JAB Nominees (Aust) Pty Ltd v Auswild
[2020] VSC 731
•11 November 2020
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
CORPORATIONS LIST
S CI 2014 04719
| JAB NOMINEES (AUST) PTY LTD (ACN 603 601 944) AS TRUSTEE FOR THE G BERGMULLER NO 2 WILL TRUST & ORS | Plaintiffs |
| v | |
| JAMES AUSWILD & ORS | Defendants |
COMMERCIAL LIST
S ECI 2014 00071
| FINANCE & GUARANTEE COMPANY PTY LTD (ACN 000 032 548) & ORS | Plaintiffs |
| v | |
| JAMES RONALD AUSWILD & ORS | Defendants |
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JUDGE: | RIORDAN J |
WHERE HELD: | Melbourne |
DATE OF HEARING: | 15-18, 22-24, 30 June 2020; 1-2 July 2020 |
DATE OF JUDGMENT: | 11 November 2020 |
CASE MAY BE CITED AS: | JAB Nominees (Aust) Pty Ltd v Auswild |
MEDIUM NEUTRAL CITATION: | [2020] VSC 731 |
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CORPORATIONS LAW – Oppressive conduct – Whether the filing and maintenance of a proceeding by a corporation (‘the Company Proceeding’) against defendant shareholders constituted oppressive conduct by directors and/or related shareholders – Whether relief from the oppression requires an order that the directors indemnify the corporation for all costs incurred in the Company Proceeding.
CORPORATIONS LAW – Directors’ duties – Duty to exercise powers in good faith in the best interests of the corporation – Whether directors breached duty by filing and maintaining the Company Proceeding against defendant shareholders.
EQUITY – Fiduciary duties – Conflict rule – Whether directors had a conflict between duty and interest in filing and maintaining the Company Proceeding against defendant shareholders – Whether the Company Proceeding advantaged the directors and related shareholders, as the plaintiffs in proceedings against the defendant shareholders based on similar claims – Principles of conflict rule considered – Whether conflict rule is strictly applied to directors – Whether conflict rule is affected by an attenuation clause in the constitution.
EQUITY – Equitable compensation – Whether ‘but for’ test is a causative requirement in a claim for equitable compensation for a breach of conflict rule – Burden of proof of causation in a claim for equitable compensation for a breach of conflict rule.
COSTS – Costs against non-parties – Whether costs of successful defendant shareholders in a Company Proceeding should be paid by non-parties, being the directors and/or related shareholders.
COSTS – Claim for costs to be assessed on indemnity basis – Whether the Company Proceeding had no chance of success – Whether the failure of fraud claims was sufficient to justify an indemnity costs order.
COSTS – Gross sum costs order – Whether a gross sum costs order would result in significant savings in time and costs – Gross sum costs order not appropriate for complex costs orders.
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APPEARANCES: | Counsel | Solicitors |
| S CI 2014 04719 | ||
| For the First Plaintiff | Mr P W Collinson QC with Ms V Bell | Brown Wright Stein |
| For the Second to Fourth Plaintiffs | Mr J L Evans QC with Ms K Wangmann | Harris Freidman Lawyers |
| For the Defendants | Mr J C Kelly SC with Mr S V Shepherd | Pikes & Verekers |
| For the First Third Party | Mr C M Archibald QC with Ms F J Bentley | Shanahan Tudhope |
| For the Second Third Party | Mr J W S Peters QC with Mr L J S Molesworth | Bridges Lawyers |
S ECI 2014 00071 | ||
| For the Plaintiffs | Mr A J Bailey with Mr N C M Walter | Macpherson Kelley |
| For the First Defendant | Mr A T Strahan QC with Mr E J Batrouney | Lander & Rogers |
| For the Second to Tenth Defendants | Mr J C Kelly SC with Mr S V Shepherd | Pikes & Verekers |
TABLE OF CONTENTS
Background to the dispute............................................................................................................... 3
Carlisle loan................................................................................................................................... 4
Debt Management Agreement.................................................................................................... 4
Purchase of the Seascape Apartments....................................................................................... 5
Telasava and Rossfield loans....................................................................................................... 5
Transfer of the Sutton Farm property........................................................................................ 6
Purchase of the Regency Unit for Baronja................................................................................. 6
Purchase of the Beresford Units.................................................................................................. 6
Payment of wages to the defendants......................................................................................... 6
Common Conduct Allegations................................................................................................... 7
Short procedural history of the Company Proceeding and the Shareholders Proceeding.. 9
Chronology........................................................................................................................................ 14
Issues for determination................................................................................................................. 45
Question 1 – Did the filing and maintenance of the Company Proceeding by the Third Party Directors constitute a breach of their directors’ fiduciary duties and/or statutory duties under s 181 of the Act?.......................................................................................................................................... 47
Submissions................................................................................................................................. 47
Submissions of the RWA Shareholders - the defendants/plaintiffs by counterclaim 47
Submissions of JAB Nominees - the first plaintiff/first defendant by counterclaim.. 48
Submissions of James Bergmuller – the first third party................................................ 51
Submissions of Peter Parker - the second third party..................................................... 53
Conclusion on question 1........................................................................................................... 55
Principles................................................................................................................................ 55
Did the Third Party Directors have a personal advantage in the filing and maintenance of the Company Proceeding such that a reasonable person would think there was a real or substantial possibility of them being swayed by it?........................................................ 57
The Third Party Directors had a substantial personal interest in the Shareholders Proceeding............................................................................................................ 58
The interests of the JFJ Shareholders in the Shareholders Proceeding were advantaged by the filing and maintenance of the Company Proceeding.. 61
The Shareholders Proceeding was not in the interests of the Plaintiff Companies................................................................................................................................ 62
The Third Party Directors knew about the Shareholders Proceeding........ 62
Further submissions of the Third Party Directors.................................................................. 63
Was there a real conflict of interests?................................................................................. 64
Was a breach of the conflict rule pleaded?........................................................................ 64
Does the conflict rule operate if the conduct is in the interests of the company?....... 67
Should the conflict rule be strictly applied to directors?................................................ 68
Was the conflict rule affected by the attenuation clauses in the constitutions of the Plaintiff Companies?............................................................................................................................ 69
Was there acquiescence or consent to the conflict of interests?..................................... 71
Were the Third Party Directors in breach of their statutory duties under s 181 of the Act to exercise their powers in good faith in the best interests of the corporation, and for a proper purpose?................................................................................................................................. 72
Question 2 – If yes to question 1, did the Third Party Directors act on the instructions of the JFJ Shareholders as majority shareholders?...................................................................................... 75
Submissions................................................................................................................................. 75
Submissions of the RWA Shareholders – the defendants/plaintiffs by counterclaim 75
Submissions of JAB Nominees - the first plaintiff/first defendant by counterclaim.. 75
Submissions of the Parker Women – the second to fourth plaintiffs/second to fourth defendants by counterclaim................................................................................................ 76
Conclusion on question 2........................................................................................................... 76
Question 3 – If yes to question 1, in determining whether the Third Party Directors would be liable for a breach of fiduciary duty for the costs and liabilities incurred in the Company Proceeding:.............................................................................................................................................................. 77
a. is it necessary for the Court to be satisfied that the breach of duty caused the costs sought to be recovered; and................................................................................................................... 77
b. has the burden of proving causation been discharged.................................................. 77
Submissions................................................................................................................................. 77
Submissions of the RWA Shareholders – the defendants/plaintiffs by counterclaim 77
Submissions of JAB Nominees - the first plaintiff/first defendant by counterclaim.. 78
Submissions of James Bergmuller - the first third party................................................. 81
Submissions of Peter Parker - the second third party..................................................... 81
Conclusion on question 3........................................................................................................... 82
Question 4 – If yes to questions 1 or 2, does such conduct constitute oppressive conduct by the majority shareholders or the Third Party Directors?................................................................ 88
Submissions................................................................................................................................. 88
Submissions of the RWA Shareholders – the defendants/plaintiffs by counterclaim 88
Submissions of JAB Nominees - the first plaintiff/first defendant by counterclaim.. 89
Submissions of the Parker Women - the second to fourth plaintiffs/second to fourth defendants by counterclaim................................................................................................ 90
Submissions of James Bergmuller - the first third party................................................. 91
Submissions of Peter Parker - the second third party..................................................... 92
Conclusion on question 4........................................................................................................... 92
Question 5 – If yes to question 4, does the majority shareholders’ or the Third Party Directors’ conduct enliven the jurisdiction under s 233(1)(j) of the Act for an order that they reimburse the Plaintiff Companies for the costs of the Company Proceeding?............................................ 92
Submissions................................................................................................................................. 92
Submissions of the RWA Shareholders - the defendants/plaintiffs by counterclaim 92
Submissions of JAB Nominees - first plaintiff/first defendant by counterclaim........ 93
Submissions of the Parker Women - the second to fourth plaintiffs/ second to fourth defendants by counterclaim................................................................................................ 94
Submissions of James Bergmuller - the first third party................................................. 94
Submissions of Peter Parker - the second third party..................................................... 95
Conclusions on questions 4 and 5............................................................................................. 96
Costs claims of the defendants in the Company Proceeding................................................ 101
Question 6 – Are the elements in Knight v FP Special Assets Ltd satisfied such as to enliven the jurisdiction for a non-party costs order?................................................................................... 101
Submissions............................................................................................................................... 101
Submissions of the Company Defendants - the second to tenth defendants............. 101
Submissions of JRA - the first defendant......................................................................... 103
Submissions of JAB Nominees.......................................................................................... 106
Submissions of James Bergmuller.................................................................................... 107
Submissions of Peter Parker.............................................................................................. 108
Submissions of the Parker Women................................................................................... 109
Conclusion on question 6......................................................................................................... 109
Question 7 – Does the Court retain a discretion to award costs against a non-party independently of the principles in Knight?.......................................................................................................... 114
Question 8 – If yes to question 7, should non-party costs orders be made pursuant to that discretion?........................................................................................................................................ 114
Submissions............................................................................................................................... 114
Submissions of the Company Defendants – the second to tenth defendants............ 114
Submissions of JRA - the first defendant......................................................................... 114
Submissions of JAB Nominees.......................................................................................... 116
Submissions of the Parker Women................................................................................... 117
Submissions of James Bergmuller.................................................................................... 117
Submissions of Peter Parker.............................................................................................. 117
Conclusion on question 8......................................................................................................... 117
Basis for assessment of costs........................................................................................................ 119
Question 9 – Should any orders for costs made against the Plaintiff Companies, the Third Party Directors and/or the JFJ Shareholders be assessed on an indemnity basis?...................... 119
Submissions............................................................................................................................... 119
Submissions of the Company Defendants – the second to tenth defendants............ 119
Submissions of JRA – the first defendant........................................................................ 119
Submissions of the Plaintiff Companies – the plaintiffs................................................ 120
Submissions of JAB Nominees.......................................................................................... 120
Submissions of the Parker Women................................................................................... 120
Submissions of James Bergmuller.................................................................................... 121
Submissions of Peter Parker.............................................................................................. 121
Conclusion on question 9......................................................................................................... 121
Question 10 - Should the Court order that the costs be assessed on a gross sum basis?. 123
Conclusion on question 10....................................................................................................... 123
Orders............................................................................................................................................... 125
GLOSSARY
The following abbreviations are used in these reasons:
ActCorporations Act 2001 (Cth)
Auswild Family The JFJ Family and the RWA Family
Company Defendants The second to tenth defendants in the Company Proceeding
Company Proceeding Proceeding S ECI 2014 00071
Company Proceeding Reasons Finance & Guarantee Company Pty Ltd v Auswild [2019] VSC 664
JFJ FamilyThe lineal descendants and partners of Sir James Frederick John Auswild
JFJ Shareholders The plaintiffs/defendants by counterclaim in the Shareholders Proceeding
JRAJames Ronald Auswild Senior, the first defendant in the Company Proceeding
Parker Women Martina Carole Parker, Simone Catherine Ferry and Kathleen Nicole Alekna, the second to fourth plaintiffs/second to fourth defendants by counterclaim in the Shareholders Proceeding
Plaintiff Companies The plaintiffs in the Company Proceeding
PMGThe Preston Motors Group, being the companies referred to in Schedule A to the reasons in Finance & Guarantee Company Pty Ltd v Auswild [2019] VSC 664
RWA Family The lineal descendants and partners of Ronald William Auswild
RWA Shareholders The defendants/plaintiffs by counterclaim in the Shareholders Proceeding
Shareholders Proceeding Proceeding S CI 2014 04719
Third Party Directors James Auswild Bergmuller and Peter Parker, the third parties in the Shareholders Proceeding
______________________________________
HIS HONOUR:
By originating process filed 8 September 2014 in the Shareholders Proceeding, the JFJ Shareholders applied under ss 232 and 233 of the Act for relief including:
(a)the transfer of the RWA Shareholders’ shares in Finance & Guarantee Company Pty Ltd, Auswild Securities Pty Ltd, Auswild Secretarial Services Pty Ltd and Austwide Corporation Pty Ltd (collectively ‘the PMG holding companies’) at fair value; or alternatively
(b)the purchase by the RWA Shareholders of the JFJ Shareholders’ shares in the PMG holding companies at fair value after taking into account:
(i) the repayment of the amounts and transfer of the properties sought in the Company Proceeding; and
(ii) the loss and damage suffered as alleged in the Company Proceeding; or alternatively
(c)upon the payment of the claims and transfer of the properties sought in the Company Proceeding, the PMG holding companies or the companies comprising the PMG be wound up, or a receiver be appointed and directed to sell the assets of the PMG holding companies and to distribute the proceeds of sale to the shareholders.[1]
[1]In the amended statement of claim filed 15 November 2017, the JFJ Shareholders did not seek the relief referred to in subparagraph (c).
The Company Proceeding was a proceeding filed on 29 August 2014 in which the Plaintiff Companies claimed equitable compensation, damages, an account of profits, declarations and other relief from the defendants arising out of the management of certain corporations between 1985 and 2003.
Both proceedings are part of a longstanding dispute between two branches of the Auswild Family. The branches emanate from two brothers, Sir James Auswild and Ronald Auswild.
The relevant members of the Auswild Family who are referred to in these reasons are:
(a)Sir James Frederick John Auswild (‘Sir James’) (deceased) – Husband
Ada Kathleen Margaret Auswild (‘Lady Auswild’) (deceased) - Wife
(i)Margaret Parker (deceased) – Daughter
1.Martina Carole Parker – Granddaughter, whose partner is Peter Parker
2.Simone Catherine Ferry - Granddaughter
3.Kathleen Nicole Alekna (‘Nicky Alekna’) – Granddaughter
(collectively ‘the Parker Women’)
(ii)Geraldine Bergmuller (deceased) – Daughter
1.James Auswild Bergmuller (‘James Bergmuller’) – Grandson
This branch of the Auswild Family is referred to as ‘the JFJ Family’.[2]
[2]On occasions the initials ‘JFA’ were adopted by the parties to refer to the JFJ Family. To avoid confusion I have changed all such references to ‘JFJ’.
(b)Ronald William Auswild (‘RWA’) (deceased) - Husband
Joan Patricia Auswild (deceased) - Wife
(i) James Ronald Auswild Senior (‘JRA’) – Son
1. James Ronald William Auswild Junior (‘James Auswild Jnr’) - Grandson
(ii) Barbara Joan Auswild – Daughter
(iii) Ronald Raymond Auswild (‘Raymond Auswild’) – Son.
This branch of the Auswild Family is referred to as ‘the RWA Family’.
Background to the dispute
After the Second World War, Sir James and his younger brother, RWA, established very successful businesses, principally in the motor industry, under the name of Preston Motors, and had substantial investments in properties.
The businesses and assets were held in a network of companies known as the Preston Motors Group, in which Sir James held a controlling interest of 52.186% and RWA held 47.814%.
On 29 May 1985, Sir James died. In summary, he left his estate, including his controlling interest in the PMG, to his wife and two daughters.
As the executor of Sir James’s estate, RWA held Sir James’s shares on trust until they were transferred to Sir James’s daughters, Geraldine Bergmuller and the estate of Margaret Parker, between 4 December 2003 and 6 November 2006. Margaret Parker died on 25 August 2000 and Geraldine Bergmuller died on 31 July 2011.
The claims in the Company Proceeding substantially related to the period in which RWA held Sir James’s shares on trust from 1985 to 2006. During this time, RWA and his son, JRA, were directors of the companies in the PMG.
The gravamen of the Plaintiff Companies’ claims in the Company Proceeding were that during this period, JRA and RWA preferred the interests of the RWA Family over the interests of the JFJ Family. Broadly speaking, they were said to have done so by:
(a)entering into transactions which benefited joint venture companies in which the JFJ Family did not have an interest; and
(b)using the PMG’s funds to purchase and transfer assets and make payments, all to the benefit of members of the RWA Family.
The specific claims in the Company Proceeding were as follows:
Carlisle loan
(a)JRA and RWA caused Fintee Investments (Canberra) Pty Ltd (‘Fintee’) and/or Finance & Guarantee Company Pty Ltd (‘F&G’), entities within the PMG co-owned by the JFJ Family and the RWA Family, to borrow the sum of at least $7,800,000 from General Motors Acceptance Corporation (‘GMAC’), and for F&G to on-lend the sum of $8,328,447.72 to Carlisle Investments Pty Ltd (‘Carlisle’), a joint venture entity only partially owned by the Auswild Family, which sum was not repaid.
Debt Management Agreement
(b)JRA and RWA caused F&G to enter into a Debt Management Agreement (‘DMA’) under which F&G became a guarantor for the following entities which were part of a joint venture between the Auswild Family and Bernard Webb and his family:
(i) Carlisle;
(ii) Beron Investments Pty Ltd (‘Beron Investments’);
(iii) Calabar Pty Ltd;
(iv) Rossfield House Pty Ltd (‘Rossfield’); and
(v) Telasava Pty Ltd (‘Telasava’),
(collectively ‘the Webb/Auswild Group’).
(c)Alternatively, if it was appropriate for F&G to enter into the DMA on the basis that it had already previously guaranteed Carlisle’s liabilities to GMAC pursuant to:
(i) a deed dated 27 September 1985;
(ii) a cross-guarantee dated 25 October 1989; and/or
(iii)a deed of acknowledgement of indebtedness dated 10 December 1990; then
JRA breached his fiduciary duties to F&G by causing its initial entry into each of those deeds.
Purchase of the Seascape Apartments
(d)Between August 1994 and October 1994, JRA and RWA caused Preston Motors Pty Ltd (‘Preston Motors’) to purchase 22 apartments and 18 car parking spaces at 53 Bay Street, Tweed Heads, New South Wales (known as ‘the Seascape Apartments’) from the Webb/Auswild Group for a total consideration of $8,062,000.
Telasava and Rossfield loans
(e)JRA caused the PMG to borrow $8 million from Hatmax Mortgage Management Ltd (‘Hatmax’) and loan the following sums to joint venture entities in the Webb/Auswild Group:
(i) $2.9 million to Telasava on or about 17 August 1993;
(ii) $3,748,048 to Telasava between 8 June 1994 and 30 June 1994; and
(iii) $5.1 million to Rossfield on or about 8 June 1994.
Transfer of the Sutton Farm property
(f)On or about 26 October 1994, JRA and RWA caused Auswild Securities Pty Ltd (‘Auswild Securities’) to transfer the Sutton Farm property to Joan Auswild, RWA’s wife and JRA’s mother, for no consideration.[3]
[3]See Company Proceeding Reasons [176]-[212].
Purchase of the Regency Unit for Baronja
(g)JRA caused Preston Motors and/or F&G to pay $944,363.98 towards the purchase of Unit 1702 and car park 161 at the Hyde Park Regency, 281-283 Elizabeth Street, Sydney, New South Wales, on behalf of Baronja Investments Pty Ltd (‘Baronja’), a company in which JRA had an interest.
Purchase of the Beresford Units
(h) In the period from about February 1991 to June 1991, JRA caused F&G to pay:
(i)$222,289 for 6,000 E Group ordinary shares in Rose Bay Esplanade Properties Pty Ltd (‘Esplanade Properties’) which entitled Raymond Auswild to have exclusive possession of Unit 5, 1A Beresford Road, Rose Bay, New South Wales; and
(ii)$259,670 for 8,000 G Group ordinary shares in Esplanade Properties which entitled JRA to have exclusive possession of Unit 7, 1A Beresford Road, Rose Bay, New South Wales.
Payment of wages to the defendants
(i)JRA and RWA caused F&G, Preston Motors, Commonwealth Motors Pty Ltd (‘Commonwealth Motors’) and Preston Motors (Holdings) Pty Ltd (‘Preston Motors (Holdings)’) to pay wages to:
(i)Barbara Auswild, RWA’s daughter and JRA’s sister, for the period 1987 to July 2000;
(ii)Keith Kearns, RWA’s brother-in-law and JRA’s uncle, for the period 1988 to 2006; and
(iii)Raymond Auswild, RWA’s son and JRA’s brother, for the period 1985 to 2002,
(collectively ‘the Employment Payments’).
Common Conduct Allegations
In the Shareholders Proceeding, the JFJ Shareholders relied upon similar allegations to those set out in paragraphs 9 to 11 above in support of their claims for relief (‘the Common Conduct Allegations’). The similarity is demonstrated by reference to the allegations in Part F of the amended statement of claim filed 15 November 2017 in the Shareholders Proceeding, and the fact that the underlying dispute is between the JFJ Family and the RWA Family is demonstrated by the following pleaded background:
1.The Preston Motors Group (PMG):
(a)is a group of related companies, the primary business of which is, and at all material times has been, the ownership and operation of new and used car dealerships, and the supply of motor vehicle parts;
…
(b)has, further to the motor vehicle and parts sales arm of its business, been involved in a range of other business enterprises including property investment and development;
(c)was established in the late 1960s by the late Sir James Frederick John Auswild (Sir James).
…
10.Collectively, the Plaintiffs hold:
(a)34.59% of the issued shares in Finance & Guarantee;
(b)50% of the issued shares in Auswild Securities;
(c)50% of the issued shares in Auswild Secretarial Services; and
(d)62.37% of the shares in Austwide Corporation;
and thereby, directly or indirectly own 52.186% of the PMG.
…
15.Collectively, the Defendants hold:
(a)20.52% of the issued shares in Finance & Guarantee;
(b)50% of the issued shares in Auswild Securities;
(c)50% of the issued shares in Auswild Secretarial Services; and
(d)37.63% of the issued shares in Austwide Corporation;
and thereby, directly or indirectly own 47.814% of the PMG.
…
19.The extended Auswild Family consists of:
(a)the Parker/Bergmuller family, which includes or has included Sir James Auswild (Sir James), his spouse his lineal descendants, and their spouses (the JFJ Family); and
(b)the Auswild Family, which includes or has included Ronald William Auswild, his spouse and his lineal descendants and their spouses (the RWA Family).
…
43.Throughout the period of 1960s to about early 1984, the PMG was controlled and managed by Sir James and RWA (for the benefit of both the JFJ Family and the RWA Family), with the assistance of other directors and officers from time to time …
…
46.Following the stroke of Sir James in March 1984 until at least 2003 the PMG was under the effective control and management of RWA and JRA, who managed it solely or predominantly for the benefit of the RWA Family and not for the benefit of both the JFJ Family and the RWA Family …
On 3 October 2019, I published the Company Proceeding Reasons. On 30 October 2019, judgment was entered for the defendants in the Company Proceeding and it was ordered that:
(a) the Plaintiff Companies’ claims be dismissed; and
(b) all questions relating to costs be reserved.
In summary, I found that each of the claims should be dismissed because:
(a)to the extent that the claims were subject to limitation periods applied in equity by analogy to statutory limitation periods, they were filed outside such periods, and the periods were not postponed by either s 27 of the Limitation of Actions Act 1958 (Vic) or the equitable exception; or alternatively
(b)the Plaintiff Companies were prevented from bringing each of the claims by application of the doctrine of laches.
Further, I found as follows:
(a)JRA breached his duty not to allow his interests to conflict with his duties as a director of Auswild Securities, F&G and Preston Motors by the transfer of Sutton Farm, the purchase of the Regency Unit for Baronja and the purchase of the Beresford Units respectively. However, the Plaintiff Companies failed to prove that:
(i) Auswild Securities, F&G or Preston Motors suffered any loss; or
(ii) JRA obtained any unauthorised benefit,
from the relevant transactions as a result of the conflict.
(b)Except for (a), the Plaintiff Companies failed to prove with respect to each of the transactions that the defendants breached their fiduciary and equitable duties, or knowingly assisted in such breaches.
Short procedural history of the Company Proceeding and the Shareholders Proceeding
The questions posed for resolution require an understanding of the procedural history of the dispute:
(a) On 29 August 2014, the Plaintiff Companies filed the Company Proceeding.
(b)On 8 September 2014, James Bergmuller and the Parker Women filed the Shareholders Proceeding against JRA, Barbara Auswild and Raymond Auswild (later pleaded as being part of the RWA Family) (‘the RWA Shareholders’).
(c)On 20 November 2015, JAB Nominees (Aust) Pty Ltd as trustee for the G Bergmuller No 2 Will Trust (‘JAB Nominees’) was substituted for James Bergmuller as the first plaintiff to the Shareholders Proceeding, and Berpark Pty Ltd as trustee of the James Auswild Family Trust, the beneficiaries of which included the Parker Women, was added as the fifth plaintiff.
(d)On 15 November 2017, the JFJ Shareholders filed an amended statement of claim in the Shareholders Proceeding.
(e)On 16 November 2017, Sifris J ordered that the Company Proceeding and the Shareholders Proceeding be listed for trial commencing on 15 October 2018 (which was refixed by orders made on 25 May 2018 to 12 November 2018).
(f)On 16 February 2018, the RWA Shareholders filed a defence and counterclaim in the Shareholders Proceeding, alleging that the JFJ Shareholders’ conduct, individually and/or cumulatively, was conduct of the PMG’s affairs that was:
(a)contrary to the interests of the members of PMG as a whole; and
(b)oppressive to, unfairly prejudicial to, unfairly discriminatory against the RWA Shareholders, within the meaning of those terms in s 232(d) and (e) of the Corporations Act.
By counterclaim, the RWA Shareholders sought the following relief:
1.An order pursuant to s. 233 (1) (j) of the Corporations Act that the plaintiffs reimburse and indemnify PMG for its costs to date, its future costs and any adverse costs order in the Company Proceedings.
2.An order pursuant to s. 233 (1) (d) of the Corporations Act that upon the plaintiffs’ compliance with order 1 above the plaintiffs sell their shares in Finance & Guarantee, Auswild Secretarial Services, Austwide Corporation and Auswild Securities, or alternatively their shares in each of the PMG Companies to the counterclaimants, upon payment by the counterclaimants to the plaintiffs of a price to be assessed as the fair value dollar amount per share.
3.Alternatively to orders 1 and 2, an order pursuant to s. 233 (1) (d) of the Corporations Act that the plaintiffs sell their shares in Finance & Guarantee, Auswild Secretarial Services, Austwide Corporation and Auswild Securities, or alternatively their shares in each of the PMG Companies to the counterclaimants, upon payment by the counterclaimants to the plaintiffs of a price a price [sic] to be assessed as the fair value dollar amount per share taking into account the value that PMG would have had prior to the preparation for and commencement of the Company Proceedings.
4.Alternatively to orders 1 and 2 or 3, an order pursuant to s. 233 (1) (d) of the Corporations Act that the counterclaimants sell their shares in Finance & Guarantee, Auswild Secretarial Services, Austwide Corporation and Auswild Securities, or alternatively their shares in each of the PMG Companies to the plaintiffs, upon payment by the plaintiffs to the counterclaimants of a price to be assessed as the fair value dollar amount per share taking into account the value that PMG would have had prior to the preparation for and commencement of the Company Proceedings.
(g)On 19 February 2018, the RWA Shareholders filed a third party notice in the Shareholders Proceeding against the Third Party Directors, alleging that the filing and maintenance of the Company Proceeding was oppressive to, unfairly prejudicial to, or unfairly discriminatory against the RWA Shareholders within the meaning of s 232(e) of the Act, for the following reasons:
(i)the RWA Shareholders, through their membership of the PMG, bear 48% of the burden of the expense and risk of the Company Proceeding;
(ii)the dispute in the Company Proceeding is essentially one between the JFJ Shareholders and the RWA Shareholders; and
(iii)in the premises, the PMG’s money is being used to fund the costs of the relief sought by the JFJ Shareholders in the amended statement of claim.
(h)By amended third party notice filed 29 May 2018, the RWA Shareholders sought the following relief:
(i)In respect of the PMG, declarations that the Third Party Directors had:
(i)Breached their duty of care and diligence in contravention of s. 180 (1) of the Corporations Act 2001.
(ii)Breached their duty to act in good faith in contravention of s. 181 of the Corporations Act 2001.
(iii)Improperly used their position to gain advantage for themselves and other JFJ Shareholders in contravention of s. 182 of the Corporations Act 2001.
(iv)Conducted and are conducting PMG’s affairs contrary to the interests of the members as a whole and oppressively to, unfairly prejudicial to or unfairly discriminatory against the RWA Shareholders within the meaning of ss. 232 (d) and (e) of the Corporations Act 2001.
(ii) Consequential orders that:
(i)Pursuant to s. 1324 of the Corporations Act 2001, James Bergmuller and Peter Parker indemnify PMG for the costs to date, future costs and any adverse costs order in the Company Proceedings.
(ii)Pursuant to s. 233 (1) (j) of the Corporations Act 2001, James Bergmuller and Peter Parker indemnify F&G and Auswild Securities for the costs to date, future costs and any adverse costs order in the Company Proceedings.
(i)On 12 June 2018, I varied the orders of Sifris J made on 16 November 2017 setting both proceedings down for trial, so that only the Company Proceeding was to be heard, and the parties to the Shareholders Proceeding:
(i)undertook to be bound by findings of fact made in the Company Proceeding; and
(ii)were entitled to appear at the hearing of the Company Proceeding but not to lead evidence.
(j)On 18 October 2019 (after delivery of the Company Proceeding Reasons on 3 October 2019), JRA gave notice that he intended to seek the following costs orders:
(i)costs against each of the Plaintiff Companies, calculated on an indemnity basis and assessed as a gross sum without formal taxation;
(ii)costs against each of the Third Party Directors as non-parties, being the directors charged with the responsibility for commencing and conducting the litigation, calculated on an indemnity basis and assessed as a gross sum without formal taxation; and
(iii)costs against each of the JFJ Shareholders as non-parties, being the plaintiffs in the Shareholders Proceeding, calculated on an indemnity basis and assessed as a gross sum without formal taxation.
(k)On 25 October 2019, the Company Defendants filed an amended notice of orders to be sought in the Company Proceeding as follows:
(iii) Their costs of the Company Proceeding, including the reserved costs of the strike out application determined by the orders made on 28 July 2015, assessed on an indemnity and gross sum basis under r 63.07 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) and paid by:
1. each of the JFJ Shareholders, jointly and severally and as to 100% of those costs as so assessed;
2. each of the Third Party Directors, jointly and severally with each of the JFJ Shareholders and as to 100% of those costs as so assessed; and
3. each of the Plaintiff Companies, jointly and severally with each of the JFJ Shareholders and Third Party Directors and as to 100% of those costs as so assessed, or alternatively, limited to such proportion of those costs as the Court thinks fit having regard to the issues, time spent and any other relevant matter.
(ii)An order that the parties and persons ordered to pay their costs pay interest on costs in accordance with the principles discussed in Lahoud v Lahoud.[4]
[4][2006] NSWSC 126. This claim was ultimately not pressed.
(iii)An order that all questions of costs be heard and determined at the hearing of the Shareholders Proceeding.
(l)On 30 October 2019, judgment was entered for the defendants in the Company Proceeding and the applications for special orders for costs in that proceeding were fixed for hearing in June 2020, together with the remaining issues in the Shareholders Proceeding.
(m)On 1 June 2020, on the application of the JFJ Shareholders, it was ordered that the plaintiffs’ claim in the Shareholders Proceeding be discontinued. The plaintiffs were ordered to pay the costs of the discontinued claim.[5]
(n)On 9 June 2020, JAB Nominees filed a fresh statement of claim in the Shareholders Proceeding, alleging oppressive conduct by the RWA Shareholders in refusing to appoint directors, and seeking relief pursuant to ss 233(1)(b) and 233(1)(c) of the Act, including amendments to the constitutions of the companies in the PMG.
(o)On 15 June 2020, JAB Nominees filed an amended statement of claim in the Shareholders Proceeding seeking alternative relief, being the appointment of a sale committee. This claim was resolved by interim orders made by consent on 26 June 2020.
(p)On 22 June 2020, it was ordered by consent that the Plaintiff Companies pay JRA’s costs of the Company Proceeding in the sum of $2.3 million.
(q)On 22 June 2020, JRA filed a further amended notice of costs orders in the Company Proceeding, in which he relevantly sought the following orders:
(i)an order that each of the Third Party Directors and JFJ Shareholders pay JRA’s costs of and incidental to the proceeding, fixed in the sum of $2.3 million; or alternatively
(ii)an order that each of the Third Party Directors and JFJ Shareholders pay JRA’s costs of and incidental to the proceeding, calculated on an indemnity basis and assessed as a gross sum without formal taxation; and
(iii)an order that each of the Third Party Directors and JFJ Shareholders indemnify the Plaintiff Companies in respect of the cost order made against them in the proceeding in respect of JRA’s costs.
[5]With respect to the second to fourth plaintiffs, the costs were up to 20 April 2020 with the basis for the taxation of costs in relation to all plaintiffs to be determined at the trial commencing 15 June 2020.
Chronology
The background to the dispute is set out in detail in the Company Proceeding Reasons. In particular, the events leading up to the filing of the Company Proceeding and the Shareholders Proceeding are set out at paragraphs 318 to 476 of those reasons.
In the Company Proceeding Reasons, I concluded that there was a deliberate decision by the JRA Family to delay the communication of concerns to the RWA Family and the filing of the Company Proceeding until the resolution of Project Statesman.[6] The relevant chronology after the resolution of Project Statesman is as follows.
[6]Company Proceeding Reasons [477]. Project Statesman was the negotiation for the separation of the Auswild and Webb interests in Rossfield: at [397], [432].
On 30 November 2009, James Bergmuller was appointed as a director of F&G and Austwide Corporation Pty Ltd and Martina Parker was appointed as a director of some of the companies in the PMG.
By email of 19 September 2011 to James Bergmuller, Martina Parker suggested that James Bergmuller bring forward his allegations concerning financial misappropriation within the PMG or retract them, stating:
Hope you are doing ok.
This has been on my mind for a while and it is something that I believe needs to be addressed.
You have put forward a number of allegations concerning financial misappropriation within the Preston Motors group. In the best interests of the company I believe that it is time that you either put forward these allegations to the board or to retract them.
If you wish to proceed, can you please specifically detail the incidents that you believe that the board needs to address.
By email of 27 September 2011 to the Parker Women, James Bergmuller noted that the RWA Family believed they were owed $5 million on loan account movements which he thought was incorrect.
By email of 29 September 2011 to James Bergmuller, Martina Parker stated:
My expectation about [Project Fluffy][7] is that it would be resolved at the board level.
If as a shareholder I wasn’t satisfied with the outcome then it still leaves the option to take action as a share-holder.
The proposal is to start the investigation process at the next board meeting by tabling the issues and appointing an independent forensic investigator.
You could then pass information across as you get it ready.
[7]Project Fluffy was the code name adopted by the JFJ Family for the investigation into the disputes that later became the subject of both proceedings. For an explanation about Project Fluffy, see Company Proceeding Reasons, in particular [371]-[372].
On 28 October 2011, the board of directors of companies within the PMG (‘the PMG Board’) resolved to engage BDO (NSW-VIC) Pty Ltd (‘BDO’) to:
(a)investigate shareholder loan account balances, including opening balances;
(b)liaise with shareholders about their concerns; and
(c)report back to the PMG Board as soon as possible.
The Chairman was authorised to discuss with and notify auditors.
By letter dated 24 November 2011 to James Bergmuller, BDO confirmed its appointment to provide the following services:
•Preparation of loan confirmations for shareholders and associates for Auswild Securities Pty Ltd for the financial years ended 30 June 2006, 2007, 2008, 2009 and 2010;
•Liaise with shareholders’ regarding concerns they may have;
•Investigate discrepancies’ highlighted by shareholders’ and
•Present to the Board a report with signed loan confirmations and details of discrepancies identified.
By email of 13 April 2012 to James Bergmuller and Martina Parker (copied to JRA), Graham Hamilton wrote on behalf of the RWA Family and alleged discrepancies in the management and directorships of various companies in the PMG. He advised that he had been appointed to fill a casual vacancy on the boards of several companies in the PMG, and suggested a without prejudice meeting to discuss the various disputes and disagreements currently existing between shareholders.
On 22 June 2012, the shareholders of the companies in the PMG resolved, among other things, to:
(a) adopt new constitutions for each of the companies in the PMG; and
(b)appoint Martina Parker as a director of various other companies in the PMG.
Relevantly, cl 13.1 of each new constitution limited the number of directors for each company in the PMG to six, and prescribed that ‘except with the Unanimous Consent of the Board, the Company, its Shareholders and directors shall, acting in good faith and in co-operation with one another, use all reasonable endeavours to ensure that at all times the directors include’:
(a) one director appointed by James Bergmuller or his lineal descendants;
(b)one director appointed by the lineal descendants of Margaret Parker; and
(c) two directors appointed by the lineal descendants of RWA.
On 17 February 2013, Martina Parker tendered her resignation as a director of each company in the PMG and was replaced by her partner, Peter Parker.
On 28 March 2013, Mr Michael Smith, formerly of BDO but then of ShineWing Corporate Advisory Pty Ltd (‘ShineWing’), provided a comprehensive report in response to the engagement by the PMG Board. On the application before me, the parties referred to various parts of this report, including the following:
(a) In the summary of findings:
It is clear from our review of matters raised and investigations that significant Auswild Group resources have been used for the benefit of non-group parties including particular entities in which JFJ Family had no interest. In addition, Auswild group assets were pledged against loans incurred as a result of failed property development in which the JFJ Family had no ownership interests.
(b) With respect to the DMA:
As parties to the Debt Management Agreement, F&G and the Preston Motors Companies were placed at risk of being wound up in relation to the repayment of GMAC loans which were based upon property developments the JFJ Family had no interest in.
(c) With respect to the repayment of the Carlisle loan:
We were advised by Joe Hart that the Seascape Apartments were provided to Preston Motors Pty Ltd as repayment of the outstanding Carlisle loan in lieu of cash.
Preston Motors Pty Ltd was given Seascape Apartments for a book value $8,062,000 in consideration for the repayment of part of Carlisle’s loan.
(d) With respect to the repayment of the Telasava loan:
According to balance sheet movements, Telasava repaid $4,059,943 to Preston Motors Pty Ltd in the FY1995.
According to the Telasava balance sheet, the loan from Preston Motors Pty Ltd was repaid in FY1998.
(e) With respect to the repayment of the Rossfield loan:
According to Preston Motors Pty Ltd balance sheet, the loan was repaid in FY1997.
(f) With respect to payment for the Sutton Farm property:
According to correspondence between [Geraldine Bergmuller] and Kerrie Kent dated 14 September 2006, Sutton Farm was sold to [Joan Auswild] for $540,000 on 26 October 1994 which was paid by Preston Motors. This payment was offset against a $500,000 loan owed to RWA in the books of Preston Motors. The balance of $40,000 reduced the loan owed to [Joan Auswild] by F & G.
As per paragraph 2.1.67 to 2.1.72, RWA received a $1 million loan from Midlands in FY1991. In FY1993 RWA loaned $500,000 to Preston Motors Pty Ltd. In FY1993, RWA loaned a further $500,000 to Preston Motors Pty Ltd. In FY1994, Preston Motors Pty Ltd repaid $500,000 to RWA. Based on Auswild Family financials RWA used these funds to gift [Joan Auswild] $500,000 to pay for Sutton Farm.
In FY1995 RWA gifted [Joan Auswild] $500,000 as per the Auswild Family financials for FY1995.
[Sutton Farm] was sold on 26 October 1994 to [Joan Auswild] for consideration of $540,000.
By letter dated 8 May 2013 to the directors of Preston Motors, F&G and Auswild Securities, Macpherson Kelley (the solicitors for those entities) detailed allegations that, during the period from 1985 to 2005, a number of transactions took place that were not in the interests of and not for the benefit of the PMG. Rather, they were mostly for the benefit of various members of the RWA Family and their related entities. The allegations were said to be based on the ShineWing report. The letter proposed a resolution of the dispute by:
(a)repayment of the full amount of the deprived funds and assets to the PMG; and
(b)a transfer of shares from the RWA Family to the JFJ Family as part of the consideration.
By email of 6 June 2013 to the Parker Women, James Bergmuller attached documents, including the ShineWing report and the letter from Macpherson Kelley dated 8 May 2013, and stated:
The final report on the amount owing to the company will be provided to the board in the next few weeks and then I will pass it on for all of us to discuss and decide on how to move forward
All of this information is confidential to the Board and Shareholders and must not [be] shared with anyone
By letter dated 19 June 2013 to the directors of Preston Motors, Macpherson Kelley provided advice on whether former directors and officers of the PMG or companies within the PMG would be covered by the PMG’s ‘insurance policies for the conduct set out in Mr Smith’s [ShineWing] report dated 28 March 2013’.
By report dated 25 June 2013 to Macpherson Kelley, Mr Smith of ShineWing provided an assessment of the quantum of each item falling under the following categories of transactions, which had been set out in the ShineWing report dated 28 March 2013:
1.2.1Non-business expenses paid by the Preston Motors Group of Companies;
1.2.2Payments from the Preston Motors Group of companies, including amounts paid from Preston Motors to F&G via the intercompany loan accounts, as well as payment of management fees;
1.2.3 Transfer of group assets to related parties;
1.2.4Entry into external loans for non-group purposes and the pledging of the Group’s assets as security; and
1.2.5Group payments which have been incorrectly accounted.
In summary, he concluded that the total amount owing was $244,755,064, being a principal sum of $49,500,978 plus interest of $195,254,086. He emphasised that the amounts were ‘heavily reliant on the instructions and assumptions outlined in this report’. It is to be noted that the amount due on the Carlisle loan as a principal sum was listed as nil, but the interest was assessed at $14,035,783. Similarly, there was no principal sum included with respect to the pledging of the PMG’s assets for Telasava and Rossfield using Hatmax loan funds, but $7,504,351 was allowed for interest.
On 25 June 2013, there was a special shareholders meeting for the purposes of discussing the ShineWing reports.
By email of 1 July 2013 to James Bergmuller, Graham Hamilton and Brown Wright Stein, Macpherson Kelley attached a copy of a report dated 4 September 2008, prepared by Po Mar of BDO, which reported on the Hatmax and GMAC loans. Macpherson Kelley also attached an amended list of plaintiffs, defendants and claims, which noted the following:
(a)The companies who were the proposed plaintiffs, being relevant companies in the PMG.
(b) The proposed defendants, being:
(i) JRA;
(ii) RWA (deceased);
(iii) Douglas Farrelly;
(iv) Nola June Hancock (deceased);
(v) David Edward Victor Dove (deceased);
(vi) Alec Forsythe (deceased);
(vii) Joe Hart;
(viii) Phillip McGillvray; and
(ix) John Stephen O’Connor.
(c) Persons who were potentially defendants by reason of being recipients, being:
(i) George Keith Kearns;
(ii) Barbara Auswild;
(iii) Joan Auswild (deceased);
(iv) Raymond Auswild;
(v) Elizabeth Auswild;
(vi) Geraldine Bergmuller (deceased);
(vii) James Bergmuller;
(viii) Martina Parker;
(ix) Nicky Alekna;
(x) Baronja;
(xi) JFJ Auswild & Co;
(xii) Rossfield;
(xiii) Telasava Unit Trust;
(xiv) Carlisle; and
(xv) Destination Resorts Pty Ltd.
(d)Details of individual transactions and distributions of funds under the following headings:
(i) non-business expenses;
(ii) payments from Preston Motors (1984 to 2005);
(iii) transfer of group assets to related parties; and
(iv) external loans for non-group purposes.
It identified a total claim of ‘$70 million (without compound interest except in relation to GMAC and Hatmax loans where this is the measure of damage)’.
By letter dated 23 July 2013 to James Bergmuller, Pikes & Verekers responded to allegations made against JRA in the amended list of plaintiffs, defendants and claims, and requested the name of the firm acting for the person making the allegations against JRA and production of documents including those relating to Macpherson Kelley’s retainer and advice.
By letter dated 6 August 2013 to Pikes & Verekers, Macpherson Kelley confirmed that they acted for Preston Motors, F&G and Auswild Securities and that Mr Wright of Brown Wright Stein acted for some shareholders. They refused to provide documents relating to their retainer and advice to the PMG on the grounds of privilege.
On 13 August 2013, there was a without prejudice meeting between James Bergmuller, Peter Parker, Graham Hamilton, Mr Wright, Mr Sturgess of Macpherson Kelley and Mr Green of Pikes & Verekers (the ’13 August meeting’). In relation to that meeting, Graham Hamilton said that:
… it was agreed that a sensible way forward would be for [Macpherson Kelley] to prepare a draft Statement of Claim which would more clearly set out the details of the various claims referred to in the [ShineWing] report and letters from [Macpherson Kelley].
By email of 28 August 2013 to the PMG Board, James Bergmuller’s assistant circulated proposed resolutions authorising Macpherson Kelley to draft a statement of claim in accordance with the agreement reached at the 13 August meeting.
By letter dated 29 August 2013 to Macpherson Kelley, Pikes & Verekers again requested documents and challenged the claims of privilege.
By email of 2 September 2013 to Graham Hamilton and James Auswild Jnr, James Bergmuller stated:
Last week I sent you through the updated resolutions of the three companies. You indicated at the board meeting that you would send through a comment within a day or so and then sign off on the resolutions. To date I have not had any comments or resolutions returned.
By email of 4 September 2013 to James Bergmuller (copied to Peter Parker and James Auswild Jnr), Graham Hamilton noted that he and James Auswild Jnr were now being asked to approve a resolution for Preston Motors (Holdings) to instruct Macpherson Kelley to prepare a draft statement of claim, as had been discussed at the 13 August meeting. He identified the difficulties arising from a conflict of interests held by both James Auswild Jnr and himself, and concluded that ‘it is probably up to [James Bergmuller] and Peter Parker to vote to instruct [Macpherson Kelley] to proceed [to draft a statement of claim]’.
On 26 September 2013, James Bergmuller and Peter Parker, as directors of companies within the PMG, resolved to instruct Macpherson Kelley to draft a statement of claim for proceedings that the Plaintiff Companies proposed to initiate with respect to breaches of the Act and other potential claims. James Auswild Jnr and Graham Hamilton abstained.
By letter dated 4 October 2013 to Macpherson Kelley, Pikes & Verekers repeated ‘several outstanding requests’ for information and documents which were said to be necessary to enable a resolution of the dispute. It noted that the draft statement of claim had not been delivered despite the undertaking that it would be done within four weeks of the 13 August meeting.
By letter dated 22 October 2013 to Pikes & Verekers, Macpherson Kelley enclosed further documents, including the PMG Board minutes from 28 October 2011, which resolved to instruct Mr Smith to prepare a forensic report. The letter stated that the minutes of that meeting were confirmed at the following PMG Board meeting on 29 November 2011.
By letter dated 24 October 2013 to Macpherson Kelley, Pikes & Verekers requested all ‘submissions and available information’ referred to by Mr Smith in the ShineWing report and reiterated their instructions that JRA unreservedly denied any wrongdoing on his part.
By letter dated 11 November 2013 to Macpherson Kelley, Pikes & Verekers noted Mr Smith’s apparent dismissal of the investigation of Midlands Finance Co,[8] and asserted that Mr Smith ‘was not an independent expert in forensic terms’. The letter stated that it was necessary to understand the basis of the report if it was to be used to settle the dispute commercially, and that the information requested in the 24 October 2013 letter should therefore be provided.
[8]Midlands Finance Co was a vehicle employed by the PMG for the purpose of distributing profits and lending back for investment purposes as part of what was known as the Auswild Accounting Practice. See Company Proceeding Reasons [180]-[186].
By letter dated 25 November 2013 to Pikes & Verekers, Macpherson Kelley replied to the letters dated 24 October 2013 and 11 November 2013. They stated that they were ‘currently preparing a statement of claim in final form’, and requested identification of those payments alleged to have been made to the JFJ Family out of the Midlands Finance accounts.
By letter dated 13 December 2013 to Macpherson Kelley, Pikes & Verekers responded and asserted a number of deficiencies in the approach adopted by Mr Smith in the ShineWing reports. The letter stated that the draft statement of claim had still not been delivered, and observed:
[JRA] is increasingly distressed by what he considers to be unsustainable contentions going back many many years and is concerned at the possibly oppressive costs being incurred on prospectively fruitless action given the time that has elapsed.
By letter dated 16 January 2014 to Pikes & Verekers, Macpherson Kelley responded and stated that JRA had not offered any substantive explanation in response to the matters alleged, and that the draft statement of claim being prepared would be more detailed than originally anticipated.
By letter dated 31 January 2014 to Macpherson Kelley, Pikes & Verekers referred to a transaction report entitled ‘Jenola Holdings Pty Limited Acquisition of Assets from Rossfield House Group Transaction Report’ and dated 10 June 2010. The letter contended that the report raised material issues with respect to the proposed claims articulated in and based on the ShineWing reports, including:
(a)limitations;
(b)estoppel;
(c)instructions for the ShineWing report; and
(d)oppression of minority shareholders.
The concluding comments in the letter included the following:
The questions raised in my previous correspondence go to the efficacy of the ShineWing Report. Equally the questions are relevant to the purpose of the ShineWing Report and PMG’s course of conduct in pursuing the allegations based on that Report where persons for whom you do not act but whom are entitled to hold 50% beneficial ownership are concerned at the resources being devoted to making as yet completely un-particularised claims.
The minutes of a PMG Board meeting on 4 February 2014 recorded the following:
· Granting of indemnity to Joe Hart was tabled and [Graham Hamilton] raised his concerns and will speak with [Macpherson Kelley].
· It was RESOLVED delegation of authority [James Bergmuller] and [Peter Parker] to provide instructions for litigation.
The minutes of a PMG Board meeting on 25 February 2014 recorded the following resolution with respect to Joe Hart, formerly employed as a secretary of various companies in the PMG:
· Granting of Indemnity to Joe Hart
[Graham Hamilton] feels the indemnity is too wide and needs to be restricted. A vote of the directors took place to pass the resolution. [James Bergmuller] and [Peter Parker] were for the resolution, [Graham Hamilton] and [James Auswild Jnr] were against the resolution. [James Bergmuller] used his casting vote. Resolution passed to provide Joe Hart with Indemnity as proposed.
During the course of the PMG Board meeting, Graham Hamilton deposed that the following conversation took place between himself and James Bergmuller:
Mr Bergmuller: ‘These are the minutes for today’s meetings. They have been re-drafted by [Macpherson Kelley]. The intention is to secure the co-operation of Joe Hart and to delegate responsibility for the conduct of our case against the previous directors to Peter [Parker] and myself. Graham [Hamilton] and James [Auswild Jnr] are excluded because of their conflicts’.
I said: ‘These are all typed up as final minutes. Is there any point in us discussing them? Or is it intended to pass them on the Chairman’s casting vote in any event?’
Mr Bergmuller: ‘There is really no point discussing them. We have to ensure that the proceedings are not affected by your conflicts. [Macpherson Kelley] have advised that this is the way to do it. I think we should act on that advice.’
I said: ‘Aren’t you and Peter [Parker] in the same position of conflict as James [Auswild Jnr] and me?’
Mr Bergmuller: ‘No, we are not being sued, nor are members of our family.’
…
I said: ‘How are James [Auswild Jnr] and I supposed to function as directors if we are kept in the dark Mr Chairman?’
Mr Bergmuller: ‘[Macpherson Kelley] have included a provision that we report to the board on key developments, progress, timing and cost updates. That is enough.’
I said: ‘So you can spend whatever company money you like, and do whatever you like, and we will be told about it later?’
Mr Bergmuller: ‘Look, there is no point arguing about it. This is the way [Macpherson Kelley] say it should be done and we are going to do it that way.’
By letter dated 13 March 2014 to Macpherson Kelley, Pikes & Verekers noted that there had been no response to their letter dated 30 January 2014, and that they had still not received a draft statement of claim. They asserted that the directors who engaged Mr Smith to complete the ShineWing reports had failed to ‘exercise proper control over the cost and scope of the investigation’ and to limit it to the retainer authorised by the PMG Board. With respect to conflict of interests and oppression, the letter asserted as follows:
Section 232 of the Corporations Act and related sections broadly provide that a company must act in the interests of members as a whole and not for the preference of one group of shareholders over another in a fashion that is oppressive or unfairly prejudicial. This would include actions by the company with the collateral purpose or affect of unfairly discriminating between shareholders. The issue of whether your clients’ conduct in this matter has been oppressive has previously been raised in correspondence from this firm. In the circumstances it would appear that the directors of PMG instigating this claim have or will have a conflict of interest and collateral purpose arising from:
(a) Their actions in instructing Mr Smith to prepare the ShineWing Report;
(b)Threatening and or instigating proceedings in the name of PMG against my clients; which
(c) Will directly benefit those directors at the expense of PMG;
And those actions are oppressive and unfairly prejudicial to my clients in that:
(d) None of those directors are bearing the costs of the proceedings.
(e)The costs of the proceedings are born [sic] by PMG, approximately half, if not in fact half, of which is owned by my clients.
(f)Effectively half of such costs are being born by the Auswild interests for an action against them where PMG appears intent on benefitting the Bergmuller/Parker interests and in those circumstances the cost of the action should lie with the Bergmuller/Parker interests, who stand to benefit from the action or the settlement proceedings as they are being presently conducted.
(g)In the event my clients successfully defend any action in whole or in part thereby entitling costs, my clients are through their 50% (approx.) shareholding effectively only recovering 25% of their costs.
(h)The claim to date has been directed solely at my clients in circumstances where and [sic] integral part of the complaint is unsatisfactory accounts which were audited and [JRA] and Mrs Waugh are the only parties from the indicative pool of 9 director/officer defendants and 14 third party defendants from whom PMG is seeking settlement. It is not in the company’s interests to limit its source of recompense.
The letter concluded as follows:
Should your clients continue to reject legitimate requests for information as set out above, I am instructed to put you on notice that in the event of this matter being wholly or partly resolved in favour of my clients either informally or in court, my clients will seek costs personally from the directors of your client who instigated proceedings.
On or about 17 April 2014, the day prior to the Easter holiday period, Macpherson Kelley provided the draft statement of claim to Pikes & Verekers.
By letter dated 6 May 2014 to Macpherson Kelley, Pikes & Verekers acknowledged receipt of the draft statement of claim and requested confirmation of certain matters prior to the proposed mediation before Mr McHugh QC.
By letter dated 2 July 2014 to Pikes & Verekers, Brown Wright Stein stated that they acted for James Bergmuller and Simone Ferry, and that their letter was written with the consent of Martina Parker and Nicky Alekna, whom they referred to collectively as JFJ’s grandchildren. The letter set out ‘JFJ’s grandchildren’s concerns in relation to the affairs of the Group and related matters’. Following a detailed family history and background, the letter identified ‘the various acts and transactions which are of concern to JFJ’s grandchildren’ under the following headings:
(a)use of company funds for non-business expenses;
(b)Seascape Apartments;
(c)wages paid by the business to RWA Family;
(d)unexplained payments of over $12m;
(e)management fees;
(f)Bellevue Hill property;
(g)Regency Apartments – Joan Auswild and Baronja;
(h)unapproved transfer of group assets to related parties:
(iv) Rose Bay;
(v) Sutton Farm; and
(vi) Admiral North;
(i) external loans for non-group purposes;
(i) Hatmax/PT Limited borrowings - loans to Telasava and Rossfield;
(ii) GMAC/Carlisle loans; and
(iii) the DMA;
(j) Rose Bay Esplanade Properties Pty Ltd – Beresford property; and
(k) Telasava distributions.
The letter alleged that the conduct described was oppressive and suggested that the following alternatives merited consideration with respect to resolving the dispute:
(a)the transfer of assets formerly owned by the Group (or paid for using Group funds), and now owned by members of the RWA Family, back to the Group – The Bellevue Property, The Regency Apartments, The Rose Bay Property, Sutton Farm, Admiral North, units 3, 4, 5, 7, 8 and 9 of the Beresford Properties;
(b)the RWA Family pay back excessive moneys taken from the Group whether by way of salaries paid by the Group to family members for work not performed, management fees, personal expenses booked to Group entities, or unexplained loans;
(c)an arrangement whereby, the RWA Family buys out the shares held by the JFJ Family at a value, which is grossed up to reflect the value that the JF] holding would have had, but for the substantial transfer out of Group assets to members of the RWA Family and the use of Group assets for the non-Group purposes;
(d)an arrangement whereby the JFJ Family acquires the shares held by the RWA Family on an agreed basis which takes account of the matters set out in this letter and the Group claims against members of the RWA Family; and
(e)a break up of Group assets on an agreed basis which takes account of the matters set out in this letter and the Group claims against members of the RWA Family.
By letter dated 15 July 2014 to Brown Wright Stein, Pikes & Verekers replied and contended that their clients had been the subject of oppressive conduct set out under the following headings:
A. The Evolution of the Complaint.
B. The Rossfield Settlement.
C. The ShineWing Report.
D. Post ShineWing Conduct.
The letter concluded by stating:
[My clients’] primary exception is to the manner in which the ShineWing Report has been prepared on the basis of selective incomplete information for the benefit of your clients but paid for by PMG. This is aggravated considerably by the fact that my clients have been denied access to the actual basis and instructions on which the ShineWing Report was prepared. When such a report is the basis of proposed proceedings in the circumstances outlined above, therein lies the oppression.
On 23 and 24 July 2014, the matter was mediated before Mr McHugh QC. The dispute did not resolve.
The minutes of the PMG Board meeting on 29 July 2014 recorded the following resolutions:
·Resolution: Statement of Claim.
It was resolved to instruct [Macpherson Kelley] to finalise the draft Statement of Claim previously prepared against prior Directors and to proceed to issue Court proceedings in respect of the claims made by and for the benefit of the companies within the Preston Motors Group (as previously defined in the draft statement of claim circulated in April 2014).
•Chairman tabled the resolution. [Peter Parker] seconded the resolution. [Graham Hamilton] and [James Auswild Jnr] abstained from voting. Resolution was passed. [Graham Hamilton] noted that he did not believe the parties had exhausted all options for negotiation.
·Resolution: Access to information and documents.
It was resolved that the directors (collectively and individually) must assist the Company with respect to the Court proceedings having regard to their obligations to the companies and, in particular, the directors will (without limitation):
a)promptly deliver and/or provide the companies and their legal representatives ([Macpherson Kelley]) with access to all documents and records within their control or possession which may be relevant to the Court proceedings;
b)identify and notify the Company of any documents within their actual knowledge or which they believe to exist that are or may be relevant to the Court proceedings; and
c)identify and assist the Company and its legal representatives with access to premises which contain or which may contain documents or records relevant to the Court proceedings.
Resolution put forward by Chairman, seconded by [Peter Parker]. [Graham Hamilton] and [James Auswild Jnr] voted against the resolution. The Chairman used his casting vote to pass the resolution.
By email of 31 July 2014 to James Bergmuller (copied to Peter Parker and James Auswild Jnr), Graham Hamilton noted that the first of these resolutions was passed after James Auswild Jnr and Graham Hamilton abstained, while the second resolution was passed by James Bergmuller using his casting vote.
By email of 13 August 2014 to Graham Hamilton (copied to James Auswild Jnr and Peter Parker), James Bergmuller explained the process by which the resolutions had been brought forward, and stated with respect to the first resolution:
… I am comfortable that the resolution to issue proceedings in the meantime was a sensible decision. I note that you have also previously stated that, if the matters in dispute cannot be resolved, then the plaintiff companies should issue proceedings. I also note that you abstained from voting on this resolution, as opposed to voting against it.
By email of 16 August 2014 to James Bergmuller (copied to James Auswild Jnr and Peter Parker), Graham Hamilton explained that he had abstained from the first resolution because of the previous resolutions to delegate the management and authority to the Third Party Directors to instruct Macpherson Kelley in relation to the claim.
On 27 August 2014, Mr Wright met with Mr Joseph (then of Kemp Strang, the solicitors for the Parker Women), and told him that James Bergmuller intended to commence a second set of proceedings seeking relief arising from the same conduct as alleged in the Company Proceeding. Mr Wright communicated that some of the claims in the proposed Company Proceeding were at risk of being statute barred. Mr Wright said that the Court may be assisted by having more options for relief available to redress the relevant conduct, and that it would be more cost effective for the Parker Women to join with James Bergmuller rather than commence their own proceeding.
On 29 August 2014, the Plaintiff Companies filed the Company Proceeding.
On 2 September 2014, Mr Joseph met with the Parker Women. In summary, Mr Joseph told them that Mr Wright’s proposal was as follows:
(i)he act for all of the grandchildren of Sir James Frederick John Auswild, being the Parker Women and James Bergmuller, in proceedings to be commenced to pursue an Oppression Claim;
(ii)he seek instructions from me whenever he required instructions from the Parker Women in relation to the Oppression Claim;
(iii)in the event that a Conflict of Interest arises, the Parker Women were to waive their right to object to Mr Wright continuing to act for James Bergmuller in the Oppression Claim; and
(iv)all legal costs associated with the Oppression Claim, including costs rendered and disbursements incurred by [Brown Wright Stein] and Kemp Strang, be reimbursed from the proceeds of the sale of 2 Seascape apartments on the Gold Coast that were to be payable to James Bergmuller and the Parker Women.
At the meeting, the Parker Women instructed Mr Joseph to accept the proposal put by Mr Wright.
By letter dated 4 September 2014 to Mr Joseph, Brown Wright Stein enclosed copies of the amended originating process, amended affidavit of James Bergmuller, draft waiver and draft letter of engagement. The letter confirmed that James Bergmuller would continue to fund the cost of the proceedings until funds became available from the sale of two of the Seascape Apartments. The letter then set out the following proposal for corporate governance in the event that either proceeding resulted in the RWA Family’s shares in the PMG being transferred to the JFJ Family:
In the event that there is either a resolution of the Proceedings or the proceedings issued by the Company (the ‘SOC’) or a judgment that results in all of the shares of the defendants in the Proceedings being either bought back or transferred to the Parkers/Bergmullers then our clients need to agree on the governance of the companies in the Preston Motors Group.
We have been instructed to enter into discussions with you on behalf of the Parkers as to how the Preston Motors Group would be dealt with in such circumstances. Our client envisages that a shareholders agreement would be entered into and/or the constitution varied to deal with those matters. Rest assured our client will conduct such negotiations in good faith.
By letter dated 4 September 2014 to the Parker Women (copied to Mr Joseph), Mr Wright confirmed that he acted for James Bergmuller and each of the Parker Women in the Shareholders Proceeding ‘with the aim to avoid the costly and potentially unnecessary doubling up on legal costs, and in order to make the conduct of the Proceeding more efficient’. He noted the possibility of a conflict of interests developing and that:
one potential outcome of the Proceeding would see the JFJ Family purchasing the RWA Family’s shares in the Preston Motors Group. This will invariably raise issues as to the subsequent distribution of those shares.
By originating process filed 8 September 2014, the JFJ Shareholders filed the claim in the Shareholders Proceeding against the RWA Shareholders under ss 232 and 233 of the Act, claiming the following relief:
1.An order pursuant to s233(1)(d), that the first to third defendants transfer their shares in the entities referred to in paragraph 6 of the Bergmuller Affidavit, to the plaintiffs, upon payment by the plaintiffs to the first to third defendants of a price to be assessed as the fair value dollar amount per share.
2.Alternatively to paragraph 1 hereto, an order pursuant to s233(1)(d) that the shares of the plaintiffs held by them in the entities referred to in paragraph 6 of the Bergmuller Affidavit be purchased by the defendants for a price to be assessed as the fair value dollar amount per share and on the basis that the fair value dollar amount per share take account of inter alia:
(i)the value that the shares would have upon the repayment of the amounts and the transfers of the properties sought in proceeding S ECI 2014 00071;
(ii)the value that the shares would have had the Preston Motors Group companies (as that term is defined in the Statement of Claim in proceeding S ECI 2014 00071) not suffered the loss and damage referred to in the Statement of Claim in S ECI 2014 00071.
3.Alternatively to paragraphs 1 and 2, upon the payment of the claims and transfers of the properties sought in proceeding S ECI 2014 00071, the companies referred to in paragraph 6 of the Bergmuller Affidavit and further or in the alternative the companies comprising the Preston Motors Group, be wound up.
4.Alternatively to paragraphs 1, 2 and 3, and upon the payment of the claims and the transfers of the properties sought in proceeding S ECI 2014 00071, a receiver be appointed to the companies referred to in paragraph 6 of the Bergmuller Affidavit, and directed to sell the assets of those companies and to distribute the proceeds of the sale to the shareholders.
(f)On 14 April 2020, Graham Hamilton and James Auswild Jnr resigned as directors.
(g) The PMG has made trading losses in every month since April 2018.
(h)The PMG’s advisers have recommended that the PMG divest its entire portfolio of assets.
Conduct of and interest in the litigation
JRA submitted as follows:
(a)The Third Party Directors played an active part and had an interest in the subject matter of the Company Proceeding for similar reasons to those submitted by the Company Defendants.
(b)JAB Nominees and the Parker Women played an active part and had an interest in the Company Proceeding for the following reasons:
(xvi) The Company Proceeding is a historical family dispute between the RWA Family and the JFJ Family.
(xvii) The Shareholders Proceeding was issued as a backup plan in the event that the Company Proceeding failed due to limitation problems.
(c)The Parker Women elected to participate in the Shareholders Proceeding after receiving legal advice that the Shareholders Proceeding:
(i)relied on the same conduct as the Company Proceeding; and
(ii)provided them with an alternative means of obtaining relief in the event that the Company Proceeding failed due to time problems.
Further, they had the ability to control the Company Proceeding through their appointed director, Peter Parker.
(d)JAB Nominees replaced James Bergmuller as the first plaintiff in the Shareholders Proceeding and he was its directing mind.
Interests of justice
JRA submitted that it was in the interests of justice for a non-party costs order to be made because the Company Proceeding was filed and maintained for the collateral purpose of furthering the interests of the majority shareholders, which is to be inferred from the following:
(a) The Company Proceeding was, in substance, a family dispute.
(b) Prior to the commencement of the Company Proceeding:
(i) Geraldine and James Bergmuller deliberately concealed Project Fluffy;
(ii)Martina Parker proposed that the company appoint a forensic investigator to investigate the Project Fluffy allegations, and if the dispute could not be resolved at the board level, she intended for the majority shareholders to use the fruits of the investigation, paid for by the companies, to ‘take action as a share-holder’; and
(iii)after the matter was not resolved at the board level, the information from the ShineWing investigation was given to Brown Wright Stein who were then acting for James Bergmuller and Simone Ferry.
(c)The purpose of the Company Proceeding was to benefit only the JFJ Family.
(d)The Company Proceeding was not a genuine attempt to recover moneys for the benefit of the Plaintiff Companies. It was in fact part of a strategy, designed by James Bergmuller and assisted by Peter Parker and the Parker Women, in which the PMG assets would be used to fund complex and expensive claims against the RWA Family to force the RWA Shareholders to sell their shares at a discount.
(e)The Company Proceeding was conducted unreasonably in disregard of known facts.
Submissions of JAB Nominees
Persons of straw or insolvent
JAB Nominees submitted that the Plaintiff Companies were not insolvent, nor incapable of paying any costs orders made against them, for the following reasons:
(a)In considering a company’s financial position the Court must have regard to commercial realities, including whether liabilities can be met not just from cash flow but from other resources such as asset sales or borrowings.
(b)As at 30 June 2019, the statement of financial position in the audited accounts showed a consolidated net asset position for the PMG of $41,446,944.
(c)The most recent statement of financial position in evidence is as at 30 April 2020, which showed a consolidated net asset position of $65,108,406.
(d)Peter Parker’s evidence was that the audited accounts did not include the goodwill of the Porsche dealerships, which he estimated at between $30 to $40 million.
(e)The current cash flow forecast for the PMG as at 30 April 2020 indicates that $6.64 million is available. According to the evidence of Peter Parker, the following needs to be added to that sum:
(xviii) the Holden compensation payment estimated to be in ‘the millions of dollars’;
(xix) the additional working capital of approximately $3 million available from re-bailment of inventory;
(xx) funds available from the Scottish Pacific Invoice Finance Facility in the order of between $4.4 million and $4.5 million; and
(xxi) proceeds from asset sales, noting that a written offer for the Chadstone dealerships and Parts businesses had been received.
(f)The evidence was that the assessment of costs would not be completed for another 6.5 to 20 months. The interim orders of the Honourable Justice Riordan made 26 June 2020 included that the PMG would take all reasonable steps as soon as practicable to sell its assets.
Conduct of and interest in the litigation
JAB Nominees submitted as follows:
(a)James Bergmuller’s interest in the outcome of the litigation was aligned with JAB Nominees, which was as a shareholder of the Plaintiff Companies.
(b)The plaintiffs in the Shareholders Proceeding had no direct involvement with the conduct of the Company Proceeding.
(c)The fact that the plaintiffs in the Shareholders Proceeding had nominee directors on the boards of the Plaintiff Companies does not lead to the inference that they played a part in the litigation. Such a role is to be contrasted with involvement in a breach of the Act within the meaning of s 79.
Interests of justice
JAB Nominees submitted that the interests of justice did not warrant making a non-party costs order.
Submissions of James Bergmuller
Persons of straw or insolvent
James Bergmuller submitted that the Plaintiff Companies were not insolvent, adopting the submissions of JAB Nominees.
Conduct of and interest in the litigation
James Bergmuller submitted that his conduct was in his capacity as a director and, as the ordinary proposition is that a company only acts through its director, a director is not regarded as the real party in litigation.
Interests of justice
James Bergmuller submitted that in all the circumstances and, in particular, the fact that the Company Proceeding was brought and acquiesced to by the RWA Shareholders and their nominee directors, it would be entirely unjust to order personal costs against James Bergmuller.
Submissions of Peter Parker
Persons of straw or insolvent
Peter Parker submitted that the insolvency of the Plaintiff Companies was not pleaded, nor raised as an issue, until immediately prior to the hearing of the costs applications. The Company Defendants did not attempt to put on any evidence of a genuinely held belief in the insolvency of the Plaintiff Companies. At most, the Company Defendants allege that ‘the companies’ cash flow is parlous’, which cannot be sustained after the Court’s orders made 26 June 2020.
Conduct of and interest in the litigation
Peter Parker submitted that the there was no evidence that he was the real party to the litigation. He was not a shareholder and there is no evidence that he sought to act for the Parker Women as shareholders or any other shareholders in commencing or continuing the proceeding.
Interests of justice
Peter Parker submitted that if the discretion to award costs against him was enlivened, it was not in the interests of justice to do so for the following reasons:
(a)Costs against non-parties should be treated with ‘considerable caution’ and granted only when exceptional circumstances make such an order reasonable and just.
(b)There was nothing exceptional about a properly informed director, advised by experienced legal practitioners and funded by a unanimous board resolution passed on behalf of all shareholders, commencing litigation on behalf of a company for the recovery of company assets.
(c)It had not been contended that there was no reasonable prospect of success for the Company Proceeding.
(d)The fact that the claim was against only certain shareholders is unremarkable.
(e)Peter Parker had responsibilities as a director to consider and pursue other claims of the company.
Submissions of the Parker Women
Persons of straw or insolvent
The Parker Women submitted that the Plaintiff Companies were not insolvent and adopted the submissions of JAB Nominees, James Bergmuller and Peter Parker on this issue.
Conduct of and interest in the litigation
The Parker Women submitted that they had only an indirect interest in the successful prosecution of the Company Proceeding, namely the value of their shares would be increased by any amount obtained by the Plaintiff Companies, which was of no greater interest than that of the RWA Shareholders.
Interests of justice
The Parker Women submitted that it was not in the interests of justice that a non-party costs order be made for the same reasons as was submitted that their conduct was not oppressive.
Conclusion on question 6
JRA and the Company Defendants applied for costs orders against the non-parties, being James Bergmuller, JAB Nominees, Peter Parker and each of the Parker Women.
The Court’s power to order costs against non-parties arises within its general discretion under s 24(1) of the Supreme Court Act 1986 (Vic), which provides as follows:
Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.
In Knight, Mason CJ and Deane J recognised a general category of cases in which a court can make an order for costs against a non-party where the interests of justice require. This arises when all of the following circumstances are present:
(a) the party to the litigation is an insolvent person or man of straw;
(b)the non-party has played an active role in the conduct of the litigation; and
(c)the non-party (or some person on whose behalf he or she is acting or by whom he or she has been appointed) has an interest in the subject of litigation.[95]
[95](1992) 174 CLR 178, 192–3.
In FPM Constructions Pty Ltd v Council of the City of Blue Mountains, Basten JA surveyed some authorities subsequent to Knight, and identified the following non-exhaustive and non-exclusive criteria that may inform the exercise of the discretion to make a non-party costs order:
(a)the unsuccessful party to the proceedings was the moving party and not the defendant;
(b) the source of funds for the litigation was the non-party or its principal;
(c) the conduct of the litigation was unreasonable or improper;
(d)the non-party or its principal had an interest (not necessarily financial) which was equal to or greater than that of the party or, if financial, was a substantial interest; and/or
(e)the unsuccessful party was insolvent or could otherwise be described as a man of straw.[96]
[96][2005] NSWCA 340, [210] (‘FPM Constructions’).
The usual costs order in a proceeding is that the costs follow the event. This means that the losing party is ordered to pay the costs of the successful party. Costs orders against a non-party are exceptional in the sense that it is ‘outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense’.[97] The informing principle of a non-party costs order was explained by the Court of Appeal in Gdanski v Palms Court Management Pty Ltd:
The informing principle … is that, if a party to litigation is liable to pay the costs of the successful party but is unable because of insolvency to do so, justice may require the costs to be paid by a non-party if it can be shown that the non-party played an active part in conducting the litigation and stood to benefit from a successful outcome.[98]
[97]Dymocks Franchise Systems (NSW) Pty Ltd v Todd (No 2) [2005] 1 NZLR 145, 156 [25(1)] (Lord Brown for the Court); cited with approval in Yu v Cao (2015) 91 NSWLR 190, 216 [139] (McColl JA, with whom Sackville AJA and Adamson J agreed).
[98][2017] VSCA 348, [66] (Maxwell P, McLeish JA and Keogh AJA).
With respect to the ability of the Plaintiff Companies to pay the costs previously ordered and to be ordered consequent on the dismissal of the Company Proceeding, I accept the submissions of JAB Nominees. The most recent evidence of the financial capacity of the Plaintiff Companies to pay the costs is that, at 30 April 2020, the PMG had a consolidated net asset position of $65,108,406.
On 26 June 2020, it was ordered that the boards of the PMG companies shall take all reasonable steps as soon as practicable to realise the substance of the PMG assets. There is no reason to believe that the Plaintiff Companies will be unable to pay the costs of JRA and the Company Defendants with respect to the Company Proceeding.
The second and third elements of Knight (being whether the non-party has played an active role in the conduct of the litigation and has the relevant interest) are satisfied if the non-party is a ‘real party’ to the litigation in ‘critical’ and ‘important’ respects.[99]
[99]Ibid [69], approving the formulation in Kebaro Pty Ltd v Saunders [2003] FCAFC 5, [111], [113]–[114].
For the reasons set out in paragraphs 183 to 185 above, I do not consider that the JFJ Shareholders played an active part in the proceeding.
The question of whether the Third Party Directors are real parties to the litigation in a relevant sense is answered by examining their role in the conduct of the litigation and their interest in its outcome.[100]
[100]Gdanski [2017] VSCA 348, [69], [71] (Maxwell P, McLeish JA and Keogh AJA).
Whether the non-party is a real party is to be evaluated by reference to all of the relevant factors. Each of the criteria should not be treated separately. As Basten JA said in FPM Constructions:
The criteria identified in Knight v FP Special Assets should not ultimately be treated as separate and independent factors. Each requires an evaluative assessment of factors which will clearly tend to interact.[101]
[101][2005] NSWCA 340, [214] (with whom Beazley and Gyles JJA agreed).
The fact that a director instructs and assists solicitors with respect to litigation by a company is unremarkable. As the Court of Appeal said in Gdanski:
Given that Mr Gdanski was acting in his capacity both as a director of the company and as its solicitor, the activities listed are unremarkable. As the authorities recognise, and as senior counsel for Palms properly conceded, a company is an artificial legal entity which must, of necessity, conduct its commercial activities through natural persons, who represent it in commercial dealings and make decisions on its behalf. Likewise, when it engages in litigation, the company must do so through natural persons, who act as its legal representatives.[102]
[102][2017] VSCA 348, [72] (Maxwell P, McLeish JA and Keogh AJA).
It is apparent that to enliven the discretion to award costs against a non-party ‘something more’ is required than a director merely assisting the corporate litigant in the conduct of litigation, which may be in accordance with his or her fiduciary duties.[103] The ‘something more’ required to enliven the discretion may be:
[103]FPM Constructions [2005] NSWCA 340, [212].
(a) a director giving instructions to pursue a claim or defence which has no real prospects of success;[104]
(b) the institution of a proceeding based on fraud without reasonable grounds;[105] or
(c) the continuation of such a proceeding on the basis of a ‘stubbornly and totally unreasonably’ held belief.[106]
[104]Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34, [87]-[88] (Gleeson JA, with whom Macfarlan JA and Leeming JA agreed); Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, 412 (Callinan J).
[105]QBH Commercial Enterprises Pty Ltd v Dalle Projects Pty Ltd [2018] VSC 383, [77] (Riordan J).
[106]Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, 412 [30] (Callinan J).
For the reasons set out in rejecting the alleged breaches of duty to act in the best interests of the Plaintiff Companies at paragraphs 176 to 179 above, I am not satisfied that the Company Proceeding:
(a) had no real prospects of success;
(b) was based on fraud without reasonable grounds; or
(c) was continued ‘stubbornly and totally unreasonably’.
Further, I do not consider the fact that a director may have breached their fiduciary duties to a company as necessarily relevant or determinative of whether the director should be liable as a non-party for the costs of the defendant to the proceeding.[107] The conflict of interests affecting the Third Party Directors constituted no breach of duty to JRA and the Company Defendants. Improper conduct might become relevant to the interests of justice if the Knight discretion is enlivened,[108] but:
(a)for the reasons stated above, the defendants have not established that the Knight discretion is enlivened; and
(b)the defendants would not be entitled to any of the presumptions about causation that may be available to the persons to whom relevant duties were owed.[109]
[107]Queenfield Pty Ltd v Gordon Nominees Pty Ltd [2020] VSC 292, [23] (Riordan J).
[108]Vestrisv Cashman (1998) 72 SASR 449, 467 (Lander J), quoted with approval in Gdanski [2017] VSCA 348, [89] (Maxwell P, McLeish JA and Keogh AJA).
[109]See paragraph 208 above.
Accordingly, I am not satisfied that, on the basis of the principles in Knight, the Third Party Directors or the JFJ Shareholders should be ordered as non-parties to pay the costs of JRA or the Company Defendants with respect to the Company Proceeding.
Question 7 – Does the Court retain a discretion to award costs against a non-party independently of the principles in Knight?
It was common ground that the Court does retain such a discretion.
Question 8 – If yes to question 7, should:
a. non-party costs orders be made pursuant to that discretion; and/or
b. the non-parties be ordered to indemnify the Plaintiff Companies in respect of any costs order made against the Plaintiff Companies?
Submissions
Submissions of the Company Defendants – the second to tenth defendants
The Company Defendants submitted that non-party costs orders should be made because otherwise:
(a)the Company Defendants will effectively pay half of their own costs, despite being the successful party; and
(b)the non-parties who have sought to obtain the benefit of the Company Proceeding, would bear very little of the cost discipline that is imposed on unsuccessful plaintiffs.
Submissions of JRA - the first defendant
JRA submitted that non-party costs orders should be made for the following reasons:
(a)The non-parties were given clear notice of the possibility of costs being sought against them if the proceeding failed by the letter from Pikes & Verekers to Macpherson Kelley dated 7 June 2016, and the exchange between the Court and counsel for the JFJ Shareholders on 12 June 2018.
(b)The non-parties could have terminated the proceeding. The Third Party Directors could have done so directly through their delegated authority and the Parker Women could have replaced their nominee representative.
(c)There has been improper conduct on the part of the non-parties, being the conflict of interests on the part of the Third Party Directors.
(d)The Company Proceeding was conducted unreasonably and in disregard of known facts. In particular, JRA relied upon the following matters:
(i)the claims against the sixth to tenth defendants were abandoned; and
(ii)the Plaintiff Companies alleged fraud based on an absence of evidence and selective entries in the books and records of the companies, and then subsequently made objections to the admissibility of the same books and records.
(e)The Third Party Directors terminated the retainers of counsel retained in the Company Proceeding less than two weeks before the scheduled commencement of the trial.
(f)Counsel for the Plaintiff Companies opened on the basis that, prior to the entry into the DMA in April 1992, F&G was not liable for the debts of the Webb/Auswild Group. This allegation had no reasonable basis because of the cross-guarantee dated 25 October 1989 and the deed of acknowledgment of indebtedness dated 10 December 1990.
(g)On 19 November 2018, the joint expert report made it clear that the Carlisle, Telasava, Rossfield and Baronja loans had all been repaid with interest.
(h)The Plaintiff Companies did not call their own expert witness, Mr Stone.
(i)The Plaintiff Companies’ case refused to acknowledge the significance of the Midlands Finance Co and the Auswild Accounting Practice.
(j)On 28 November 2018, the Plaintiff Companies sought and obtained leave to file a further amended statement of claim alleging dishonest breaches of fiduciary duties in causing F&G to enter into the guarantees preceding the DMA.
(k)On 3 April 2019, being day 23 of the trial, the Plaintiff Companies abandoned their claims with respect to expenses.
(l)The Third Party Directors caused the Plaintiff Companies to persist with the claims that the Telasava and Rossfield loans had not been repaid, despite being advised since at least 2007 by Auswild & Co, Joe Hart, BDO/ShineWing, Bartier Perry Solicitors, Rossfield (via their solicitors) and their own expert Mr Stone, that all of the available evidence showed that the Telasava and Rossfield loans were repaid with interest in 1997.
(m)JRA otherwise relied on Schedule A to his submissions, which set out allegations made by the Plaintiff Companies in respect of which they held inconsistent evidence.
Submissions of JAB Nominees
JAB Nominees submitted that:
(a)A non-party costs order would be an extraordinary departure from the existing law in circumstances where the losing party is solvent and able to meet any adverse costs order.
(b)A court has no reason to venture into a consideration of a non-party costs order where the winning party would obtain recourse for all of its costs from the losing party.
(c)The claim for indemnification exceeds the Court’s jurisdiction to order costs and was made by the defendants in the Company Proceeding without proper standing.
Submissions of the Parker Women
The Parker Women submitted that the Court ought not to exercise its jurisdiction to make a non-party costs or indemnity order against the Parker Women for the same reasons as it was submitted that their conduct was not oppressive.
Submissions of James Bergmuller
James Bergmuller submitted that it was not appropriate to make a non-party costs order because the economic complaint of the defendants, that they bear a share of the Plaintiff Companies’ expenditure, arises through their interests as shareholders and not as defendants to the litigation.
Submissions of Peter Parker
Peter Parker submitted that:
(a)A non-party costs order should not be made for the same reasons that he submitted (in relation to the Knight discretion) that it was not in the interests of justice that such an order be made.
(b)The proposition that the claims were unreasonably prosecuted in disregard of known facts was raised later and not put to Peter Parker.
(c)The ‘Joint Table of the Plaintiffs in the Company Proceeding and the Third Parties in the Company Proceeding’ as to the claims advanced in the Company Proceeding filed 29 June 2020 set out the evidence relevant to the issue of the evidence supporting the claims in the Company Proceeding.
Conclusion on question 8
For the reasons set out with respect to questions 4 and 5, I do not consider that it is in the interests of justice that a non-party costs order should be made against the JFJ Shareholders.
I also consider that, in the exercise of my residual discretion, the interests of justice do not justify the Court making a non-party costs order against the Third Party Directors in favour of JRA and the Company Defendants, for the following reasons:
(a)As stated above, the mere fact that a person is a director and shareholder of an unsuccessful litigant corporation will not, without more, justify a non-party costs order. As Muir J said in Rushton (Qld) Pty Ltd v Rushton (NSW) Pty Ltd:
To conclude otherwise would be to ignore the principle that costs orders against non-parties are ‘exceptional’ and ought be made only if appropriate in the interest of justice. The control of a corporate litigant by a director who is also its sole or majority shareholder is an unremarkable occurrence. It is sanctioned by a long established legislative framework which recognises that a company has an independent legal personality distinct from that of its members and that neither members nor directors, as a general proposition, are personally liable for its acts and defaults.[110]
(b)As noted in paragraph 275 above, the conflict of interests affecting the Third Party Directors was a breach of their duties to the Plaintiff Companies, but constituted no breach of duty to JRA and the Company Defendants.
(c)On the third party claims in the Shareholders Proceeding, I am proposing to make an order that the Third Party Directors reimburse the Plaintiff Companies for the costs incurred in the conduct of the Company Proceeding, including any costs ordered to be paid by the Plaintiff Companies.
(d)For the reasons set out in paragraphs 266 and 267 above, I do not consider that there is a real prospect that JRA or the Company Defendants will not recover their costs from the Plaintiff Companies.
[110][2004] QSC 47, [12]–[13], quoted with approval in Gdanski [2017] VSCA 348, [43] (Maxwell P, McLeish JA and Keogh AJA).
It is not necessary for me to consider whether, absent these factors, an assessment that the underlying nature of the Company Proceeding, as a dispute between the RWA Family and the JFJ Family, would justify a non-party costs order.
Basis for assessment of costs
Question 9 – Should any orders for costs made against the Plaintiff Companies and/or:
a. the Third Party Directors; and/or
b. the JFJ Shareholders, as plaintiffs in the Shareholders Proceeding (if any);
be assessed on an indemnity basis, on the grounds that:
i. the claims were made in wilful disregard of known facts or clearly established law;
ii. the claims were made for a collateral purpose;
iii. the claims included substantiated allegations of fraud; and/or
iv. any other ground and if so, what ground?
Submissions
Submissions of the Company Defendants – the second to tenth defendants
The Company Defendants submitted that costs should be ordered on an indemnity basis for the following reasons:
(a)The claims were replete with allegations of dishonesty which failed without a skerrick of evidence.
(b)The claims included claims known to be false such as the alleged non-payment of the Carlisle loan.
(c)The proceedings included some $20 million in claims that were abandoned, including, for example, the expenses claims.
Submissions of JRA – the first defendant
JRA submitted that the Court should order that the costs be taxed on an indemnity basis for the same reasons as it was submitted that non-party costs orders were appropriate. The Court should find that the Company Proceeding was filed and maintained:
(a) in wilful disregard of known facts or clearly established law;
(b) for a collateral purpose; and
(c) with allegations of fraud which were not proven.
Submissions of the Plaintiff Companies – the plaintiffs
The Plaintiff Companies submitted that costs should not be awarded on an indemnity basis for the following reasons:
(a)The making of an allegation of fraud which does not succeed is not enough, without more, to justify an award of indemnity costs.
(b)The abandoned claims were not obviously hopeless or made without a proper basis, and withdrawing or recasting a claim does not inevitably lead to a conclusion that the claim was speculative from the beginning. Claims are properly withdrawn before a trial for any number of reasons, including that a plaintiff may accept a defence that has been pleaded.
(c)The claims against the second to fifth defendants did not proceed in disregard of known facts. There was evidence throwing doubt on the validity of the transactions and on the books and records of the company. In respect of each transaction, the Plaintiff Companies pointed to evidence and circumstances which supported their claims.
Submissions of JAB Nominees
JAB Nominees submitted that the issue of indemnity costs does not arise for consideration.
Submissions of the Parker Women
The Parker Women submitted that the Court should not order indemnity costs because it was not part of the defendants’ pleaded case that the claims in the Company Proceeding had no chance of success, and the Parker Women had no involvement in the Company Proceeding which could support an inference of an ulterior purpose.
Submissions of James Bergmuller
With respect to indemnity costs, James Bergmuller adopted the submissions of the Plaintiff Companies and submitted that, even if costs were ordered against the Plaintiff Companies on that basis, it does not follow that any costs should be ordered against James Bergmuller.
Submissions of Peter Parker
With respect to the question of indemnity costs, Peter Parker relied upon the submissions made by the plaintiffs in both the Company Proceeding and the Shareholders Proceeding.
Conclusion on question 9
I am not satisfied that the Company Proceeding was filed and maintained:
(a) in wilful disregard of known facts or clearly established law; and/or
(b) for a collateral purpose.
Nor do I consider that the fact that there were allegations of fraud which were not proved justifies an award of indemnity costs.
I do not accept that the Company Proceeding was filed and maintained in wilful disregard of known facts or clearly established law, for the following reasons:
(a)I repeat my reasons for finding that, by filing and maintaining the proceeding, the Third Party Directors did not breach their duty to act in the best interests of the Plaintiff Companies.
(b)In the Company Proceeding, it was alleged that the Carlisle, Telasava and Rossfield loans were not repaid, despite the fact that the ShineWing report said that the books recorded these loans as having been repaid. However, I accept the evidence of Peter Parker that he and James Bergmuller believed there were reasonable grounds for doubting the accuracy of these records for the following reasons:
(xxii) As the ShineWing report demonstrated, there were significant gaps and errors in the accounting records of the PMG during the relevant period.[111]
[111]See, eg, ShineWing report dated 28 March 2013, 68-72 [5.1].
(xxiii) Mr Stone’s report dated 12 June 2018 said, in substance, that he was unable to determine how these loans had been repaid.
Further, proof of the allegation that the loans had not been repaid was not critical to the success of the Company Proceeding. The ShineWing quantum report dated 25 June 2013 had calculated the amount owing as $244,755,064, even assuming that the Carlisle, Telasava and Rossfield loans had been repaid.
I do not accept that the Company Proceeding was filed and maintained for a collateral purpose. A collateral purpose is established where the plaintiff uses the processes of the Court to secure some collateral advantage beyond what the law offers.[112] The Third Party Directors believed the Company Proceeding to have real prospects of succeeding in the recovery of substantial damages. The fact that the funding of the Company Proceeding advantaged James Bergmuller and Martina Parker, which gave rise to a conflict between duty and interest, does not mean that the Company Proceeding was intended to secure some collateral advantage beyond what the law offered.
[112] Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3) [2012] VSC 399, [22] (Croft J).
I do not consider the fact that the Company Proceeding included unproved allegations of fraud justifies an order for indemnity costs. As Woodward J stated in Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurances Pty Ltd:
It is sometimes said that [indemnity costs (solicitor/client costs)] can be awarded where charges of fraud have been made and not sustained; but in all the cases I have considered, there has been some further factor which has influenced the exercise of the Court’s discretion – for example, the allegations of fraud have been made knowing them to be false, or they have been irrelevant to the issues between the parties.[113]
For the reasons previously given,[114] I do not consider that the Third Party Directors knew the pleaded allegations of fraud to be false, or that the allegations were irrelevant to the claims in the Company Proceeding.
Question 10 - Should the Court order that the costs be assessed on a gross sum basis on the basis that:
[113](1986) 10 FCR 177, 178.
[114]See paragraph 177 above.
a. there will be significant costs savings;
b. there will be a reduction in Court allocated resources; and/or
c. any other basis and if so, what basis?
The evidence of the experts called by the Company Defendants (Ms Dealehr) and JRA (Ms Young) was, in summary, that a gross sum costs order would be resolved in approximately half the time and for approximately 30% of the costs of a taxation.
The evidence of the expert called by the Plaintiff Companies (Ms Paver) was, in summary, that a gross sum costs order would likely take longer and cost more than the costs of a taxation.
In summary, their evidence as to time and cost was as follows:
Expert (party calling)
Average time/cost of taxation of Company Defendants’ costs
Average time/cost of gross sum assessment of Company Defendants’ costs
Dealehr (Company Defendants) 23 months/$713,000 8 months/$226,000 Paver (Plaintiff Companies) 10.5 months/$287,000 11 months/$413,000 Expert (party calling)
Average time/cost of taxation of JRA’s costs
Average time/cost of gross sum assessment of JRA’s costs
Young (JRA) 22 months/$304,000 12 months/$87,000 Paver (Plaintiff Companies) 11 months/$228,000 16 months/$286,000 Conclusion on question 10
In my opinion, the resolution of costs in this matter requires that the matter be assessed by the Costs Court because of the complexities arising from the following:
(a)The Plaintiff Companies may wish to contend that a substantial part of the defendants’ costs in the Company Proceeding should be apportioned to the JFJ Shareholders, as the plaintiffs in the Shareholders Proceeding.
(b)As a result of the orders to be made in the third party proceedings, James Bergmuller, JAB Nominees, Peter Parker and/or Martina Parker may be entitled to be separately represented as to their interests with respect to the quantum of costs to be ordered against the Plaintiff Companies and the allocation of costs between the proceedings.
(c)The costs orders in the Shareholders Proceeding require separate consideration of the following costs:
(xxiv) Costs payable to the defendants consequent on the discontinuance of the plaintiffs’ claims in the Shareholders Proceeding with:
1. the first plaintiff being liable for the costs of the discontinued claim; and
2. the second to fourth plaintiffs being liable for costs of the discontinued claim up to 20 April 2020.
(xxv) Costs payable by the defendants by counterclaim to the plaintiffs by counterclaim.
(xxvi) Cost payable by the third parties to the defendants on the third party claim.
(xxvii) Costs incurred with respect to the (yet to be determined) claim of the first plaintiff in the statement of claim filed 9 June 2020, as amended by the amended statement of claim filed 15 June 2020.
(d)The costs orders in the Company Proceeding require separate consideration of the costs of and incidental to the first defendant’s and second to tenth defendants’ respective applications for special costs orders, which I propose to order be paid by those defendants.
I am not satisfied that the ‘broad brush’ approach,[115] which is applied in assessing costs on a gross sum basis, could properly and fairly accommodate:
(a) the allocation of costs between the proceedings; and
(b)the need to ensure procedural fairness is afforded to all persons with separate and distinct interests in the outcome of the assessments.
[115]Sunland Waterfront (BVI) Ltd v Prudentia Investments Pty Ltd (No 3) [2012] VSC 399, [84] (Croft J).
Orders
In the Company Proceeding I propose to order that:
(a)the first defendant pay the plaintiffs’ costs of and incidental to his claims in the notice of costs orders filed 18 October 2019, as amended by the further amended notice of costs orders dated 22 June 2020;
(b)the second to tenth defendants pay the plaintiffs’ costs of and incidental to their claims in the amended notice of orders to be sought filed 25 October 2019; and otherwise
(c)the plaintiffs pay the second to tenth defendants’ costs of and incidental to the proceeding up to and including the entry of judgment on 30 October 2019.
In the Shareholders Proceeding, I propose to order that:
(a)the third parties reimburse the plaintiffs in the Company Proceeding for the costs and disbursements incurred in the Company Proceeding up to and including the entry of judgment on 30 October 2019, together with the costs payable to the first defendant,[116] and the costs payable to the second to tenth defendants in the Company Proceeding (being the costs referred to in paragraph 303(c) above);
(b)the third parties pay the defendants’ costs of and incidental to the third party proceedings;
(c) the counterclaim is dismissed; and
(d)the plaintiffs by counterclaim pay the defendants by counterclaim’s costs of and incidental to the counterclaim.
[116]By orders made by consent on 22 June 2020, the plaintiffs were ordered to pay the first defendant’s costs of the Company Proceeding in the sum of $2,300,000.
All of the above costs orders include reserved costs and are to be assessed on a standard basis.
It is confirmed that the claim of the first plaintiff in the amended statement of claim filed 15 June 2020 in the Shareholders Proceeding is adjourned to 26 March 2021.
I will hear the parties on the final form of orders.
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