Devmin International Pty Ltd v Garden

[2023] QDC 182

DISTRICT COURT OF QUEENSLAND

CITATION: 

Devmin International Pty Ltd v Garden [2023] QDC 182

PARTIES: 

DEVMIN INTERNATIONAL PTY LTD  
(Applicant)

v

JAMIE GARDEN  
(First Respondent)

AND

RUSSELL BROWNING
(Second Respondent)

FILE NO:

BD No 96 of 2022

DIVISION:

Civil

PROCEEDING:

Application

ORIGINATING COURT: 

District Court of Queensland

DELIVERED ON:

22 August 2023 (ex tempore)  

DELIVERED AT:

Brisbane

HEARING DATE: 

22 August 2023  

JUDGE:

Porter KC DCJ

ORDER:

1.          Application dismissed.

CATCHWORDS:

PROCEDURE – CIVIL PROCEEDINGS IN STATE AND TERRITORY COURTS – COSTS – NON-PARTIES GENERALLY – DIRECTOR OF COMPANY – where the plaintiff claimed, against the defendant company amounts owing as a debt or in the alternative, damages for breach of contract –where the proceeding was stayed when the defendant went into voluntary administration and later liquidation – where the plaintiffs were given no notice that the defendant may be put into administration – where the plaintiff seeks as against the directors of the defendant the costs incurred from when the directors first considered putting the company into voluntary administration until the plaintiff stopped incurring costs -  whether the directors of the defendant should be ordered to pay the plaintiffs costs

Citrus Queensland Pty Ltd v Sunstate Orchards Pty Ltd (No 10) [2009] FCA 498

Grocon Constructions (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd [2015] QSC 333

Knight v FP Special Assets Ltd (1992) 174 CLR 178

Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90

Rushton (Qld) Pty Ltd v Rushton (NSW) [2004] QSC 47

Symphony GroupPlc v Hodgson [1994] QB 179

COUNSEL:

S B Whitten for the Applicant

M A Goldsworthy for the Second Respondent

SOLICITORS:

Kelly Legal for the Applicant

O’Shea and Partners for the First Respondent

Stratos Legal for the Second Respondent   

Procedural Background

1. Devmin International Pty Ltd (Devmin) sued Parity Developments Pty Ltd (Parity Developments) now called Canlux Pty Ltd, by proceedings filed on 14 January 2022 in this Court. Devmin sued Parity Developments alleging it was a guarantor of funds lent to another entity in a group of which Parity Developments was a part.  That group can be loosely called the Parity Group and it involved companies associated with Mr Jamie Garden.  Those companies included a trustee company called Parity Partners.

2. Devmin (and perhaps some related entities) has been pursuing various entities in the Parity Group for some years.  This proceeding is just one of those proceedings, and far from the largest. 

3. On 27 April 2022, I made orders to prepare of the matter for a trial to be conducted over three days starting on 8 June 2022.  Various steps had to be taken in the meantime, including preparation of witness summaries and resolving disclosure issues. 

4. Both parties took some of the steps required by those orders.  In particular, Devmin says that it took a number of steps up to 27 May 2022 when Parity Development’s solicitors went off the record.  The affidavit of Mr Kelly filed on these proceedings[1] sets out those steps   taken.  There is no need to set them out in detail but in effect, Mr Kelly and counsel prepared witness summaries, pleadings and attended to disclosure issues and from time to time engaged in correspondence with solicitors for Parity Developments about compliance with orders. 

   [1] Court Document 17 at [23]-[25].

5. On 30 May 2022, without prior notice Parity Developments to Devmin, Parity Developments appointed administrators.  On 27 June, Parity Developments went into liquidation.  Accordingly, these proceedings have been stayed under one insolvency provision or another since 30 May 2022.  After a hiatus of a year, on 29 May 2023, Devmin filed an application seeking costs of the proceedings incurred after 20 April 2022 (20 April 2022 being the date of the hearing in which I set the matter down for trial).  The costs were sought against Mr Jamie Garden, who was a director of Parity Developments as well as Parity Partners and other companies in the Parity Group up until his resignation as a director of Parity Developments on 11 April 2022.  

6. On 12 July 2023 I made directions and listed the matter for a hearing on 21 and 22 August 2023.  In the shadow of the trial, Devmin sought to amend the application for costs against Mr Garden to include an application for third-party costs against Mr Russell Browning in addition to its claim against Mr Garden.  Mr Browning was a director of Parity Developments from January 2022.  Whether he is still a director or not, his powers have ceased to be of any relevance since the appointment of administrators on 30 May 2022. 

7. Prior to the joinder application, Mr Browning had filed an affidavit in support of Mr Garden’s case.   The affidavit material filed by Mr Browning, along with that filed by Mr Garden and Mr Evans, (the solicitor for Mr Garden and previously for Parity Developments), swore that that Mr Garden resigned as a director on 11 April 2022 and that Mr Browning gave instructions to Mr Evans thereafter. Given that the amount in dispute seems to be only about $60,000 to $70,000 the parties adjusted their plans so that the application could still proceed to hearing on 22 August 2023 with Mr Browning joined as a additional respondent. 

Factual Matters

1. It is not in dispute, or at least it is not challenged in this application, that Parity Developments was insolvent from at least October 2021 when payments became overdue to the Commissioner of Taxation.  In fact, in my view, the evidence established that Parity Developments was unable to pay its debts as and when they fell due at any time without the support of Parity Partners. 

2. It is convenient to set out a little more context to the relationship between those companies.  Parity Developments was the development manager of a development at Bega in New South Wales.  Parity Partners was the owner of the land which was the subject of the development.  The project was for the construction of premises for Bega Limited.  In about early 2021, the land was purchased and an agreement for lease was signed with Bega.  At that time Parity Partners appointed PD as the development coordinator of the project under a development agreement.  In effect, seemingly, Parity Developments was the project manager for the project. 

3. PD’s only source of income or capital at all times was Parity Partners.  It never had sufficient capital or cash flow to fund its activities itself; that was the position from the very start.  It was reflected in the evidence put before the Court which demonstrated that absent Parity Partners ongoing support, PD never had any income or capital of its own of any material kind. 

4. In about early 2021, Parity Developments as development coordinator entered into a construction agreement with ICM Construction.  At that point things might have looked good.  There was an agreement for lease with a reputable company, the land had been secured and a building contract underway.  Things went wrong when disputes arose under the construction contract.  The merits of that dispute are irrelevant.  What is relevant is that those disputes resulted in termination of the construction contract on 26 August 2021. 

5. Things went from bad to worse for the project after that.  In November 2021, a dispute arose with Bega over the agreement for lease such that Bega refused to proceed.  The lease was ultimately terminated in about March the next year.  Next, ICM obtained an adjudication award under the New South Wales equivalent of the Building Industry Fairness Act against Parity Developments in December 2021 for some $1.4 million.  As it the way with adjudication amounts under the statutory progress payment schemes, that amount had to be paid, despite Mr Garden believing that Parity Developments had a good defence to ICM’s claims.  The award was registered in Queensland on 1 February 2022. 

6. Parity Partners was a trustee of a unit trust called the Consumer Staples Unit Trust.  In January 2022 Mr Garden was seeking to revitalise the project through a new builder and new negotiations with Bega.  At that time, he invited Mr Browning to become a director of Parity Developments; Mr Browning agreed.  Mr Browning gave evidence and I accept that he was brought in for project management experience to try to get the project back on track.  He became a director on about 7 January 2022.  Mr Browning gave evidence that after Mr Garden resigned, he was the one who gave instructions to Mr Evans for the company.  Mr Evans gave evidence that he looked to Mr Browning for those instructions after Mr Garden resigned as a director. 

7. Mr Garden gave the reason for his resignation as being that he perceived a conflict of interest between Parity Partners and Parity Developments. 

8. It was part of the case against Mr Garden that, even though he resigned as a director, he remained a person who was involved in directing the litigation.  The basis for that submission is that he was the only one who knew about the history of the matter.  Mr Browning knew nothing about the litigation before becoming a director.  The applicant also relies on various statements from Mr Browning and, indeed, Mr Evans that Mr Garden was involved from time to time in giving advice about the background of the proceedings to Mr Browning.  Evidence was also given that Mr Garden was involved in telephone calls and conferences related to the dispute with Devmin.

9. Ultimately, I am not persuaded that after he resigned, Mr Garden remained one of the guiding wills of Parity Developments.  That was not because I necessarily accepted his evidence about that matter (in fact I found his evidence to be uncooperative and unnecessarily unresponsive).  Rather, though, when he says that he did not have a great deal to do with this litigation after he resigned, I accept it because it seems to me to be generally consistent with what was going on in the Parity Group at the time. 

10. It is perhaps no compliment to Mr Garden that given his background in the matter and the fact that he caused Parity Partners to fund this litigation, I find that he happily washed his hands of it and left Mr Browning to deal with it.  But he did give evidence that a lot was going on in Parity Group’s affairs, and there is no doubt that wit was true that Parity Partners for one was under pressure on many fronts.  They were being sued by unit holders in the unit trust, there was an application to remove Parity Partners as trustee and for the appointment of a receiver, there was ongoing litigation with ICM, and there was other litigation involving Devmin. 

11. The circumstances around the end of 2021 and the first half of 2022 are redolent of a development group that was in trouble and was fighting desperately on numerous fronts.  In those circumstances, I think it quite likely that this relatively small claim was left to Mr Browning to do with what he could.  I find that Mr Garden was quite happy to wash his hands of it and leave it to Mr Browning.

12. The one caveat on that is that Mr Garden through Parity Partners had, as I said, been funding Parity Developments.  There is not much doubt that as soon as Parity Partners, through Mr Garden, said that the defence to the litigation (and Parity Developments generally) was not going to be funded any more Mr Browning had no choice but to put the company into administration or some other insolvency regime. 

13. It is not entirely clear to me when Mr Garden decided to cease funding Parity Developments.  There is a suggestion that he decided that it was no longer viable to do so on 22 April 2022.  Mr Browning’s recollection is that he found out about it in early to mid-May and Mr Garden’s evidence was a bit equivocal.  ‘

14. However, none of that leads me to conclude that Mr Garden continued direct involvement in the conduct of this relatively small dispute in the scheme of the Parity Group’s problems at the time.   

15. I also observe that the fact of Parity Partners’ involvement in the affairs of Parity Developments in the way I have described it may have consequences in other places and in respect of other proceedings.  But it is important to keep firmly in mind that what is sought here is, in effect, a claim for costs thrown away.  It is to that aspect that I now turn.

Character of Devmin’s claim for costs

1. Late yesterday, the parties, and in particular Mr Whitten, received the sort of email you do not want at that stage of your preparation, with the Judge having some bright idea that he wants addressed. 

2. The bright idea that I had was that there had been no decision on the merits and no order for costs in this case.  So how can a third party be made liable for costs where there has been no determination that costs should be paid by the actual party to the litigation?  That actually does not matter in this particular case because of the, careful way that Devmin tried to formulate the character of its claim for costs.  The claim for costs is only for the period from 20 April when I had the directions hearing setting the matter down for trial to 30 May when the administrator was appointed. 

3. The claim for those costs is really like a claim for costs thrown away, or a claim for costs for misconduct by a solicitor.  They do not involve determination of what the merits were or some sort of costs order in the underlying proceeding.  What they are concerned with is that there has been conduct by someone who is a party to the litigation or, indeed, a non-party that has caused costs to be incurred, which would never have been incurred no matter what.  That is the argument here.

4. Arguments arising out of Parity Partners’ funding of the company and the litigatiomn were always a secondary issue to the real case, I think, advanced by Devmin which was a function of the very confined character of the costs they were seeking to recover.  The argument was really a simple one. 

5. Devmin contended that the costs after the date I set the matter down for trial should never have been incurred because Mr Garden, or following his resignation, Mr Browning should have told Devmin that Parity Developments was going to go into administration when they first considered doing so.  On Devmin’s case, administration was first considered on 22 April 2022 when an insolvency practitioner had been approached, apparently at the instigation of Mr Browning, to look into the question of whether a deed of company arrangement would be possible.

6. Their case was that if Mr Browning and/or Mr Garden, if it could be said to have been his responsibility, had told Devmin at that time, then Mr Giraudo, the guiding mind and will of Devmin, would have consulted his solicitors as to what to do.  They would have, on Mr Kelly’s uncontested evidence, advised them to bring the matter back before the Court with a view to compelling or calling on PD to either appoint an administrator or get on with the litigation.

7. The case is that if that had happened, one way or another the costs incurred in preparing for trial would not have been spent.  These are costs which are separate from the merits they say which would never have been incurred.  They are, in a sense, costs thrown away.

8. The claim against Mr Garden and Mr Browning is founded, in my respectful view, on the proposition that a director can be liable for the costs of litigation thrown away where an insolvency administration brings the proceedings to an end, at least for costs incurred between when consideration is given to an insolvency administration and when that is communicated to the other party in the litigation, either as a consequence of the insolvency administration or some other method. 

Relevant principles

1. The general rule is that conducting a defence of a proceeding by a director, even a sole director and a sole shareholder, is not a sufficient basis to attract a third-party costs order against the director.  Why is that the rule?  It seems to me from review of authorities, there are three principal reasons. 

2. The first is the general rule that an order for costs should only be made against a party to the litigation, and that rule is not easily displaced.  The second principal reason is the principle of limited liability, which should not be easily set aside.  The third is that where a plaintiff institutes proceedings against a corporate entity, it assumes the risk that if the claim is successful, the defendant will not be able to meet any award of damages or costs.[2]   

   [2] Rushton (Qld) Pty Ltd v Rushton (NSW) [2004] QSC 47 [12] – [15] and [34].

3. Notwithstanding the general rule, the discretion to award costs extends to making third-party costs orders if the interests of justice require it to be made.  Broadly, there are two categories of case which have been recognised as falling within that category. 

4. The first is that identified in Knight v FP Special Assets Ltd (1992) 174 CLR 178 and applied by the Court of Appeal in Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90. In Knight, Mason CJ and Deane J (with Gaudron J agreeing), relevantly stated at 192-193:

   For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party… That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.

5. The circumstances described in that quote might be characterised as a category where the effective litigant is the third party.  

6. The second is where proceedings are an abuse of process or a contempt and the third party has participated in that abuse of process. 

7. Of course, the categories are not closed, but that does not mean the discretion is completely at large.  It needs to be exercised judicially and informed by principles developed by the Courts in analogous cases. 

8. To my mind, there is a general theme in the cases that tells strongly against making even a sole director and a sole shareholder liable for defending proceedings brought against a company.  That is true even where the company is, and is shown to have always been, insolvent.  Something more is required.  As I have said, what more is required is articulated conveniently in the judgment of Justice Muir in Rushton at [12] to [15] and in the cases that he cites.

Consideration

1. I accept on the evidence, as I have said, the defendant company was insolvent during the period for which costs are claimed and was insolvent from at least October 2021.  It is likely it was insolvent before then, but, I do not have to resolve that to resolve this application. 

Mr Browning

1. Looking first at Mr Browning, the case does not rise, in my view, above the contention that, as the sole director of Parity Developments for less than six weeks, he should be personally liable for costs incurred in that six weeks, because he knew or at least should have known the company was hopelessly insolvent and was going to, or was going to have to, appoint a voluntary administrator.  Nothing in the evidence persuades me there is anything about Mr Browning’s conduct which attracts personal liability or justifies setting aside the principle of limited liability as referred to in Rushton. 

2. Further, his circumstances individually tell against ordering costs against him: 

   (a)First, he appears to have received nothing for his work as a director.  It appears to have been something he did to assist Mr Garden, perhaps as an incident of other work he was doing.  It was submitted that he had some expectation of getting some compensation for his involvement, if the development had gone ahead, but that was an inchoate and optimistic, bordering on fanciful, prospect.  I think it fair to say that he received nothing of substance for his work as a director. 

   (b)Second, when he became sole director, he had no background or history in dealing with this litigation or other key pieces of litigation affecting the company. 

   (c)Third, the litigation stopped within less than six weeks of Mr Browning becoming sole director.  Whether he was responsible for that directly or not, it is not a particularly long period for a director new to the litigation and the financial position of a company to bring its activities to an end.  Directors are entitled to some time to consider their position. 

   (d)Fourth, Parity Partners was funding the litigation, at least on the company’s side, and it was the withdrawal of that funding which appears to have prompted Mr Browning to bring things to an end, although there were some other factors. 

   (e)Finally, the defendant company, in his view, was not at this stage trading, so the impetus to terminate its activities was less than it otherwise might have been.

1. The case against Mr Browning seems to amount to this:  there is a freestanding obligation on a director to inform the other side in litigation if it appears the company will be unable to meet a judgment or is insolvent or is likely soon to be the subject of a voluntary administration or an insolvency rating.  I do not accept there is such a general obligation, particularly on a defendant company, at least in the circumstances of this case.  To my mind, it is inconsistent with the approach evident in the cases.  I do not think such a duty arises. 

2. The applicant referred to Justice Peter Lyons’ judgment in Grocon Constructions (Qld) Pty Ltd v Juniper Developer No 2 Pty Ltd [2015] QSC 333. There, his Honour referred with approval at [22] to a statement from an English case, Symphony GroupPlc v Hodgson [1994] QB 179, 191 that a third party costs order could be made in circumstances, inter alia:

   Where a person has some management of the action, e.g., a director of an insolvent company who causes the company improperly to prosecute or defend proceedings…

3. I note that Symphony Group, itself, was not a case in that category.  It deals with quite different considerations.  Importantly however, even in Symphony Group, itself, after citing six cases for the proposition extracted above finishes up with this comment at 191:

   It is of interest to note that, while it was not suggested in any of these cases, it would never be a proper exercise of the jurisdiction to order the director to pay the costs, in none of them was it the ultimate result that the director was so ordered.

4. I note that that observation goes quite a bit further than the principles articulated in Rushton.  In any event, I do not think the statement in Symphony Group by itself establishes the broad proposition it states and certainly is not support for the proposition that a director of a defendant company has a duty to tell a plaintiff in that the company is insolvent and/or that they are considering putting the company down in one or another. 

Mr Garden

1. The case against Mr Garden was articulated as falling within the scope of the specific example in Knight v Special Assets.  However, ultimately, the plaintiff’s proposition is that the thing that Mr Garden did wrong was not to inform or cause, the plaintiff to be informed that the company was insolvent or likely to be put into administration.  That is the only thing that Mr Garden could have done differently. 

2. That would have avoided the specific costs which are the subject of this application.  I have already said that I do not think that there is a general obligation to make such a disclosure.  I think that ultimately that has to be the nature of the case against Mr Garden, and the principles I have articulated stand against ordering him to pay costs on that basis. 

3. Having reached that conclusion I do not have to decide whether Mr Garden was involved with the management of the company or not at the time.  That plaintiff sought to establish his involvement in management as a step along the way to establishing that the duty to disclose the insolvency and the prospective voluntary administration applied to him as well.  It might also have been argued that he was responsible for Mr Browning’s actions in not causing in the disclosure to be made, but as I have said, I have not found Mr Browning had any such obligation.

4. It is worth referring at this stage to Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90. That case involved an appeal from a judgment of this Court in which Judge Clare SC ordered costs against Mr Geoff Murphy personally. That order was made in respect of Mr Murphy’s defence of proceedings brought against him by Mackay Hire for services supplied to a company under his control.

5. The focus of that case like this was not on the merits but on Mr Murphy’s responsibility for the conduct of the litigation in the context of the defendant’s financial predicament.  Regardless, it is important to recognise that the case properly understood does not stand for the principle that continuing to defend a case when a director knows the company is insolvent and does not disclose it, is of itself a basis for liability for costs incurred as a result of that conduct.  That appears to have been the basis of the finding by her Honour.[3]  However, that finding was challenged on appeal on the basis that her Honour failed to consider the elements of the category of claim in Knight which her Honour was purporting to apply.  Her Honour’s decision was upheld by the Court of Appeal on the basis that it (perhaps implicitly) did address the necessary elements.[4]

   [3] Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90 [21].

   [4] Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90 [42] – [43].

6. Further, the Court of Appeal did not endorse the principle of disclosure of insolvency articulated by the applicant here.  The Court of Appeal referred to her Honour’s finding that Mr Murphy had a duty to disclose.  However, that finding was characterised as being merely a response to Mr Murphy’s argument that the application, in that case, was flawed because notice was not given of the possibility of a personal costs order being sought.  Indeed, it is implicit, in my view, in the Court of Appeal decision on these points that it would have been an error to rely on the so-called disclosure obligation as the primary basis for making a costs order against Mr Murphy.[5] 

   [5] Murphy v Mackay Labour Hire Pty Ltd [2018] QCA 90 [45] – [47].

7. So, while the fact of insolvency and Mr Garden’s knowledge of it might be relevant to whether a third-party costs order ought to be made in the exercise of the Court’s discretion, it is not a proper basis alone for that order. 

8. The applicant also appears to rely on the category of case is articulated in Knight itself.  In that regard there is not much doubt that the first element of that category of case is made out.  PD was an insolvent person.  The difficulty is, as I have found, I am not satisfied that Mr Garden continued to claim the role of an active participant in the litigation after he, in effect, washed his hands of it in April 2022.  There is also difficulty in concluding that he had a sufficient interest in the subject matter of the litigation.  It is true that Parity Partners probably did but his interest is one step removed from that. 

9. Ultimately, this involves an exercise of the Court’s discretion.  It seems to me, the real case against Mr Garden can only be sustained on the basis that he should have responsibility for Mr Browning failing to disclose the fact that the company was insolvent and that voluntary administration was imminent.  I do not think that that is sufficient to attract the Court’s jurisdiction to order costs against a corporate party’s directors, present or past. 

10. There was another issue which arose and that is whether, if the administration had been disclosed, Mr Giraudo for Devmin would have held his hand in the litigation.  There is no doubt that he had had success in applying consistent pressure to Parity Partners and the other companies in the group.  Mr Giraudo said, and I accept, he believed that the Parity Group may well have had funds available to meet any judgment.  There is a prospect that if it was disclosed to him that Parity Developments might appoint a voluntary administrator, he might have forged ahead until they did so.

11. Nonetheless, he also gave evidence that he would have followed his solicitor’s advice.  Mr Kelly’s evidence of what he would have advised was orthodox and not challenged and I have got no reason to conclude that Mr Giraudo would not have followed that advice. 

12. But as I say, for other reasons given, I am not persuaded that this is a proper case for a third-party costs order against Mr Garden or Mr Browning, in respect of the specific costs that are sought to be the subject of this application.  I therefore dismiss the application.