Hakea Holdings Pty Ltd v McGrath (No 3)

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FEDERAL COURT OF AUSTRALIA

Hakea Holdings Pty Ltd v McGrath (No 3) [2023] FCA 39   

File number: NSD 278 of 2019
Judgment of: YATES J
Date of judgment: 2 February 2023
Catchwords: COSTS — whether costs should be awarded on an indemnity basis in light of a failure to accept an offer of compromise
Legislation:

Corporations Act 2001 (Cth) s 180(1)

Federal Court of Australia Act 1976 (Cth) s 54A

Federal Court Rules 2011 (Cth)
Cases cited:

Anchorage Capital Partners Pty Limited v ACPA Pty Ltd (No 2) [2018] FCAFC 112

Black v Lipovac [1998] FCA 699; 217 ALR 386

Calderbank v Calderbank [1975] 3 All ER 333

Hakea Holdings Pty Ltd v McGrath [2021] FCA 660

Hakea Holdings Pty Ltd v McGrath (No 2) [2022] FCA 995

Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) [2005] VSCA 298; 13 VR 435

Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721

Oversea-Chinese Banking Corporation Ltd v Richfield Investments Pty Ltd [2004] VSC 351
Division: General Division
Registry: New South Wales
National Practice Area: Commercial and Corporations
Sub-area: Corporations and Corporate Insolvency
Number of paragraphs: 35
Date of last submissions: 30 January 2023
Counsel for the Plaintiff: Mr S Harford-Davis with Ms K Dyon
Solicitor for the Plaintiff: Holding Redlich Lawyers
Counsel for the First Defendant: The First Defendant did not appear
Counsel for the Second Defendant: Ms E Steer
Solicitor for the Second Defendant: Colin Biggers & Paisley Lawyers

ORDERS

NSD 278 of 2019
BETWEEN:

HAKEA HOLDINGS PTY LTD (ACN 116 147 436)

Plaintiff
AND:

STEVEN JAMES MCGRATH

First Defendant

NEON UNDERWRITING LIMITED FOR AND ON BEHALF OF THE UNDERWRITING MEMBERS OF LLOYDS SYNDICATE 2468

Second Defendant

ORDER MADE BY:

YATES J

DATE OF ORDER:

2 FEBRUARY 2023

THE COURT ORDERS THAT:

1.The second defendant’s application for indemnity costs be refused.

2.The question whether a lump sum costs order should be made and, if so, the quantum of those costs, be referred to a Registrar of the Court for inquiry and report as a referee under s 54A of the Federal Court of Australia Act 1976 (Cth) and in accordance with the Federal Court Rules 2011 (Cth).

3.The inquiry referred to in Order 2 not proceed until after the determination of the appeal in proceeding NSD 804 of 2022. 

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.


REASONS FOR JUDGMENT

YATES J:

INTRODUCTION

  1. On 26 August 2022, I published reasons for judgment in which I found that the plaintiff, Hakea Holdings Pty Ltd (Hakea), had established that the first defendant, Mr McGrath—who, at relevant times, was one of its directors—had breached his duty to Hakea under s 180(1) of the Corporations Act 2001 (Cth): Hakea Holdings Pty Ltd v McGrath (No 2) [2022] FCA 995 (the primary reasons).

  2. I also found that the Directors and Officers liability insurance policy held by Hakea, which had been issued by the second defendant, Neon Underwriting…

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Details
Case
[2023] FCA 39
Decision Date

CaseChat Overview and Summary

In the matter of Hakea Holdings Pty Ltd v McGrath (No 3), the plaintiff Hakea contested the defendant Neon's application for indemnity costs, as well as the quantum of costs claimed. The case was originally filed in the Supreme Court of New South Wales on 24 April 2017 and was later transferred to this Court on 29 January 2019. Neon filed its defence on 10 September 2019, denying any liability to Hakea. The hearing for final relief commenced on 19 April 2021 and concluded on 29 September 2021. Following the dismissal of the proceeding against Neon, Hakea filed a notice of appeal dated 19 September 2022, which is listed for hearing on 9 February 2023.

The central legal issues in this case were whether costs should be awarded on an indemnity basis, given the failure to accept an offer of compromise, and whether a lump sum costs order should be made, considering the quantum of costs claimed by Neon. Hakea argued against the indemnity costs and disputed the quantum of the costs claimed by Neon. The court had to determine whether Hakea acted unreasonably in not accepting the offer, and whether Neon's case on the application of the first exclusion was clear enough to justify an indemnity costs order.

The court concluded that Hakea did not act unreasonably in not accepting the offer of compromise, as it was not given a reasonable opportunity to consider its position, due to the timing of the offer and the limited period allowed for its acceptance. Additionally, the application of the first exclusion was not as straightforward as Neon's present submissions suggest, as Neon's position was clarified only on the first day of the hearing. The court also determined that the question of a lump sum costs order and its quantum should be referred to a Registrar of the Court for inquiry and report as a referee under s 54A of the Federal Court of Australia Act 1976 (Cth) and in accordance with the Federal Court Rules 2011 (Cth). This inquiry should not proceed until after the determination of the appeal in proceeding NSD 804 of 2022.

In conclusion, the court refused Neon's application for indemnity costs and referred the question of a lump sum costs order and its quantum to a Registrar for inquiry and report. The inquiry will not proceed until after the determination of the appeal in proceeding NSD 804 of 2022.

Orders

Orders of the court

1. The second defendant’s application for indemnity costs be refused.

2. The question whether a lump sum costs order should be made and, if so, the quantum of those costs, be referred to a Registrar of the Court for inquiry and report as a referee under s 54A of the Federal Court of Australia Act 1976 (Cth) and in accordance with the Federal Court Rules 2011 (Cth).

3. The inquiry referred to in Order 2 not proceed until after the determination of the appeal in proceeding NSD 804 of 2022.

Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

Background

Background to the litigation

Hakea opposes both aspects of Neon’s application. It contends that Neon’s costs should not be awarded on a lump sum basis but should be assessed on a taxation of costs. Hakea also disputes the quantum of the costs claimed by Neon.BACKGROUND This proceeding was commenced in the Supreme Court of New South Wales (the Supreme Court) on 24 April 2017 by the filing of a Commercial List Statement. Hakea subsequently joined Neon to the proceeding and, on 29 January 2019, the proceeding was transferred to this Court by order of the Supreme Court. By then, Hakea had filed an Amended Commercial List Statement which pleaded its claim against Neon. On 10 September 2019, Neon filed its defence. It denied any liability to Hakea, including on the ground that the first exclusion applied. On 3 June 2020, I made an order that the proceeding be listed for hearing for five days commencing on 19 April 2021. On 22 December 2020, I made an order permitting Neon to file, on certain conditions, an expert’s report limited to the issues raised in para 65(b)(i) of the amended defence it wished to file. Paragraph 65(b)(i) of the proposed amended defence was in these terms: 65. In answer to paragraph 65, the Second Respondent:…(b)Says that if (which is not admitted) the First Respondent is liable to the Applicant as alleged in the List Statement, then:(i)that liability is Loss in connection with a Claim based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, in any way involving or in connection with the First Respondent gaining a personal profit or advantage, and by virtue of the term pleaded at paragraph 58(c)(i) above (clause 5(a)(ii)) the Second Respondent is not liable to indemnify the First Respondent in respect of that Loss;ParticularsThe conduct of the first respondent pleaded in paragraphs A5, A6, A10, A11 and C17-C52 of the List Statement constituted or involved the first respondent gaining a personal profit or advantage. The claim made by the applicant against the first respondent is a claim based upon, consequent upon, by reason of, arising out of, arising from, directly or indirectly resulting from, attributable to, involving or in connection with that conduct. Further, the first respondent used moneys wholly or partly obtained from the applicant (by the first respondent’s conduct pleaded in the List Statement) to make the payments set out in the Schedule, each of which discharged a personal liability of the first respondent. On 11 March 2021, I made an order granting leave to Neon to file and serve the amended defence and the expert’s report. The hearing for final relief commenced on 19 April 2021. It was adjourned part-heard on 22 April 2021. The hearing finally concluded on 29 September 2021 (after leave to re-open had been granted to Hakea). Following the dismissal of the proceeding against Neon, Hakea filed a notice of appeal dated 19 September 2022. The appeal is listed for hearing on 9 February 2023.THE APPLICATION FOR INDEMNITY COSTS

Evidence

Evidence Before The Court

Full text does not contain this section.

Decision

Reasons for decision

Hakea also submits that the quantum of the offer does not represent a genuine compromise. If accepted, the offered sum of $200,000 was to be paid on the basis that each party bear its own costs. Hakea submits that, given the loss it claimed (which it says was in excess of $3 million), Neon’s offer was “basically akin to a walk-away” and that its “real purpose” was not to attempt to compromise the proceeding, but to generate “costs protection”. CONCLUSION I am not persuaded that an order for indemnity costs should be made. Hakea did not act unreasonably in not accepting the offer and allowing it to lapse. Hakea was not given a reasonable opportunity to consider its position, having regard to the time at which the offer was made, and the period allowed for its acceptance. I also take into account the fact that Hakea’s case with respect to the first exclusion was not unarguable, even though it was hardly assisted by its own pleading of the case against Mr McGrath. In this regard, however, Neon’s own case on the application of the first exclusion was not without its difficulties. To explain, Neon initially advanced a case that was somewhat at odds with its reliance on the first exclusion. As I pointed out at [124] – [134] of the primary reasons, when opening their respective cases on the first day of the hearing, Hakea and Neon refined their positions by departing significantly from their respective pleadings concerning Mr McGrath’s alleged breaches. As I noted at [134] of the primary reasons, in oral opening submissions Hakea’s case had moved from one of conscious and deliberate wrongdoing on the part of Mr McGrath to one of negligence. On the other hand, Neon’s case moved from one that denied or put in issue the fact that Mr McGrath owed any fiduciary duties or breached any statutory duties as a director of Hakea, to one that not only embraced the fact that Mr McGrath had breached his duties, but also relied on the fact that, in doing so, Mr McGrath acted deliberately to prefer his personal interests and to obtain an improper advantage for himself and for Denham Constructions Pty Ltd (Denham). In its written opening submissions, which were served on 15 April 2021, and which remained unqualified at the time the offer was made, Neon argued that Hakea had acceded to, and consented to, Mr McGrath’s conflict between his duties to Hakea and his duties to Denham, and had thereby relieved Mr McGrath of his fiduciary duties to it (Hakea). Although, in its written opening submissions, Neon relied on the first exclusion, its contention that Mr McGrath was relieved of his fiduciary duties to Hakea struck at the foundation of Hakea’s pleading that Mr McGrath had preferred his and Denham’s interests over Hakea’s interests. This sat awkwardly with Neon’s reliance on the first exclusion. Therefore, at the time the offer was made, the application of the first exclusion was not as straightforward as Neon’s present submissions suggest. Neon’s position was only clarified on the first day of the hearing by its departure, in the course of its oral opening, from its pleaded case and, in this respect, its written outline of opening submissions. By that time, the period for accepting the offer was rapidly coming to an end. As I have said, Hakea was not given a reasonable opportunity to consider its position in light of the offer. This was particularly so given Neon’s change in position, discussed above.LUMP SUM COSTS AND QUANTUM

Ratio Decidendi

Legal Principle Established

Full text does not contain this section.