El-Saafin v Franek (No 5)
[2020] VSC 773
•21 December 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
TECHNOLOGY ENGINEERING AND CONSTRUCTION LIST
S CI 2018 01685
| HASSAN EL-SAAFIN | First Plaintiff |
| MOHAMAD EL-SAAFIN | Second Plaintiff |
| v | |
| MARK FRANEK and others according to the Schedule | Defendants |
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JUDGE: | LYONS J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | On the papers |
DATE OF RULING: | 21 December 2020 |
CASE MAY BE CITED AS: | El-Saafin & Anor v Franek & Ors (No 5) |
MEDIUM NEUTRAL CITATION: | [2020] VSC 773 |
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COSTS – Injunction application – Injunction granted - Whether costs in the cause or order in favour of plaintiffs for their costs – Discrete application involving question of law – Lack of candour of respondents – Order that plaintiffs’ costs be costs in the cause – No order for respondents’ costs.
COSTS - Company in administration – Plaintiff directors sought leave to bring proceedings in name of company - Administrators sought directions that justified in assigning all claims in proceeding to company controlled by defendants to proceedings – Neither application granted – Whether separate order for costs on each application – Factual overlap between two applications – Plaintiffs opposed administrators’ application and administrators opposed plaintiffs’ application – No orders for costs made.
COSTS – Appeal by plaintiff directors from decision of chair of second creditors meeting of company in administration to allow proofs of debt for voting purposes – Appeal successful in part with result that it was likely company would not have been placed into liquidation – Liquidation not set aside as Court ordered report on solvency – Whether plaintiffs entitled to costs of appeal – Whether plaintiffs entitled to costs against chair personally – Plaintiffs entitled to part of their costs reflecting degree of success – Finding that chair did not act independently and impartially in determining proofs constituted misconduct or unreasonable behaviour justifying personal costs order – Costs taxed forthwith.
COSTS – Company in liquidation - Plaintiff directors sought leave to bring proceedings in name of company – Application not opposed by liquidator but opposed by defendants - Leave granted - Whether costs in the cause or plaintiff entitled to costs of the application – discrete application - Much evidence not relevant to the trial of the proceeding – Costs ordered in favour of plaintiffs – Reduction as conduct on part of plaintiffs added unnecessarily to costs.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiffs | Mr I Upjohn QC with Mr B Mason | Hicks Oakley Chessell Williams |
| For the First and Fourth Defendants | Mr M Clarke QC with Ms K Wangmann | Mr M Halse |
| For the Fifth and Sixth Defendants | Mr A Trichardt | Mr C Fice |
HIS HONOUR:
INTRODUCTION AND SUMMARY
I have delivered four separate reasons for judgment in respect of various applications in this proceeding.[1] These reasons deal with the costs of those applications.
[1]El-Saafin v Franek [2018] VSC 450 (‘Reasons No 1’); El-Saafin v Franek (No 2) [2018] VSC 683 (‘Reasons No 2’); El-Saafin v Franek (No 3) [2019] VSC 155 (‘Reasons No 3’), El-Saafin v Franek (No 4) [2020] VSC 389 (‘Reasons No 4’). For convenience I will adopt the terms defined in the earlier reasons.
I addressed each of those applications and the outcome of them in Reasons No 4. In order to understand the costs submissions, it is appropriate that I summarise those applications now.
First, there was the plaintiffs’ application for an injunction, which was heard on 7 August 2018 (the ‘injunction application’). This was the subject of Reasons No 1 delivered on 15 August 2018. The plaintiffs were successful in obtaining an interlocutory injunction restraining Franek and MAG (the first and fourth defendants) from taking steps to further enforce any securities in relation to the Company, and restraining AAGG (a company related to the MAG parties) from dealing with the North Melbourne property. As the Company was placed in administration in early August 2018 by MAG, I adjourned the proceeding for the Administrators (who are the fifth and sixth defendants) to consider whether they wished to prosecute the proceeding.
Second, as the Administrators did not wish to prosecute the proceeding, there was an application by the plaintiffs by summons dated 30 August 2018, amended on 26 October 2018, for leave to bring this proceeding on behalf of the Company while in administration (the ‘first leave application’). This was brought pursuant to s 237 of the Corporations Act 2001 (Cth) (the ‘Act’), the inherent jurisdiction of the Court, or alternatively, s 90-15 of the Insolvency Practice Schedule (Corporations), being Schedule 2 of the Act.
Third, there was the application by the Administrators by summons dated 11 September 2018, amended on 25 October 2018, for directions that they were justified in having entered into two deeds on 7 September 2018 and 24 October 2018, the effect of which was to assign to Trade On Pty Ltd (a company related to the MAG parties) all claims made in the proceeding available to the Company against MAG, AAGG or Trade On for the sum of $100,000 (the ‘administrators application’).
The first leave application and the administrators application were heard at the same time on 24, 25 and 26 October 2018. These applications were the subject of Reasons No 2 delivered on 9 November 2018. In summary, I rejected the administrators application. I also rejected the first leave application as the Court had no jurisdiction under s 237 of the Act in respect of a company in administration. I determined not to decide the first leave application pursuant to the inherent jurisdiction of the Court at that time in light of the second creditors meeting on 12 November 2018. As a result, I adjourned the balance of the first leave application until the outcome of the second creditors meeting.
Fourth, there was an appeal against the decision of Mr Glavas to admit and reject various proofs of debt at the second creditors meeting (the ‘proofs application’). Mr Glavas was one of the Administrators and acted as chair of the second creditors meeting. As a result of that meeting, by reason of the casting vote of Mr Glavas, the Company was placed into liquidation. Further, by an amended summons dated 10 December 2018, the plaintiffs sought an order that the winding up of the Company be terminated pursuant to s 482 of the Act (the ‘termination application’).
The proofs application and the termination application were heard on 30 January 2019 and 14 February 2019. At the first day of the hearing, the plaintiffs did not pursue the termination application, but sought instead an order that the Liquidator of the Company call a meeting of the Company’s creditors in order for the Company to resolve whether it should remain in liquidation. These applications were the subject of Reasons No 3 delivered on 15 March 2019.
In summary, I accepted that many proofs had been admitted wrongly by Mr Glavas totalling in excess of $5 million. As a result, I concluded it was very likely that creditors who were properly entitled to vote at the second creditors meeting would have voted by number and by value against placing the Company in liquidation and in favour of ending the administration of the Company. However, as I had concerns about the solvency of the Company, I declined to order the Liquidator to call a meeting of creditors. Rather, I directed that by 3 May 2019 the Liquidator provide a report to the Company regarding the solvency of the Company.
The Liquidator’s Report took some time. After it was filed, in about September 2019, the plaintiffs pursued the termination application. As part of that application, the plaintiffs also sought orders that the North Melbourne property be re-conveyed immediately to the Company upon payment of the amount owing under the mortgage. When that application came on for hearing on 5 December 2019, senior counsel conceded that the Court had no power to order re-conveyance without a trial. As a result, the termination application was adjourned for the plaintiffs to consider their position. Subsequently, the plaintiffs sought leave to prosecute the proceeding on behalf of the Company in liquidation under the inherent jurisdiction of the Court (the ‘second leave application’).
After further material was filed, the second leave application was heard on 14 May 2020. I granted leave for AAGG to appear on that application. The second leave application is the subject of Reasons No 4 delivered on 9 July 2020. I granted the second leave application.
To date, I reserved the costs of all these applications. Thus, I am at liberty to determine those costs now. I have now received submissions from the plaintiffs dated 14 August 2020, Franek and MAG dated 1 September 2020, and the Administrators dated 1 September 2020. None of these parties sought an oral hearing. As a result, I advised the parties that I would determine the costs issues on the papers. I note that the submissions of Franek and MAG also addressed costs orders sought against AAGG.
In summary, the plaintiffs seek that:
(1) their costs of the injunction application be costs in the cause, but Franek and MAG’s costs should not be costs in the cause;
(2) as to the administrators application, their standard or their indemnity costs[2] be paid by Franek, MAG, and the Administrators in their personal capacity, such costs to be taxed immediately;
(3) as to the proofs application, their indemnity costs be paid by Franek, MAG, and Mr Glavas in his personal capacity, such costs to be taxed immediately; and
(4) as to the first and second leave application, their standard costs be paid by Franek, MAG and AAGG, such costs to be taxed immediately.
[2]Compare [3(b)] and [19] of the plaintiffs’ costs submissions dated 14 August 2020.
Franek and MAG seek orders that:
(1) their costs of the injunction application be costs in the cause;
(2) as to the administrators application, there be no order as to costs;
(3)as to the proofs application, all parties’ costs be costs in the liquidation or that there be no order as to costs; and
(4) as to the first and second leave application:
(a)the plaintiffs pay the costs of Franek and MAG on a standard basis from 30 August 2018 to 9 November 2018 (which relevantly encompasses the first leave application); and
(b)all parties’ costs be costs in the cause from 10 November 2018 to 28 July 2020 (which relevantly encompasses the second leave application).
The Administrators seek orders that:
(1) there are no personal costs orders against either of the Administrators;
(2) as to the administrators application:
(a)the Company in administration (and not the Administrators) should be ordered to pay the standard costs of the plaintiffs in so far as time was spent on the administrators application for 24 to 26 October 2018;
(b)the plaintiffs should pay the standard costs of the Administrators, or alternatively the Company in administration, of the wasted hearing on 17 September 2018;[3]
[3]There is some uncertainty as to the position of the Administrators in relation to the costs of the hearing on 17 September 2018. I will refer to this further in section 5 below.
(3) the plaintiffs pay the Administrators’ standard costs of the first leave application during the Administrators’ involvement on 17 September 2018 and 24 to 26 October 2018 in so far as time was spent on the first leave application;
(4) the plaintiffs pay, on an indemnity basis, Mr Glavas’ costs of the failed component of the proofs application; and
(5) the plaintiffs pay the Administrators’ costs in respect of the submissions filed and prepared in this costs application.
For the reasons that follow, I have concluded that:
(1) as to the injunction application, the plaintiffs’ costs are costs in the cause and there be no order for the costs of Franek and MAG;
(2) there be no order for the costs of either the administrators application or the first leave application;
(3) as to the proofs application, the plaintiffs are entitled to 70% of their costs on a standard basis to be paid by Franek, MAG, and Mr Glavas in his personal capacity, such costs to be taxed immediately; and
(4) as to the second leave application, the plaintiffs are entitled to 50% of their standard costs from 5 August 2019 to be paid by Franek, MAG and AAGG.
Further, in light of the fact that each of the parties who filed costs submissions have been both successful and unsuccessful, I do not intend to make orders in respect of the costs of this costs application.
RELEVANT LAW
First, costs are generally in the discretion of the Court, but that discretion must be exercised judicially. Section 24 of the Supreme Court Act 1986 (Vic) provides:
Costs to be in the discretion of Court
(1)Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.
Second, generally costs orders are made after a hearing on the merits: the ordinary rule is that costs follow the event except where it appears to the Court that some other order should be made.
Third, certain practices that have developed in relation to interlocutory applications are now reflected in the Supreme Court (General Civil Procedure) Rules 2015 (Vic) (the ‘Rules’). For example, r 63.20 provides that:
Where an interlocutory or other application is made in a proceeding and –
(a) no order is made on the application; or
(b) the order made is silent as to costs –
the costs are the parties’ costs in the proceeding, unless the Court otherwise orders.
Fourth, there are now two kinds of costs orders generally available in Victoria: standard costs and indemnity costs.[4] The standard basis allows recovery of all costs which are reasonably incurred and are of a reasonable amount.[5] The indemnity basis allows for recovery of all costs except for those which have been unreasonably incurred.[6] The relevant difference is one of the onus.[7] The categories of special circumstances in which indemnity costs orders are made are not closed and include those where:
(1) there has been a claim or defence in wilful disregard of the known facts;
(2)the commencement or continuation of a proceeding for an ulterior motive;
(3)conduct which causes loss of time to the Court and to other parties; and
(4)conduct which amounts to a contempt of court.[8]
[4]Supreme Court (General Civil Procedure) Rules 2015 (Vic) r 63.28 (‘Rules’).
[5]Rules (n 4) r 63.30.
[6]Rules (n 4) r 63.30.1.
[7] Chick v Grosfeld (No 4) [2013] NSWSC 509, [17]-[19].
[8] See, eg, Ugly Tribe Co Pty Ltd v Sikola [2001] VSC 189, [7] (Harper J).
Fifth, if a liquidator issues or defends proceedings in relation to the affairs of the company in liquidation, and the liquidator is unsuccessful, the liquidator will not generally be made personally liable for the costs incurred in doing so. This is usually achieved by the liquidator’s right of indemnity for those costs from the assets of the company in liquidation.[9] So too the liquidator will generally have a right of indemnity from the assets of the company in liquidation for the liquidator’s own costs of the unsuccessful proceeding.[10]
[9]See generally Mead v Watson (2005) 23 ACLC 718, [11]-[16] (’Mead’) and Sylvia v Brodyn Pty Ltd [2007] NSWCA 55, [49]-[55] (‘Sylvia’). I note that orders may also be made that the company in liquidation pay the costs, for example in the case of the unsuccessful defence of a proceeding by a liquidator (if the company is also a defendant): Sylvia [53].
[10]See generally Mead (n 9) [11]-[16]; Sylvia (n 9) [49]-[55].
However, that right of indemnity may be denied, either for the costs of the successful party or the liquidator’s own costs, if those costs were not ‘properly incurred’. What is proper must be answered by reference to the circumstances of each case. For example, in Mead, the New South Wales Court of Appeal held that a personal degree of impropriety, wilful recklessness or incurring costs unreasonably or unnecessarily is sufficient to deny a liquidator’s right of indemnity.[11] As a result, if a liquidator has acted unreasonably in pursuing or defending proceedings, he or she may be personally liable for those costs. In Sylvia, the New South Wales Court of Appeal applied these principles in the case of the costs of an administrator.[12]
[11]Mead (n 9) [14].
[12]Sylvia (n 9) [55].
Sixth, generally a party is entitled to have a costs order in that party’s favour taxed. In the case of costs of an interlocutory application, generally those costs are not taxed until the conclusion of the proceeding. However, the court has the discretion to order that such costs be taxed and payable forthwith. [13] The relevant factors to be taken into account include:[14]
(1) there is prospect of considerable delay in completion of the proceeding; (2) the issue the subject of the interlocutory order was discrete from what will finally require determinations; (3) the party against whom the substantive order was made was guilty of unsatisfactory conduct — described variously as ‘unreasonable’ or ‘reprehensible’, or as involving a want of ‘competence and diligence’.
[13]Rules (n 4) r 63.20.1.
[14]Setka v Abbott (No 2) [2013] VSCA 376, [27].
APPROACH TO THE COSTS APPLICATION
As is evident from the summary of the costs submissions of the parties set out above, each party considered that the costs of the various applications should be dealt with on different bases. I have considered the submissions of each of the parties in deciding how I should determine my approach to all these applications. In my view, the most appropriate way of determining the costs issues is, for the most part, on the basis of the chronological order of the applications consistent with the summary of the various applications set out in [3] to [11] above. As a result, if more than one application was heard at one time, I have addressed the costs orders to be made in the context of all applications heard at the same time.
Further, I am conscious that only one summons was issued for the plaintiffs to have leave to prosecute this proceeding on behalf of the Company. The initial application was made when the Company was in administration. However, that application was amended after the Company was placed into liquidation. The legal and factual basis of the determination of the leave application when the Company was in administration (i.e. the first leave application) was very different to the legal and factual basis of the leave application when the Company was in liquidation (i.e. the second leave application). As a result, for the purposes of considering costs issues, I have considered them as separate applications. I note this is generally consistent with the approach of Franek and MAG that the leave application can be divided into the period until November 2018 and the period after November 2018.
INJUNCTION APPLICATION
It is not in dispute that that plaintiffs’ costs of the injunction application should be costs in the cause. The only issue is whether, in relation to the costs of Franek and MAG, there should be no order as to the costs or whether those costs should also be costs in the cause.
The plaintiffs submitted that there should be no order as to the costs of Franek and MAG given the conduct of the MAG parties both before and after the injunction application. They relied upon the Plan as set out in Reasons No 2. In summary, the Plan was developed by Mekkya and Sacca from about 2018 for them to take control of the North Melbourne property and its development by acquiring and exercising the rights of the Company’s secured creditors. As senior counsel acknowledged in the course of the administrators application and the first leave application, to achieve the commercial goal of getting the money Mekkya and Sacca alleged that they were owed by the Company, Mekkya and Sacca through the MAG parties:
(1) acquired first mortgage rights in respect of the Balanced Securities loan and the Franek loan that were assigned to MAG (which was set up for this purpose);
(2) assigned the 20 June debts owing to them to MAG;
(3) appointed the Receivers; and
(4) appointed the Administrators, one of the purposes of which was to seek to purchase the claims made or which could be made against the MAG parties and to validate the exercise of MAG’s power of sale of the North Melbourne property to AAGG,
(the ‘MAG acknowledgment’).
Franek and MAG submitted that their costs should be costs in the cause because the purpose of an interlocutory injunction is to maintain the status quo, and in the event that Franek and MAG are successful in defeating the plaintiffs’ underlying claims in respect of the property, costs ought to follow the event. They submitted that the plaintiffs had not established why Franek and MAG should be dis-entitled to their costs in the event that they are successful at trial.
On balance, I consider that Franek and MAG should not be entitled to their costs of the interlocutory injunction. This is for two reasons.
First, they opposed the interlocutory injunction which was a discrete application. While it is true in a sense that the award of an injunction is linked to the merits of the claim, there are separate principles which have developed in determining whether to grant an interlocutory injunction. Further, in light of the concession by senior counsel for Franek and MAG that there was a serious question to be tried, the determination of the interlocutory injunction turned very much on a distinct question of law unrelated to the trial, namely the so called rule in Inglis v Commonwealth Trading Bank of Australia.[15] Franek and MAG were unsuccessful on that point.
[15](1972) 126 CLR 161.
Second, I have formed the view that there was, at the very least, a lack of candour on the part of MAG and Franek before Kennedy J on 17 July 2018 or subsequently in relation to the sale of the North Melbourne property. I refer to [18] to [25] of Reasons No 1. This is in a context where there was an injunction in place restraining the Receivers appointed by MAG from dealing with the securities, including the North Melbourne property. Relevantly, Kennedy J was not told at the hearing on 17 July 2018 that, at the latest by 9 July 2018, MAG as mortgagee had entered into a contract to sell the North Melbourne property to AAGG. Nor was her Honour informed of this when Mr Halse, the solicitor for Franek and MAG, filed a memorandum stating the Receivers were then in possession of the North Melbourne property. Settlement of the sale of that property from MAG to AAGG took place on 20 July 2018. As noted in Reasons No 1, Mr Halse acted as solicitor for both MAG and AAGG on the conveyance.
In my view, this conduct gave rise to the need for the interlocutory injunction to restrain Franek and MAG from further dealing with the securities and thus is directly related to it. This is quite apart from the substantive merits of the case, which will be the subject of the allegations at trial. In these circumstances, I consider that there should be no order as to the costs of Franek or MAG in relation to the interlocutory injunction.
Further, if I had been asked, for the same reasons I would have ordered that Franek and MAG pay the plaintiffs’ costs of the injunction application on a standard basis. However, in the absence of any such submission, I will order that the plaintiffs’ costs of the injunction application be costs in the cause.
ADMINISTRATORS APPLICATION AND FIRST LEAVE APPLICATION
5.1 Submissions
As set out above, the plaintiffs seek:
(1)as to the administrators application, that their standard or indemnity costs be paid by Franek, MAG, and the Administrators in their personal capacity, such costs to be taxed immediately; and
(2)as to the first leave application, that their standard costs be paid by Franek, MAG and AAGG, such costs to be taxed immediately.
I deal first with the submissions of the parties in relation to the administrators application. However, the submissions of the Administrators also addressed the first leave application which was heard at the same time.
The plaintiffs submitted that the administrators application was a result of the Plan by the MAG parties set out above, in essence to obtain security for the debts owed by the Company to Mekkya and Sacca, to sell the North Melbourne property, and to appoint administrators to purchase any claims the Company might have against them or the MAG parties. Further, they submitted that:
(1) the Administrators adopted this course and strongly argued in favour of the administrators application; and
(2) in the course of the administrators application, the Administrators agreed to vary the relevant agreements in the case any of the choses of action purported to be assigned to Trade On were incapable of assignment.
They noted that the MAG parties who were to benefit from the administrators application strongly supported that application.
Further, the plaintiffs submitted that the administrators application was unsuccessful given I concluded that:
(1) the Court did not have jurisdiction to make the directions sought in the administrators application; and
(2) even if I had jurisdiction, I would not exercise my discretion to do so because I was not satisfied the assignment of the Company’s claims against the MAG parties to the MAG parties was proper or just and beneficial for the administration of the Company.
Further, the plaintiffs submitted that the conduct of the Administrators was unreasonable. They submitted that the outcome of the administrators application was their removal. That submission is not correct: the removal of the Administrators was never sought by the plaintiffs or ordered in the applications.
Franek and MAG submitted there should be no order as to costs on the administrators application. It is submitted that the bases relied upon by the plaintiffs for a costs order were not meritorious. Further, they noted that the Administrators’ view was that the Company was insolvent. That was also the view of Franek and MAG. They also noted that this view was subsequently confirmed by the Liquidator in the subsequent Liquidator’s Report. They also noted that I concluded in Reasons No 2 that it appeared that the Company was insolvent.
As noted above, the Administrators submitted that:
(1) as to the administrators application:
(a) the Company in administration (and not the Administrators) should be ordered to pay the standard costs of the plaintiffs in so far as time was spent on the administrators application for 24 to 26 October 2018;
(b) the plaintiffs should pay the standard costs of the Administrators, or alternatively the Company in administration, of the wasted hearing on 17 September 2018; and
(2) the plaintiffs pay the Administrators’ standard costs of the first leave application during the Administrators’ involvement on 17 September 2018 and 24 to 26 October 2018 in so far as time was spent on the first leave application.
The Administrators filed detailed submissions. I will summarise them as best I can.
First, they noted that the administrators application was heard together with the first leave application. Second, they distinguished between the costs of the hearing on 17 September 2018 and the hearings on 24 to 26 October 2018. They were the only parties who did so. As a result, it is necessary to say something about the hearing on 17 September 2018.
The administrators application and the first leave application were set down for first hearing on 17 September 2018. However, the hearing of the substance of those applications did not proceed on that day: rather, it was devoted to a dispute between the plaintiffs and Franek and MAG (and related parties) regarding disclosure and access to documents. As noted above, there is some uncertainty as to the position of the Administrators in relation to the costs of the hearing on 17 September 2018. They submitted at [6] of their written submissions that the Administrators’ wasted costs, or alternatively the Company’s (then in administration) wasted costs, of that day should be paid on a standard basis by the plaintiffs and/or Franek and MAG. However, at [27] of the Administrators’ submissions they then submitted that:
(1) the plaintiffs should pay the Administrators’ costs of the wasted hearing on 17 September 2018 in respect of the administrators application;
(2) the Company in administration (and not the Administrators) should be ordered to pay the standard costs of the plaintiffs in respect of the administrators application for 24 to 26 October 2018 (and not the costs of, and incidental, to 17 September 2018); and
(3) the plaintiffs pay the Administrators’ costs of the first leave application during the Administrators’ involvement on 17 September 2018 and 24 to 26 October 2018.
As a result, I will proceed on the basis that the Administrators seek their costs, or alternatively the Company’s (then in administration) costs, of the 17 September 2018 hearing from the plaintiffs.
As to 24 to 26 October 2018, the Administrators submitted that a considerable time was spent on the first leave application. They submitted that, as a result of the Administrators’ assistance and submissions, the Court held that s 237 of the Act did not apply to a company in administration. They noted that the plaintiff did not succeed on the first leave application at that time.
Third, the Administrators contended that any criticism of the way they conducted themselves in the administration and the administrators application was unwarranted. They submitted that at all times the Administrators acted in an open, honest and frank manner with the other parties and the Court. In summary, they submitted that:
(1) the plaintiffs never sought the removal of the Administrators for abuse of process;
(2) any adverse comments in Reasons No 2 concerning the continuing role of the Administrators in the external administration of the Company had nothing to do with the Administrators’ conduct in seeking approval of the Trade On assignment;
(3) the plaintiffs tried to participate in the bidding process to purchase the Company’s claims. However, the plaintiffs did not value the claims in an amount sufficiently high to justify them offering more than Trade On; and
(4) the Administrators were never part of any scheme or strategy of the MAG parties known as the Plan. They submitted that any failure to undertake an independent analysis of the claims in the proceeding was due to the funds available: further their view was that the Company was insolvent and should be wound up.
Further, they submitted that the Administrators’ execution of a variation of the Deeds does not impinge upon the conduct of their administration or their decision to sell the Company’s claims.
As to the first leave application:
(1) Franek and MAG seek that the plaintiffs pay the costs of Franek and MAG of the first leave application on a standard basis (from 30 August 2018 to 9 November 2018); and
(2) the Administrators seek that the plaintiffs pay the Administrators’ costs of the first leave application during the Administrators’ involvement on 17 September 2018 and 24 to 26 October 2018.
Each of Franek, MAG and the Administrators contend these orders should follow given that the plaintiffs were unsuccessful in obtaining leave on the first leave application.
5.2 Analysis
In my view, it is significant that both the administrators application and the first leave application were heard together. As Reasons No 2 show, it is difficult to disentangle one application from the other. The MAG parties actively supported the administrators application while the plaintiffs opposed it. Further, as set out below, the Administrators opposed the first leave application. This is in circumstances where the relief sought in the administrators application was entirely inconsistent with the first leave application.
As to the hearing on 17 September 2018, the first leave application and the administrators application were both fixed for hearing on that day. Further, an application by the plaintiff to restrain the solicitor for the defendants from continuing to act was also listed for hearing. However, none of those applications proceeded on that day. Rather, the hearing related to the production of documents under notices to produce issued by the plaintiffs to Franek and MAG and pursuant to subpoenas issued by the plaintiffs to Mekkya, Sacca, AAGG and Trade On.
I have reviewed the transcript of that day. The entire day was spent in relation to the production of documents and, in particular, whether all documents had been produced and/or were available for inspection or subject to claims for privilege. The transcript records that Franek and Mekkya claimed privilege over documents, notwithstanding, in the case of Mekkya, that there may have been an inadvertent waiver of privilege. Counsel for Franek and MAG sought the opportunity to maintain his clients’ claim for legal professional privilege by way of affidavit.
Further, I note that after the hearing on 17 September 2018, the plaintiffs and the MAG parties agreed upon a regime for resolution of the privilege issues in relation to the subpoenaed documents, which was resolved by Matthews JR on 11 October 2018. Some of those documents were relied upon at the hearing of the administrators application and the first leave application. In this regard, I note that:
(1) in her reasons at [50], Matthews JR indicated that at least some of the documents ordered to be produced were relevant to the administrators application; and
(2) Mr Nair, the solicitor for the plaintiffs, at [6] of his affidavit sworn 15 October 2018, exhibited a number of the documents produced as a result of the decision of Matthews JR both for the purposes of the administrators application and the first leave application.
In my view, I am not in a position on the material and submissions before me to make an order as to who should pay the costs of the hearing on 17 September 2018. I consider such a determination would involve further analysis and submissions in relation to the events after the hearing on 17 September 2018, including the hearing before Matthews JR.
However, one thing is clear: based upon my review of the transcript of 17 September 2018, it would not be appropriate that I make an order that the plaintiffs pay the costs of the hearing on 17 September 2018. I can see nothing in the conduct of the plaintiffs on that day which would justify such an order. In all these circumstances, I do not intend to make a separate order in relation to the costs of the hearing on 17 September 2018, but to treat them as forming part of the costs of the relevant applications.
As to the hearing on 24 to 26 October 2018, based upon my evaluation of the material and submissions, I have estimated that an equal amount of time was spent on each application during the hearing. This is also reflected in the material filed and Reasons No 2. There was an overlap of factual material in each application, particularly relating to the nature of the causes of action sought to be pursued and the solvency of the Company.
What is clear is that:
(1) the Administrators and the MAG parties were unsuccessful on the administrators application, which was opposed by the plaintiffs; and
(2)the plaintiffs were unsuccessful in obtaining leave on the first leave application, which was opposed by the MAG parties which were supported by the Administrators.
As a result, there appears to be two options available as to the costs orders that could be made. First, that costs are awarded in favour of each of the successful parties on each application. Second, that there should be no order as to the costs of these two applications.
In the circumstances of this case, I consider the second option is more appropriate in the interests of justice. As set out above, it is difficult to disentangle one application from the other. I refer to my comments in [58] above.
Moreover, and as also noted above, the granting of the administrators application was directly inconsistent with granting the first leave application. That is to say, making an order that the Administrators were justified in entering into the Deeds, by which the Company’s claims against the MAG parties were assigned and released, would result in the first leave application being dismissed. In this regard, while the Administrators submitted they were not in a position to express a view about the merits of the first leave application, they submitted that the Court ought not grant leave among other things because the Company should pursue the claims in the proceeding. Further, as recorded in Reasons No 2 the Administrators adopted the MAG parties’ submissions that the first leave application should be refused in light of the Deeds and the insolvency of the Company. This is notwithstanding that the Administrators were not strictly parties to the first leave application.
Further, I am concerned that any order for costs would result in the need for taxation given the history of the dispute between the parties. Significant costs have already been incurred in these applications.
I am conscious that the effect of making no order for costs on each application means that the Administrators do not have any costs order in their favour in respect of the administrators application or the first leave application. I have considered whether that factor favours separate orders for costs on each application.
In the circumstances of these applications set out above, I am not satisfied that it does. As set out in section 2 above, generally, external administrators have an entitlement to an indemnity for costs properly incurred by them, including in respect of legal proceedings. In this case, I have no evidence before me as to whether the Administrators’ costs have been met.
In light of the order I propose to make, I am not called upon to consider any entitlement to an indemnity for the costs incurred by the Administrators in respect of the administrators application. However, I wish to address the submission of the Administrators that any criticism of the way they conducted themselves in respect of the administrators application is unwarranted. In short, I disagree. I am conscious that this was an application for directions from the Court. However, as set out in Reasons No 2:
(1) there was no jurisdiction for the Court to make the orders sought because the Deeds had already been executed: it was a done deal; and
(2) even if there was jurisdiction, I would have declined to grant the administrators application because I was not satisfied that the assignment and releases of the claims against the MAG parties to the MAG parties was proper and/or beneficial to the administration of the Company.
I wish to reiterate that the Administrators, who were appointed by the MAG parties, sought approval of the assignment and release of the claims against the MAG parties to the MAG parties. Those circumstances should have caused the Administrators to consider carefully the appropriateness of such a course. In my view, they did not do so.
I am conscious that, due to the lack of funds, the Administrators obtained no legal advice as to the claims against the MAG parties or the relief that might be ordered against them. However, I reiterate my comments at [133] of Reasons No 2. Further, as to the submission of the Administrators that the plaintiffs took part in the ‘sale’ process so as to in some way justify or validate their decision, I refer to my comments at [134] of Reasons No 2.
Finally, I note that the MAG acknowledgement did not cause the Administrators to review the appropriateness of entering into the Deeds. In my view, in making and continuing with the administrators application, the Administrators appeared to have no, or not sufficient, regard to the significance of the fact that it was the MAG parties:
(1) who appointed the Administrators in accordance with the MAG acknowledgment;
(2) who were the defendants to the claims sought to be pursued by the plaintiffs on behalf of the Company; and
(3) who were the assignees of those same claims so as to relieve them from any potential liability.
PROOFS APPLICATION
6.1 Submissions
The plaintiffs seek their indemnity costs of the proofs application be paid by Mr Glavas in his personal capacity, Franek and MAG, such costs to be taxed immediately. They relied upon:
(1) the matters set out in [28] above;
(2) the fact that the plaintiffs were substantially successful in the proofs application;
(3) the fact that Mr Glavas and Franek and MAG opposed the proofs application; and
(4) in respect of Mr Glavas, the findings in Reasons No 3 that he breached his obligation under the Insolvency Practice Rules (Corporations) 2016 (Cth) (‘IPR’) to act independently and impartially as a result of the way in which he determined the challenged proofs.[16]
[16]Reasons No 3 (n 1) [191], [214].
The plaintiffs submitted that costs orders should be made on an indemnity basis because the need for the proofs application arose out of Mr Glavas’ lack of independence when performing his functions as chair at the second creditors meeting. They submitted he was a participant in the Plan of securing a compliant administration. Further, they submitted that the Court should exercise its power to make a personal costs order against Mr Glavas in this context. They relied in particular upon Sylvia and Maylord Equity Management Pty Ltd v ReelTime Media Ltd (No 2).[17]
[17][2008] NSWSC 1133.
By contrast, Franek and MAG seek that all parties’ costs of the proofs application be costs in the liquidation or that there be no order as to costs. They submitted it was wrong for the plaintiffs to contend that they were substantially successful in the proofs application. This is in circumstances where not all the challenges were successful and no order was made for the liquidation to be terminated or that the Liquidator call a meeting of the Company’s creditors.
The Administrators opposed the orders sought by the plaintiffs in the proofs application, in particular an order for indemnity costs and that Mr Glavas pay costs personally. In doing so, they relied upon similar reasons as those submitted by Franek and MAG. Further, they noted that no orders were made on the proofs application of the kind sought by the plaintiffs: indeed they submitted that there was no order that the plaintiffs’ appeal was successful.
The Administrators resisted any indemnity costs or personal costs order against Mr Glavas based upon any adverse findings against Mr Glavas in Reasons No 3. They submitted that such findings were without notice to Mr Glavas, and the Court did not have all the material that was available to Mr Glavas at the second creditors meeting. The Administrators accepted the principles in Sylvia but submitted that they had no application to the proofs application. They noted that the adjudication of claims for the purpose of a second creditors meeting of a company in administration is very different to admitting claims for dividend purposes.
The Administrators seek an order that the plaintiffs are ordered to pay Mr Glavas’ indemnity costs in respect of the proofs application.
6.2 Analysis
It is appropriate that I address some of the submissions of the Administrators.
First, I reject any suggestion that the findings made in Reasons No 3 adverse to Mr Glavas were made without proper notice or without proper material. It is important to recall that, in Reasons No 2, I made comments about perceptions of impartiality on the part of the Administrators. The arguments in the proofs application were made in that context.
Second, as made plain in Reasons No 3, Mr Glavas was given the opportunity to file, but chose not to file, material relating to all the decisions which were the subject of the proofs application. This is notwithstanding r 14.1(5) of the Supreme Court (Corporations) Rules 2013 (Vic) (the ‘Corporations Rules’). Rule 14.1(5) relevantly provides in substance that, in respect of any appeal relating to adjudications at a second creditors meeting, the person whose act or omission or decision is being appealed must file an affidavit stating the basis upon which the act, omission or decision was done or made, and exhibiting a copy of all relevant documents that had not been put in evidence by the person instituting the appeal.
In this regard, I refer to my comments at [8] to [22] of Reasons No 3. The Court raised with Mr Glavas this rule and gave him the opportunity to file relevant material. In response, Mr Glavas chose only to file limited material relating to some of his adjudications. I was obliged to determine the application on the material filed by the parties. As a result, I concluded that, based on the evidence before me and after careful consideration, Mr Glavas did not act independently and impartially when he failed to consider the merits of the MAG claim in light of the issues raised in my reasons.[18] I also referred to the different way in which Mr Glavas adjudicated upon the challenged proofs (being proofs lodged by Mekkya and Ibrahim, persons whose interests aligned with the MAG parties) compared to the proofs lodged by persons aligned with the plaintiffs.
[18]Reasons No 3 (n 1) [191].
Third, the Administrators did not seek to file further material on this costs application to make good any alleged deficiency in the evidence, notwithstanding Mr Glavas is represented by experienced solicitors and senior counsel. Indeed at [24(f)] of their costs submissions, it provides that ‘Mr Glavas is not trying to challenge such observation’ for the purpose of the costs application.
Further, the failure of the Administrators or the MAG parties to draw to my attention r 14.1(5) of the Corporations Rules or s 75-95 of the IPR was and remains unexplained. I refer again to [13] to [16] of Reasons No 3. This is notwithstanding that Mr Glavas deposed in his affidavit, sworn 5 February 2019, that he gave consideration to s 75-95 at the second creditors meeting. In my view, the failure to raise the matters added to the costs and expense of the proofs application, in particular the need for the hearing on 14 February 2019.
Contrary to the submissions of Mr Glavas and the MAG parties, I consider that the plaintiffs had substantial success on the proofs application. It is true that the challenge to a number of rejected proofs was unsuccessful. I upheld Mr Glavas’ decision in relation to the proofs of Mr Ramahi, Mr El-Daouk, Mr Abou-Eid, Mr Bakhtiyar, Dr Atalla, Mr Wael El-Saafin and Mr Nasser. However, I rejected or altered the decision of Mr Glavas as follows:
(1) in relation to Mr Ibaida (a rejected proof) which I concluded should have been allowed in the sum of $300,000;
(2) in relation to Dr Hegazy which I concluded should be increased from $250,000 to $353,000;
(3) in relation to Mekkya which was allowed in the sum $1,560,000, but which I concluded should have been rejected;
(4) in relation to Ibrahim which was allowed in the sum of $360,001.37, but which I concluded should have been rejected; and
(5) in relation to MAG which was allowed in the sum of $3,768,023.04, but which I concluded should have been assessed at a nominal value.
Thus, while I am conscious that not all challenges were accepted, the ones that were accepted were significant. This is reflected in my conclusion that it was very likely that creditors who were properly entitled to vote at the second creditors meeting would have voted by number and by value against placing the Company in liquidation and in favour of ending the administration of the Company.
It is also true that I did not end the liquidation after the hearing of the proofs application. This was because of my concerns about the solvency of the Company. This issue was not the subject of detailed consideration in the proofs application: the proofs application centred on whether there was a proper basis for Mr Glavas’ decision in relation to the status of certain creditors and their entitlement to vote at the second creditors meeting. Indeed, if a decision had been made by Mr Glavas in accordance with my findings, there would have been no occasion for him to exercise his casting vote.
Further, Franek and MAG both vigorously supported Mr Glavas’ submissions. That is because they had a common interest with Mr Glavas in defending the proofs application.
Based upon my impression and evaluation in light of the fact that the plaintiffs were not entirely successful in the proofs application, I consider that they are entitled to 70% of their costs of the proofs application. In my view, this reflects a fair estimate of the extent to which they were successful in the proofs application, including my view that they are entitled to their costs of the hearing on 14 February 2019 as set out above.
Further, I consider those costs ought be paid by Franek, MAG, and Mr Glavas personally. As to Franek and MAG that is because they vigorously opposed the proofs application.
As to my decision that Mr Glavas is to be personally liable for the plaintiffs’ costs, based on the evidence in the proofs application, I was compelled to conclude that Mr Glavas breached his obligation to act independently and impartially in relation to the challenged debts. I refer to my comments in [79] above. I am conscious that those findings only related to some of the proofs lodged. However, those findings related to the substantial debts of the Company and involved debts claimed by the MAG parties who appointed the Administrators. As recently noted, if a decision had been made by Mr Glavas in accordance with my findings, there would have been no occasion for him to exercise his casting vote. In deciding to make a personal costs order against Mr Glavas, I have also had regard to the way in which Mr Glavas conducted his defence to the proofs application set out in [78] and [81] above.
As a result, consistent with the principles set out in Mead and Sylvia, I have concluded that there was a degree of personal misconduct on the part of Mr Glavas, or at the very least unreasonable behaviour on the part of Mr Glavas, in regard to his conduct in relation to the proofs that were the subject of the proofs application and his subsequent defence to that application on the basis that the decisions that he made were proper ones.
I am conscious that a court is reluctant to make orders that a person in the position of Mr Glavas is personally liable for the costs of another successful party. However, in the circumstances of this case, I have reached the conclusion that the costs liability to the plaintiffs was not ‘properly incurred’ in the sense set out above, with the result that he should be personally liable for them. However, in the exercise of my discretion, I decline to order indemnity costs in favour of the plaintiffs.
That deals with the costs liability which Mr Glavas has to the plaintiffs. The Court has not been asked to address any entitlement to an indemnity for Mr Glavas’ own costs. Indeed, I have no material before me as to whether or how they have been paid. As a result, I am not in a position to make any finding in this regard. However, should such an indemnity be sought or have been granted, my findings set out above would be relevant to such a claim.
SECOND LEAVE APPLICATION
As noted above, the plaintiffs seek their costs of the second leave application from Franek, MAG and AAGG on a standard basis, to be taxed immediately in default of agreement. This is on the basis that they were successful in obtaining leave to prosecute the proceeding on behalf of the Company.
By contrast, Franek and MAG submitted that the costs of the second leave application (i.e. from 10 November 2018) should be costs in the cause. This was because they submitted that the costs should be determined after the trial of the derivative claim, consistent with other cases where derivative leave was obtained, including, for example, Re Akierman Holdings Pty Ltd.[19]
[19][2015] NSWSC 1395, [41]-[44] (‘Akierman’).
In that case, Black J noted a series of cases which have ordered that the costs of an application for leave to prosecute a proceeding should be costs in the cause. I note that, in that case, Black J made the applicant’s costs of the leave application costs in the cause. This was in part because he considered that much of the affidavit material relied upon in the leave application might also be relied upon at the trial of the derivative proceeding. His Honour considered it would be unfair if the respondent/defendant had to bear the costs of that affidavit material but was successful at trial. Further, I note that Black J made no order as to the costs of the respondent/defendant so that the respondent’s/defendant’s costs could not be recovered even if the derivative proceeding was unsuccessful.
I am mindful of the principles referred to by Black J in Akierman. However, I am conscious that the question of costs remains in the discretion of the Court to be determined on the facts of each case. The second leave application was unusual. As Reasons No 4 demonstrate:
(1) the principles on which the application were to be determined were for the most part not in dispute, save to a limited extent by AAGG;
(2) the relevant principles in summary were:
(a) whether the claims had a solid foundation;
(b) the attitude of the Liquidator; and
(c) practical considerations, in particular protection of the Liquidator and assets of the Company;
(3) Franek and MAG conceded that the claims sought to be pursued had a solid basis; AAGG did not;
(4) the second leave application was not opposed by the Liquidator;
(5) arrangements were in place for the Liquidator’s protection;
(6) the Liquidator deposed that the Company had a damages claim against the MAG parties of at least $1.2 million; and
(7) the Liquidator’s Report addressed some of the claims sought to be pursued, including the 20 June debts and the Franek loan.
Franek, MAG an AAGG opposed the second leave application, primarily for practical and discretionary reasons, and primarily on the basis that granting leave would not produce a tangible benefit to the Company and would be futile because it would not result in the solvency of the Company.
This was because, among other things:
(1) any re-transfer of the land would be subject to whatever security interest existed before the transfer to MAG or AAGG; and
(2) the plaintiffs’ evidence as to the finance available should be rejected, with the result there was no prospects of the security interest of MAG or AAGG being redeemed or the North Melbourne development being completed.
I ultimately concluded that the claims had a solid basis and that the grant of leave was likely to result in a tangible benefit for the Company. I concluded that this would include determination of the true debts of the Company and the possibility of an award of damages in favour of the plaintiffs for at least $1.2 million, which they undertook to pay to the Company.
In these circumstances, I have given serious consideration as to whether I should order that the costs of the plaintiffs and/or of Franek, MAG and AAGG should be costs in the cause, or whether I should deal with the costs now.
On balance, I have concluded that I should deal with the costs now. This is for three main reasons. First, it was a discrete application involving discreet issues to the trial. This is particularly in circumstances where Franek and MAG conceded that the claims had a solid basis. Second, and related to the first point, much of the affidavit material and submissions related to practical considerations, in particular the utility of the second leave application and the solvency of the Company. That will not be the subject of the trial. Third, the Liquidator did not oppose the second leave application. In my view, that is significant. This is particularly so in the context of his investigation of the 20 June debts and the Franek loan.
Further, I have concluded that the plaintiffs are entitled to some of their costs of the second leave application. This is because it was a discrete application involving discreet issues to the trial and the plaintiffs were successful in the second leave application. However, I do not consider that they are entitled to all their costs. Rather, I consider that there should be a substantial reduction in their costs.
This is for two main reasons. First, I consider that the costs of 6 December 2019 were entirely wasted due to the conduct of the plaintiffs. Second, I consider that the plaintiffs’ material and submissions in relation to the plaintiffs’ proposal to refinance the North Melbourne property and development were misconceived. With respect, issues relating to the plaintiffs’ proposal may have been intimately connected with the termination application, which was not pursued after 6 December 2019. However, as Reasons No 4 show, they had little relevance to the second leave application. Further, I rejected the facts which form the basis of the plaintiffs’ proposal. I refer to [80] to [108] and [193] of Reasons No 4. As is evident from those paragraphs, the plaintiffs’ proposal added significantly to the costs of the second leave application.
Based upon my impression and evaluation of the impact of these matters on the plaintiffs’ costs, I consider that the plaintiffs are only entitled to 50% of the costs of the second leave application from the time the matter was re-agitated after the Liquidator’s Report was filed on 5 August 2019. I do not consider that there is any basis to order indemnity costs.
Finally, I have formed the view that these costs ought to be ordered against Franek, MAG and AAGG. Franek and MAG submitted that no costs order should be made against AAGG because it was not in fact joined to the proceeding until 9 July 2020. I do not accept that submission. This is because that submission does not acknowledge the close relationship between Franek and MAG on the one hand and AAGG on the other, and AAGG’s continuing involvement in the proceeding and the second leave application in particular. It is important to recall that, in the first leave application and the second leave application the plaintiffs were seeking to prosecute claims against AAGG as set out in the proposed amended statement of claim originally dated 3 August 2018. Indeed, counsel for Franek and MAG appeared for and represented the interests of AAGG on the first leave application. Leave was given to AAGG to appear at the hearing on 14 May 2020, and detailed legal and factual submissions were filed by AAGG in opposition prior to the hearing of the second leave application. In all these circumstances, it is appropriate that the limited costs order in favour of the plaintiffs in respect of the second leave application be made against Franek, MAG and AAGG.
CONCLUSION
As a result, I will order that:
(1) the plaintiffs’ costs of the injunction application be costs in the cause and there be no order as to the costs of Franek and MAG;
(2) there is no order as to costs of the first leave application or the administrators application up to 1 December 2018;
(3)Franek, MAG, and Mr Glavas in his personal capacity pay 70% of the plaintiffs’ costs of the proofs application to be paid on a standard basis; and
(4)Franek, MAG and AAGG pay 50% of the costs of the second leave application from 5 August 2019.
There remains the question as to whether those costs should be taxed now or after the trial. In my view, the plaintiffs are entitled to have the costs of the proofs application determined now. First, it was a discrete application to the trial of the proceeding. Second, it was determined in November 2018, a long time ago. Third, it involved the Administrators, against whom no relief is now sought in this proceeding based on the amended statement of claim filed 30 July 2020. Fourth, I consider that that the conduct of Mr Glavas and of the MAG parties which led to the proofs application has been unsatisfactory for the reasons set out above.
By contrast, the costs of the second leave application, which was determined in July 2020, should await the trial which has been fixed for February 2021. I will ask the parties to confer about a minute of order consistent with these reasons.
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