In the matter of Zamora Homes Pty Limited (in liquidation) and others

[2019] NSWSC 1633

Supreme Court

New South Wales

Medium Neutral Citation:

In the matter of Zamora Homes Pty Limited (in liquidation) and others [2019] NSWSC 1633

Hearing dates:

11 June 2019

Date of orders:

11 June 2019

Decision date:

11 June 2019

Jurisdiction:

Equity - Corporations List

Before:

Black J

Decision:

Order that the Plaintiffs pay the liquidator’s costs on the specified basis.

Catchwords:

COSTS – party/party – general rule that costs follow the event – proceedings discontinued or dismissed – where party bringing application delayed in filing pleading – where party withdrew application for appointment of special purpose liquidator – where proceedings were dismissed by consent – whether the applicant should pay the respondent’s costs

 

COSTS – application for costs on an indemnity basis – where delay caused by party by filing a pleading late – where proceedings have not been unreasonably conducted – whether indemnity costs should be ordered.

 

COSTS – application for costs on an indemnity basis – where offer of compromise purportedly made – whether offer was capable of constituting an offer for the purposes of r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW).

  COSTS – application for costs on an indemnity basis – where Calderbank offer made –where offer was complex and introduced uncertainties – whether it was unreasonable to not accept offer.

Legislation Cited:

- Uniform Civil Procedure Rules 2005 (NSW) rr 20.26, 42.20

Cases Cited:

- Calderbank v Calderbank [1975] 3 WLR 586
- Hall v Poolman [2009] NSWCA 64
- McNamara v San [2010] NSWSC 809
- Nu Line Construction Group Pty Ltd v Fowler [2012] NSWSC 816
- Re MF Global Australia Pty Ltd (in liq); Hopper v Campbell in his capacity as liquidator of MF Global Australia Ltd (in liq) [2015] NSWSC 1583
- Re Mustang Marine Services Pty Ltd [2014] NSWSC 1074

Category:

Costs

Parties:

Salvatore Morabito and Frank Morabito (Plaintiffs)
Jainti Pty Ltd (in liq) (Second Defendant)
Geoffrey Reidy in his capacity as liquidator of Jainti Pty Ltd (in liq) (Third Defendant)

Representation:

Counsel:
J A Rose (Plaintiffs)
H Somerville (Second and Third Defendants)

  Solicitors:
James Beatty & Associates (Plaintiffs)
William James Law (Second and Third Defendants)

File Number(s):

2018/349882

Judgment – ex tempore

1. The Plaintiffs, Mr Salvatore Morabito and Mr Frank Morabito, sought orders for the appointment of a special purpose liquidator to several companies in liquidation for the conduct of certain proceedings. An order was previously made appointing a special purpose liquidator in respect of claims in respect of what has been described as the Burradoo matter. The Messrs Morabito also sought such an order in respect of claims relating to the Fraser Panorama matter, where the liquidator has now commenced proceedings against third parties. The liquidator resisted the appointment of a special purpose liquidator to take conduct of the proceedings. The Messrs Morabito have today indicated that they no longer press the application, and an order has been made, by consent, dismissing the proceedings, but preserving orders previously made in respect of other aspects of the application.

2. The Court must now determine the costs that follow from the dismissal of the proceedings. That matter has been addressed with some detail in the evidence, and I have had the benefit of a chronology prepared by Mr Rose, who appears for the Messrs Morabito, and written submissions provided by Mr Rose. Mr Rose also made oral submissions, to which Mr Somerville who appears for the liquidator has responded.

Application of r 42.20 of the Uniform Civil Procedure Rules

3. The starting point, as Mr Rose accepts in submissions, is that r 42.20 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) provides that, if the Court makes an order for the dismissal of proceedings, either generally or in relation to a particular cause of action or the whole or part of any claim, then, unless the Court orders otherwise, the Plaintiff must pay the Defendant’s costs of the proceedings to the extent to which they have been dismissed.

4. Mr Rose draws attention to the comprehensive review of the relevant principles in respect of that rule by Hallen AsJ in McNamara v San [2010] NSWSC 809 at [12]. His Honour there noted, by reference to authority, that the rule does not give rise to a presumption that costs will be ordered against a plaintiff, but does create a starting point by requiring that the plaintiff pay the defendant’s costs of the proceedings unless that outcome is displaced by a discretionary decision of the Court to the contrary. His Honour also there referred to several circumstances in which it may be appropriate to depart from the ordinary position, including where proceedings had been rendered unnecessary by circumstances beyond a plaintiff’s control. I pause to note that that issue does not arise here. There was, plainly, a change of circumstances in the course of the proceedings, when the liquidator commenced proceedings against third parties in respect of the Fraser Panorama matter, at least in part by reason of conduct of those third parties. However, the commencement of those proceedings, and the filing of a Statement of Claim in them, occurred at or prior to the date from which the liquidator now seeks costs as against the Plaintiffs. The whole of the relevant part of these proceedings has therefore been conducted in circumstances that the Fraser Panorama proceedings against the third parties were ongoing and under the liquidator’s control. In McNamara v San above, Hallen AsJ also referred, again by reference to authority, to the distinction between circumstances in which there is an effective surrender in the proceedings, and to the different situation where there is a change in the course of the proceedings, and to the relevance of the question whether the proceedings were reasonably commenced and reasonably defended by the parties.

5. Mr Rose submits that there is good reason to depart from the provision of UCPR r 42.20 in this case, and identifies several matters which are said to support that reason, including the basis on which the Plaintiffs had commenced the proceedings. He also refers to observations that I previously made as to the orders which the Court might make, and ultimately did make in respect of the Burradoo proceedings, in circumstances that the liquidator had not in fact commenced proceedings at that time. The relevance of those observations is somewhat reduced by the fact that the liquidator ultimately commenced proceedings in the Fraser Panorama matter, so that the premise of those observations, that it had not done so, was displaced.

6. The parties have relied on a range of evidence in support of their respective positions. The liquidators rely on an affidavit dated 4 June 2019 of their solicitor, Mr Baltins, which annexes correspondence between them. That correspondence makes clear that there was a significant delay in the filing of a Reply by the Messrs Morabito to the Notice of Grounds of Opposition to the Amended Originating Process that was filed by the liquidator, where that reply was due to be filed by 10 April 2019. The liquidator's solicitors had raised that delay, on several occasions, and been met with comments which implied, without confirming, that the Reply would be filed shortly. It was ultimately not filed until 24 May 2019, some six weeks after it was due to be filed.

7. The liquidator’s solicitors had, in the course of that correspondence, pointed to the risk that the delay in filing that Reply would bring about the loss of a hearing date which had been scheduled for today. It would inevitably have done so, in my view, where the liquidator had been put to an invidious choice of either filing evidence which could have been, and ultimately would have been, insufficient where the Reply sought to raise a potentially significant new allegation of a conflict of interest, which would have had to be addressed by further evidence, or delaying his evidence. The liquidator took the latter course. Whether the liquidator had filed his evidence, or delayed it, in either case the filing of the Reply, in its first version, on 24 May, and in a second version on 4 June, would have brought about the need for further evidence by the liquidator and the loss of the hearing date. That would have had significant consequences where the hearing dates that are available in the immediate future are limited, and the matter likely could not have gone to hearing for some considerable time.

8. Mr Somerville in turn points to allegations raised in the Reply, which at least arguably raise new issues. The first is a characterisation of the liquidator’s behaviour as “dilatory”. Mr Rose submits, and I will charitably assume, that the use of that term was not intended to convey any criticism of the liquidator, beyond the observation made by the Plaintiffs over the course of the proceedings, that the liquidation had continued over a considerable period, in circumstances that the liquidator was unfunded. It remains that the use of that term was likely to lead the liquidator, reasonably, to consider that he ought to lead evidence to respond to its implication that there had been an unreasonable delay in bringing the matter to completion.

9. More significantly, perhaps, the Reply raised a suggested conflict of interest between the liquidator’s interests and the interests of creditors, so far as the liquidator would have an interest in recovering his fees from the conduct of the proceedings. It might immediately be noted that that proposition would seem to be universal, so far as any liquidator bringing any proceedings will have an interest in recovering his or her fees of the liquidation, and his or her fees of the proceedings, in continuing those proceedings. That was a matter which was noted, without any apparent criticism, by the Court of Appeal in Hall v Poolman [2009] NSWCA 64; see also Re Mustang Marine Services Pty Ltd [2014] NSWSC 1074. Whatever the merit of that allegation, it appears to have the difficulty that any such conflict would be apparent, from the fact of the conduct of the proceedings, from the date they were commenced, and it appears to be an aspect of the Plaintiffs’ case in chief, and not a matter raised that should fairly be raised in Reply, where the liquidator would then have no opportunity to answer it.

10. The parties also rely on correspondence which relates to a claim by the liquidator for indemnity costs, based on a suggested offer of compromise, or alternatively an offer in accordance with the principles in Calderbank v Calderbank [1975] 3 WLR 586, arising from their solicitor’s letter dated 24 April 2019 (Ex D1). I will refer to that letter further below. The parties also refer to subsequent correspondence (Ex D2) debating the question whether the earlier letter had provided sufficient information for the Plaintiffs to determine the merits of the liquidator’s defence. I am not assisted by that subsequent correspondence in determining the application. Finally, reference was made to a debate about the amount of costs incurred, by emails dated 10 June 2019. It seems to me that that matter would properly be a matter for the assessor, if costs are ordered and are referred for assessment if they are not agreed between the parties.

11. Returning now to the parties’ respective positions, it is common ground between the parties that an order should be made that the liquidator's costs up to and including 20 March, in respect of the Fraser Panorama aspect of the proceedings, should be the liquidator’s costs in the winding up. It seems to me that that order is appropriate, where the bulk of the time prior to that date related to a period in which the liquidator had filed a submitting appearance, and to the determination of issues in respect of the Burradoo claim. The liquidator seeks an order that the Plaintiffs pay his costs on an ordinary basis from that date, 20 March 2019, until 10 April 2019, the date on which the Reply was due to be filed, or alternatively until 24 April 2019, the date of the suggested Calderbank letter, and costs on an indemnity basis from those dates. The Messrs Morabito in turn submit that there should be no order as to costs of the proceedings, on the basis that they have displaced the starting point under UCPR r 42.20 for the reasons that I have noted previously.

12. Dealing with these matters in turn, it seems to me that an order should be made in favour of the liquidator and against the Plaintiffs for costs of the Fraser Panorama application from 20 March 2019 to the date of the last directions hearing before me, on 6 June 2019, but excluding the costs of today, and those costs should be payable on an ordinary basis. I reach that view because the Plaintiffs have not displaced the starting point which arises under UCPR r 42.20. First, they cannot do so, in my view, by pointing to the merits of their application, when it was first brought, or the observations in the Court’s earlier judgment, prior to the commencement of the proceedings by the liquidator. The position was changed, significantly, after the commencement of the Fraser Panorama proceedings by the liquidator and that change was emphasised by the filing of a Statement of Claim in the Fraser Panorama proceedings by the liquidator on 20 March 2019. Since that date, the Plaintiffs have faced the further difficulty that the appointment of a special purpose liquidator would displace a liquidator who had commenced proceedings in respect of the matter in which they had sought to have proceedings commenced, although there appears to be a continuing debate between the parties as to the width of those proceedings, and had done so at his own cost, avoiding the funding charges which were implicit in the Plaintiffs’ proposal.

13. Second, the starting point under that rule is not displaced because of the deficiencies in the Plaintiffs’ conduct of the proceedings since their Reply was due, including the long delay in filing that Reply. Third, the starting point under that rule is not displaced where the Court cannot, where the proceedings are dismissed by consent, reach a determination as to the outcome which the proceedings would have reached had they gone to a hearing. That is particularly the case where issues may well have been finely balanced, so far as the Plaintiffs would have pointed to delay in the conduct of the liquidation to date, and the liquidator would have pointed to the fact that he had now commenced proceedings and was doing so on a basis that may well be advantageous to creditors, so far as the funding of the proceedings is concerned.

14. For these reasons, the starting point in UCPR r 42.20 is not displaced in respect of the order for costs for the period from 20 March 2019 until 6 June 2019.

Whether an order for indemnity costs should be made

15. As I noted, the liquidator seeks an order for costs on an indemnity basis from 10 April 2019, by reference to the conduct of proceedings from that date by the Plaintiffs. I accept that the Court has power to make an order for indemnity costs, where proceedings have been unreasonably conducted. I am not persuaded that, in this case, the delays by the Plaintiffs rise to the level that warrant an order for indemnity costs, although I have noted above that aspects of the conduct of the proceedings in that period were not ideal. In particular, it appears that there was correspondence between the parties over the period as to matters involved in the conduct of other proceedings, and various attempts to address various alternatives as to the conduct of the Fraser Panorama proceedings, and those matters may have contributed to the delay in filing the Reply. It may be that the Plaintiffs would have been ordered to pay the costs thrown away of the hearing today, had it been vacated, and not used for the question of costs as it has been. That, however, does not indicate, in my view, that their conduct rose to the level that would warrant an order for indemnity costs.

16. Alternatively, the liquidator seeks an order for costs on an indemnity basis from 24 April 2019 in reliance on his solicitor’s letter dated 24 April 2019 (Ex D1). That letter pointed to several reasons why the liquidator contended that the application for the appointment of a special purpose liquidator would fail, and advanced the brave observation that the liquidator considered that application was “without merit”. It does not seem to me that that characterisation was well founded, in circumstances that the delay in the liquidation plainly raised issues which would have required serious consideration, notwithstanding that the application may ultimately have failed, because the liquidator had ultimately commenced proceedings, and was doing so at his own cost, in a manner that may have advantaged creditors as I noted above.

17. That letter in turn offered to settle the proceedings, on the basis that they be dismissed with no order as to costs, and that paragraph 1 of an order that I had previously made be varied so as to delete a condition imposed on the withdrawal of the submitting appearance by the liquidator, that he pay the costs thrown away, without recourse to the assets of Jainti Pty Ltd (in liq). Mr Rose submits, and I accept, that the satisfaction of that condition was not within the Plaintiffs’ control. Even if the Plaintiffs had consented to that order being made, there was no certainty that it would be made, where that order protected the interests of creditors of the company generally, which include persons in an adverse interest, as matters stand, both to the liquidator and to the Plaintiffs. In those circumstances, it does not seem to me that the letter was capable of constituting an offer of compromise for the purposes of UCPR r 20.26, not least because of the difficulty in comparing the outcome for the Plaintiffs, if they continued the proceedings, with the outcome if the proceedings were dismissed, on the basis of an order that might or might not be made, with impacts that extended to third parties other than the Plaintiffs.

18. It also seems to me that, in those circumstances, it cannot be said that it was unreasonable for the Plaintiffs not to accept the offer, for the purposes of the principles in Calderbank v Calderbank above. The effect of those principles was reviewed by Ward J in Nu Line Construction Group Pty Ltd v Fowler [2012] NSWSC 816 at [9]-[15], and her Honour there noted that the onus is on a party seeking to rely on a Calderbank offer to satisfy the Court that it should exercise the cost discretion in its favour, and an order for indemnity costs does not follow, necessarily, from the making of an offer of compromise, even if it is more favourable than the final judgment made. In Re MF Global Australia Pty Ltd (in liq); Hopper v Campbell in his capacity as liquidator of MF Global Australia Ltd (in liq) [2015] NSWSC 1583 at [6]ff, I summarised the relevant principles and drew attention to the significance of whether it could be said that it was unreasonable for a plaintiff not to accept the offer, so as to warrant a departure from the general rule as to costs. As I have noted, it seems to me that the complexity of the offer made by the liquidator, the uncertainty as to whether the Court would vary the previous order, and the impact of that variation upon third parties, was such that it was not unreasonable for the Plaintiffs not to accept an offer in that form. For these reasons, the claim for costs on an indemnity basis by the liquidator is not established.

Costs of the costs argument

19. It seems to me, subject to offering Counsel an opportunity to be heard if they require it, that there should be no order as to the costs of the costs argument. Each party has had a degree of success. The Plaintiffs sought that there be no order as to costs, and were unsuccessful in that respect, but have succeeded in avoiding an order for indemnity costs made against them, and the period for which they are liable for costs has been narrowed. The liquidator sought, and was successful, in obtaining an order for costs over a part of the period, but pressed for and was unsuccessful in obtaining an order for indemnity costs. Where each party has had a measure of success, and the hearing and the costs hearing needed to go ahead in any case because of the positions taken by both parties on the issues on which they succeeded and the issues on which they failed, there is no basis for an order that one party pay the costs of the other.

Orders

20. I make the following orders as to costs:

1.    Order that the liquidator’s costs up to and including 20 March 2019, in respect of the Fraser Panorama matter, and excluding all costs that are the subject of previous costs orders, be the liquidator’s costs in the winding up.

2.   The Plaintiffs pay the liquidator’s costs of the application concerning the Fraser Panorama matter, excluding any costs that were the subject of previous costs orders, from 21 March 2019 to 6 June 2019, on an ordinary basis.

3.   There be no order as to costs since 7 June 2019 or of the hearing today.

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Decision last updated: 29 November 2019