do not think that fact is important. All the applicant had was a complaint it could formulate into a cause of action.
Against that position, the first respondent had an immediately enforceable judgment and the capacity to secure a second one. In contrast, it is only in rare circumstances that funds will be called into court in support of an inchoate right. The circumstances justifying a Mareva[9] type order are perhaps the most obvious, although doing so does not give rise to a secured interest: Jackson v Sterling Industries Ltd (1987) 162 CLR 612. There was good reason for the applicant to part with its money but preserve its corpus by depositing it into trust. Its rights were not substantive, they were ethereal. As a matter of fact, the applicant parted with these moneys into trust to secure first respondent’s claim, just as occurred in Duncan.[10] Accordingly, the first respondent did acquire an equitable interest in the fund. That conclusion follows the character of the payment and the purpose for which it was made.
[9] Mareva Compania Naviera SA v International Bulk Carriers SA (The Mareva) [1980] 1 All ER 213.
[10] Duncan at [49].
I note that the applicant’s submission focused upon the creation of the trust and that it actively sought to disregard the background circumstances surrounding its creation as irrelevant. However, I am satisfied as a matter of fact that in paying the sum the applicant parted outright with the moneys subject only to any successful cross-claim it could make against the first respondent. Accordingly, consistent with Duncan and the authorities set out therein, the applicant had “parted outright” with its money at the time of payment in. From that time the first respondent had an equitable charge on the moneys. Its rights now having been finally determined, it is entitled to be paid the moneys.
If I am incorrect in my determination that the first respondent is a secured creditor, the applicant says the first respondent’s debt was compromised by the DOCA. In particular, counsel for the applicant contended in his oral submissions that no monetary order can be made because it was extinguished by the DOCA. The applicant contends this follows covenant 7 of the DOCA and s.444D of the Corporations Act 2001 (Cth). Covenant 7 of the DOCA provides that the DOCA binds all parties to it and, “in accordance with section 444D of the Corporations Act, all Creditors of the Company so far as concerns Claims arising on or before the Appointment Day.” Section 444D provides that a deed of company arrangement binds all creditors of the company so far as concerns claims arising on or before the day specified in the deed.
Although not referred to until submissions in reply, the real power in the DOCA concerning unsecured creditors is to be found in covenant 17.2. Relevantly, it provides:
“17.2 Discharge of debts
(i) The Creditors (other than Secured Creditors …) must accept (whether the person’s Claim is or is not actually admitted or established under this Deed) their entitlements under this Deed in full satisfaction and complete discharge of all Claims and each of them will, if called upon to do so, execute and deliver to the Company such forms of release of any Claim as the Company or the Deed Administrator requires.
(ii) After the Deed Administrator has paid to the Creditors their full entitlements under this Deed, all Claims they (other than Secured Creditors …) had or may have are extinguished, and this Deed may be pleaded by the Company against any Creditor in bar of any Claim that is admissible and has been extinguished under this Deed, even though the person’s Claim is not actual fact [sic] admitted or established under this Deed. The establishment or bona fide purported establishment of arrangements under covenant 13, shall be deemed to be for all purposes whatsoever, including covenant 18.1, to be the payment of the Creditors of their full entitlements as referred to above, so that the abovementioned extinguishment is effective.
(iii) Debts remain discharged notwithstanding the termination of this Deed and it is noted that at common law consideration was found to be present in the case of compositions and this provision is in addition to and not in derogation of any other provisions hereof or dehors this instrument to like effect and the existence of any covenant herein shall not preclude the finding of a simple contract releasing such debts implied by the acceptance or receipt or both of any payment.”
Respectfully, it is s.444D together with covenant 17.2, and not covenant 7, which is directly relevant in this instance.
The first respondent contended that the deed only effected a moratorium of creditors’ claims. However, because of matters which follow this is plainly not the case. The administrator sought to address the creditors of the applicant and did so. Accordingly, it is that action to which regard must be had.
The first respondent lodged a formal proof of debt in the applicant’s administration claiming the sum of $517,045.25. Initially the administrator issued a “Notice as to Rejection of Formal Proof of Debt or Claim” regarding the first respondent’s formal proof of debt, admitting it for a nominal value of $1.00 and otherwise rejecting the balance of the claim. The notice dated 15 April 2011 provided various reasons, in particular noting that moneys had been paid into a solicitors’ trust account and that:
“… an agreed amount of $172,467.88 has been paid into Trust by the Company in relation to the awards originally determined in connection with the adjudicator decisions, such that a reduction to items 1 and 2 may require accounting for upon the outcome of the Ongoing Proceedings.”[11]
[11] Affidavit of David Martell filed on 5 September 2011 – Form 573 at paragraph 2(a), annexure page 61.
The first respondent was dissatisfied with the administrator’s decision. Accordingly, it appealed to the Federal Court against the partial rejection and admission of the first respondent’s claim in the nominal amount of $1.00. In response to the first respondent’s appeal, a number of creditors wrote to the first respondent seeking to resolve the issue.[12] They proposed seeking amendments to the DOCA to provide the first respondent “with a priority payment in the administration as if [its] proof of debt was admitted in the sum of $517,045.25.”
[12] Curiously, their letter of request was written on the letterhead of the company under administration – although without reference to that fact. See the affidavit of David Martell filed on 5 September 2011 at annexure pages 72-73.
That proposal was agreed to by creditors and accepted by the administrator who incorporated it, together with other matters, into the DOCA. However, it was plain from correspondence from the first respondent’s solicitors dated 1 June 2011 that the parties were not ad idem on all points. The first respondent’s solicitors observed:
“Your client has suggested a proposed amendment to the deed of company arrangement to allow our client to have its proof of debt admitted. However, we see no requirement to amend the deed of company arrangement. All that is required is for our client’s proof of debt to be admitted.
We note also that the sum of $172,467.88 is held in the trust account of Garland Waddington Solicitors. It is our assertion that these funds are held beneficially by the party ultimately found to be successful in [these proceedings] … This needs to be taken into account in any draft order admitting the proof of debt.”
This difference of opinion was never formally resolved. As the creditors had the numbers, the proposal as submitted was passed and the appeal became otiose. Consent orders for its adjournment and ultimately its dismissal were subsequently agreed. Materially however, the DOCA was amended to introduce, inter alia, the following recitals and covenants:
“1. That the DOCA be varied to insert recitals “E” to “M,” as follows:-
E. …
…
H. The dividend to creditors is likely to be higher by paying Sunstruct an amount equal to what it would be entitled to if its proof were properly admitted at $517,045.25, even though the Deed Administrator does not believe that its claim can be admitted at that amount.
…
J. This Deed of Company Arrangement is to be otherwise confirmed and to the extent that any provision the reference whether directly or indirectly, would have contrary effect it is to be modified so as to confirm and give effect to this Deed of Company Arrangement on the above basis respecting the Sunstruct claim.
…
2. That the DOCA be varied to insert a new covenant numbered 1A, as follows, under the heading – “Special Preference for Sunstruct”:-
1A. Notwithstanding any other provision to the contrary, this DOCA is to be administered and is to provide as set out in recitals “E” to “M,” so that the Deed Administrator is to calculate and pay dividends and do all things appropriate in connection therewith and is entitled to proceed to do so notwithstanding any other provision hereof in accordance with the recitals “E” to “M” and where any provision of this DOCA would otherwise not be complied with as a result of or in connection with circumstances arising as a result of the claim by Sunstruct, including without limitation the circumstances referred to in recital E to P, then the Deed Administrator is entitled to proceed on the basis that no such failure of compliance has occurred and the creditors are bound accordingly and all other persons who would be bound by wholly effective DOCA are bound hereby and accordingly, subject to the above variations and this provision, the DOCA is wholly confirmed and any delays occasioned by or in connection with the abovementioned circumstances are wholly excused.”
Ultimately, following the administration the administrator forwarded to the first respondent a bank cheque for the sum of $12,999.74. The bank cheque was sent with an accompanying letter stating that the dividend rate was 2.51 cents in the dollar, “calculated at that rate on your debt as admitted to rank for dividend for $517,045.25.”[13]
[13] Affidavit of David Martell filed on 5 September 2011, annexure page 123.
In response, the first respondent’s solicitors replied:
“We enclose, for your reference, a copy of our letter dated 24 June 2011 to your firm which notes that our client’s proof of debt is for the unsecured portion of $344,577.37 (on the basis that our client claims a security interest in the funds of $172,467.88 held in the trust account of Garland Waddington). We also enclose a copy of our letter dated 1 June 2011 to your firm which again makes reference to the funds in the trust account of Garland Waddington being taken into account in any order admitting our client’s proof of debt.”
The terms of covenant 1A introduced into the DOCA noted that the deed was otherwise confirmed on the basis that it would be implemented in accordance with the recitals except where any provision of the DOCA would “… otherwise not be complied with as a result of or in connection with circumstances arising as a result of the claim by Sunstruct …” The reference to the claim by Sunstruct was plainly a reference to Sunstruct’s claim to enforce the BCIPA awards which were in part secured (in its view) by funds paid into the trust account of Garland Waddington. Given the timeframe for administration, it was plainly unlikely that the Sunstruct claim would have been resolved by the time the administrators were called upon to conclude their administration. Covenant 1A clearly contemplated that outcome. That is, if Sunstruct’s claim had not been determined by the time of administration then the DOCA could not otherwise be complied with insofar as it concerned Sunstruct claim.
In my view it follows that the construction as contended for by the first respondent is correct, although for reasons with which I respectfully differ. That is, if Sunstruct’s claim was unsecured, the only part of its claim that was compromised by the DOCA was that part which was not resolved. That part of Sunstruct’s claim which concerned moneys paid into the solicitors’ trust account, being the sum of $172,467.88, was not resolved and accordingly excluded from the DOCA.
If I am wrong on this view, and my earlier view that the fund was secured, then plainly the fund should be returned to the administrator, as they otherwise were funds which ought to have been available to him at the time of his administration and ought to have been distributed among the unsecured creditors in accordance with their respective interests and entitlements. Upon that basis I would not order the release of the funds to the applicant in any event.
Interest
Initially the first respondent also claimed for interest on the quantum awarded for the cross-claim. In the end it elected to abandon that claim and content itself with the accretions, if any, that had accrued to the fund. Plainly, accretions to the fund are payable to the person beneficially entitled to it, which in this case is the first respondent.
Costs
The respondents seek an order for costs. Three issues were raised, namely:
1.The ambit of any order for costs;
2.Whether costs be on a standard basis or indemnity basis;
3.Whether costs be awarded personally against the director, Mr Sid Knell.
Ambit of costs orders
The first respondent contends, it having succeeded in defending the applicant’s claim and prosecuting its cross-claim, that it ought to have an order for costs in respect of both matters in its favour.
Accepting that the first respondent has an equitable claim secured by the fund, the costs of these proceedings associated with the enforcement of its security are also charged to the fund. However, a question arises concerning whether the costs of enforcement or recovery of a sum the subject of an equitable charge can be recovered as a component of that sum.
This matter was examined by Darke J in the case of Chateau Constructions (Aust) Ltd v Zepnic [2013] NSWSC 1326, a matter which evolved out of a building dispute. There the plaintiff contended that an order should have been made adding its costs of the proceedings to the amount secured by the charge on the basis that they were costs associated with protecting and enforcing the charge. The situation was likened to one involving an entitlement to costs as of right where it involves a legal or equitable mortgagee.[14]
[14] At [23]. See National Provincial Bank of England v Games (1886) 31 Ch D 582 as to legal mortgagee and Cotterell v Stratton (1872) 8 Ch App 295 as to equitable mortgagee.
His Honour accepted the plaintiff’s submission on this point, noting at [31]:
“I accept, having regard to the nature of the proceedings, that the plaintiff's costs, which have been the subject of assessment, were properly incurred in the course of preserving and enforcing the equitable charge contained in the building contract. I am further satisfied that the principle, that costs of this character may be recovered by recourse to the secured property, is applicable to an equitable chargee in the position of the plaintiff (see Fisher and Lightwood's Law of Mortgage, 13th ed (2010) at paragraph 55.7; Ezekiel v Orakpo [1997] 1 WLR 340 at 346 per Millett LJ). Accordingly, I am prepared to make order 1(a) as sought in the Further Amended Notice of Motion which has the effect of adding those costs to the amount which the Court previously declared to be covered by the charge.”
Sykes and Walker, in their text The Law of Securities,[15] note that where a mortgagee incurs costs in redemption proceedings:
“… the mortgagee is not subject to the ordinary rule that costs are in the discretion of the court. The mortgage in fact is a security, not only for principal and interest, but also for necessary costs and expenses, including the costs of a redemption or foreclosure suit. As the mortgagor has to rely on equity to help her or him, equity imposes payment of such costs as part of its terms.”[16]
[15] Edward I. Sykes and Sally Walker, The Law of Securities (The Law Book Company Limited, 5th
[16] At page 82-83.
A similar situation exists in the context of deceased estates. There it will usually be the case that “an applicant who succeeds in an action to secure (further) provision from the deceased’s estate is, in the ordinary case, entitled to have his or her own costs paid, commonly on an indemnity basis, from the estate.”[17]
[17] Giacomo E. Dal Pont, Law of Costs (LexisNexis Butterworths Australia, 2013) at 10.35.
It follows that I am satisfied in this instance that not only is it open to charge the first respondent’s costs against the fund, but that it is also appropriate to do so.
Assuming that the first respondent had no equitable claim in respect of the fund, the applicant says that the matter of costs of the proceeding on both the claim and the counterclaim was compromised by the DOCA. Accordingly, it contends that no order ought be made. Notwithstanding the DOCA, the first respondent says that it is in principle entitled to costs as the applicant has now emerged from administration.
In my view, the first respondent, as a minimum, should be entitled to costs of successfully defending the applicant’s claim. However, for reasons which follow I also accept the first respondent’s submission that in principle it should also have the costs of prosecuting its cross-claim.
At no time relevant to the DOCA was a costs order made or outstanding, none the less subject to assessment or otherwise quantified. Accordingly, to be captured by the DOCA the question to be resolved is whether or not it was a “Claim” as defined by the DOCA. A “Claim” is defined in the DOCA to mean:
“… any debt owing by, any liability of or any claim against the Company in favour of a person, or any action, suit, cause of action, arbitration, cost, demand, verdict or judgment at law or in equity or under any statute, against the Company which was incurred, instituted or made (whether… present, prospective or contingent …) or the circumstances giving rise to which occurred on or before the Appointment Day, and whether or not it is secured…”
In this case the proceeding was commenced before the appointment date. Although the term “Claim” appears expansive, a careful reading of it appears to significantly confine its application to matters of a “prospective” or “contingent” nature. Insofar as “prospective” or “contingent” liability arises, it appears to be limited to “… any debt owing by, any liability of or any claim against the Company in favour of a person, or any action, suit, cause of action, arbitration, cost, demand, verdict or judgment at law … which was incurred, instituted or made …” On that basis, the costs of the first respondent in defending the applicant’s cross-claim would not fall within the definition. It follows that only the question of the first respondent’s entitlement to enforce a costs order on the cross-claim falls to be considered within the definition of Claim.
More generally, the first respondent advances Foots v Southern Cross Mine Management Pty Ltd (2007) 234 CLR 52 as authority for the principle that any obligation as to costs did not arise until a costs order was made. It contends that any costs would not be “incidental” to the underlying judgment.[18]
[18] Foots at [35] and [37].
In Foots, Mr Foots, a director of Southern Cross Mine Management, had been successfully sued and had suffered a judgment for damages made before his bankruptcy; a costs order against him was made after his bankruptcy. A question arose as to whether the assessed costs were provable in his bankruptcy. Plainly, that position favoured Foots, who would have enjoyed a discharge of liability for those costs if they were a debt provable in his bankruptcy.
Although the terminology varies, the principal concepts in insolvency law are common. The situation insofar as it is constituted in bankruptcy law is also applicable to corporations: Sons of Gwalia Ltd v Margaretic (2007) 231 CLR 160 at 220-221.
It follows that Foots provides useful guidance as to the principles to be applied to the DOCA. Importantly in the current context, the plurality in Foots observed:
“… there is no express or implied textual support for the notion of a debt being provable if it is incidental to, or consequent upon, a debt which is itself provable. Those debts which are provable are spelled out by the section: matters falling outside those categories are not provable.”[19]
[19] Foots at [11].
Having reached that position, their Honours continued at [35]:
“What, then of the appellant's first submission? This is, that his exposure to an adverse costs order arose from an “obligation” incurred prior to his bankruptcy. The submission should be rejected: no such obligation arose until the costs order was made. This conclusion is consistent both with the Australian authorities upon which Chesterman J had relied and the twentieth century English authorities regarding the proof of costs in bankruptcy, particularly In re a Debtor, In re Pitchford and Glenister. Each of these authorities emphasises the distinct nature of the proof of a costs order and the proof of an underlying debt.
[36] The most that can be said, as Mummery LJ observed in Glenister, is that “[o]nce legal proceedings have been commenced there is always a possibility or a risk that an order for costs may be made against a party.” But that risk is not a contingent liability within the sense of s 82(1). The order for costs itself is the source of the legal liability and there is no certainty that the court in question will decide to make an order. It should be remarked that in support of his reasoning in Glenister, Mummery LJ referred to what had been said by Kitto J in Community Development Pty Ltd v Engwirda Construction Co and by Tadgell J in Federal Commissioner of Taxation v Gosstray …”
Their Honours remarks are pregnant with two propositions which apply with equal force here. First, the award of costs is discretionary: s.79 Federal Circuit Court of Australia Act 1999 (Cth); and secondly, that the discretion will be exercised in favour of the creditor.
Their Honours proceeded to note:
“… it cannot be said that exposure to an adverse costs order is “incidental” to liability for the underlying judgment debt. For reasons that will be explored later in these reasons, it is highly doubtful that the text of s 82 supports the notion of “incidental” liabilities that are not themselves provable debts. However, it is sufficient for present purposes to observe that, as a factual and legal matter, costs are no longer an “incident” of either verdict or judgment. As explained above, the making of an adverse costs order turns upon discretionary considerations that arise independently of the entry of judgment against the debtor.”
Looking back to the DOCA, “Claim” is also said to mean “cost.” However, such a cost “… whether present, prospective or contingent …” is plainly of a different character to the costs which were being spoken of by the majority in Foots when considering a costs order made at the conclusion of proceedings. As they noted, the order for costs itself is the source of the legal liability, such that unless it was evident within the meaning of the claim it would not satisfy the definition of “contingent.”
It follows in my view that it is open for me to award costs in favour of the first respondent in its successful defence of the applicant’s claim against it because those costs are not directly addressed by the DOCA.
Perhaps helpfully, this point arose for consideration on a materially similar clause which was considered by Hammerschlag J in the decision of Larkden Pty Ltd v Lloyd Energy Systems Pty Ltd [2011] NSWSC 1567. On that occasion his Honour was considering the question of a costs award following an arbitration in circumstances where the defendant company entered into a DOCA after the hearing but before the award. In that instance the DOCA had a materially similar definition of ‘claim’ purporting to extend it to cover “any … cost (including legal costs …) … present, prospective, future or contingent …”. In concluding that a costs award in the context of an extant claim is neither a claim arising on or before the date of voluntary administration, nor reflects a contingent claim in existence at that date, his Honour considered Foots v Southern Cross Mine Management Pty Ltd. In explaining Foots, his Honour stated, commencing at [61]:
“… [Costs] orders turn on discretionary considerations that arise independently of the entry of judgment against the losing party. There is no certainty that the Court in question will decide to make the order. Indeed, there is no certainty that any party will move for an order.
[62] However widely one considers the notion of provable claim to be, the substantive obligation under the costs award has only one element, namely, the making of the costs award by the arbitral tribunal in the exercise of its discretion under s 33B(1) of the Commercial Arbitration Act.
[63] It follows that only the making of the order itself can constitute circumstances giving rise to the claim. Before this occurs there is no claim. Neither a prayer for costs nor the potential, however strong, that a party may have to obtain an order for costs by persuading a tribunal to exercise a discretion in its favour suffices; cf Southern Cross Mine Management Pty Ltd v Ensham Resources Pty Ltd (2006) 196 FLR 419 per Chesterman J.
[64] In Haagmans v Australian Bight Infrastructure Pty Ltd [2010] SASC 337, Judge Lunn, a Master of the Supreme Court of South Australia, concluded that Foots decides that costs payable under an order made after the relevant date for the winding up is not a provable debt. I respectfully agree. It is accordingly not necessary to consider first instance decisions prior to Foots which might arguably say differently …”
My view on this point accords with that of his Honour.
The Court enjoys a general power to award costs: s.79(3) Federal Circuit Court of Australia Act 1999 (Cth). The power must be exercised judicially. It is accepted that while a court retains a general discretion over costs, in the absence of special circumstances courts generally exercise the discretion to award costs to the successful party, or in other words, costs follow the event: Oshlack v Richmond River Council (1998) 193 CLR 72.
The first respondent submits that in this case no reason has been advanced on the part of the applicant to justify other than the usual order. I agree. The applicant has demonstrated no special circumstances warranting departure from the usual order and accordingly the first respondent ought have its costs for both defending the applicant’s claim and the successful prosecution of its cross-claim.
The situation for the second and third respondents is less complicated. They were successful in their defence of the claim made against them by the applicant. Their rights were not compromised by the DOCA. They are entitled to costs orders in their favour.
Basis for assessment of costs
The next issue concerns the basis on which costs ought to be assessed. The first respondent seeks costs on an indemnity basis. The applicant challenges that claim.
In the first respondent’s submission, offers were made on both 14 April 2010 and 5 October 2010 by the first respondent to settle the proceedings. The offers were in the nature of Calderbank[20] offers and not made under the rules of Court.
[20] Calderbank v Calderbank [1975] 3 All ER 333.
In a letter of 14 April 2010 addressed as “WITHOUT PREJUDICE SAVE AS TO COSTS,” the first respondent made a Calderbank offer to the applicant to settle on the basis that it would pay the applicant $200,000.00 in full and final settlement of:
“(a) all current and future claims relating to our clients’ work under the Construction Management Contract dated 21 September 2007 (including any pre-construction work carried out prior to 21 September 2007 (the Works); and
(b) any claim made or which could be made in the Proceedings or in the Morris proceedings (ACT CS09/90307).”
The offer was stated to remain open until 23 April 2010. The offer was formally rejected by letter of 22 April 2010 from the applicant’s solicitors.
Subsequently, on 5 October 2010, the first respondent’s solicitors again wrote “WITHOUT PREJUDICE SAVE AS TO COSTS,” offering to settle on the basis that:
“1. Your client pay to Sunstruct Pty Ltd the sum of $163,472.37 (together with any interest earned on that sum) by authorising the firm of Garland Waddington to release the sum from the funds held in their trust account by providing a written authority to that effect within 48 hours of acceptance of this offer;”
That offer was stated to be open until 20 October 2010, but was formally rejected by a letter of 11 October 2010.
Putting aside the machinery issues also addressed in the offers, the effect of the May offer was for the first respondent to pay the applicant $200,000.00 and for first respondent to retain the sums paid into the solicitors’ trust account. The second offer simply sought for the payment to the first respondent of the fund.
The second offer was made following the second substantive series of dates set aside for the trial and before the commencement of the third substantive series of dates allocated to conclude the trial. Significantly, in an open letter on 21 May the first respondent’s solicitors wrote to the applicant in the following terms:
“Our clients are becoming most concerned about the increasing costs of the proceedings, a large part, if not all, of which are due to the manner in which your client has conducted the proceedings. Specifically, we estimate that of the 13 days of trial to date, three days have been lost due to your client amending its claim and a further two days, at least, have been lost dealing with (justified) objections to your client’s evidence.”
The first respondent contends that awarded costs should be assessed on the indemnity basis because of the applicant’s unreasonable refusal to accept its first offer of April 2010. If it fails in respect of that application it contends that the refusal to accept the offer of 5 October was also unreasonable.
As was submitted, the Court has a clear power to make such an order. The circumstances warranting the granting of an order for indemnity costs were stated by Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225, a case commonly referred to in the context of applications for indemnity costs. However, the rejection of an offer which proves to be more favourable to the offeree than the judgment is of itself not unreasonable conduct. The question of whether an offer is unreasonably rejected has to be evaluated in the context of the circumstances when the offer was rejected. In that context the Calderbank offer is merely one factor which will be taken into consideration: Australian Competition & Consumer Commission v Universal Music Australia Pty Ltd (No 2) [2002] FCA 192 at [60].
At the time of the May letter, the offer of $200,000.00 proved, in hindsight, to be particularly generous. However, in my view its generosity ought also to have been apparent to the applicant at that time. First, as I determined in my reasons for judgment, I consider the applicant’s claim to have been poorly founded. It was premised largely upon the evidence of its principal director, Mr Knell, who I found to be a discreditable witness. As I noted at [54] and [55] of my judgment, he simply sought to bully his view of the contract onto others. No doubt that approach had been successful in his dealings with subcontractors, as the progressive lowering of costings of those who were contracted to provide services for the project demonstrate. However, the first respondent did not cower in the face of that conduct, standing, as they did, on their appreciation of their contractual rights. Mr Knell, the alter ego of the applicant, had indefatigable self-belief. Notwithstanding that matter, a reasonable person in his position ought to have appreciated the significant risks associated with the prosecution of this litigation, particularly in the face of the contract and the nature of the case which was being advanced on his part, especially with regard to the peculiar difficulties associated with proving a global damages claim. Those matters ought to have been reasonably open to impartial and informed assessment as the trial was underway at the time the offers were made. In my view, the offer was plainly reasonable given the risks associated with running a global damages claim. The applicant was or ought reasonably have been aware of those risks as the risks associated with running a global damages claim had been highlighted at various directions hearings leading up to and during the early stages of the trial. Against the background of those matters, the rejection of the April offer was unreasonable. The first respondent ought be allowed its costs on an indemnity basis from that date.
Although the second offer was made later in the year, the fact remains that by 23 April the difficulties confronting the applicant’s case, together with the obvious issues concerning Mr Knell’s credit, ought to have been apparent to the applicant and its advisors given that many of the procedural objections and arguments concerning the nature and structure of the applicant’s claim and the evidence Mr Knell had been debated to that time.
I consider the applicant’s rejection of the offer contained in the letter of 14 April 2010 to have been wholly unreasonable and in the circumstances it is appropriate that the first respondent have an award for indemnity costs against the applicant in respect of both the claim and its cross-claim.
Those considerations apply with greater force to the offer made on 5 October and need not be rehearsed.
As all the respondents were represented by the same solicitors and counsel and their involvement in the proceedings was because of alleged accessorial liability the factors applicable to the first respondent’s position apply with equal force to the second and third respondents. They too should have their costs on an indemnity basis.
Costs against non-party
The first respondent contends that costs ought to be awarded against Mr Knell personally. It was submitted that the court has a clear power under s.79(2) Federal Circuit Court of Australia Act 1999 (Cth) to make such an order but acknowledged that such an order should only be made in exceptional circumstances, with that notion not of itself limiting the judicial discretion, which is “a wide untrammelled discretion.”: Bischof v Adams [1992] 2 VR 198 at 213. It was submitted that the principles that would guide a court in the exercise of its discretion on this matter include:
a.There must be some connection between the non-party and the party to the proceedings;
b.There must be some connection between the non-party and the incurring of costs;
c.There ought to be notice to the non-party;
d.If security for costs was available, then failure to obtain such an order may be relevant against an order for costs against a non-party, although that defect may be cured by relevant notice being given to the non-party; and
e.The conduct of the non-party may bolster the court’s conclusion that an order is appropriate in the circumstances.
In this instance it was submitted that the following factors were relevant:
a.Mr Knell was put on notice of this prospect by letter dated 5 October 2010;
b.Mr Knell was the driving force behind the applicant, being the only director and only shareholder including when the letter of 5 October was sent to his solicitors; and
c.While the first respondent did not apply for security for costs, there was no reason for the first respondent to do so as it had no reasonable basis to suspect insolvency or difficulty in paying, a matter which was emphasised by Mr Knell’s statement that his group was successful and worth in excess of $20 million. This was a matter upon which the first respondent had sought advice and the information then reasonably available to its solicitors suggested the first respondent had no realistic prospects of success on any such application.
The first respondent submitted that an exceptional case could be made because:
a.The claim was pursued in a complex and prolix manner with little regard being had to distilling the matters in dispute to the real issues being determined;
b.There was no regard had by the applicant to the proper conduct of the case, with many days being wasted because of its failure to conduct the matter responsibly;
c.Mr Knell was not a witness of truth, and accordingly it was within his knowledge that the claim would not be successful had the true position been accepted by him at the outset. It was within his power to settle the action but he rejected such offers; and
d.The applicant’s pursuit of damages on a global basis was always flawed, such that even if it had established any breaches it could not have succeeded in any award of damages.
Dr O’Hair, who formally appeared for the applicant at trial, appeared on this application for Mr Knell (who was not a party to the action). Mr Knell opposes orders that he be subject to personal costs in favour of the first respondent.
In summary, Dr O’Hair submits that the authorities relied upon to support the exercise of jurisdiction to make a costs order against a non-party do not extend to persons, such as Mr Knell, who stand legitimately behind the corporate veil. His argument commenced by reference to Knight v F.P. Special Assets Ltd (1992) 174 CLR 178. Knight is the authority commonly relied upon for the exercise of this jurisdiction and which guides the circumstances in which a Court ought to be invited to exercise the power.[21] The point advanced by Dr O’Hair was reflected in the observation of Dawson J at 204, where his Honour stated:
“The only question raised in this appeal concerned the existence of jurisdiction to make an award of costs against a non-party. The question whether, given jurisdiction, an award ought to have been made against the receivers and managers in this case was not argued. There is some authority for making such an award. Having regard to the limited nature of the appeal, I should do no more than observe that an order for security for costs must ordinarily be the appropriate remedy where a receiver and manager conducts litigation through a company which will be unable to pay the costs of the defendant if the defendant is successful in his defence.”
[21] Knight at 185.
I do not understand Dr O’Hair to contend that a court does not have the jurisdiction to do so, although later in his submissions he contended that this Court in fact has no such jurisdiction. Instead he contends that in this case the jurisdiction ought not be exercised. He submits that the express point now being considered was addressed in Oasis Hotel Ltd v Zurich Insurance Co (1981) 124 DLR (3d) 455, a case referred to by Dawson J in Knight and seemingly referred to with approval by Mason CJ and Deane J at page 192.
More importantly, it was submitted by Dr O’Hair that in Oasis the conclusion was reached upon the basis of the personal culpability of the third party, not on any principle of piercing the corporate veil. He relied particularly on the remarks of Lambert JA where, at 463, his Honour stated:
“… I do not regard this case as a case about the piercing of the corporate veil. The principles that are applicable are principles about costs in a case involving duplicity and abuse of the Court. But I am satisfied that the order made by Mr Justice Mackoff does not violate the sanctity of the corporate personality. This was a case of fraud. In such cases the individual who conceives and carries out the fraud cannot shield behind a corporation that he controls.”
Accordingly, Dr O’Hair submitted that there was an important point of distinction between the cases involving receiver and managers, as considered in Knight, and cases involving individuals who, as directors, stand behind the corporate veil and otherwise do nothing to attract adverse interest in their capacity as directors and/or shareholders. As Dr O’Hair noted, the situation of a receiver/manager is justifiable on the basis that a receiver/manager carries on the company’s business and does so subject to his/her own personal liability. A receiver/manager cannot be protected by seeking to stand behind the corporate veil. He contended that where there is a corporate entity involved then it can only be in exceptional circumstances, such as those considered in Oasis, where the corporate veil might be pierced and the director and/or shareholders might be made the subject of a personal costs order. This submission was supported by the authority of May v Christodoulou [2011] NSWCA 75, where the court was considering a similar situation to that which is before me. Commencing at [81] with commentary addressing Knight, Sackville JA, with whom Macfarlan JA concurred, stated:
“[44]… [Dawson J referred to] a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court. Even if the cases were confined to ejectment proceedings (and clearly they are not), the principle lying behind the ejectment cases is that the real litigant rather than the nominal party may be made liable for costs.”
i. The judgments in Knight do not attempt to mark the outer limits of the jurisdiction to award costs against a non-party. The particular fact situation in Knight is an example of the circumstances in which an order can be made, but it is not the only illustration of an appropriate exercise of the power. Even so, their Honours were cautious about identifying other circumstances in which non-party costs orders might be made. There is no suggestion in the judgments, for example, that merely because a director represents a defendant company and the defence fails a costs order should ordinarily be made against the director personally.
Sackville JA then proceeded to conclude,
FPM Constructions v Blue Mountains City Council
ii. In FPM Constructions, to simplify the facts a little, a company sued a council for moneys allegedly due under a building contract. The council brought its own proceedings claiming damages against the company for breach of contract. The council succeeded in both proceedings. Mr Yazbek controlled the company, but was not a party to the proceedings. The trial Judge made a costs order against Mr Yazbek personally, on the grounds that he played an important and integral role in the proceedings, that he was the sole witness for the company and the that litigation was “effectively run for his benefit” (see at [207], per Basten JA).
iii. Basten JA (with whom Beazley and Giles JJA agreed) set aside the costs order. His Honour pointed out (at [205]) that the judgments in Knight are replete with references to the “real party.” In his view (at [206]):
“it could not be said that FPM Constructions was merely a nominal party or that Mr Yazbek was the “real party” to the proceedings. No doubt it is true, as his Honour found, that Mr Yazbek was the driving force behind FPM Constructions and was its representative for the purposes of the litigation. That does not mean, however, that the benefit of the proceedings brought by FPM Constructions for progress payments, in law, flowed to anyone other than FPM Constructions, nor that the company was other than the proper defendant in proceedings brought by the Council. Nor is the fact that Mr Yazbek was the sole director and secretary of the company inconsistent with that conclusion. Were it otherwise, the corporate veil would, in effect, be nullified at the very point at which it provides protection against personal liability for the shareholders and directors. The carefully crafted exceptions to the principle would overtake the principle itself were that the case.”
iv. Basten JA accepted (at [210]) that the principle in Knight cannot be limited to the specific circumstances of the case and that the categories of circumstances which might attract the power to make non-party costs orders are not closed. His Honour continued (at [210]):
“the requirements of justice should not be allowed to expand an exception to the general rule, so as to undermine the rule itself. What is significant from a survey of the cases in which orders have been made against non-parties is that they tend to satisfy at least some, if not a majority, of the following criteria:
(a) the unsuccessful party to the proceedings was the moving party and not the defendant;
(b) the source of funds for the litigation was the non-party or its principal;
(c) the conduct of the litigation was unreasonable or improper;
(d) the non-party, or its principal, had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest, and
(e) the unsuccessful party was insolvent or could otherwise be described as a person of straw.”
[45] Basten JA emphasised (at [214]) that the power to make a non-party costs order is only to be exercised in exceptional circumstances. He also made a point of some importance to the present case:
“In many cases involving individuals in the superior courts the parties may lack the resources to meet the costs of the litigation if unsuccessful. Similarly, there will frequently be a non-party, be it a company officer or solicitor, who will be active in the conduct of the litigation and who will obtain some direct or indirect financial benefit from its success. The fact that it is entirely proper for legal practitioners to runs cases on a speculative basis, so long as satisfied that they have reasonable prospects of success, demonstrates that care must be taken not to apply the criteria mechanically. Careful attention is required to the conduct of the party said to be involved in the litigation and the nature of the “interest” in its outcome or subject-matter.””
The observations in FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340 concerning the five criteria were noted with approval by Handley JA, who dissented on their application to the facts of the decision under appeal.
Although a lengthy passage, his Honour’s reference to the judgment in FPM Constructions provides a useful illustration of how a court might go about resolving whether any particular circumstances satisfy the requirement of “exceptional circumstances.” The mere fact that one is a shareholder/director is, of itself, insufficient to satisfy the test; the same applies to a conclusion that as a shareholder/director one may prove to be the ultimate beneficiary. However, he listed five criteria which appeared to follow from an analysis of cases and which might be relevant in this instance.
In particular, in this case the relevant considerations militate in favour of a finding of exceptional circumstances. First, the unsuccessful party to the proceedings was the applicant, the party which was the alter ego of Mr Knell. Secondly, the conduct of the litigation was improper. It had its genesis in the applicant’s efforts to restrain the respondent from access to its entitlement to enforce a BCIPA award. It sought to set up a claim, in terrorem, for damages in excess of $2 million which were claimed on a global basis, founded upon an untenable contention of the underlying contract, and in respect of a misrepresentation case without merit. Significantly, Mr Knell had an impact on the litigation which was more than merely confluent with the interests of the applicant. The circumstances surrounding the DOCA and the various transfers and retransfers of shareholdings between himself and others are indicative of cynical conduct on his part directed to his self-interest rather than those of the applicant, and highlight the true indifference Mr Knell had to the independent and separate legal character the applicant sought to have enjoyed from him.[22]
[22] The ASIC business name search of the Applicant records it current issued capital at 100 ordinary one dollar shares. No document filed with ASIC indicates there has ever been an increase in the companies issued shares. I infer that this was the initial share issue. The record of “current members” records the shares being held by “Endeavour ACT Pty Ltd”. That change occurred on 11 February 2013. Mr Knell was reappointed director of the Applicant on 16 January 2013 and continues as director so I expect that those who control Endeavour ACT Pty Ltd are comfortable with his governance as sole director of the applicant. Mr Knell had otherwise been the sole director of the applicant from 20 February 2008 when it appears the company became active until 20 November 2010 when Mrs Knell (Alison Carmelle Strutt) was appointed sole director. It will be recalled the applicant was a special vehicle company created for the applicant’s Gladstone development which commenced in early 2008. Late November 2010 coincidental with the conclusion of the evidence in the proceeding Mrs Knell was appointed sole director. The ASIC search reveals a change to the company’s members on 30 November 2011. Former members were Refund Property Fees Pty Ltd which had its registered office at the current principle place of business for the applicant and Mr Knell. Refund became the registered shareholder on 30 November 2011. The intrigue is exacerbated by the “request for correction” filed with ASIC which was prepared and completed by Mrs Knell stating the shares when initially issued were beneficially held by Mr Knell when plainly as initially issued they were not so held. I do not think these internal reorganisations are without significance against the background of this litigation.
The second point advanced by Dr O’Hair was that no order ought be made because, as a matter of procedural fairness, Mr Knell was not put on notice until well into the proceeding of the prospect that an application might be made against him as the subject of a personal costs order.
In addressing this submission, the first matter to note is my acceptance of the submission that as a matter of procedural fairness there is a need to permit a non-party a right to be heard in respect of costs if they are to be awarded against the non-party. When this matter first returned after judgment and after the matter of costs against Mr Knell arose, the application was adjourned to permit him an opportunity to be heard. He is now represented by Dr O’Hair.
However, Dr O’Hair’s submission appears to extend beyond the mere right to be heard. He submits that the right extends not only to be heard on submissions after trial, but also to the extent that a non-party who is likely to be the subject of an adverse costs order ought be put on notice in the course of the trial and heard in that context. In support of this submission, Dr O’Hair relied upon some observations in an English Court of Appeal decision, Symphony Group Plc v Hodgson [1994] QB 179. In that case the court was considering circumstances justifying the exercise of the courts discretion to award costs against a non-party. The court, in considering whether a costs order ought be made against a non-party, determined that such an order ought not be made because:
“… I take the view that at least part of the cross-examination of Mr. Bramley was directed, objectively speaking, not at the pleaded issues in the trial but at securing admissions which would justify an order under section 51. That is not to say that the questions should never have been asked, or should have been disallowed by the deputy judge if objection had been taken; they may well have also been relevant to Mr. Bramley's credibility. But objectively speaking, as I say, their main function now appears to have been to establish a case under section 51.
Neither Mr. Bramley nor Halvanto had any warning that questions which would tend to make out such a case would be asked. Neither had reason to obtain professional advice on the topic before Mr. Bramley gave evidence. Neither was represented by counsel at the trial, who might, for example, have asked further questions in re-examination. The main purpose of pleadings is to inform one party of the case which the other will seek to make against him. That is an essential feature of justice, and was entirely absent here.
Nevertheless there are cases, as Balcombe L.J. has shown, where a person may be ordered to pay costs on the basis of evidence given and facts found at a trial to which he was not a party. Before such an order is made, it must be just and fair that the stranger should be bound by that evidence and those findings. In my judgment that is not the case here.”
In my view, this is not such a case. Here Mr Knell was present throughout the trial. In large measure he was personally responsible for much of the elongation of the proceedings. He could have directly instructed the applicant’s counsel on matters that gave rise to procedural difficulty, especially concerning the ambit of the case sought to be run so as to minimise delay occasioned by tactical choices. Further, his cross-examination was rendered lengthy because of the manner in which he addressed the questions – a matter I have touched upon in the principal judgment. There is no evidence in this case of an ulterior motive to surreptitiously ensnare an unwary Mr Knell as was evident in the Symphony case. Unlike the situation in Symphony, here Mr Knell was the alter ego of the applicant. There was no need to conduct a cross-examination of him with a view to setting him up for costs. In Symphony, a breach of restraint of employment case, the non-party was the putative employer of the defendant (a former employee of the plaintiff). No doubt the former employee, Mr Hodgson, was a man of straw, and a decision was taken by the applicant at trial to pursue the non-party who would ultimately benefit from the defendant former employee’s services being available after trial if he was successful in pursuing his claim for a release from his restraint of trade obligations. The relationship between the defendant and the non-party in Symphony was plainly tenuous and no doubt dependant entirely upon the defendant’s success in that litigation.
In this instance, Mr Knell, as the then sole director and shareholder in the applicant, had a confluence of interest in the outcome of the litigation with the applicant. His active participation in the proceeding by being present each day and instructing counsel on behalf of the applicant ensured that he was not personally prejudiced in not having independent representation. The case was not conducted, nor cross-examination undertaken, with a view to setting him up for costs. It follows that I do not accept Dr O’Hair’s submissions that in this case he has been unfairly prejudiced by any absence of representation during the course of the hearing.
As I have noted, the applicant is the alter ego of the non-party. A useful analogy in the context of the current proceeding is the decision of Harpur v Ariadne [1984] 2 Qd R 523. In that case the court was considering an application for security for costs, a matter which gives rise to a relevant consideration in this case, and which I will address shortly. In any event, relevant to this discussion, Connolly J, with whom Campbell CJ and Demack J agreed, observed:
“The mischief at which the provision [security for costs against a company] is aimed is obvious. An individual who conducts his business affairs by medium of a corporation without assets would otherwise be in a position to expose his opponent to a massive bill of costs without hazarding his own assets. The purpose of an order for security is to require him, if not to come out from behind the skirts of the company, at least to bring his own assets into play. If however he is already available for whatever he is worth, the object of the legislation is seen to be satisfied.”[23]
[23] At 532.
In any event, to his favour the fact remains that in this application the respondent did not make application for any order for security for costs. Had it done so, it might not now be pursuing this application. However, as the respondent contends, and I accept, the applicant was not portrayed as an entity which was financially fragile. Indeed, Mr Knell sought to emphasise the contrary. Further, as I have earlier noted, the decision not to pursue such an application was a deliberate decision, taken as advised and specifically made on the belief the company was of substance, a part which seems not to be well founded as the subsequent DOCA demonstrated.
The final matter advanced by Dr O’Hair was that the Court does not have the power to make such orders, as powers to make orders against a non-party are reserved only to the superior courts. The submission was one pressed faintly, but nevertheless must be addressed. It is axiomatic that the Federal Court of Australia is a superior court of record: s.5(2) Federal Court of Australia Act 1976 (Cth) and this Court is merely a court of record: s.8(3) Federal Circuit Court of Australia Act 1999 (Cth). Both courts are limited in jurisdiction as Chapter III Courts created by the Commonwealth Parliament. This Court is a court of record, as opposed to the Federal Court, which is a “superior court of record”. It is accepted that the Federal Court, notwithstanding it being declared to be a superior court of record, is a court of limited jurisdiction: Re McJannet;Ex parte Minister for Employment, Training and Industrial Relations for Queensland (1995) 132 ALR 198 at 207.
The significance of superior Courts was addressed by Connolly J in Harpur v Ariadne in the context of costs powers. At 526 his Honour noted, referring to English authority, that “the power of superior courts of common law to order security for costs arises from the inherent jurisdiction.” His Honour’s comments were made in the context of state supreme courts and not federal courts.
A Chapter III court has no inherent common law jurisdiction. The power to award costs by both this Court and the Federal Court are powers invested by statute. Materially, the powers of both courts to award costs are expressed in similar terms: s.43(1) Federal Court of Australia Act 1976 (Cth); s.79(2) Federal Circuit Court of Australia Act 1999 (Cth). Accordingly, this Court does not rely upon any inherent jurisdiction to invest it with costs powers because it is expressly vested. An order for costs against a non-party is a necessary incident of the exercise of the jurisdiction. It follows that I am satisfied that I do have the jurisdiction to award costs against a non-party provided that any such order is directly related to proceedings properly before the court.
Earlier I addressed the criteria relevant to this application. However, in addition to those matters it is important to note that I do not consider this a case where Mr Knell’s involvement as director could be seen as merely passive, with his only interest to see the applicant’s rights prosecuted and, if appropriate, defended. In this instance, as I have noted earlier, Mr Knell has sought to cynically use the applicant to advance his own interests above those of the corporation, and it is for that reason I consider he ought indemnify the respondent in respect of costs. Mr Knell has sought to use the corporate veil in an attempt to stymie the respondents from recovery of their just entitlement by fashioning a DOCA which was clearly intended to neutralise the value of any victory.
The circumstances surrounding the DOCA bear a certain stench.[24] The DOCA followed a demand made by the ATO for the payment of approximately $975,000. At the time the total value of the creditors was listed at about $3,408,000. There were 23 creditors listed. Of the 23, at least 11 by name can be seen to be associated with the applicant. Some of the other creditors have an association by address. Two of the associated creditors, Bypass Payments Systems Pty Ltd and Harbour Lights Trust, by value, approximate half the creditors.[25] The DOCA was concluded following the trial and before the judgment. At that time it would have been reasonably apparent to Mr Knell from his attendance on each day of the proceedings that there were significant difficulties in the case he had the applicant prosecute. Furthermore, he would reasonably have appreciated that his evidence did not go well, and that the applicant’s case was consequently at risk. These matters, in addition to the outstanding tax liability, would have provided significant incentive to see a scheme designed to permit the retention of any profits by the applicant. Ultimately, Mr Knell would be a beneficiary of such profits. Except for the DOCA, I may have been inclined to the conventional view that those standing behind a corporation are entitled to the protection of the corporate veil. However, I consider Mr Knell to have overreached in this instance and accordingly he should not be protected from the downside on the risk he took in entering the applicant into an arrangement to defeat the respondent as a creditor, a prospect which remains a clear and present danger given his demonstrated propensity to date.
[24] Putting aside the details of other creditors and the general circumstances surrounding the administration, which are addressed elsewhere, some of the curiosities surrounding it include the involvement of Mr Hackett and Dr O’Hair (who appeared as counsel with Mr Hackett). Dr O’Hair attended with Mr Knell at the pre-appointment meeting with the proposed administrator. Despite there being solicitors on the record, Mr Hackett claimed as a creditor in the Administration. Counsel’s fees are usually an honorarium and payment made by instructing solicitors. Mr Hackett appointed Mr Bruce Quelch and/or Mr Martell as his proxy. In the event Mr Quelch attended the creditors’ meeting and voted Mr Hackett’s proxy with Mr Knell’s interests. I note that the applicant’s solicitors were not listed as a creditor.
[25] Mr Martell wrote on behalf of Bypass Payments Systems Pty Ltd and Harbour Lights Trust to request a meeting to consider the respondent’s appeal from the receiver/manager’s decision to refuse its proof of debt. Mr Martell’s letter was written on the applicant’s letterhead. Given the value and votes controlled by the applicant it was unnecessary to worry about Sunstruct’s claim being admitted for its full value and thus put the administration to unnecessary expense given the impact it would have on any dividend to creditors. I note that the Australian Taxation Office queried the Chairman of the creditor’s meeting about his knowledge of related entities and he only acknowledged Alison Strutt (Mr Knell’s wife), Prime Project Development and Prime Property Investment, and that he did not believe Bypass Payments Systems Pty Ltd or Harbour Lights Trust to be related.
I am mindful that the costs orders will include costs incurred long before the events which I also consider relevant to the exercise of my discretion and which I have related above. However, as my primary judgment reveals I did not form a particularly favourable impression of Mr Knell. He appeared to me a person who would use whatever means available within the technical limits of the law to achieve his desired outcome. I have no doubt in concluding that he would always have had it in mind to structure an outcome to see him enjoy the profit of the applicant’s project and leave losses where they could be left, if that was at all possible. To that end I am satisfied that he is of a nature to use corporations to his advantage for profit but also, where possible, to avoid his just creditors. He is not the sort of person to whom Basten JA was referring in FPM Constructions. The non-party being referred to by Basten JA was the company shareholder/officer who took the good with the bad. In such a circumstance it is inappropriate to look behind the corporate veil and nullify its effect. That is not this case, for the reasons I have stated.
Having considered the criteria addressed in FPM Constructions relevant to this instance which I addressed earlier, and which I note are not exhaustive, I consider that a costs order ought be made against Mr Knell.
I certify that the preceding one hundred and sixteen (116) paragraphs are a true copy of the reasons for judgment of Judge Burnett
Associate:
Date: 20 November 2013
ed, 1993).
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