C&L International Holdings Pty Ltd v Goodin (Costs)
[2021] VSC 82
•3 February 2021 (Ex tempore)
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S ECI 2020 04723
IN THE MATTER OF ACN 122 909 040 PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (FORMERLY KNOWN AS MODSCAPE PTY LTD (ACN 122 909 040))
BETWEEN:
| C&L INTERNATIONAL HOLDINGS PTY LTD (ACN 163 004 395) | Plaintiff |
| - and - | |
| PETER GOODIN (IN HIS CAPACITY AS DEED ADMINISTRATOR OF ACN 122 909 040 PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (FORMERLY KNOWN AS MODSCAPE PTY LTD (ACN 122 909 040)) | First Defendant |
| ACN 122 909 040 PTY LTD (SUBJECT TO DEED OF COMPANY ARRANGEMENT) (FORMERLY KNOWN AS MODSCAPE PTY LTD (ACN 122 909 040)) | Second Defendant |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 3 February 2021 |
DATE OF JUDGMENT: | 3 February 2021 (Ex tempore) |
CASE MAY BE CITED AS: | C&L International Holdings Pty Ltd v Goodin (Costs) |
MEDIUM NEUTRAL CITATION: | [2021] VSC 82 |
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COSTS – Parties consented to proceeding being discontinued – No agreement as to costs – Principles to be applied – Order that each party bear its own costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr M Galvin QC with Ms B Slocum | Gadens Lawyers |
| For the Defendants | Ms A V M Carruthers | Hutchinson Legal |
| For the Interveners | Mr S K Wilson QC with Mr B J Murphy | Findlay Arthur Phillips |
HIS HONOUR:
The plaintiff commenced this proceeding by originating process filed 22 December 2020. On 3 February 2021, I ordered by consent that the proceeding be discontinued. The remaining issue to be determined is the question of the costs of the proceeding.
Background to the dispute
The underlying dispute has a substantial history. A brief summary is as follows:
(a)In June 2018, the plaintiff obtained an arbitral award against ACN 122 909 040 Pty Ltd (Subject to Deed of Company Arrangement) (Formerly Known As Modscape Pty Ltd (ACN 122 909 040)) (’the Company’) in the sum of $382,638. In October 2018, the plaintiff obtained further awards of $87,906 and $426,636 for interest and costs.
(b)Modscape Holdings Pty Ltd (ACN 617 645 182), Modscape Residential Pty Ltd (ACN 619 650 510), Modscape Commercial Pty Ltd (ACN 619 651 535) and Modscape Install Pty Ltd (ACN 611 172 653) (‘the Purchasers’), being related companies to the Company, allege that on 30 June 2017, the Company sold its assets to the Purchasers in consideration of the Purchasers assuming certain liabilities of the Company, including liabilities for hire purchase contracts, staff entitlements and trade creditors.[1]
[1]The agreement to sell the assets was not documented prior to a deed dated 23 July 2020.
(c)The Purchasers did not assume liability for the plaintiff’s debt, being the largest debt owed by the Company to an unrelated creditor.
(d)On 17 October 2018, the Company’s directors, Stefan Seketa and Jan Gryn (‘the Company directors’), appointed Barry Wight and Rachel Burdett (of Cor Cordis) as administrators of the Company. The administrators’ recommendation to creditors was that the Company be wound up.
(e)On 20 December 2018, the creditors of the Company approved a Deed of Company Arrangement (‘the 2018 DOCA’), as proposed by the Company directors with the first defendant (‘Mr Goodin’) as deed administrator.
(f)On 21 December 2018, the plaintiff filed proceeding S ECI 2018 02963 to set aside the resolution approving the 2018 DOCA, or alternatively to set aside or terminate the 2018 DOCA and to appoint the Company’s administrators as liquidators of the Company.
(g)On 7 February 2019, the parties consented to orders setting aside the resolutions, winding up the Company in insolvency and appointing Mr Caspaney as liquidator.
(h)At a creditors’ meeting on 17 December 2019, the creditors voted to replace Mr Caspaney as liquidator of the Company with Mr Goodin.
(i)By a Sale of Assets Deed dated 23 July 2020 (‘the Deed’), the Company and Mr Goodin as liquidator on one part, and the Purchasers on the other part, agreed to complete and give legal effect to the alleged sale of assets of the Company on 30 June 2017.
(j)By a Notice of Meeting to Creditors dated 15 October 2020, Mr Goodin stated (among other things) that:
(i) he had concluded that the creditors of the Company were not disadvantaged by the sale of assets on 30 June 2017;
(ii) he had entered into the Deed with the group of related companies to document the asset transfer; and
(iii) the Company directors were intending to propose a Deed of Company Arrangement.
No copy of the Deed was provided with the notice.
(k)By a Report by Administrator dated 7 December 2020, notice was given of a meeting of creditors to be held on 15 December 2020 to consider a Deed of Company Arrangement (‘the 2020 DOCA’). The notice stated that the proposal under the 2020 DOCA would provide a return to creditors of approximately 1.0 to 4.4 cents in the dollar.
(l)On 15 December 2020, a meeting of creditors of the Company approved the 2020 DOCA.
Procedural history
By originating process filed 22 December 2020, the plaintiff applied for orders including that Mr Goodin (as deed administrator under the 2020 DOCA) and the Company directors be restrained from taking steps pursuant to the 2020 DOCA, that the 2020 DOCA be set aside, and that an independent liquidator be appointed. The stated grounds for the application were as follows:
(a) the return to creditors under the 2020 DOCA is derisory;
(b)Mr Goodin is not independent and, in addition to the plaintiff’s earlier concerns, has now (without notice to unrelated creditors) been funded by the Company directors and/or related creditors in the conduct of his investigations;
(c)it appears that Mr Goodin has, on the face of the s 439A report, not conducted a thorough investigation into the Company’s affairs, including transactions to which his funders were parties;
(d)Mr Goodin has failed to exhaust available funding arrangements to prosecute a substantial net debt claim against South City Plaster, leaving that claim to be conducted by the Company without any rigour as to the terms upon which the Company ought do so;
(e)the terms of the 2020 DOCA are prejudicial to the plaintiff and the Australian Taxation Office (being creditors who are unrelated and did not provide proxies to the related party creditors); and
(f)the 2020 DOCA has been approved having regard to the interests of the directors and related parties of the Company who acquired the Company’s business prior to the appointment of the first administrators.
The proceeding was first listed for an application for an interlocutory injunction on 23 December 2020.
During the course of hearing on 23 December 2020 and in response to a request, the Deed was produced to the Court and the plaintiff.
At the conclusion of the hearing on 23 December 2020, I made orders, in summary, that:
(a)the first three named Purchasers, Jan Gryn and Stefan Seketa (‘the Interveners’) have leave to appear at the hearing listed on 23 December 2020, and at the hearing listed on 28 January 2021;
(b)the hearing of the plaintiff’s originating process is adjourned to 28 January 2021; and
(c)the parties and the Interveners file and serve material on which they intend to rely at the hearing on 28 January 2021 by the times directed.
By proposed amended originating process dated 19 January 2021, the plaintiff sought further orders, including an inquiry into the conduct of Mr Goodin as liquidator, and to set aside the Deed.
On 27 January 2021, the plaintiff proposed orders that it have leave to file and serve:
(a) an amended originating process; and
(b) an affidavit in reply to an affidavit of Mr Goodin sworn 25 January 2021.
At the hearing on 28 January 2021, senior counsel for the plaintiff advised that, having considered the Deed, the plaintiff wished to withdraw its claim to set it aside, and now intended to make a claim under clause 2.1 of the Deed.
Clause 2.1(d) of the Deed provided as follows:
On the Settlement Date, the Vendor sold and the Purchasers purchased the Assets for the Purchase Price. The Purchase Price was calculated, and the sale was performed by way of:-
…
the Purchasers’ assumption of any and all liability for trade creditors of the Vendor as at 30 June 2017 for an amount of not less than $2,483,135, with such payments being made at such time and in such manner as may be agreed between the Purchasers and the creditor to whom the payment is made; …
Accordingly, the plaintiff sought leave to file an amended originating process, to include a claim based on clause 2.1(d), a claim against Mr Goodin for failing to prosecute the claim on behalf of the Company, and a claim that Mr Goodin be restrained from taking any further steps pursuant to the Deed.
Following submissions made during the course of the hearing on 28 January 2021, the parties requested that the matter to be stood down for the purpose of counsel respectively obtaining instructions about a possible resolution. After the hearing resumed, it was said that the parties had a ‘framework of an understanding’ but the parties requested that the hearing be adjourned for a day or two for the purpose of finalising a settlement.
Accordingly, I further adjourned the hearing to 3 February 2021.
On 3 February 2021, I was informed that the discussions were successful, and it was reported that the parties had resolved the case on the basis that:
(a)the plaintiff would withdraw its objection to the 2020 DOCA; and
(b)the plaintiff could bring a claim against the Purchasers based on clause 2.1(d) of the Deed, and the Interveners would take no point of privity against the plaintiff for the purposes of that action.
The parties sought an order by consent that the proceeding be discontinued and accordingly, the only outstanding matter to be resolved was the question of costs.
Principles
The authorities which set out the principles to be applied where parties consent to the discontinuance of a proceeding after a settlement, and without a determination by the Court on the merits, are set out in ASTA Developments (Aust) Pty Ltd v Amasya Enterprises Pty Ltd.[2] In particular, the Court referred to the following statement of McHugh J in Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin:
In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. … In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. …
Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. …
If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases.[3]
[2][2016] VSCA 186, [23]-[26] (Whelan and Ferguson JJA).
[3](1997) 186 CLR 622, 624–5 (citations omitted).
In summary, I consider the relevant principles to be applied in the above circumstances are as follows:
(a)A court will not usually try a hypothetical action for the purposes of determining a costs order.
(b)A court will usually make no order as to costs unless the court concludes that a party:
(iv) would almost certainly have failed if the matter had been fully tried; or
(v) has acted unreasonably in its conduct of the proceeding prior to the settlement.
Conclusion
In my opinion, each party should be ordered to pay its own costs of this proceeding for the following reasons:
(a)There was a serious question to be tried on the plaintiff’s originating process, and I am not in a position to make any judgment as to which party would ultimately have been successful if the matter had been fully tried.
(b)No party acted unreasonably in its conduct of the proceeding prior to the settlement.
Inability to determine the ultimate result
There were numerous issues raised by the application concerning the circumstances surrounding the alleged transfer of assets on 30 June 2017. However, prima facie, the alleged transfer of the Company’s lease and assets effected by the Company directors to the Purchasers (in respect of which they were also directors), could constitute a breach of their fiduciary duties, including the duty not to place themselves in a position of conflict in which a personal interest or duty conflicts with their duties to the Company.[4]
[4]Australasian Annuities Pty Ltd (in liq) v Rowley Super Fund Pty Ltd (2015) 318 ALR 302, 317 [58] (Warren CJ); RP Austin and IM Ramsay, LexisNexis Australia, Ford, Austin & Ramsay’s Principles of Corporations Law (online at July 2020) [9.010].
Counsel for the Interveners submitted that the Company directors had not breached their fiduciary duties because, on their valuations, the consideration for the sale exceeded the value of the Company’s business. However, as Black J said in Vanguard Financial Planners Pty Ltd v Ale:
The no conflict rule has a strict application when it applies in the sense that, if a transaction has occurred in conflict of interest, a company director cannot avoid a breach of that rule by asserting the fairness of the transaction or that it was in the company’s best interests or that the director was not acting with subjective dishonesty.[5]
[5](2018) 354 ALR 711, 750 [129]. See also Gemstone Corporation of Australia Ltd v Grasso (1994) 62 SASR 239, 252 (Olsson J); Agricultural Land Management Ltd v Jackson (No 2) (2014) 48 WAR 1, 51-2 [267]-[268] (Edelman J) and the classic statement by Lord Cranworth LC in Aberdeen Railway Co v Blaikie Brothers (1854) 1 Macq 461, 471.
The Interveners’ case was that, if the Company were to remain in liquidation, this would prevent the Purchasers (and any member of the Modscape group of companies) from obtaining a residential building licence in New South Wales, and that would cause ‘tens of millions of dollars of losses’.
Accepting the Interveners’ contentions, if the Deed was entered into in breach of fiduciary duty, then the Company may have been entitled to an account of profits,[6] or to void the alleged sale of assets.[7]
[6]Warman International Ltd v Dwyer (1995) 182 CLR 544, 557-8 (Mason CJ, Brennan, Deane, Dawson and Gaudron JJ)
[7]Clay v Clay (2001) 202 CLR 410, 434 [51] (Gleeson CJ, McHugh, Gummow, Hayne and Callinan JJ).
Accordingly, by entering into the 2020 DOCA, the Company may have lost the opportunity to:
(a) claim an account of profits from the Purchasers; or
(b)apply to set aside the alleged transfer of assets, or for substantial damages for the loss of the opportunity for an independent liquidator to negotiate a settlement from the Purchasers on the threat of an application.
Further, I consider that there may have been force in the plaintiff’s submission that the return to creditors was derisory and that the 2020 DOCA did not seek to preserve the continuing business of the Company.[8] The submission of Mr Goodin and the Interveners that the return to creditors under the 2020 DOCA was greater than that from a liquidation did not take into account the potential recoveries referred to in the previous two paragraphs. In any event, the fact that creditors may be better off under a Deed of Company Arrangement than under liquidation is not determinative.[9]
[8]QBI Corporation Pty Ltd v Plantation Rise Pty Ltd (admins apptd) (recs and mgrs apptd) (2010) 77 ACSR 573, 579 [25] (Wilson J); Australian Securities Investments Commission v Midland Highway Pty Ltd (admin apptd) (2015) 110 ACSR 203, 223 [70]-[71] (Beach J).
[9]Bidald Consulting Pty Ltd v Miles Special Builders Pty Ltd (2005) 226 ALR 510, 565-6 [286]-[291] (Campbell J).
No unreasonable conduct
With respect to my finding that no party acted unreasonably in its conduct of the proceeding, I refer to the following:
(a)The production of the Deed at the hearing on 23 December 2020 was an intervening event that provided an alternative remedy for the resolution of the underlying dispute, which was for the plaintiff to seek to be repaid its debt under the Deed.
(b)Until the settlement, it was necessary for the plaintiff to press for the 2020 DOCA to be set aside because:
(vi) the 2020 DOCA released the Company from the plaintiff’s debt; and
(vii) if the Company was returned to the Company directors under the 2020 DOCA, there was no realistic prospect that those directors would bring a claim against the Purchasers, being companies with common directors with the Company.
(c)In these circumstances, but for the settlement, for the plaintiff to maintain a claim relying on the terms of the Deed, the application to set aside the 2020 DOCA would have had to be determined. The continuation of the Company in liquidation would have caused significant detriment to the Purchasers because, as the Interveners contended:
At present a member of the Modscape Group is unable to obtain a residential building licence in New South Wales owing to the Company being in liquidation. Should the Company remain in liquidation with a new liquidator then this will cause tens of millions of dollars of losses to the Modscape Group and likely result in the loss of employment of up to 11 people.
(d)The parties reached a resolution of the proceeding, which allowed the Interveners to get the benefit of the 2020 DOCA while not depriving the plaintiff of a claim under the Deed, and which rendered the prosecution of the original proceeding redundant.
(e)The fact that the parties were able to promptly reach a compromise that accommodated their respective principal interests indicates that the parties have acted reasonably. The Court should encourage such settlements.
(f)The plaintiff referred to the failure by Mr Goodin and the Interveners to provide the Deed prior to 23 December 2020. Mr Goodin and the Interveners referred to the plaintiff’s failure to request it at an earlier time, and the failure by the plaintiff to identify the potential cause of action under the Deed prior to the hearing on 28 January 2021.
(g)I am not prepared to make any findings of unreasonableness as to the conduct of any party in respect of these matters. Mr Goodin says that he did not provide the Deed because it was not requested after its existence was referred to in the Notice of Meeting to Creditors dated 15 October 2020. There is evidence that the plaintiffs did not understand the significance of the Deed until it was produced on 23 December 2020, and in my opinion, the failure of the plaintiff to identify the potential cause of action under the Deed prior to 28 January 2021, was not unreasonable in the circumstances.
In those circumstances, the parties should each bear their own costs of this proceeding, and I so order.
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