Kyne v Brandrick & Associates Pty Ltd

SUPREME COURT OF VICTORIA

COURT OF APPEAL

S EAPCI 2023 0127

PETER FRANCIS KYNE	Applicant
v
GERARD BRANDRICK & ASSOCIATES PTY LTD (ACN 079 074 061)	Respondent

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JUDGES:	NIALL CJ, McLEISH and KENNEDY JJA
WHERE HELD:	Melbourne
DATE OF HEARING:	29 November 2024
DATE OF JUDGMENT:	28 February 2025
MEDIUM NEUTRAL CITATION:	[2025] VSCA 17
JUDGMENT APPEALED FROM:	[2023] VCC 1895 (Judge Burchell)

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COSTS – Non-party costs order – Where director of builder gave instructions to file notice of contribution against co-defendant architect – Builder insolvent – Non-party costs order made against director on basis that discretion in Knight v FP Special Assets Ltd (1992) 174 CLR 178 enlivened – Whether judge erred in finding that director played active role and held sufficient interest in relation to contribution proceeding – Leave to appeal granted – Appeal allowed.

County Court Act 1958, s 78A.

Knight v FP Special Assets Ltd (1992) 174 CLR 178; Gdanski v Palms Court Management Pty Ltd [2017] VSCA 348, considered; House v The King (1936) 55 CLR 499; Moore (a pseudonym) v The King (2024) 419 ALR 169, applied.

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Counsel
Applicant:		Mr R Andrew KC with Mr D McAloon
Respondent:		Mr JAF Twigg KC with Ms A Mobrici
Solicitors
Applicant:	Strongman & Crouch
Respondent:	Sparke Helmore Lawyers

NIALL CJ
MCLEISH JA
KENNEDY JA:

The applicant was a director and shareholder of Tugnotion Pty Ltd (‘the builder’). The builder was a small private company engaged in building contractor works in the Echuca area. In May 2019, Donald Oberin (‘Oberin’)[1] commenced proceedings against the builder and Gerard Brandrick & Associates (‘the architect’), in the County Court, in relation to what he alleged were defective building works carried out on a hotel in Echuca. The respondent was the architect and superintendent for the works.
[1]Andrew John McGlone was subsequently appointed to represent Oberin’s estate after Oberin’s death.
On 19 June 2023, the trial judge gave judgment for the plaintiff against the builder and dismissed a notice of contribution filed by the builder on 14 July 2022 against the architect. She also ordered the builder to pay both the plaintiff’s and the architect’s costs of the proceeding on the standard basis unless a party sought a different costs order.
By summons filed on 8 August 2023, the architect applied for a non-party costs order against the applicant in circumstances where the builder had recently been placed into liquidation (on 13 July 2023). By orders made on 30 October 2023, the judge ordered that the applicant pay the architect’s costs of the proceeding from 14 July 2022, as well as its costs of the application for the non-party costs order (‘the non-party costs order’).
The applicant seeks leave to appeal the non-party costs order. The proposed ground of appeal is that the court ‘misdirected itself in the exercise of its discretion to make a personal costs order’ by:
(a)finding that the applicant had deliberately set out to defraud the architect from the benefit of any costs order by reducing the builder to a ‘man of straw’, because the builder was, at all material times, a ‘man of straw’ and there was nothing that the applicant did that caused it to be unable to pay the architect’s costs;
…
(c)finding that the applicant played an active role in the litigation, because the applicant’s role was no greater than any director’s role;
(d)failing to take into account the architect’s failure to apply for security for costs; and
(e)making negative findings as to the applicant’s credibility when giving evidence.[2]
[2]Proposed ground 1(b) was abandoned at trial.
For the reasons that follow, we will grant leave to appeal and allow the appeal.

Factual background

The applicant is 63 years old and was at all material times a director, secretary and shareholder of the builder. His wife, Catherine Kyne, was also a shareholder, and a director from November 2016. The builder did not adduce any evidence as to the role played by Ms Kyne in the management of the builder and the architect did not cross-examine the applicant about this.
From 1986, the builder conducted business as a general building contractor in the Echuca area, trading as ‘KGB Constructions’. It was a small, private company with a paid-up share capital of $4.00. At the relevant time, the shares were owned equally by the applicant and his wife.
In May 2012, the builder entered into a building contract with Oberin to provide building works in respect of the American Hotel in Echuca. The architect had earlier been engaged to provide architectural services in relation to the same project, and was nominated as the superintendent for the works.
When the works were completed and handed over, the tenant of the American Hotel almost immediately complained of water leaks. The builder was engaged to undertake and completed the rectification work.
On 6 May 2019, Oberin commenced proceedings against the architect and the builder, claiming the sum of approximately $700,000 for alleged defective building works, rectification costs and other loss and damage.
On 17 July 2019, the architect filed a notice of contribution against the builder.
During the course of 2020 and 2021 there was little progress in the litigation, presumably due to the Covid-19 pandemic. However, the builder continued to incur legal fees in relation to the proceedings. For the financial year ended 30 June 2021, the financial records of the builder recorded legal expenses in an amount of $78,893.17. Its total sales were recorded as $1,481,956.38, with a loss before taxation of $167,534.32.
From 31 August 2021, the builder began selling assets. The evidence of the applicant on the costs application was that this was done in order to fund the legal fees in defending the proceeding. The income statement of the builder for the year ended 30June 2022 records a gain on the disposal of assets of $26,997.28.
On 16 September 2021, the trial of the proceeding was fixed for 13 July 2022.
On 21 January 2022, Oberin and the architect settled the matters between them by executing a deed of release. As will appear, Oberin was ultimately successful at trial. In the trial reasons, the judge recorded that under the deed of release, ‘before final orders are made with respect to the claim made by [Oberin] against [the builder], judgment is to be entered with respect to [Oberin’s] claim against [the architect] as a concurrent wrongdoer for the sum of $475,000.00 under Part IVAA of the Wrongs Act 1958 (comprising $300,000.00 for the claim and $175,000.00 for costs)’.[3]
[3]McGlone v Gerard Brandrick & Associates Pty Ltd & Anor [2023] VCC 999, [4] (Judge Burchell).
The architect says that it considered that, by reason of the settlement, its active involvement in the matter had come to an end and that it remained in the proceeding solely for the purposes of the making of an apportionment under Part IVAA of the Wrongs Act 1958.
On 18 February 2022, the applicant registered a new company, ‘Kyne General Builders’, with the Australian Securities and Investments Commission. Kyne General Builders proposed to conduct business as a general building contractor in the Echuca area. At all material times, the applicant was the sole director, secretary and shareholder of ‘Kyne General Builders’.
For the financial year ended 30 June 2022, the financial records of the builder recorded legal fees of $58,856.71. Total sales were $1,185,082.49 with a (small) profit before taxation of $9,065.06.
In June 2022, the applicant determined that the builder should stop entering into new contracts. On and from 1 July 2022, Kyne General Builders operated from the same premises as those occupied by the builder. It held a commercial builder’s licence from August 2022.
On the first day of trial on 13 July 2022, Oberin announced that it only pressed its non-apportionable claims against the builder. The applicant says that this announcement came as a surprise to the builder because it had believed that the claims made against it were all apportionable. As things then stood there would have been no reason for the architect to remain in the proceeding. However, in response, the builder applied for leave to file a notice of contribution against the architect.
The builder was granted leave to file a notice of contribution against the architect, which was filed on 14 July 2022, and the trial was adjourned. The applicant gave the instructions to the builder’s solicitors to issue the notice of contribution. The evidence of the applicant was that this was done on legal advice and that he did not know what a notice of contribution was.
The architect says that the notice of contribution caused it to incur legal costs that it would not have paid, as it had been otherwise excused from further participation in the proceeding.
The architect subsequently brought an application to summarily dismiss the applicant’s claim for contribution on the basis that it had no real prospects of success. On 28 October 2022, the judge dismissed that application.
From September 2022, the builder sold further assets. This included the sale of a Ford Ranger, trailers, and plant and equipment for the sum of $105,000.00 on 10 November 2022. The corresponding income statement of the builder for the year ended 30 June 2023 records a gain on the disposal of assets in an amount of $123,545.45.
The trial resumed on 23 November 2022, with final written submissions filed on 7 February 2023.
On 19 June 2023, the judge gave judgment in favour of Oberin against the builder. In the course of her reasons the judge held that both the builder and the architect bore some responsibility for the defects. The judge found that Oberin’s claims against the architect were apportionable, and on that basis dismissed the applicant’s contribution claim against the respondent.[4] Indeed, the judge held that, on the basis that the claims were apportionable, the architect was liable for 28.57 per cent of the claim. Those conclusions and the earlier statement by Oberin at the commencement of the proceeding, that it only pressed non-apportionable claims, are not easy to reconcile.
[4]Ibid [404].
In the result, the judge found that the builder was required to pay the sum of $684,985.54, plus interest, less the sum of $300,000 already paid by the architect.[5] The judge also dismissed the builder’s notice of contribution.[6] In addition, the judge ordered that the builder was to pay the costs of the proceeding of both the plaintiff and the architect on the standard basis, unless either party had a basis for seeking a different order as to costs.[7]
[5]Ibid [413].
[6]The judge presumed that the architect did not seek contribution given the finding that the builder was a concurrent wrongdoer and therefore also dismissed the architect’s contribution notice: ibid [411], [413].
[7]Ibid [8].
In respect of the financial year ended 30 June 2023, the financial records of the builder recorded no sales and a loss before taxation of $484,568.05. The expenses of the builder included the court order of $384,985.54, as well as legal expenses of $131,461.95. They also included an amount of $50,006.90 in respect of wages, which is less than the amount paid in previous years.[8] The evidence of the applicant was that, in around November 2022, he and his wife stopped drawing a wage so that the builder would have more money to pay legal fees.
[8]The financial records record an amount for wages of $116,598.00 in respect of the financial year ended 30 June 2022 and $371,545.00 in respect of the financial year ended 30 June 2021.
In respect of the same financial year, the financial statements of Kyne General Builders recorded total sales of $515,875.88, and a net profit before taxation of $15,801.15.
For the period between 1 July 2023 to 28 September 2023, the financial records of Kyne General Builders recorded sales of $340,250.64. On 23 August 2023, Kyne General Builders also entered into a building contract with the Moama Bowling Club with an estimated value of $320,573.00 (excluding GST).
On 13 July 2023, a liquidator was appointed to the builder.

Judge’s reasons

The judge accepted the architect’s interpretation of the principles outlined in the decision of the High Court in Knight v FP Special Assets Ltd (‘Knight’)[9] and ‘its application to the present case’.[10] She concluded that ‘the Knight principles have been met’.[11]
[9](1992) 174 CLR 178 (‘Knight’).
[10]McGlone v Gerard Brandrick & Associates Pty Ltd & Anor (Costs) [2023] VCC 1895, [119] (Judge Burchell) (‘Reasons’).
[11]Ibid.
Her Honour dealt first with the architect’s failure to make an application for security for costs. She considered that this matter was not determinative, but persuasive. She rejected the dissenting judgment of McHugh J in Knight, to the effect that an application for security for costs was a more appropriate remedy than a non-party costs order. She said that she was ‘more persuaded’ by the majority that a failure to pursue an application for security was relevant to discretion, but that this should be distinguished from the question of jurisdiction.[12] She also accepted the architect’s argument that it had no way of knowing of the applicant’s ‘plan to reduce the builder to a “man of straw”’ prior to it being placed into liquidation. She was persuaded by the fact that on 26 June 2023, the builder was ‘rated as having only a 1.7% risk of insolvency with a “neutral” risk level’. At no point did the architect possess any information to alert it to the fact that a security for costs order might be sought, even if solvency searches were undertaken earlier.[13]
[12]Ibid [120].
[13]Ibid [120]–[121].
Her Honour then turned to the ‘specific categories of Knight’. She considered that she was not required to ‘tick off’ the requirements specified and that they ‘in fact interact’.[14] She nevertheless found it useful to outline her reasons for the making of the non-party costs order, with reference to those requirements, as follows:
[14]Ibid [122]–[123].
[124] First, the named party is insolvent or a “man of straw”.
(a)In my view, Mr Kyne’s premeditated effort to reduce [the builder] to a ‘man of straw’ began when he incorporated Kyne General Builders Pty Ltd in February 2022 (following the compromise of the proceeding between the plaintiff and [the architect]), operated the building business from the same premises as [the builder], and obtained a commercial building licence for this new company.
(b)The plan then entered the second phase, where he chose to cease trading with the [builder] company and transferred and sold its assets to Kyne General builders Pty Ltd.
(c)Once [the builder] was sufficiently stripped of its assets and income, it was inevitably placed into liquidation on 13 July 2023. Mr Kyne’s plan came to its full fruition and entered the final phase, as [the builder] was compromised in its ability to pay for any costs awarded against it arising from the judgment delivered on 19 June 2023.
(d)Finally, as the evidence indicates, Mr Kyne had no real intention of ‘retiring” or ceasing trading (as was offered as an explanation for his stripping of assets from [the builder]). His decision not to trade was done to reduce the funds available for [the builder] to pay legal costs awarded against it.
(e)As a side note, it does not matter, as argued by Mr Kyne, that [the builder] only had a 1.7% chance of insolvency at the time the notice of contribution was filed, as this was early on in his ultimate plan to phoenix [the builder].
[125]Second, the non-party played a sufficiently active role in the conduct of the litigation.
(a)As the sole director and shareholder of [the builder], Mr Kyne clearly directed the course of the litigation on the part of [the builder] and was making decisions which impacted the parties as the proceedings unfolded.
(b)Mr Kyne, on his own admission, lent money (together with his wife) to [the builder] to fund at least a portion of the litigation, which is further evidence of his personal involvement.
[126] Third, the non-party has a sufficient interest in the litigation.
(a)As the sole director and shareholder of [the builder], the ability not to meet the costs order due to liquidation clearly benefits Mr Kyne.
(b)His ‘interest’ in the litigation is perhaps best exemplified by the series of decisions which he made to deliberately restructure his building companies, phoenixing [the builder] and continuing to trade under Kyne General Builders. These efforts demonstrate a high degree of ‘interest’ in the overall outcome of the litigation.
(c)My Kyne stood to personally gain from the prospect of a contribution from [the architect], given that he was sole director of [the builder] and, after the phoenixing of [the builder], would have been unable to meet any adverse costs orders made against [the builder]. It is not relevant that up until 13 July 2023, Mr Kyne’s wife was the other director of [the builder]. Mr Kyne himself still held a financial and personal interest in the proceeding.
[127]Finally, I am also required to consider whether it is in the interests of justice to permit Mr Kyne to hide behind the corporate veil and avoid liability. On this issue, I make the following findings.
(a)My Kyne’s plan to avoid the payment of costs is a deliberate use of the principles surrounding limited liability, and an example of the reliance on the corporate veil designed to avoid the payment of costs that [the builder] ought rightfully bear. To this end, in my view, it is in the interests of justice that Mr Kyne is not able to rely on the principles of limited liability.
(b)It is likewise in the interests of justice to ensure that [the architect] receive the fruits of the Court’s costs order, especially in circumstances where efforts have been made by Mr Kyne to deprive it of that right.
(c)Mr Kyne’s phoenixing of [the builder] is also contrary to his director’s fiduciary duties for the company when it approaches insolvency, which extends to obligations to the company’s creditors. Phoenixing is ‘antithetical’ to these duties and is, therefore, a further consideration of how the interests of justice is best served by providing for a non-party costs order.[15]
[15]Ibid [124]–[127].

Legal principles

As the judge correctly identified,[16] s 78A of the County Court Act 1958 provides that the costs of, and incidental to, all proceedings are in the discretion of the court. Nevertheless, costs orders against a non-party have been said to be ‘exceptional’ or ‘extraordinary’.[17] The use of such a term may distract from the ultimate question as to whether the order was made in error in this particular case, but serves as a reminder that a non-party costs order is not ordinarily made.
[16]Ibid [24].
[17]MC WholesalingPty Ltd v Zheng [2024] VSCA 248, [90] (Macaulay J) and the cases cited at n 71; Yu v Cao (2015) 91 NSWLR 190, 216 [138] (McColl JA, Sackville AJA agreeing at 225 [187], Adamson J agreeing at 225 [191]).
In Knight, Mason CJ and Deane J explained that there were several long-established categories of case in which equity had recognised that it may be appropriate to make an order against a non-party. They then stated:
For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active role in the conduct of the litigation and where 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 the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.[18]
[18]Knight (1992) 174 CLR 178, 192–3.

In Knight, Dawson J also stated:
The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court.[19]
[19]Ibid 202.
In Gdanski v Palms Court Management Pty Ltd (‘Gdanski’), this Court described the informing principle which enlivens the ‘Knight discretion’ as follows:
[I]f 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.[20]
[20][2017] VSCA 348, [66] (Maxwell P, McLeish JA and Keogh AJA) (‘Gdanski’).
The Court also stated:
Decisions since Knight have drawn on the language used in the joint judgment, as well as that of Dawson J, to describe the twin requirements that the non-party have an active role in the litigation and an interest in its subject matter as a single requirement that the non-party be ‘a real party’ to the litigation in ‘critical’ and ‘important’ respects. This formulation was approved by the Full Court of the Federal Court in Keboro Pty Ltd v Saunders, in passages cited with approval by this Court in Ipex ITG Pty Ltd (in liq) v Victoria. It may therefore be convenient to describe the threshold issue as being whether the non-party is ‘a real party’ to the litigation. Whether or not that language is apt to describe every situation in which the Knight discretion is attracted need not be explored in this case, as the parties accepted the formulation for the purposes of the present appeal.[21]
[21]Ibid [69] (citations omitted).
The Court therefore considered that, unless the non-party could be properly characterised as a ‘real party’, no question of the interests of justice — or of exceptional circumstances — arises.[22] In other words, there is in effect a threshold requirement that the non-party be a ‘real party’ to the litigation.
[22]Ibid [70].
Ultimately, the Court held that the material did not establish that Mr Gdanski’s role in conducting the litigation extended beyond what would be expected of him as a director. Although he acted as the solicitor for the company, and also lent money to it through another company he controlled, the Court found that he did not play an active part in his personal capacity, nor did he have any personal interest. It followed that the Knight discretion was not enlivened.[23]
[23]Ibid [113].
The decision in Gdanski has been applied in a number of decisions, which have accepted that there is in effect a threshold requirement for the Knight discretion to be enlivened, namely, that the non-party be a ‘real party’.[24] We also consider the approach identified in Gdanski to be correct, consistent with the language used in the joint judgment, as well as that of Dawson J in Knight.

Proposed ground 1(c): finding that the applicant played an active role in litigation and held a sufficient interest in its subject matter

[24]See, e.g., Imam Ali Islamic Centre v Imam Ali Islamic Centre Inc (No 2) [2020] VSC 136, [24], [71], [84]–[90] (McMillan J); Linchi Group Pty Ltd v Wen Yong Wang & Anor [2018] VSC 482, [49]–[50], [120] (Matthews JR); GVE Hampton Pty Ltd v Shangri-La Construction Pty Ltd [2018] VCC 1806, [26] (Judge Cosgrove). See also PM Works Pty Ltd v Management Services Australia Pty Ltd [2018] NSWCA 168, [29] (Leeming JA, McColl JA agreeing at [1], Basten JA agreeing at [2]).

It is convenient to deal first with the third proposed sub-ground of appeal which, on its terms, challenged the finding that the applicant played an ‘active role’. At the hearing, counsel clarified that the proposed ground sought to challenge the finding that the twin requirements identified in Gdanski were met (i.e. that the applicant had both an active role in the litigation and an interest in its subject matter) such that he should be viewed as a ‘real party’ to the litigation.
It should be noted at the outset that both parties proceeded on the basis that review of the non-party costs order was to be conducted according to the principles explained in House v The King.[25] That approach is correct because the judge was exercising a general discretion as to the awarding of costs. Although, as has been seen, the cases adopt a structured analysis when the ‘Knight discretion’ is under consideration, the first stage of that analysis is not strictly a jurisdictional gateway or legal prerequisite to the enlivening of a self-contained discretion. Rather, it is part of an overall exercise of discretion as to costs, in respect of which there is no single right answer and accordingly no scope for application of a ‘correctness’ standard.[26]

Applicant’s submissions

[25](1936) 55 CLR 499, 504–5 (Dixon, Evatt and McTiernan JJ).

[26]See, e.g., Moore (a pseudonym) v The King (2024) 419 ALR 169, 173–4 [14]–[15] (Gageler CJ, Edelman, Steward, Gleeson and Beech-Jones JJ).

The applicant challenged the judge’s reasons at paragraph 125 for finding that the applicant played a sufficiently active role so as to enliven the Knight discretion.
In relation to paragraph 125(a), the applicant submitted that directing the course of the litigation was not remarkable and said nothing more than could be said of any director of a company being sued. He also had a fiduciary duty to the builder to defend the claim, which extended to the filing of a notice of contribution against another defendant.
In relation to paragraph 125(b), the applicant submitted that there was no evidence of either the applicant or his wife lending money to the builder to fund the litigation, and the applicant never admitted to doing so. The evidence was rather that the assets of the builder were sold to pay legal fees. Although the applicant lent money to Kyne General Builders to start it running, and Kyne General Builders purchased the Ford Ranger, trailer, and other assets, there was no evidence that the applicant personally lent money to the builder to fund the litigation. In particular, there was no evidence that the contribution claim was funded by way of a personal loan from the applicant. It was also not put to the applicant in cross-examination that he had personally lent money to the builder to fund the litigation.
It was submitted that, in any event, even if some money was lent there was no evidence as to the amount. Given the builder was being sued in complex litigation, the lending of money did not take the matter into the Knight category. Lending money in this way was not viewed as remarkable in the case of Gdanski.
The applicant next challenged the judge’s reasons for finding that he had a sufficient interest in the litigation at paragraph 126.
In relation to paragraph 126(a), the applicant submitted that the judge incorrectly found that the applicant was the ‘sole director and shareholder of the builder’, when there were two directors and shareholders. In any event, the fact that the applicant was a director of the builder should not have been important, otherwise directors would be routinely exposed to liability for personal costs orders. The conclusion that the ability not to meet the costs order due to liquidation ‘clearly benefits Mr Kyne’ was also said to be unexplained. It was submitted that the finding made ‘no sense’ and was ‘wrong’.
In respect of paragraph 126(b), the applicant submitted that the alleged ‘phoenixing’ was not relevant to the question of whether the applicant had the requisite relevant interest in the litigation. His actual interest, at most, was to obtain some contribution for the builder towards any damages award made against it in favour of Oberin.
The applicant also submitted that the finding at paragraph 126(c) made no sense and was wrong. Money obtained via the notice of contribution would belong to the builder and would be allocated as part-satisfaction of the plaintiff’s damages. In no way could the applicant gain the money for his own personal benefit. He submitted that the reduction of the builder’s liability in this way was not a benefit that might attract the Knight discretion.
The applicant also submitted that it was significant that he could not ‘stand in the shoes’ of the builder, and he had no say in who was being sued.[27]
[27]The applicant cited GVE Hampton Pty Ltd v Shangri-La Construction Pty Ltd [2018] VCC 1806, [31] (Cosgrave J).
The applicant therefore submitted that there was an error of the kind identified in House v The King, consisting of a failure to establish the requisite elements necessary to enliven the ‘Knight discretion’.[28]

Respondent’s submissions

[28]House v The King (1936) 55 CLR 499, 504–5 (Dixon, Evatt and McTiernan JJ). The applicant also submitted that, if no specific error was established, then the general category identified in House v The King would be open, namely that the decision is ‘unreasonable or plainly unjust’.

The architect submitted that the applicant had not demonstrated that the judge made any error in accordance with the principles contained in House v The King.
The architect submitted that the finding at paragraph 125(a) was not challenged, in substance, by the applicant.
In respect of paragraph 125(b), the architect took the Court to various parts of the judge’s reasons, as well as the transcript, to support the proposition that the applicant and his wife placed money into Kyne General Builders to purchase the various assets, and that the builder then paid its lawyers for its legal fees. The architect highlighted that Kyne General Builders was a start-up company and therefore the only money available to it was from trading or loans from the applicant and his wife. The architect submitted that the conclusion that the applicant lent money to the builder to pay its legal fees had a proper evidentiary foundation and was open to the trial judge.
The architect further submitted that the applicant’s challenge to the findings at sub-paragraphs 126(a) and 126(c), to the effect that they were ‘wrong’ and ‘make no sense’, lacked a proper basis. This did not show any error as identified in House v The King.
It was submitted that in any event, the findings were explained by the applicant’s role as director, secretary and shareholder of the builder, as well as his ‘phoenixing’ activities, which took his interest beyond that of an ‘ordinary’ director, secretary and shareholder.
In oral submissions, senior counsel submitted that the establishment of the applicant’s motive supported the finding that he had an interest himself. He submitted that the Knight criteria could not be disentangled and were ‘interactive’.
Counsel defined the ‘benefit’ the applicant stood to gain from the litigation in various ways, including that the applicant was able to ‘continue to trade’, and avoid liquidation. However, he ultimately submitted more generally that there was a potential benefit to the applicant in pursuing the notice of contribution, with no downside risk to the assets.
Counsel submitted that the applicant had not made the case before the judge that was now sought to be made (that the builder was always a ‘man of straw’). Rather, the applicant had submitted that there was no evidence that the builder was a ‘man of straw’ at the time the notice of contribution was filed. He also submitted that to consider whether the builder could have met a costs order was engaging in speculation.
Senior counsel did not accept that there was a threshold requirement before a non-party cost order could be made, highlighting again that the criteria were ‘interactive’. He submitted that the categories of case in which the court will make a non-party costs order are not closed and that a range of factors may be relevant to the court’s general discretion to make a costs order against a non-party.[29]
[29]The architect cited MC WholesalingPty Ltd v Zheng [2024] VSCA 248, [97] (Macaulay J).
Nevertheless, the architect submitted that the judge correctly found that the applicant’s interest as director and shareholder was ‘sufficient to attract the Knight principle’.

Analysis

Although there is a general discretion to order costs, the power is subject to rules of practice which inform its exercise.[30] The joint judgment in Knight highlighted the importance of developing principles to govern the exercise of the discretion to award costs against non-parties.[31] Just as the requirements of justice should not be allowed to expand an exception to a general category so as to undermine the category itself,[32] resort to the requirements of justice must not undermine the exceptional character of costs orders against non-parties. Costs issues should be dealt with in a principled and expeditious way, consistent with the overarching purpose in the Civil Procedure Act 2010.
[30]Bell Lawyers Pty Ltd v Pentelow (2019) CLR 333, 355 [63] (Gageler J), 363–4 [83] (Edelman J).
[31]Knight (1992) 174 CLR 178, 185 (Mason CJ and Deane J). See also Norbis v Norbis (1986) 161 CLR 513, 519 (Mason and Deane JJ).
[32]FPM Constructions v Council of the City of Blue Mountains [2005] NSWCA 340, [210] (Basten JA, Beazley JA agreeing at [1]).
At the same time, it is undesirable that there be unnecessary satellite litigation directed solely to the resolution of costs, and this Court has made it clear that the grant of leave to appeal in respect of a question of costs is itself exceptional.[33] The present case is in our opinion of the exceptional kind that warrants leave to appeal. That is because the case raises matters of general principle regarding the making of a specific kind of costs order.
[33]See, e.g., PCCEF Pty Ltd v Geelong Football Club Ltd [No 2] [2019] VSCA 148, [38]–[41] (Whelan, McLeish and Emerton JJA).
The judge exercised the discretion to make a non-party costs order on the basis of her conclusion that the case fell within the ‘general category’ referred to in Knight. That category describes circumstances in which a number of cumulative factors are present which may mean that the interests of justice require the court to make a non-party costs order: insolvency or lack of means by the party to meet the liability (the so called ‘straw man’); the non-party plays an active role in the litigation; and the non-party has an interest in its subject matter.
The first aspect is informed by the general notion that it is to the parties that recourse must first be had and non-parties are not seen as some generally available alternative. As already explained, the second and third aspects taken together describe a person who may be considered to be a ‘real party’ to the litigation. The assimilation of the two aspects in this way shows that the inquiry is a functional one, and it would be wrong to treat the separate aspects as if they were free standing and independent of each other.
The judge relied on two matters to support her finding that the applicant played a sufficiently active role: first, that as sole director and shareholder the applicant was ‘making decisions which impacted the parties’; second, that he (with his wife) lent money to the builder to fund a portion of the litigation.
In our view, the matters relied on do not warrant characterising the applicant, as a director of the builder as, in effect, a real party to the litigation.
The first matter was unremarkable and could be said of any director complying with their obligations. Thus, the evidence was that the applicant obtained, and acted on, advice in giving instructions to file the notice of contribution so as to defray a potential liability of the builder. The notice can also be taken to have some merit given that the judge refused to summarily dismiss it. And, as the judge ultimately found, the architect was responsible for some of the loss occasioned to the client. In such circumstances, it was not shown that the seeking of contribution was not genuinely in the interest of the builder, nor that the instructions were really given for the benefit of the applicant.
We also consider the second matter to be unremarkable. There is also nothing unusual nor necessarily inappropriate in a director lending money to a company, particularly so as to enable that company to defray a liability reasonably incurred.[34] Thus, even if (which is not clear) the applicant did ‘lend’ some monies for the purposes of the litigation, the judge made no findings about the quantum of any such ‘loan’ or as to why it pointed to some collateral purpose of benefiting the applicant.
[34]See Gdanski [2017] VSCA 348, [85]–[86] (Maxwell P, McLeish JA and Keogh AJA).
We also consider that the judge erred in finding that the applicant had a sufficient interest in the litigation.
It will be recalled that the judge relied on three matters to support that finding: the first and third matters concerned alleged benefits the applicant was said to receive from the litigation. As indicated above, the architect also framed the alleged ‘benefit’ in different ways.
In considering the issue of ‘benefit’, it is important to focus on the benefit which might be received by the applicant in having the builder seek contribution from the architect. Some of the benefits suggested to have been received by the applicant lack that connection, for example the ability of the builder to continue to trade and the general ‘ability [of the builder] not to meet the costs order’.
The applicant’s interest in filing the notice of contribution was entirely derivative from the interest of the builder. It could not be said that the builder had no interest in reducing its liability by seeking contribution, and the claim against the architect both survived a strike out and gained support from the ultimate finding that the architect had been responsible for some of the works found to be faulty.
This was therefore not a situation where the applicant stood to gain ‘the fruits of the litigation’.[35] Although the applicant might stand to gain some indirect benefit as a shareholder by attempting to preserve the value of the builder, we do not consider that this in itself would justify characterising the director as the real party so as to fall within the specific type of category identified in Knight and relied on by the architect. Otherwise the threshold requirements could be met whenever a director/shareholder stood to gain from a step taken in litigation, such as seeking contribution, to reduce a company’s liability.
[35]See Carborundum Abrasives Ltd v Bank of New Zealand (No 2) [1992] 3 NZLR 757, 765 (Tompkins J) cited in Kebaro Pty Ltd v Saunders [2003] FCAFC 5, [71]–[72] (Beaumont, Sundberg and Hely JJ).
The judge also relied on the ‘phoenixing’ of the builder (at paragraphs 126(b) and 126(c)), but the motivations of the applicant for ceasing to carry on business through the builder (which was soon to be insolvent, if it was not already) and to start business with a new entity, do not define his interest in the litigation. The insolvency of the builder was a necessary but insufficient basis for enlivening the Knight discretion. In any event, a number of the actions relied upon also predated the filing of the notice of contribution.
We therefore consider that the judge erred in finding that the twin requirements for the ‘enlivening’ of the ‘Knight discretion’ were established. In terms of House v The King, the judge ‘mistook the facts’ upon which she exercised her discretion to make a costs order. There was in fact no proper basis to regard the applicant as the true party standing to benefit from the claim for contribution. It therefore cannot have been necessary in the interests of justice to make the non-party costs order in accordance with Knight on that basis. It follows that the appeal must be allowed and the costs order made against the applicant must be set aside.

Turning to the re-exercise of the discretion, having considered the material for ourselves, we are not satisfied that the applicant’s role and interest extended beyond what would have been expected of him as an ordinary director obliged to act in the interests of a company. The evidence does not establish that he played an active role, nor did he have an interest in the litigation such that he could said to be a ‘real party’. Moreover, the applicant was entitled to instruct the builder’s lawyers to seek contribution on behalf of the builder to reduce its potential liability to the plaintiff, which would be a benefit to the builder rather than the applicant himself.
We will therefore substitute an order that the application for the non-party costs order should be refused.
This conclusion is sufficient to dispose of the appeal. However, in the light of the gravity of the findings made against the applicant, it is desirable to make some brief observations about the other proposed grounds.

Other proposed grounds

Proposed ground 1(a): finding that the applicant deliberately set out to reduce the builder to a ‘man of straw’

There were two key matters that appear to have led the judge to make the serious finding that the applicant had deliberately reduced the builder to a ‘man of straw’. First, the judge found that he ‘stripped’ the company of its assets such that it was inevitably placed into liquidation. Secondly, she found that he decided not to trade so as to reduce the funds available for the builder to pay the architect’s legal costs.
In relation to the first matter, as highlighted above, the builder was a small building company which enjoyed relatively small turnover in the order of only $1–1.5 million a year. The builder’s financial records suggested that the company had suffered a loss for the financial year ended 30 June 2021, and made only a modest profit of $9,065.00 in the financial year ended 30 June 2022. When considered as at the time of filing of the notice of contribution (14 July 2022), even if the builder was not then insolvent, a potential judgment of some $700,000, plus interest and costs would be highly likely to put the company into liquidation. In such circumstances, it was not only permissible, but appropriate, for a director to make a decision to attempt to avoid and/or reduce the liability of the builder.
In this context, the sale of assets appears to have taken on a significance it did not warrant. The sales commenced prior to the decision to issue the notice of contribution. In circumstances where the viability of the builder appears to have depended on the avoidance of liability, there was nothing exceptional about the taking of such action. There was also no evidence adduced to suggest that the assets were sold below value. In fact, the architect’s counsel accepted that the assets were transferred ‘for value’.
In relation to the second matter, although the decision that the builder should cease trading clearly troubled the judge, this decision appears to have been taken in June,[36] prior to the filing of the notice of contribution in July. The objective evidence also did not suggest that further trading would have led to a different result. Thus, even if the available trading figures of Kyne General Builders are taken into account (at $340,250.64 for one quarter), they were generally consistent with the previous trading history of the builder. Such a small building company was always going to struggle to meet the potential liability if Oberin were to be successful in its proceeding.
[36]Reasons, [99].
The suggestion that it was ‘speculative’ to consider the likely outcomes based on the financial evidence also does not assist the architect. Any inadequacies with the material weighed against the making of the serious adverse findings made in this case. Such serious findings should not be made on the basis of inexact proof or indirect inferences.[37]
[37]Briginshaw v Briginshaw (1938) 60 CLR 336, 362–3 (Dixon J); Evidence Act 2008, s 140.
The sale of assets and cessation of trade do not appear to justify the extensive adverse findings made about the applicant’s propriety. In any event, the propriety of the applicant’s conduct only arose for consideration once the ‘Knight discretion’ was actually enlivened. For reasons we have explained, that threshold was not met in this case.

Proposed grounds 1(d) and 1(e): alleged failure to consider the architect’s failure to apply for security for costs and wrongly considering negative credit findings

The gravamen of the applicant’s challenge was not that the judge failed to take into account the architect’s failure to apply for security, but, rather, that she failed to consider this matter in a way that favoured the applicant. The judge made no error in considering the architect’s failure to apply for security, and certainly no error within House v The King.
The judge also made no error insofar as she cited her findings as to the applicant’s credit in considering her costs discretion. She was entitled to find that she was unable to rely on the applicant’s evidence, absent objective evidence. However, the error we have found turns on the judge’s treatment of that objective evidence, in considering the criteria necessary to enliven the Knight discretion.

Other matters

The architect filed an application seeking to rely on fresh evidence, being a liquidator’s report dated 23 August 2024, which post-dated the decision of the judge and was therefore not before the judge. In the result, the application was not pressed strongly by senior counsel for the architect at the hearing.
Given that the discretion was reviewable on the basis of House v The King, evidence of matters not before the judge when she exercised her discretion, unless it could show that she ‘mistook the facts’, is irrelevant to the proposed grounds in this case. As to that possibility, the architect did not seek to show that evidence of a liquidator’s opinions or hearsay accounts of past events would assist in resolving the key issue as to whether the applicant was a ‘real party’ to the litigation, as discussed above.

Conclusion

Leave to appeal will be granted, and the appeal will be allowed. The costs order made against the applicant will be set aside. In its place we will order that the application for non-party costs be dismissed.

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[2025] VSCA 17

28 February 2025