In the matter of Wridgemont Display Homes P/L
[1992] FCA 908
•04 DECEMBER 1992
Re: WRIDGEMONT DISPLAY HOMES PTY. LTD.
No. V G3109 of 1991
FED No. 908
Number of pages - 14
Corporations
(1992) 39 FCR 193
(1992) 117 ALR 479
COURT
IN THE FEDERAL COURT OF AUSTRALIA
VICTORIA DISTRICT REGISTRY
GENERAL DIVISION
Jenkinson J.(1)
CATCHWORDS
Corporations - Compromises and arrangements - Costs of proceeding for approval - Whether order may be made against person not party to the proceeding.
Federal Court of Australia Act 1976 - s.43
Corporations Law - s.1335(2)
Federal Court Rules - O.71 R.10
HEARING
MELBOURNE
#DATE 4:12:1992
Counsel for the Applicant: Mr H. A. Aizen
Solicitors for the Applicant: Wilder Moses Bengasino
Counsel for Creditors: Mr N. Lucarelli
Phillips Bricks and Pottery
Pty. Ltd. and Hick Timbers
Pty. Ltd.
Solicitors for Creditors: Philip Sutton and Co.
Phillips Bricks and Pottery
Pty. Ltd. and Hick Timbers
Pty. Ltd.
ORDER
THE COURT ORDERS THAT:
1. Each of the motions on the part of Phillips Bricks and Pottery Pty. Ltd. and Hick Timbers Pty. Ltd. of which notice was given in paragraphs 3 and 6 of the notice of motion filed 22 April 1992 be dismissed.
2. There be no order as to costs of the said motions.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
JUDGE1
JENKINSON J. Motions for costs of an application under s.411 of the Corporations Law for approval of an arrangement between the applicant and its creditors and its members.
The originating application was filed on 25 October 1991. At that time an application (VG No. 3032 of 1991) by B. and M. French Plastering Pty. Ltd. for an order under s.460 of the Corporations Law that the applicant ("Display") be wound up was pending in this Court. Meetings of creditors and of members having been ordered and held, the hearing of Display's motion that the Court grant its approval to the scheme commenced on 15 april 1992 and, being part heard at the end of that day, was adjourned until 22 April 1992. On the latter day Mr. Aizen of counsel for Display sought leave to withdraw the application for approval of the arrangement and consented to the making of an order in the other proceeding that Display be wound up. Leave was granted and the winding-up order was made. On a later day an order was made that Display pay the costs of two creditors of the application for approval of the arrangement. Mr. Lucarelli of counsel for those two creditors, Phillips Bricks and Pottery Pty. Ltd. ("Phillips") and Hick Timbers Pty. Ltd. ("Hick") sought also an order that the two shareholders of Display, who were at relevant times the directors of Display, pay those costs. Those two persons, Cornelius John Crowley and Kerrie Lee Crowley, were also at relevant times the shareholders and directors of another company, Wridgement Homes Pty. Ltd. ("Homes"), which had concerned itself in the making of the arrangement. Mr. Lucarelli sought also an order that Homes pay those costs. Evidence adduced on the hearing of the application for the holding of meetings of creditors and of members and evidence adduced on the hearing of the motion for approval of the arrangement before the withdrawal of that motion has been read for and against Mr. Lucarelli's motions for costs, and further evidence has been adduced for and against those latter motions.
Since the hearing of the motions concluded and judgment thereon was reserved one question has in my opinion been resolved by decisions binding upon me : whether s.43 of the Federal Court of Australia Act 1976 confers on this Court power to order that costs of a proceeding in the Court be paid by a person not a party to the proceeding. The reasoning of a Full Court of this Court in Bent v. Gough (1992) 108 ALR 131 and the reasoning of a majority of the numbers of the High Court in Knight v. F. Special Assets Ltd. 1992) 107 ALR 585 in my opinion compels the conclusion that s.43 does confer such a power, notwithstanding that in neither of those cases was s.43 under consideration. However, sub-section 43(2) recognises, if it does not create, a potential limit on the exercise of the power. Section 43 provides:
"(1) The Court or a Judge has jurisdiction to award costs in all proceedings before the Court (including proceedings dismissed for want of jurisdiction) other than proceedings in respect of which any other Act provides that costs shall not be awarded.
(2) Except as provided by any other Act, the award of costs is in the discretion of the Court or Judge."
Section 1335(2) of the Corporations Law provides:
"The costs of any proceeding before a court under this Law shall be borne by such party to the proceeding as the court, in its discretion, directs."
The reference to "any other Act" in sub-section 43(2) is to be construed as a reference to another Act of the Parliament of the Commonwealth : see the Acts Interpretation Act 1902, s.38. In this proceeding it is the Corporations Law of Victoria under which the matter arose and it is the Corporations (Victoria) Act 1990 by which jurisdiction has been conferred on this Court with respect to the matter. Section 1335(2) of the Corporations Law of Victoria is not "any other Act", within the meaning of that expression in sub-section 43(2). Exercise of the jurisdiction conferred on this court by the Corporations (Victoria) Act 1990 is authorised by sub-section 56(2) of the Corporations Act 1989. The jurisdiction must in my opinion be exercised in conformity with the provisions of s.1335(2) of the Corporations Law of Victoria. That provision limits the persons whom the court may direct to bear costs of the proceeding to those who are parties to the proceeding.
Section 60 of the Corporations Act 1989 provides:
"(1) The power to make rules of court conferred by section 59 of the Federal Court of Australia Act 1976 extends to making rules of court, not inconsistent with the Corporations Law of the Capital Territory:
(a) with respect to proceedings, and the practice and procedure, of the Federal Court of Australia under that Law; and
(b) with respect to any matter or thing that is:
(i) required or permitted by that Law to be prescribed by rules within the meaning of that Law; or
(ii) necessary or convenient to be prescribed by such rules for carrying out or giving effect to that Law; and
(c) without limitation, with respect to costs, and with respect to rules about meetings ordered by the Federal Court of Australia.
(2) When the Federal Court is exercising jurisdiction with respect to matters arising under the Corporations Law of a State, being jurisdiction conferred by a law of a State that corresponds to this Division, that Court must apply the rules of court made under subsection
(1), with such alterations as are necessary.
(3) In this section: 'Corporations Law of the Capital Territory' does not include rules of court."
Order 71 Rule 10 of this Court's Rules provides:
"(1) The Court may grant leave to any person who is or claims to be:
(a) a creditor, contributory or officer of a body corporate; or
(b) an officer of a creditor of a body corporate; or
(c) an officer of a contributory of a body corporate; to be heard in proceedings under the Corporations Law without becoming a party to those proceedings.
(2) Leave may be granted under subrule (1) on conditions, and may be revoked by the Court at any time.
(3) If the Court considers that the attendance of a person to whom leave has been granted under subrule (1) has resulted in additional costs for any party to the proceedings (including the body corporate to which the proceedings relate) which should be borne by the person to whom leave was granted, the Court may direct that those costs be paid by that person and may order that that person is not entitled to be heard in the proceedings until those costs are paid or secured to the Court's satisfaction.
(4) The Court may order that a person who is or claims to be a creditor, contributory or officer of the body corporate be added as a respondent in proceedings under the Corporations Law, and may impose conditions on such an order.
(5) Leave may be sought under subrule (1) or an order may be made under subrule (3) on:
(a) a notice of motion brought in the proceedings by a party to the proceedings; or
(b) a notice of motion brought in the proceedings by a person having an interest in the proceedings; or
(c) on the Court's own motion."
The expression "Corporations Law" in Order 71 includes a separate reference to the Corporations Law of each jurisdiction other than the Australian Capital Territory : O.72, R.2 and s.14 of the Corporations Act 1989. Phillips and Hick had each been granted leave, as creditors of Display, to be heard in the application for approval of the scheme, without either becoming a party to that proceeding. So also had Homes and Mr and Mrs Crowley been granted leave, but not until after the application for approval had been withdrawn and orders that they pay the costs of Phillips and Hick had been sought. O.71 R.10(3), assuming that it is not invalid for repugnance to s.1335(2) of the Corporations Law, provides no authority for any of the orders sought by Mr. Lucarelli. The attendance of Mr and Mrs Crowley and Homes after they had been granted leave to be heard did not result in any additional costs, in the sense intended by Sub-Rule 10(3), for Phillips and Hick. Those three attended only to be heard in opposition to the making of the orders for costs against them which Mr Lucarelli was seeking. Nor is Phillips or Hick a party to the proceeding, unless the filing of such a notice as O.71 R.22(9) contemplates were taken to constitute him or her who so files a party.
In my opinion the obstacle which s.1335(2) presents to the exercise of the jurisdiction of the Court over costs against a person not a party to the proceeding may, and in a proper case should, be obviated by exercise of the power conferred by O.71 R.10(4) in a case where the Court concludes that "a person who is or claims to be a creditor, contributory or officer of the body corporate" to which the proceeding relates ought to bear costs of that proceeding. I think that opinion to be congruous with the observation of Dawson J. in Knight v. FP Special Assets Ltd. (1992) 107 ALR 585 at 600 that "there is a certain artificiality in any proposition that an award of costs cannot be made against a person merely because he is not a party to the proceedings. If that were all, then it would be possible simply to join the person as a party for the purpose of obtaining an order for costs against him. Indeed, in the case of Mathias v. Yetts (1882) 46 LT(NS) 497 that was said to have been the practice where it was otherwise appropriate to make an award of costs against a person who was not a party. When it is said that as a general principle costs ought not be awarded against a person who is not a party to the proceedings, what is really being asserted is, not that there is no jurisdiction to do so, but that there is no justification for it because generally speaking persons who are not parties lack a sufficient connection with the litigation to provide a proper basis upon which to award costs against them. Mere lack of joinder is not the reason and, as I have said, if it were, it could easily be cured".
Each of Mr and Mrs Crowley was at relevant times an officer, namely a director, of Display. Each of them had guaranteed payment to Phillips and Hick of certain sums owed by Display to those companies. According to the explanatory statement furnished to creditors before their meeting those sums were $55,304.97 in the case of Phillips and $39,645.78 in the case of Hick. In each case that was the amount said to be claimed, and to be admitted, as owing by Display in the list of unsecured creditors scheduled to the scheme of arrangement. However, according to the evidence of a director of Phillips and of Hick only $36,650.46 of the $55,304.97 was the subject of guarantee, and of the indebtedness of Display to Hick, sworn by the director to be $57,219.38 and not $39,645.78, only the latter sum was the subject of guarantee. There was no evidence to suggest that the debt owed to any other creditor of Display was the subject of a guarantee. The total amount said in the explanatory statement to be claimed, and to be admitted, as owing to unsecured creditors was $903,076.04. (Elsewhere the total was stated to be $871,172.83.) There was said to be no preferential or secured creditor. The only significant asset disclosed was a loan indebtedness by Homes to Display of $486,292.00, the realisable value of which was stated to be that amount. Homes had traded, in its capacity as trustee of a family trust of which Mr and Mrs. Crowley were beneficiaries, as a land developer, engaging Display to build houses and other buildings on land acquired by Homes. Summarily stated, the arrangement proposed by Display to its creditors was that Homes would transfer to the administrator of the scheme four dwelling houses in a street at Kangaroo Flat, the aggregate value of which was said to be $420,000. Mr and Mrs Crowley would pay, within 12 months of the commencement of the scheme, $60,000 to the administrator. The proceeds of sale of the houses and the $60,000, after deduction of the expenses of the scheme, would be distributed rateably to the creditors of Display, and upon completion of that distribution Display would be released by each creditor from all claims in respect of the debt owed to that creditor. The dividend expected was said to be 42.5 cents in the dollar. It was claimed in the explanatory statement that Homes was by contract with Display entitled to defer payment of its loan indebtedness until 31 December 1999.
Clause 5(a) of the proposed arrangement provided:
"Scheme creditors whose debts are guaranteed by any person may elect to rank as scheme creditors, otherwise they shall and shall be deemed to rely on the rights which they possess under any such guarantees. Such election to rank as a scheme creditor shall be made by notice in writing to the administrator given to him by delivery of such notice to him care of 61-65 Bull Street, Bendigo in the State of Victoria within 45 days of the commencement date."
At the meeting of creditors to consider the arrangement, which is sworn to have occupied six and a half hours, none of those who attended in the interest of Phillips or of Hick expressed to the meeting opposition to the inclusion of clause 5(a) in the arrangement. A reason for that was given by Christopher Norman Rowsell, who was at relevant times a director of Phillips and of Hick, in an affidavit sworn 7 April 1992. Mr Rowsell attended the meeting with one other man interested on behalf of Phillips and another on behalf of Hick. Further, a solicitor, Phillip Leonard Sutton, attended in the interest of those two companies and addressed the meeting on several occasions in that interest. Clause 13 of Mr. Rowsell's affidavit reads:
"I refer to the Minutes insofar as they relate to clause 5(a) of the scheme. Phillips Bricks and Hick Timbers oppose the inclusion of clause 5(a) in the scheme. At the Creditors Meeting Phillips Bricks and Hick Timbers only sought to extend the time available to them to make their election pursuant to clause 5(a). No issue was taken by them during the Creditors Meeting to the inclusion of clause 5(a) in the scheme. This was done because it was abundantly clear from the manner in which the Creditors Meeting had been conducted up to that point in time that it was virtually impossible for Phillips Bricks and Hick Timbers to succeed in any attempt to have that clause removed. It was abundantly clear to me that the creditors represented by Mr Kirkham (who can be describ ed as representing the majority creditors) had the numbers to defeat any amendment to the scheme which in some way assisted Phillips Bricks and Hick Timbers. Indeed, the debate in respect of the amendment to clause 15 and the inclusion of a clause in clause 15 permitting the creditors represented by Mr Kirkham to receive their costs of and incidental to the debts owed to them by Wridgemont Display (to the exclusion of Phillips Bricks and Hick Timbers) made it abundantly clear that the creditors represented by Mr Kirkham would refuse any attempt to amend clause 5(a) of the scheme. As a result, I instructed Mr Sutton, who in effect represented Phillips Bricks and Hick Timbers during the course of the Creditors Meeting, not to seek to have clause 5(a) deleted at that time but to leave the issue as to the prejudicial nature of clause 5(a) of the scheme to a later time. Phillips Bricks and Hick Timbers will be prejudiced if clause 5(a) is allowed to remain in the scheme. This is because those companies will not be able to participate in the scheme and proceed against the guarantors as they would normally be entitled to do."
Another reason may perhaps be inferred from an affidavit sworn by Mr Sutton on 27 March 1992, paragraph 4 of which reads:
"My clients are creditors of Wridgemont Display Homes Pty. Ltd. ('the Company'). My Clients were given notice of the meeting of creditors convened pursuant to the order of this Honourable Court and I attended (along with representatives of My Clients) at that meeting on 21st January 1992. I note that the meeting of creditors took over eight hours and that there was a great deal of debate and discussion as to the terms of the proposed scheme of arrangement. Although the vote at the meeting approved an amended scheme of arrangement My Clients abstained from voting due to what they perceived as local commercial difficulties with not agreeing with the majority of creditors."
It would in my opinion have been arguable that the inclusion of clause 5(a) in the proposed arrangement had for a consequence that Phillips and Hick, as creditors whose debts were the subjects of guarantees, constituted a class of unsecured creditors distinct from the rest, and that approval of the arrangement including clause 5(a) would not have been granted under s.411(4)(b) of the Corporations Law unless those two creditors had consented. See Ford : Principles of Company Law (5th ed.) paras. (1909), (2130). If the determination of Phillips and Hick not to consent to the arrangement including clause 5(a), but to oppose the grant of the Court's approval, had been communicated at the meeting to Display and the other creditors, there might have been a case for the exercise of the power to order Mr and Mrs Crowley, at whose direction the application for approval was made, to pay the costs of Phillips and Hick of the application. (The case for such an order would have been weakened, if not destroyed, if the applicant company had made it clear at the meeting, or shortly afterwards to Phillips and Hick, that it would not seek to withdraw the application if the Court were to conclude that approval should be granted only subject to the deletion from the arrangement of clause 5(a), pursuant to s.411(6) of the Corporations Law.) But in my opinion the failure of those who spoke for Phillips and Hick to make clear those companies' opposition to clause 5(a) gave Mr and Mrs Crowley ground to hope that the arrangement including clause 5(a) would be approved, and reason to bring on the application for such an approval. In those circumstances, and having regard to the withdrawal of the application when it became clear that opposition to clause 5(a) would be pressed by Mr Lucarelli, justice between these persons, Mr and Mrs Crowley on the one hand and the two companies on the other, does not require that the companies' costs be ordered to be borne by Mr and Mrs Crowley by reason of the inclusion of clause 5(a) of the arrangement.
Evidence was adduced by r. Lucarelli which he submitted showed that the indebtedness of Homes to Display is, or alternatively might reasonably be suspected to be, substantially greater than represented to the creditors at the meeting and to the Court, that dealings between Display and Homes in 1991 had been, or alternatively might reasonably be suspected to have been, designed to disadvantage Display's creditors, and that the proposed arrangement had been designed and promoted by Mr and Mrs Crowley, as the shareholders and directors of both companies and beneficiaries of the trust of which Homes was trustee, to shield Homes from the enquiry which they feared a liquidator of Display would direct into those dealings, and from the proceedings such a liquidator would be likely to take as a result of that enquiry. These were circumstances, it was submitted, which made it just that an order should be made for payment of the costs of Phillips and Hick by Homes, as well as by Mr and Mrs Crowley.
In the limited time, and with the meagre means of discovering relevant evidence, available to him Mr Lucarelli was able to raise questions about the conduct of the persons against whom he sought orders for costs, and of some others who acted as agents of those persons. But I am not able to reach upon the evidence any finding of a kind which would justify any of the orders sought. In addition to the matters pertaining specifically to Homes there was evidence which in Mr Lucarelli's submission showed that incorrect and incomplete information about the affairs of Display had been put forward by Mr and Mrs Crowley, or by those lawyers and accountants who acted on their instructions, to the creditors and to the Court. But in those few instances in which the evidence might have justified a finding in accordance with those submissions, the evidence did not establish that the errors had been caused by conduct, on the part of Mr or Mrs Crowley or of an agent of theirs or of Display, of a kind which would attract an exercise of the discretionary power to order a person not a party to the proceeding to bear costs of the proceeding. Quite the most likely causes, upon the evidence before me, of the errors and omissions which Mr Lucarelli alleged, were misunderstandings and honest mistakes, not reprehensible conduct. An exhaustive enquiry might disclose reprehensible conduct. But that was not made to appear to me.
No order for costs against Mr or Mrs Crowley or Homes will be made. No occasion arises for exercise of the power conferred by O.71 R.10(4). The persons who took part in the proceedings about costs should abide their own costs of those proceedings. The costs order made against Display was expressly limited to costs incurred to and including the day on which the order was pronounced, 27 April 1992.
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