Hall v Kayon Pty Ltd (No 2) - [2007] SADC 115

DISTRICT COURT OF SOUTH AUSTRALIA
(Civil)
HALL v KAYON PTY LTD (No 2)
[2007] SADC 115
Judgment of Her Honour Judge Shaw
2 November 2007
PROCEDURE - COSTS
Insolvency - Allowance for Costs of unsuccessful plaintiff
District Court Act 1991 (SA) s 42(1), referred to.
Cummings v Lewis (1993) 113 ALR 288, considered.

HALL v KAYON PTY LTD (No 2)
[2007] SADC 115
Introduction

In my judgment and reasons delivered on 12 July 2007, I dismissed the plaintiff’s claim. I found that payments made by Symtec Pty Ltd (“the company”) to the defendant from the proceeds of sale of the business assets of the company in October and November 2000, did not discharge the unsecured loan from the defendant to the company.
I found that the payments were made at a time prior to the appointment of the liquidator on 12 March 2002, when the company was insolvent. I found that the unsecured loan had been assigned to the directors, and that the plaintiff had not established that the payments constituted unfair preferences.
The plaintiff submitted that the defendant ought to pay the plaintiff’s costs of proving that the company was insolvent at the time of the relevant transactions. Further, the plaintiff submitted that the court ought to make no order in relation to the costs of the conduct of the proceedings up until the accountant, Mr Ewan gave evidence on 16 June 2006.
The Question of Insolvency
Prior to the plaintiff’s opening on 13 June 2006, the defendant maintained that the transactions were not insolvent transactions. The plaintiff was called and gave evidence in support of the view expressed in his report that the company was insolvent as at the date of the relevant transactions. The plaintiff’s opinion was not challenged during cross-examination. During the opening and final written submissions on behalf of the defendant, no mention was made as to the issue of insolvency.
During the defendant’s closing address, it was stated for the first time, that the defendant did not take issue with the plaintiff’s contention in relation to insolvency.
The plaintiff submitted that the failure of the defendant to admit insolvency meant that the matter was more complicated and that the evidence took longer than otherwise would have been the case.
Therefore, the plaintiff ought to have his costs incurred in proving that the company was insolvent at the relevant time.
The defendant submitted that there was no misconduct on the part of the defendant or its directors and that the defence taken was reasonably available. The failure to take issue with the evidence of insolvency was the result of a forensic decision by counsel to concentrate on his primary contentions, namely that the defendant’s loan to the company had not been discharged. It remained arguable that the company was not insolvent at the relevant time.
The defendant submitted that in order for the court to order that the successful party pay any of the costs of the unsuccessful party, there must have been positive misconduct by the successful party.
Assignment and Error
The plaintiff submitted that the action was instituted upon the basis of the information provided to him upon his appointment as liquidator. It was not until a settlement conference on 8 December 2005, that the defendant filed an amended defence where it was asserted for the first time, that the defendant’s loan to the company was assigned to the directors of the defendant. On 14 December 2005, the plaintiff’s solicitors sought further and better discovery with respect to the question of assignment. On 15 May 2006, the defendant filed a further list of documents, which included ledgers showing that the loan from the defendant to the company was “taken over by Les Geyer”, effective as at 30 June 2001. Mr Ewan, the accountant who prepared the accounts, was the last witness called by the defendant on Friday 16 June 2006. For the first time, Mr Ewan stated that the accounts upon which the plaintiff relied to issue the proceedings, were incorrect. Although Mr Ewan had known this from about 2002, he had not told anyone.
The plaintiff submitted that had the plaintiff known earlier about the proposed evidence of Mr Ewan in this respect, “it cannot be assumed that the proceedings would have been issued or pursued to trial”[1]. During oral submissions, the plaintiff seemed to pitch this position somewhat higher.
[1] Plaintiff's written submissions (para 34)
The plaintiff submitted that Mr Ewan’s evidence was important in the Reasons for Judgment and that therefore, there should be a reduction in the costs order to reflect this late explanation.
The defendant submitted that the directors of the company cooperated with the liquidator from the outset and informed him that the defendant did not receive a benefit from the relevant payments. Indeed, the directors had mortgaged their own property in order to satisfy creditors of the company. The defendant submitted that the plaintiff was aware from the outset, that more than the total value of the company’s creditors was paid by the defendant and the directors of the defendant. On that basis, it must have been obvious to the plaintiff that the defendant did not receive a benefit from the payments by the company.
The defendant submitted that Mr Ewan’s evidence, which explained the erroneous entry in the company accounts, was a relatively small part of his evidence and of the overall transaction. The plaintiff’s error was to focus on a part only of a wider transaction. The plaintiff failed to consider the ultimate effect of the wider transaction.
The Law
Section 42(1) of the District Court Act 1991 (SA) vests a wide discretion to award costs. The general rule in exercising the discretion, is that “costs follow the event”.
The kind of circumstances where the general rule may not apply, include where firstly, a successful party litigates some question of law or fact which it should have conceded: Cummings v Lewis[2]. Secondly, a successful defendant has succeeded only on a point raised by an amendment later in the proceedings, or thirdly, a successful defendant has misled the plaintiff into believing that he has a cause of action[3].
A successful party who has failed on certain issues may well not only be deprived of his own costs on those issues, but ordered in addition to pay his opponent’s costs of them, and in this context “issue” does not mean a precise issue in the technical pleading sense, but any disputed question of fact, or in my view, of law ... Cretazzo v Lombardi[4] .
[2] (1993) 113 ALR 288, 327
[3] Lunn Civil Procedure, South Australia 1987 Rules at [R101.02.20]
[4] (1975) 13 SASR 1, 12
Conclusion
In relation to the issue of insolvency, I am conscious of the costs which are associated with the requirement that a liquidator prove insolvency at the relevant time. Indeed, on occasions, the courts have “penalised” a party which requires a liquidator to prove insolvency in circumstances where insolvency could never have been an issue. Indeed, on some occasions, costs have been awarded on an indemnity basis. See for example Pegulan Floor Coverings v Bruce Carte[5] .
[5] (1997) SASC 6299
In this case however, while it is true that the defendant’s counsel did not cross-examine upon insolvency or address on insolvency, the position is not as clear. The report prepared by the liquidator was itself important to the defendant insofar as it detailed the nature of the transactions and put in context what the defendant argued was the ultimate effect of the transactions.
In those circumstances, the order for costs which I have determined to make in this matter, makes proper allowance for the additional work undertaken by the liquidator in relation to the question of insolvency, which ought to have been admitted on the pleadings.
In relation to the issue of the payments to the defendant and the true nature of those payments, Mr Ewan’s evidence was important in arriving at my decision in this matter. The accounts, as presented to the plaintiff upon his appointment, did not reveal the mistake about which Mr Ewan gave evidence. The plaintiff was entitled to assume that where the accounting records showed that the company made payments to the defendant in the financial year ending on 30 June 2001, and that the company was no longer indebted to the defendant, the payments were made in discharge of the debt owed to the defendant.
The defence which alleged that there was an assignment of the debt, was not filed until 8 December 2005. The plaintiff says that despite a request for further information about this amendment, no further information was forthcoming.
The defendant says there was no written assignment to produce. However, the ledger, which recorded that the loan to the company was not extinguished by the payments to the defendant but was “taken over” by the directors, was first identified in a list of documents filed on 15 May 2006.
The evidence of Mr Ewan explained the entries in this ledger in the context of the company’s and the defendant’s accounting records.
It is important to bear in mind that the plaintiff, a liquidator, takes up his court appointment without necessarily knowing the background or history of the company’s financial affairs. He was provided with the company’s financial records. They appeared to show that the debt owed to the defendant had been discharged by the payments from the company to the defendant and that the payments constituted an unfair preference.
The liquidator was obliged to make investigations regarding payments by the company and any preferences, and, proceed to recover the monies in relation to any preference. However, by 8 December 2005, the plaintiff was aware that not only had the company benefited from a series of relatively complicated transactions but also that the defendant was alleging that the defendant’s loan to the company had been assigned and not discharged. Certainly, at least by the time that the trial commenced, the plaintiff was aware of the defendant’s contentions in relation to the nature of the payments to the defendant, contentions that I have found to be correct.
I am of the view that an important reason for the plaintiff instituting the action and the matter proceeding to trial, was the accounting record presented to the plaintiff upon his appointment. The entries in that record ought to have caused any liquidator to be concerned. In my view, this history of the course of the proceedings justifies a special order in relation to costs. Accordingly, taking into account both the insolvency question and the issue relating to the error in the accounting record, I consider that the defendant ought to receive 50% of the costs of the action to be taxed or agreed between the parties on a party/party basis.
Order
The order of the court is that the plaintiff pay 50% of the defendant’s costs of the action to be taxed or agreed between the parties, on a party/party basis.