Frigger v Mervyn Jonathon Kitay in his Capacity as Liquidator of Computer Accounting & Tax Pty Ltd (In Liquidation) - [2013] WASC 229

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: FRIGGER -v- MERVYN JONATHON KITAY IN HIS CAPACITY AS LIQUIDATOR OF COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION) [2013] WASC 229

CORAM: ALLANSON J

HEARD: 28 MAY 2013

DELIVERED : 14 JUNE 2013

FILE NO/S: CIV 2765 of 2010

MATTER :Section 78 of the Trustees Act 1962 and Section 1321 of the Corporations Act 2001

BETWEEN: ANGELA CECILIA THERESA FRIGGER
First Plaintiff
ANGELA CECILIA THERESA FRIGGER AND HARTMUT FRIGGER IN THEIR CAPACITIES AS TRUSTEES OF THE FRIGGER SUPERANNUATION FUND
Second Plaintiff
AND
MERVYN JONATHON KITAY IN HIS CAPACITY AS LIQUIDATOR OF COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION)
First Defendant
COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION)
Second Defendant

Catchwords:

Application for separate determination of issues - Principles to be applied - Complex factual disputes - Objectives of case flow management not met

Legislation:

Rules of the Supreme Court 1971 (WA), O 32 r 4, O 1 r 4A, 4 B
Superannuation Industry (Supervision) Act 1993 (Cth)
Trustees Act 1962 (WA), s 78

Result:

Application dismissed

Category: B

Representation:

Counsel:

First Plaintiff                  :     Mr S K Shepherd
Second Plaintiff             :     Mr S K Shepherd
First Defendant              :     Mr B W Ashdown
Second Defendant         :     Mr B W Ashdown

Solicitors:

First Plaintiff                  :     S K Shepherd
Second Plaintiff             :     S K Shepherd
First Defendant              :     Holborn Lenhoff Massey
Second Defendant         :     Holborn Lenhoff Massey

Case(s) referred to in judgment(s):

Calverley v Green [1984] HCA 81; (1984) 155 CLR 242
Carlo Nobili SpA Rubinetterie v Militaire Nominees Pty Ltd [2004] WASC 47
Computer Accounting and Tax Pty Ltd v Professional Services of Australia Pty Ltd [2008] WASC 133
Landsdale Pty Ltd v Moore [2009] WASCA 176
Martin v Martin [1959] HCA 62; (1959) 110 CLR 297
Napier v Public Trustee (Western Australia) (1980) 32 ALR 153
Re Kerrigan; ex parte Jones (1946) 47 SR (NSW) 76
Shephard v Cartwright [1954] UKHL 2; [1955] AC 431
Smith v Maloney (1998) 19 WAR 209

ALLANSON J: Computer Accounting & Tax Pty Ltd is in liquidation. The first defendant, Mervyn Jonathon Kitay, is its liquidator.
Among the assets of Computer Accounting & Tax that may be available for the benefit of its creditors are:
1.land situated at 140 Edward Street and 46 Pier Street Perth (the Perth property);
2.land situated at 269 South Western Highway Armadale (the Armadale property); and
3.a term deposit at St George Bank, together with interest on that deposit.
Computer Accounting & Tax is the registered proprietor of the Perth property and the Armadale property, and the term deposit is in its name. The plaintiffs, however, claim that the two properties are held on trust for them, either as the beneficiaries of a resulting trust or as the beneficiaries of a self‑managed superannuation fund. The first plaintiff, Angela Frigger, says that she is the owner of the funds in the term deposit.
The plaintiffs ask the court to order the preliminary separate determination of issues relating to the ownership of the two properties and the term deposit.

The proceedings

The proceedings were commenced in 2010 by an originating summons. On 4 January 2011, a substituted summons was filed seeking:
1.an order pursuant to s 78 of the Trustees Act 1962 (WA) that the Perth property and the Armadale property vest in Mr and Mrs Frigger in their capacity as trustees of the superannuation fund;
2.a declaration that the defendants have no right title or interest in the term deposit, or in interest in respect of it; and
3.orders regarding the plaintiffs' entitlement to repayment of a taxing fee.
On 21 January 2011, a registrar ordered that the matter proceed as if commenced by writ of summons, and ordered pleadings. The plaintiffs filed a statement of claim on 11 March 2011. The substance of the relief sought was unchanged. In the statement of claim the plaintiffs pleaded that:
1.they advanced funds to Computer Accounting & Tax on the 'mutual understanding and intention' that Computer Accounting & Tax would use those funds to purchase the Perth property and the Armadale property, and that those properties would at a later date become assets of the Trust (not defined, but presumably the trust over the assets constituting the superannuation fund);
2.the advances would be loans, liable to interest at 8.5% per annum.
The plaintiffs pleaded that, as a consequence of these matters, Computer Accounting & Tax became indebted to repay the amount of each advance, with interest, and to take all necessary steps to cause each property to become an asset of the superannuation fund.
The statement of claim was amended in May 2011. Materially, the allegations regarding the purchase of the properties were amended to the extent that the plaintiffs now alleged that Computer Accounting & Tax and Mr and Mrs Frigger each became parties to an enforceable agreement pursuant to which Mr and Mrs Frigger advanced the funds for the purchase of the two properties. The allegations that the funds were advanced to Computer Accounting & Tax as loans remained unchanged.
The defendants filed an amended defence and counterclaim in March 2012. I will return to the issues raised by counterclaim.
On 25 October 2012, the plaintiffs filed a re‑amended statement of claim. It was in this pleading that the plaintiffs first advanced the contention in these proceedings that Mr and Mrs Frigger paid the purchase price for each of the Perth property and the Armadale property on a mutual understanding with Computer Accounting & Tax that the company would hold the beneficial interests in each property for the benefit of Mr and Mrs Frigger.
On 19 November 2012, the plaintiffs filed an affidavit of Mrs Frigger in support of an application for the trial of a preliminary issue.
On 6 December 2012 the defendants filed a substituted defence and counterclaim. On 9 April 2013, the defendants filed an amended substituted defence and counterclaim. In this last defence, the defendants add a claim that Computer Accounting & Tax is entitled to exoneration and indemnification for certain liabilities it has incurred out of the assets of the company, even if those assets were acquired subject to a resulting trust or became assets of the superannuation fund.
From January 2013 the plaintiffs have included Mr Frigger as the second plaintiff in the heading of documents filed in the court. A minute of proposed orders to join Mr Frigger was filed on 11 December 2012, but orders were not made on it. If the plaintiffs intend to join Mr Frigger as a party, it must be formally done.

Separate determination of an issue

Order 32 r 4 of the Rules of the Supreme Court 1971 (WA) provides that the court may order that any question or issue arising in a cause, whether of law or fact or partly of law and partly of fact, be tried separately before trial of the proceedings. The authorities on the considerations relevant to this rule have been collected and summarised conveniently by McKechnie J in Carlo Nobili SpA Rubinetterie v Militaire Nominees Pty Ltd [2004] WASC 47 [4].
In Smith v Maloney (1998) 19 WAR 209, Ipp J said that the exercise of the power to order a preliminary question of fact will generally only be appropriate when its outcome will put an end to the action, or where there is a clear line of demarcation between the issues and the determination of one issue in isolation from the others is likely to save inconvenience and expense. A preliminary trial is not an appropriate procedure when the findings of fact could only be made after trial.
In deciding whether to order the trial of a preliminary issue the court must have regard to O 1 r 4A and r4B, and follow the course that best ensures the attainment of the objects set out in those rules. But those objects are consistent with the considerations referred to in the earlier authorities, even though many of those authorities preceded the introduction of case management: see Landsdale Pty Ltd v Moore [2009] WASCA 176 [19] - [21]. It is still necessary to consider whether the issues for separate determination can be clearly stated and finally answered without the court having to resolve complex contested issues of fact. Unless an issue can be clearly defined and determined in isolation, the objectives of case flow management are unlikely to be met. If the issue will require extensive evidence, and may result in appeals, but will not finally determine the outcome of the case, it is unlikely that there will be real savings in time and cost.

The issue proposed for preliminary determination

The plaintiffs describe the proposed hearing as a trial to determine the beneficial ownership of the Armadale property, the Perth property, and the term deposit.
Mr and Mrs Frigger were the directors of Computer Accounting & Tax. The company was the trustee of the superannuation fund, but its activities may not have been confined to that role. In their reply and defence to counterclaim, filed on 13 April 2012, the plaintiffs plead that from 1996 to December 2009 Computer Accounting & Tax traded as a vehicle for various enterprises and investments conducted or made by Mr and Mrs Frigger in their personal capacity. These enterprises and investments included Mrs Frigger's accounting practice and Mr Frigger's engineering consultancy practice, as well as the investments which constituted the assets of the superannuation fund.
It is not in dispute that Mr and Mrs Frigger paid the consideration and stamp duty for the purchase of both the Perth property and the Armadale property with money they borrowed and that, upon settlement, the title of each property was registered in the name of Computer Accounting & Tax. The Perth property was registered on 2 August 2002, and the Armadale property on 17 September 2003.
Most other matters are, however, in dispute.
In relation to each of the properties, the plaintiffs say that it was the 'mutual understanding' of Computer Accounting & Tax and Mr and Mrs Frigger (in relation to the Perth property), and of Computer Accounting & Tax and Mrs Frigger (in relation to the Armadale property), that:
1.the beneficial interest in the property would, following settlement, be held by Computer Accounting & Tax for the benefit of Mr and Mrs Frigger;
2.each property would at a later date be transferred for nominal consideration as an undeducted personal in specie contribution to the superannuation fund;
3.Computer Accounting & Tax would be entitled to derive rental income from the properties and any such rental income would be held for the benefit of Mr and Mrs Frigger.
The plaintiffs also specifically plead that, as a self‑managed superannuation fund, the Frigger Superannuation Fund was disallowed from borrowing monies by the Superannuation Industry (Supervision) Act 1993 (Cth); that no loan agreement was made between Computer Accounting & Tax and Mr and Mrs Frigger; that interest payments on Mr and Mrs Frigger's borrowings were made out of the rent payments; and that those borrowings were repaid from the personal funds of Mr and Mrs Frigger.
In those circumstances, the plaintiffs say that Computer Accounting & Tax held the property and any income derived from it on a resulting trust for Mr and Mrs Frigger. Although they plead the trust arises from a mutual understanding, the plaintiffs rely upon a resulting trust and not an express trust.
The plaintiffs further plead that Computer Accounting & Tax became obliged to take all necessary steps to cause the property to be transferred at their direction as a contribution to the superannuation fund. The plaintiffs plead that:
(1)on about 1 July 2007, each property was transferred to the fund, and from then Computer Accounting & Tax held each property on trust according to the terms of the Frigger Superannuation Fund trust deed;
(2)in about April or May 2009, Computer Accounting & Tax executed one or more declarations of trust by which each of the Perth and Armadale properties was declared to be an asset of the fund.
As a result, from July 2007, alternatively from April or May 2009, each property was held by Computer Accounting & Tax on trust pursuant to the trust deed.
On 12 December 2009, Computer Accounting & Tax resolved that it should enter liquidation. Mr Glenn Trinick was appointed as liquidator. From then, Computer Accounting & Tax ceased to be qualified to act as a trustee of the fund. Mr and Mrs Frigger moved to amend the trust deed to remove Computer Accounting & Tax as trustee of the fund. They also attempted to transfer title to the properties from Computer Accounting & Tax to Mr Frigger. The Registrar of Titles, however, would not register the transfer without the consent of the liquidator. The liquidator refused and still refuses to consent.
In summary, the plaintiffs rely on the use of their funds to purchase the properties. They say that the issue for the proposed determination is clear and simple, essentially requiring a determination of whether the liquidator can rebut the presumption of a resulting trust, when it is not disputed that the plaintiffs paid the purchase price for each property. If Computer Accounting & Tax never held the property in its own right, transfer to the superannuation fund would not affect the fact that at all times the company held only legal title. At all times, beneficial title was held by Mr and Mrs Frigger, either in their own right as beneficiaries of the resulting trust, or as members of the superannuation fund. The plaintiffs say that the evidence on the issue of a resulting trust will be confined and that issue is suitable for a separate hearing.
The issue regarding the term deposit is similar. It is, perhaps, less complicated because no issue of transfer to the superannuation fund arises.
The plaintiffs say that the liquidator has raised factually complex issues in the defence and counterclaim. The question of the solvency of Computer Accounting & Tax, and the plaintiffs' actions at various times in relation to the various items of property, will require a long and complex trial. That may be avoided if the two pieces of land can be removed from the equation, particularly if (as the plaintiffs submit) the company did not at any time have a beneficial interest in them.
I am not satisfied, however, that the proposed preliminary determination would meet the objects of case management.
First, the factual issues are not quite as straightforward as the plaintiffs contend.
Mr and Mrs Frigger paid the purchase price of the properties, with title registered in the name of Computer Accounting & Tax. There is a presumption that the company holds the properties on trust for them if the properties were transferred to the company without consideration passing from it to the plaintiffs: see Napier v Public Trustee (Western Australia) (1980) 32 ALR 153, 158. The presumption is one which 'should not ... give way to slight circumstances': see, for example, Shephard v Cartwright [1954] UKHL 2; [1955] AC 431, 445. If there was a resulting trust, the extent of the beneficial interest of the parties must be determined at the time when the property was purchased and the trust created: Calverley v Green [1984] HCA 81; (1984) 155 CLR 242, 252, 262, 271.
In this matter, it is in issue whether the company did give consideration for the land, with the liquidator pleading that the funds were advanced as loans. The plaintiffs submit that the liquidator has given no particulars of the loan agreements on which he relies. But that submission is of limited force when, until quite recently, the plaintiffs themselves pleaded the transactions were loans. They have testified on previous occasions about the nature of the arrangements in which the properties were purchased. I am satisfied that the existence of loans is a real issue for decision.
Further, in determining whether the presumption has been displaced, the question depends upon the 'the intention of the parties as gathered from all available relevant facts': Napier (158 ‑ 159); Re Kerrigan; ex parte Jones (1946) 47 SR (NSW) 76, 82 - 83. Evidence of the actual intention of the person who paid the purchase price has been held to be admissible, at least in rebutting the presumption or the presumption of advancement: see, for example, Martin v Martin [1959] HCA 62; (1959) 110 CLR 297, 304 ‑ 305. The court may also receive evidence of the circumstances surrounding the transfer so far as those circumstances go to the plaintiffs' true intention in paying the money. Evidence of subsequent acts or declarations may be admissible to the extent that they are admissible as declarations against interest: see Calverley v Green.
And on these points, the defendants say that there are substantial issues of fact to be tried, including questions going to the credit of the plaintiffs. The earlier pleadings in this matter are inconsistent with the case the plaintiffs now put. The plaintiffs (or Mrs Frigger on behalf of herself and her husband) have on several occasions given evidence on oath regarding the status of the properties. For example, in proceedings against Professional Services of Australia Pty Ltd, heard in 2007, Computer Accounting & Tax claimed damages for misleading and deceptive conduct in relation to the sale to it of the Armadale property and a business conducted on that property. In the course of his reasons for decision, Computer Accounting and Tax Pty Ltd v Professional Services of Australia Pty Ltd [2008] WASC 133, Simmonds J referred to several apparently mutually inconsistent accounts in the evidence of Mrs Frigger regarding the purchase of the properties and the existence of loans. His Honour referred in particular to affidavits sworn on 10 April 2007 and 24 April 2007, and Mrs Frigger's witness statement and evidence at the trial: see [51] ‑ [65]. It is not necessary to set them out here. Those accounts are, on their face, inconsistent with the case now put forward.
Computer Accounting & Tax was awarded a sum of damages. In response to an application to stay enforcement pending an appeal by Professional Services of Australia, Mrs Frigger swore another affidavit to the effect that Computer Accounting & Tax owned the Perth property and the Armadale property, and held the term deposit, in its own right.
The purpose of referring to these matters is not to attempt in any way to now determine whether the properties were the subject of a resulting trust, but rather to identify the extent and complexity of the factual disputes that may require determination on a preliminary question.
Second, I am also satisfied that the solvency of Computer Accounting & Tax, and the plaintiffs' conduct in the period leading up to the company's liquidation, will have to be resolved in any case. Those issues are not confined to the two properties, but also are relevant to: a fund of approximately $1 million that was transferred to Mr and Mrs Frigger (and perhaps their children) in January 2009; and a substantial sum (again approximately $1 million) from the judgment obtained by Computer Accounting & Tax against Professional Services Australia that was transferred on or about 30 June 2009.
Third, in their most recent defence and counterclaim, the defendants plead that even if the properties were or are held on trust by Computer Accounting & Tax, either on resulting trust or as assets of the superannuation fund, the company 'is entitled to exercise rights of exoneration and/or to be indemnified out of such trust' with respect to debts, liabilities and costs and expenses it has incurred.
The plea, as currently expressed, is in my opinion inadequate. But, properly formulated, it will raise issues of the extent to which the company incurred liabilities that were either authorised by the trust deed, or authorised by one or more of the plaintiffs as beneficiaries under the trust. This will require a determination of the assets of the trust at various times, including whether the properties were transferred into the trust, and the conduct of the plaintiffs in relation to those assets. The defendants plead the company's entitlement to a lien or an equitable charge, in priority to the plaintiffs' rights, to secure the company's right to be indemnified.

These matters will have to be litigated, even if the preliminary issue were tried and determined in favour of the plaintiffs.
The interests in the term deposit may be more discrete and capable of isolation from the other issues in the case, but there is no obvious saving in time or resources in trying it separately. The amount is comparatively small. And the defendants have foreshadowed the possibility that they would apply for interlocutory restraints on the plaintiffs disposing of the funds in the term deposit.

Conclusion

For these reasons, I am not satisfied that the proposed preliminary issue would promote the objects set out in O 1 r 4A and r 4B. More generally, the interests of justice will be better served by the trial and determination of all issues of fact and law at the one hearing. I dismiss the application.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CHAMBERS

CITATION: FRIGGER -v- MERVYN JONATHON KITAY IN HIS CAPACITY AS LIQUIDATOR OF COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION) [2013] WASC 229 (S)

CORAM: ALLANSON J

HEARD: 12 AUGUST 2013

DELIVERED : 23 OCTOBER 2013

FILE NO/S: CIV 2765 of 2010

MATTER :Section 78 of the Trustees Act 1962 and Section 1321 of the Corporations Act 2001

BETWEEN: ANGELA CECILIA THERESA FRIGGER
First Plaintiff
ANGELA CECILIA THERESA FRIGGER AND HARTMUT FRIGGER IN THEIR CAPACITIES AS TRUSTEES OF THE FRIGGER SUPERANNUATION FUND
Second Plaintiff
AND
MERVYN JONATHON KITAY IN HIS CAPACITY AS LIQUIDATOR OF COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION)
First Defendant
COMPUTER ACCOUNTING & TAX PTY LTD (IN LIQUIDATION)
Second Defendant

Catchwords:

Practice and procedure - Costs - Plaintiffs unsuccessful on application for trial of preliminary issue - Whether defendants entitled to costs in light of litigation funding agreement - Turns on own facts

Legislation:

Nil

Result:

Plaintiffs to pay the defendants' costs of the application for trial of a preliminary issue

Category: B

Representation:

Counsel:

First Plaintiff                  :     In person
Second Plaintiff             :     In person
First Defendant              :     Mr B W Ashdown
Second Defendant         :     Mr B W Ashdown

Solicitors:

First Plaintiff                  :     In person
Second Plaintiff             :     In person
First Defendant              :     Holborn Lenhoff Massey
Second Defendant         :     Holborn Lenhoff Massey

Case(s) referred to in judgment(s):

Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495
Angor Pty Ltd v Ilich Motor Co Pty Ltd (1992) 37 FCR 65
Dyktynski v BHP Titanium Minerals Pty Ltd [2004] NSWCA 154; (2004) 60 NSWLR 203
Frigger v Mervyn Jonathon Kitay in his Capacity as Liquidator of Computer Accounting & Tax Pty Ltd (In Liquidation) [2013] WASC 229
Noye v Robbins [2010] WASCA 83
Wentworth v Rogers [2006] NSWCA 145; (2006) 66 NSWLR 474

ALLANSON J: On 14 June 2013, I dismissed an application by the plaintiffs to set down the trial of a preliminary issue. My reasons for dismissing the application included issues raised by an amendment to the defence and counterclaim - the defendants amended the defence and counterclaim after the application had been made, although still well before it was heard. But I would have dismissed the application even without the amendments on the more general ground that the issue which the plaintiffs sought to have separately determined was not appropriate for separate determination: see Frigger v Mervyn Jonathon Kitay in his Capacity as Liquidator of Computer Accounting & Tax Pty Ltd (In Liquidation) [2013] WASC 229.
On the application of well understood principles guiding the exercise of the court's discretion on costs, the defendants would have the costs of the application. I deferred making a costs order, however, to give the parties an opportunity to make submissions on the effect of material that had been filed in an earlier application in these proceedings.
On 30 April 2013, Mr David Lenhoff, solicitor for the defendants, swore an affidavit to which he annexed a letter from Mr Kitay. That letter provided a response to an enquiry regarding the extent of assets that Mr Kitay (as liquidator of Computer Accounting & Tax Pty Ltd) would need to recover in order to discharge all the known debts of the company in full. Mr Kitay referred to a litigation funding agreement with Hillcrest Litigation Services Ltd, under which Hillcrest 'are entitled to a 40% success fee, after recoupment of legal fees'. The letter included a table to the effect that: the total claims against the company were either $1,767,583 or $1,667,483 (the difference being to the amount of an unliquidated damages claim); Hillcrest's share at 40% was either $1,178,388 or $1,111,655; legal costs were estimated at $300,000; so the total recovery to discharge the debts was $3,245,971 (or $3,079,138).
That was the only information then available. The arrangement, as outlined in that letter, left some questions about the defendants' entitlement to costs.
The defendants have now put into evidence an affidavit of Mr Kitay, dated 29 July 2013, in which he says:
4.By orders made in Supreme Court of Western Australia action COR 2 of 2010 on 17 January 2012 approval was granted pursuant to section 477(2B) of the Corporations Act for the entry into of a Litigation Funding Agreement by myself and Computer Accounting and Tax Pty Ltd (In Liquidation) with Hillcrest Litigation Services Ltd in respect of Supreme Court action CIV 2765 of 2010 ('Litigation Funding Agreement').
5.The orders made on 17 January 2012 also contained confidentiality orders with respect to, inter alia, the terms of the Litigation Funding Agreement.
6.On 18 January 2012 I entered into the Litigation Funding Agreement on behalf of myself and Computer Accounting and Tax Pty Ltd (In Liquidation).
7.By orders made in Supreme Court of Western Australia action COR 2 of 2010 on 26 July 2013 approval was granted pursuant to section 477(2B) of the Corporations Act for the entry into of a Litigation Funding Amendment Agreement by myself and Computer Accounting and Tax Pty Ltd (In Liquidation) with Hillcrest Litigation Services Ltd in respect of Supreme Court action CIV 2765 of 2010 ('Amendment Agreement').
8.On 26 July 2013 I entered into the Amendment Agreement on behalf of myself and Computer Accounting and Tax Pty Ltd (In Liquidation).
The Litigation Funding Agreement and Amendment Agreement were attached to the affidavit, with very limited redactions for the purposes of preserving confidentiality. The amount of Budgeted Costs has not been revealed. In the Litigation Funding Agreement, Mr Kitay is referred to as the 'Litigant', and Hillcrest as 'HLS'. The 'Proceedings' are the current matter, CIV 2765 of 2010.
The Litigation Funding Agreement relevantly provides:
2. FUNDING BY HLS
HLS agrees to:‑
(a)pay the Budgeted Costs, in accordance with an agreed budget and timetable;
(b)pay any taxed costs (which are taxed on a party party basis) payable by the Litigant to any other party whether arising upon the dismissal or discontinuance of the Proceedings or otherwise, but only to the extent that those costs were incurred during the term of this Agreement;
(c)provide any security for costs ordered by the court in the Proceedings during the term of this Agreement.
3.ADVERSE COSTS ORDER INDEMNITY
Subject to the provisions of clause 4(b), HLS will indemnify and keep indemnified the Litigant and the Company in respect of any Adverse Costs Order (as defined).
4.THE LITIGANT'S OBLIGATIONS, THE LAWYERS' RETAINER AND INSTRUCTIONS
(a)If the Costs exceed the Budgeted Costs, the Litigant shall be responsible for payment of such excess costs.
(b)If any costs order is made against the Litigant or the Company in the Proceedings on any basis other than a party party basis, HLS shall be responsible for payment of that part of such costs as represents the amount that would have been payable if the costs were taxed on a party party basis and the Litigant shall be responsible for payment of that part of such costs as exceeds the amount that would have been payable if the costs were taxed on a party party basis.
(c)The Lawyers are to be instructed by the Litigant, and not HLS, and the Litigant will instruct the Lawyers to prosecute the Proceedings as soon as reasonably practicable after the execution of this Agreement and the Litigant will keep the Lawyers properly instructed during the Proceedings.
(d)Subject to clause 5, HLS will not interfere with the conduct of the Proceedings by the Litigant.
(e)If the Litigant is beneficially entitled to any real property as a result of the resolution of the Proceedings (whether by way of settlement, judgment or order), the Litigant shall sell those properties in the ordinary course of the liquidation of the Company and the net proceeds of such sales (after the costs of the sales) shall form part of the Resolution Sum and be disbursed in accordance with clause 8.
…
7.CONSIDERATION AND ASSIGNMENT
In consideration of HLS agreeing to provide the funding set out in clause 2 and to provide the indemnity set out in clause 3, the Litigant hereby assigns to HLS the HLS Percentage of the Net Resolution Sum.
8.DISBURSEMENT OF THE RESOLUTION SUM
The parties agree that the Resolution Sum shall be paid into a trust account operated by the Lawyers and the Litigant and HLS each hereby irrevocably authorise and direct the Lawyers to apply and pay the Resolution Sum in the following manner and order, namely:‑
(a)firstly, in reimbursing HLS for the Funding Costs paid by HLS;
(b)secondly, in paying the amount comprising the HLS Percentage of the Net Resolution Sum to HLS;
(c)thirdly, in paying the amount comprising the Litigant's Percentage of the Net Resolution Sum to the Litigant.
…
13.TERM OF AGREEMENT
(a)Subject to clause 13(b), this Agreement shall endure until the disbursement of the Resolution Sum in accordance with this Agreement.
(b)HLS may terminate this Agreement at any time upon written notice.
(c)If this Agreement is terminated pursuant to clause 13(b) then:
(i)HLS remains liable to pay all amounts incurred up to the date of termination and will also remain liable to indemnify the Litigant for any Adverse Costs Order relating to costs incurred up to the date of termination; and
(ii)the Litigant will reimburse HLS for any payments it has made pursuant to the Agreement from the Resolution Sum, if any.
Costs are defined as all legal costs and disbursements reasonably incurred by the lawyers for the sole purpose of advising upon and prosecuting the proceedings on behalf of the Litigant from the date of the agreement. The Net Resolution Sum is defined as the amount obtained by deducting the funding costs (the amount of the Budgeted Costs paid by Hillcrest and all other costs paid by Hillcrest under the agreement) from the Resolution Sum.
The amendments made by the Amendment Agreement included a definition of Recovered Costs in these terms:
any amount ordered to be paid to, or otherwise recovered or recoverable by, the Litigant pursuant to any order for costs made in, or in connection with, the Proceedings (whether fixed, agreed, assessed or determined by taxation) irrespective of whether such entitlement to costs or order for costs is made: during the subsistence of the Proceedings (on an interlocutory or final basis, and whether ordered to be paid forthwith, in any event, or reserved); in respect of any interlocutory application or step or issue; at or following the final determination or conclusion of the Proceedings; or in respect of the Proceedings as a result, consequence or following the outcome of, any appeal.
The definition of 'Net Resolution Sum' was amended to read 'the amount obtained by deducting the Recovered Costs from the Resolution Sum'.
Clause 8 was also amended, by requiring the lawyers, in disbursing the Resolution Sum, to pay to Hillcrest the amount by which the recovered costs exceed the funding costs paid by Hillcrest before paying the HLS percentage (that is, 40%) to Hillcrest, and the Litigant's percentage to the litigant.
It was further provided that nothing in the agreement would permit or result in any amount of legal costs or recovered costs being paid to Hillcrest otherwise than in reimbursement of legal costs and disbursements paid by Hillcrest to and on behalf of the Litigant; and any amount payable to Hillcrest (in addition to the reimbursement of legal costs actually paid by Hillcrest) being calculated by reference to, or by application of, the HLS percentage to any amount which includes recovered costs.
Before dealing with the proper order for costs of the application, informed by this additional material, there is a side issue that requires resolution. In response to the defendants' application for costs, the plaintiffs relied upon several affidavits sworn by Mrs Frigger. In particular, Mrs Frigger swore an affidavit dated 7 August 2013 to which she appended several documents. They included a copy of a confidential affidavit sworn by Mr Kitay on 5 January 2012 on the application under s 477(2B) of the Corporations Act 2001 (Cth). The body of the confidential affidavit refers to attachments, including a letter of advice from solicitors who then acted for Mr Kitay.
In the course of submissions, counsel for the defendants pointed out the presence of this material, and objected to it. I do not know how Mrs Frigger obtained clearly confidential material, including letters subject to legal professional privilege. The only question immediately raised is whether I should allow those parts of the affidavit to be read in this application. The material is not relevant to the question I have to now decide. The affidavit of Mrs Frigger, pars 15 to 19 together with attachment AF7 will not be read in this application.
Until further order, the affidavit of Mrs Frigger sworn on 7 August 2013 will be confidential, will be kept on the court file but sealed and marked to the effect and will not be available for access to any person except by order of the court.

The defendants' entitlement to costs and the indemnity principle

The 'indemnity principle', 'at its simplest, provides that a party who does not have a liability to his solicitor for costs cannot recover costs against the unsuccessful party to the litigation': Noye v Robbins [2010] WASCA 83, Owen JA (Pullin JA & Buss JA agreeing) [296]. The principle is, however, flexible, and 'designed to allow for a just and fair result': Noye v Robbins [332] - [334]; Dyktynski v BHP Titanium Minerals Pty Ltd [2004] NSWCA 154; (2004) 60 NSWLR 203 [80]; Wentworth v Rogers [2006] NSWCA 145; (2006) 66 NSWLR 474 [45] ‑ [50].
I am not satisfied that anything in the arrangements between the defendant and the litigation funder, or between the defendants and their solicitors, should lead me to deny a costs order.
First, the Litigation Funding Agreement provides for Hillcrest to pay the defendants' costs, within the amount of Budgeted Costs. But the defendants remain responsible for costs exceeding the Budgeted Costs. And, by cl 8, the defendants must reimburse Hillcrest for funding costs out of any amount the defendants recover before any other payments.
Second, there is nothing to show that the defendants are not liable to their solicitors for costs incurred. The Litigation Funding Agreement is a separate agreement to which the defendants' solicitors (although identified in the agreement) are not parties. Nothing in that agreement is inconsistent with the defendants' obligations to their solicitors: see Adams v London Improved Motor Coach Builders Ltd [1921] 1 KB 495, 501, 504; Angor Pty Ltd v Ilich Motor Co Pty Ltd (1992) 37 FCR 65.
Third, I am satisfied that the just and fair result is that the defendants are entitled to recover their costs. Otherwise, the funds available to the liquidator for legal costs, within the Budgeted Costs, could be exhausted in resisting repeated interlocutory applications which might be without merit.

Conclusion

The plaintiffs are to pay the defendants' costs of the application to set down the trial of a preliminary issue. I will hear the parties on the wording of the order, including whether there are any reserved costs. I will also hear the parties on what is the appropriate order for the costs of determining the present question.