MC Wholesaling Pty Ltd v Zheng
[2024] VSCA 248
•23 October 2024
| SUPREME COURT OF VICTORIA COURT OF APPEAL |
| S EAPCI 2023 0067 |
| M C WHOLESALING PTY LTD (ACN 621 035 265) & ORS (ACCORDING TO THE ATTACHED SCHEDULE) | Applicants |
| v | |
| LIN ZHENG (ALSO KNOWN AS ‘ROCKY’) | First respondent |
| AND | |
| LINFANG PTY LTD (ACN 150 877 124) | Second respondent |
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| JUDGES: | MACAULAY, LYONS and ORR JJA |
| WHERE HELD: | Melbourne |
| DATE OF HEARING: | 6 June 2024 |
| DATE OF JUDGMENT: | 23 October 2024 |
| MEDIUM NEUTRAL CITATION: | [2024] VSCA 248 |
| JUDGMENT APPEALED FROM: | [2023] VSC 267 (Delany J) |
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COSTS – Indemnity costs – General discretion as to costs – Judge ordered costs on indemnity basis after applicant companies made allegations of fraud then discontinued proceeding – Whether judge erred in finding allegations of fraud ‘at heart of’ and ‘provided ongoing basis for’ proceeding – No error – Arguments against indemnity costs order unexceptional in any event – Leave to appeal refused – House v The King (1936) 55 CLR 499; Colgate‑Palmolive Co v Cussens Pty Ltd (1993) 46 FCR 225; Cargill Australia Ltd v Viterra Malt Pty Ltd [2023] VSCA 301, applied; NIML Ltd v MAN Financial Australia Ltd (No 2) [2004] VSC 510; Russian Airlines v Leeds [2018] EWHC 1735 (Ch), considered.
COSTS – Indemnity costs – Calderbank offer – Judge ordered costs on indemnity basis following rejection of Calderbank offer – Whether judge erred in finding rejection of Calderbank offer unreasonable – No error – Leave to appeal refused – Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, applied.
COSTS – Indemnity costs – Calderbank offer – Whether judge erred in extending benefit of Calderbank offer to party joined to proceeding after offer’s rejection – Offeror was sole director and shareholder of later joined party – Same allegations made against offeror and later joined party – No error – Leave to appeal refused – Bathurst Real Estate Pty Ltd v Fairbrother (No 2) [2022] NSWSC 408, considered.
COSTS – Non-party costs orders – Non-party costs order against sole director of applicant companies – Applicant company dependent for healthy financial position on recoverability of unsecured loans to companies controlled by director – Whether judge erred in making non‑party costs order on basis that whether applicant companies met adverse costs orders was at director’s choosing – No error – Categories of case in which court will order non-party costs not closed – Corporate party not required to be insolvent or ‘person of straw’ before non-party costs order appropriate in interests of justice – Leave to appeal granted – Appeal dismissed – Knight v FP Special Assets Ltd (1992) 174 CLR 178, considered.
COSTS – Non-party costs orders – Non-party costs order against sole director of applicant companies – Whether judge erred in making non-party costs order on basis that director was ‘driving force’ behind allegations of fraud – Director caused making and maintenance of fraud allegations, unreasonable rejection of Calderbank offer, procurement and maintenance of freezing orders, discontinuance of proceeding – Director’s role beyond mere direction of litigation on behalf of company – No error – Leave to appeal granted – Appeal dismissed –JAB Nominees (Aust) Pty Ltd v Auswild [2020] VSC 731; Carter v Caason Investments Pty Ltd [2016] VSCA 236, considered.
COSTS – Variation of previous costs orders – Whether judge erred in varying previous costs orders in proceeding to provide for payment of costs on indemnity basis – Unremarkable exercise of general discretion as to costs – No error – Leave to appeal refused.
Supreme Court Act 1986, ss 14A, 14C, 24; Supreme Court (General Civil Procedure) Rules 2015, r 63.
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| Counsel | |||
| Applicants: | Mr PJ Bick KC with Mr AL Ounapuu | ||
| Respondents: | Mr SV Palmer with Ms N Lenga and Mr LJS Molesworth | ||
Solicitors | |||
| Applicants: | Amberlake Lawyers | ||
| Respondents: | Oakley Thompson & Co Pty Ltd | ||
TABLE OF CONTENTS
MACAULAY JA:
Introduction and summary
Background
Reasons of the trial judge
Costs on an indemnity basis
(a) Rejection of Rocky’s Calderbank offer
(b) Allegations of fraud
Costs order against Andy personally
Did the judge err in finding that allegations of fraud were ‘at the heart’ of, and ‘provided an ongoing basis’ for, the applicant companies’ case (ground 3)?
Relevant legal principles
Submissions
Consideration
Was it unreasonable for the applicant companies to reject Rocky’s Calderbank offer, and should Linfang have received its benefit (grounds 1 and 2)?
Relevant legal principles
Submissions
Consideration
Did the judge err in making a non-party costs order against Andy (grounds 4, 5 and 6)?
Submissions
Relevant legal principles
Consideration
(a) Proposed ground 4
(b) Proposed grounds 5 and 6
(i) Andy’s role as the director of a litigating company (proposed ground 6)
(ii) Andy’s control of MC Wholesaling’s capacity to pay the adverse costs orders (proposed ground 5)
(c) Conclusion
Did the judge err by varying previous costs orders to provide that the respondent’s costs be paid on an indemnity basis (grounds 7 and 8)?
Submissions
Consideration
Conclusion
LYONS JA:
ORR JA:
SCHEDULE OF PARTIES
MACAULAY JA:
Introduction and summary
Corporate proprietors of a business believed that a number of people, including a delivery contractor, were ‘skimming’ money from the business. After starting a proceeding against them in the Trial Division of this Court, the proprietors later discontinued against the contractor. Upon the discontinuance, a judge ordered that the business proprietors — and their sole director — pay the delivery contractor’s costs on an indemnity basis. Against those orders, the business proprietors and the director seek leave to appeal.
The first and second applicants (‘MC Wholesaling’ and ‘AusPro’, collectively, the ‘applicant companies’) were in the business of distributing milk powder products. The third applicant (‘Andy’) was their sole director. The second respondent (‘Linfang’) provided delivery services to MC Wholesaling. The first respondent (‘Rocky’) was the director and shareholder of Linfang.
In June 2020, the applicant companies made an ex parte application for freezing orders against Rocky and other parties involved in the milk powder distribution business, alleging their involvement in a fraudulent scheme through which they had profited at the applicant companies’ expense. Freezing orders were granted and the applicant companies commenced a proceeding against Rocky and his alleged co-conspirators, claiming breach of contractual and/or fiduciary duties and seeking the return of up to $2.6 million in unlawfully acquired profits.
For more than two years, the proceeding endured. Affidavits were filed, pleadings were exchanged, hearings took place, pleadings were amended and exchanged again, Linfang was joined to the proceeding, and the applicant companies were ordered to make discovery. Throughout, efforts to resolve the dispute proved fruitless: two mediations were unsuccessful, and the applicant companies rejected a Calderbank offer from Rocky (before Linfang was joined) to settle the claim on the basis that each party walk away and bear their own costs. At all times, Rocky and, after it was joined, Linfang, denied the allegations levelled against them. Rocky repeatedly asked the applicant companies to discharge the freezing order, but they refused to do so.
Then, in November 2022 — having thus far maintained their claim, even while resiling from their express allegations of fraud and conceding that the true quantum of their claims did not exceed $60,000 — the applicant companies discontinued the proceeding against the respondents.
There is no dispute that in the wake of the discontinuance, the applicant companies must pay the respondents’ costs of the proceeding. At issue is the basis on which those costs are to be paid.
Below, the trial judge ordered that the applicant companies pay the respondents’ costs of the proceeding on an indemnity basis, including any costs that he had previously ordered be paid on a standard basis. The judge did so both on account of Rocky’s Calderbank offer and, more broadly, in exercise of the Court’s general discretion as to costs, having regard to the serious allegations of fraud levelled against the respondents. At the respondents’ urging, the same orders were also made against Andy personally, in light of the applicant companies’ precarious financial position and Andy’s role as the ‘driving force’ behind the allegations of fraud.[1] Andy was not a party to the proceeding.[2]
[1]M C Wholesaling Pty Ltd & Anor v Che & Ors (No 5) [2023] VSC 267 (‘Reasons’).
[2]Andy was a defendant to a counterclaim brought by another defendant, Aries (see below, [17]), but not a party to any claim by or against the respondents.
The applicants now seek leave to appeal the judge’s orders. They contend that the respondents’ costs of the proceeding should be paid on the standard basis only, and that there should be no personal costs order made against Andy. They propose eight grounds of appeal in support of these contentions,[3] which, in summary, give rise to the following issues:
(a)Was it unreasonable for the applicant companies to reject Rocky’s Calderbank offer, and should Linfang have received its benefit (grounds 1 and 2)?
(b)Did the judge err in finding that allegations of fraud were ‘at the heart’ of, and ‘provided an ongoing basis’ for, the applicant companies’ case (ground 3)?
(c)Did the judge err in making a non-party costs order against Andy (grounds 4, 5 and 6)?, and
(d)Did the judge err by varying previous costs orders to provide that the respondents’ costs be paid on an indemnity basis (grounds 7 and 8)?
[3]The full terms of each proposed ground of appeal are set out in the discussion below.
For the reasons that follow, I would refuse leave to appeal on proposed grounds 1–4 and 7–8. I would grant leave to appeal on proposed grounds 5 and 6, but dismiss the appeal.
Background
The issues raised by the applicants require that the course of the proceeding be traced in some detail.
On 22 June 2020, the applicant companies made an ex parte application for freezing orders against Rocky and his alleged co-conspirators: ‘Aries’, described as a sales representative of the applicant companies, and ‘Luke’, a director of companies that were customers of MC Wholesaling and AusPro. In support of the application, an affidavit of Andy was filed in which it was alleged that:
Aries and Luke (with the assistance of Rocky) skimmed the [applicant companies’] stock, issued fraudulent invoices to cover their tracks and sold the stock to third parties for amounts greater than that charged to our customers, and kept the profit for themselves.
…
I believe that Rocky (via Linfang) has issued invoices to [MC Wholesaling] claiming “logistics fees” for purportedly delivering stock to our customers (which invoices have been paid), when in fact those goods were unlawfully taken and sold to third parties. Based upon Rocky’s average fortnightly “logistics fees” ($7,000) and the quantum of goods the subject of the fraudulent invoices ($10.4 million), for the period from July 2018 to February 2020, I estimate that Rocky has fraudulently claimed at least $200,000 in “logistics fees”.[4]
[4]Reasons, [5]–[6].
In supporting submissions, the applicant companies alleged that the supposed conspirators had breached fiduciary and contractual duties owed to the applicant companies, making an unlawful profit of between $300,000 and $2.6 million. The submissions then proceeded to set out what was characterised as ‘compelling evidence of the Defendants’ fraudulent scheme’.[5]
[5]Ibid [7], [9].
The following day, freezing orders were made on an interim, ex parte basis, and Andy gave a personal undertaking as to damages in respect of the freezing orders. Importantly for later events, the minimum amount of assets that Rocky and others were each required to retain under the freezing orders was $402,887.[6] In his reasons for granting the orders, the judge remarked:
Based on the affidavit evidence, it appears that [Aries] and [Rocky] were engaged in systematic fraud over a prolonged period of time. From the 17 February 2020 conversation between [Andy] and Aries, it appears that Aries gave product to … Luke, and that Luke sold the product, and Luke and Aries shared the profit. The documentary evidence shows that payments of invoices were made by companies of which [Luke] is or was a director. On that basis, it appears that each of the defendants were involved in a fraudulent scheme.
…
The nature of the allegations made against the defendants; serious allegations of systematic and sophisticated fraud, and the evidence to which I have referred is such that it may be inferred there is a risk of dissipation of assets if a freezing order is not made.[7]
[6]Ibid [109].
[7]Ibid [10].
On 23 June 2020, the applicant companies filed and served an amended generally indorsed writ in which it was alleged that Aries and/or Rocky, in breach of contractual and/or fiduciary duties:
(a)unlawfully took the applicant companies’ property;
(b)sold said property for personal profit;
(c)defrauded the applicant companies and their customers by generating and using fake invoices and fake email addresses; and
(d)subsequently, held the applicant companies’ property and/or the proceeds of sale of that property for the benefit of the applicant companies.
Thereafter, the freezing order against Rocky was continued on several occasions. On 17 August 2020, Rocky filed and served an affidavit in which he deposed, among other things, that he received instructions from Aries as to the quantity of stock allocated, and to be delivered to each customer; that he did not know to whom the relevant stock the subject of the plaintiffs’ application was delivered; that he was not given copies of the invoices issued to customers at the time, and that he could not reconcile which invoices related to which deliveries.
On 9 October 2020, the applicant companies filed and served a statement of claim. In it they alleged that from at least July 2018, Aries, Luke and Rocky entered into an agreement or understanding pursuant to which they agreed to divert stock from the applicant companies. It was alleged that they did so in two ways: first by not delivering stock to the applicant companies’ customers and, secondly, by Rocky collecting stock from customers who wished to return the stock but not returning it to the applicant companies. Aries, Luke and Rocky then allegedly sold the diverted stock to third parties for a profit. As part of the scheme, so it was alleged, four unauthorised replacement invoices showing significantly lower levels of stock were issued to customers of the applicant companies. The four invoices included two invoices addressed to a customer called Fen Fa, for amounts totalling $399,570 (the ‘Fen Fa invoices’). Further allegations were that Rocky had charged the applicant companies fees for services that he did not render. It was alleged that Rocky owed fiduciary duties to the applicant companies, was party to the agreement to divert stock from the applicant companies and sell the stock for a profit, and, in that way, breached his fiduciary duties owed to them.
Also in October 2020, Rocky applied to discharge the freezing order. In his supporting affidavit Rocky denied knowledge of any ‘fraudulent invoicing scheme’. He said he never had access to the accounts or accounting software of MC Wholesaling nor received any payments from Aries or Luke. The applicant companies opposed that application and it was dismissed. Rocky served his defence in November 2020, denying the allegations made against him. He also pleaded that the relevant agreements for delivering stock were made with Linfang, as opposed to with himself personally. Also in November 2020, Aries filed a defence and counterclaim joining Andy as a party to the proceeding, and the applicant companies filed their reply to Rocky’s defence.
On 22 February 2021, Rocky served a Calderbank offer on the applicant companies offering to settle the matter on the basis that they discontinue their claim against him, with no order as to costs. The offer was not accepted.
In April 2021, a mediation was held in the proceedings. This was the second mediation to occur between the parties, following an earlier mediation in September 2020. Neither was successful in resolving the proceedings.
In June 2021, Rocky filed an application seeking orders to strike out the applicant companies’ claims. In the context of this application, the applicant companies sought leave to circulate a proposed amended statement of claim. After a second iteration of the proposed pleading was circulated, the Court granted the applicant companies leave to file and serve an amended statement of claim. When doing so, on 13 October 2021, the applicant companies joined Linfang to the proceeding.
By their amended statement of claim, the applicant companies:
(a)abandoned any express allegation of fraud on the part of Rocky and/or Linfang;
(b)abandoned the claims in respect of the Fen Fa invoices;
(c)abandoned the claim that Rocky had charged them fees for logistics services that he did not render, and pallet return fees for stock that was not returned;
(d)alleged that Aries, Luke, Rocky and Linfang entered into ‘an agreement, arrangement or understanding between them pursuant to which they agreed to ... divert stock from [the applicant companies]’;
(e)alleged that the diversion of stock occurred by two methods: first, not delivering stock to customers at all but, instead, delivering it to third parties, and second, only partially delivering stock; and
(f)alleged that Aries had a dishonest and fraudulent design to divert stock, and that Rocky and/or Linfang, knowing of circumstances that would indicate the facts to an honest and reasonable person, knowingly assisted Aries in that dishonest design and knowingly received diverted stock.
On 14 December 2021, Rocky and Linfang filed and served a defence to the amended statement of claim. Amongst other things, they pleaded a substantive defence to the alleged diversion arrangement. Rocky and Linfang alleged that they delivered stock as and when requested to do so by Aries, and that they otherwise had no knowledge of the matters alleged against Aries.
At a hearing on 8 April 2022, the applicant companies conceded that their claim against Rocky and Linfang — in respect of which they had obtained a freezing order against Rocky for an amount greater than $400,000 — did not exceed $60,000.
On six occasions — 27 October 2020, 7 September 2021, 21 April 2022, 3 May 2022, 19 May 2022 and 11 August 2022 — solicitors for Rocky and Linfang wrote to the solicitors for the applicant companies seeking discharge of the freezing orders. Until the discontinuance of the proceeding against Rocky and Linfang, the circumstances of which I will shortly describe, the applicant companies steadfastly resisted those orders being lifted or varied. At a hearing on 9 September 2022, at which the judge heard another application by Rocky to have the freezing order discharged, the applicant companies maintained that the risk of dissipation of assets remained. The judge discharged the freezing order that day. Senior counsel then appearing for the applicant companies (not the same counsel who appeared before this Court), said this:
[T]he basis on which Your Honour initially made the freezing order was because of the conduct by [Aries, Luke, Rocky and Linfang], which was to deal with the [applicant companies’] stock surreptitiously and to engage in that conduct, which effectively was a fraud upon the [applicant companies]. Now, that allegation has not changed. The methodology has changed but the allegation has not.
The timing and circumstances of the discontinuance are as follows. In August 2022, an associate judge ordered that the applicant companies and Andy make discovery of various categories of documents. In October 2022, Aries and Luke each filed a summons seeking an order that the applicant companies’ claims be dismissed on the basis of non-compliance with the discovery order. Their applications were listed for hearing on 18 October 2022.
The day before the scheduled hearing, the solicitors for the applicant companies wrote to the other parties stating that their clients wished to discontinue the proceeding against Luke, Rocky and Linfang. They sought the consent of all parties to the discontinuance pursuant to r 25.02(2)(b) of the Supreme Court (General Civil Procedure) Rules2015 (the ‘Rules’). Consent was not forthcoming. At the hearing on 18 October 2022, the applicant companies sought and were granted leave to discontinue the proceeding against Luke, Rocky and Linfang, which they then did on 2 November 2022.
After receipt of a sequence of written submissions from the parties, on 22 May 2023 the judge made the costs orders summarised above at [7], accompanied by reasons.
Reasons of the trial judge
Costs on an indemnity basis
The judge placed particular weight on two considerations in determining that the respondents were entitled to their costs on an indemnity basis: first, the rejection of Rocky’s Calderbank offer, and secondly, the applicant companies’ serious allegations of fraud. Specifically, the judge found that an order for costs on an indemnity basis was appropriate in respect of that part of the proceeding that followed the unreasonable rejection of the Calderbank offer of 22 February 2021, and — in any case — in respect of the entire proceeding because of the applicant companies’ unfounded allegations of fraud.[8] His reasons were as follows.
(a)Rejection of Rocky’s Calderbank offer
[8]Ibid [72], [93], [112].
The trial judge considered Rocky’s and Linfang’s costs separately. In respect of Rocky, he briefly stated the circumstances in which a Calderbank offer can justify an award of indemnity costs. He noted that, as the applicant companies did not contend that the offer did not involve a real and genuine element of compromise, the only question was whether the applicant companies’ rejection of Rocky’s offer was unreasonable.[9]
[9]Ibid [53].
Addressing submissions that the applicant companies put to him, the judge found that their rejection of Rocky’s offer was unreasonable because:[10]
(a)the offer was made after sufficient information was available for the applicant companies to make an informed assessment of the strength of Rocky’s defence;[11]
(b)it was not necessary that the offer specify the basis on which it should be accepted, but in any event, the offer identified arguments in support of Rocky’s prospects of success in the litigation and satisfactorily explained why the offer should be accepted;[12]
(c)no evidence was adduced by the applicant companies to explain the reason for refusing the offer;[13] and
(d)it would undermine public policy considerations to refrain from ordering indemnity costs following the unreasonable rejection of a Calderbank offer simply because, after that rejection, the recipient of the offer added a new party to the proceeding (in this case, Linfang) and expanded the case.[14]
[10]Ibid [54].
[11]Ibid [56].
[12]Ibid [58]–[60].
[13]Ibid [61].
[14]Ibid [62]–[64].
On that basis, the judge held that Rocky was entitled to indemnity costs following the unreasonable rejection of the Calderbank offer.[15]
[15]Ibid [65].
The judge also considered that, while the offer could not have direct application to Linfang, in exercise of the general discretion as to costs it was appropriate to order that Linfang’s costs be paid on an indemnity basis on account of Rocky’s Calderbank offer.[16] His reasons for coming to that conclusion were that: the applicant companies had relied on Rocky’s conduct to underpin the claim against Linfang; Linfang was in essence the ‘alter ego’ of Rocky; Linfang’s defence was essentially the same as Rocky’s defence, and the costs and work involved in both were the same; and Linfang would never have been joined to the proceeding had the Calderbank offer made by Rocky been accepted.[17]
(b)Allegations of fraud
[16]Ibid [71].
[17]Ibid [69]–[71].
Aside from the rejection of the Calderbank offer, the judge considered two potential bases for ordering indemnity costs under the Court’s general discretion. They were: (1) bringing a case which was hopeless from the outset, and (2) making allegations of fraud or other serious misconduct and then discontinuing the proceeding. As to the first of these bases, the judge was not satisfied that the applicant companies’ claims against Luke, Rocky and Linfang were necessarily hopeless from the outset without there being a trial of the issues alleged.[18]
[18]Ibid [79], [85]–[87], [92].
The judge then turned to consider the applicant companies’ conduct of the proceeding as a whole prior to discontinuance, in particular the making of allegations of fraud and serious misconduct. Noting that, as a matter of principle, unfounded fraud allegations may justify an indemnity costs order,[19] he concluded that this was an appropriate case in which to make such an order.[20] The circumstances upon which he elaborated were that:
[19]Ibid [95]–[98].
[20]Ibid [93].
(a)serious allegations of fraud were made by the applicant companies against the discontinued defendants from the outset, and those allegations formed the basis of the freezing orders which remained in place for extended periods;[21]
[21]Ibid [94].
(b)‘when the conduct of the proceeding overall is considered, including the application for freezing orders, it is clear that fraud was at the heart of the [applicant companies’] case against the discontinued defendants’,[22] because:
[22]Ibid [99] (emphasis added).
(i)the general indorsement of claim dated 22 June 2020 alleged that Rocky unlawfully took and sold the applicant companies’ property, and defrauded the applicant companies;[23]
[23]Ibid [100].
(ii)the affidavit and accompanying submissions upon which the freezing orders were obtained made clear allegations of fraud against Rocky, including by setting out what was said to be a ‘fraudulent invoicing scheme’ relating to the Fen Fa invoices;[24]
(iii)at the hearing on 9 September 2022, the applicant companies sought to maintain the freezing orders against Rocky on the basis that he engaged in conduct that ‘effectively was a fraud upon the [applicant companies]’, and that allegation had not changed even though the ‘methodology’ had;[25] and
(iv)although the express allegations of fraud did not flow into the pleaded case, the case against each of the discontinued defendants was one of dishonesty, the alleged diversion of goods was a key feature, and the re-pleading did not change the fact that ‘the case was initiated and maintained as one in which Luke and Rocky engaged in fraudulent misconduct’;[26]
(c)the serious allegations made against Luke and Rocky were likely to have had an adverse impact on their reputations, and, by the discontinuance, they were deprived of the opportunity to vindicate their reputations;[27]
(d)despite abandoning their express allegations of fraud, and even after accepting that the quantum of their claim against Rocky did not exceed $60,000, the applicant companies still refused to discharge or vary the freezing orders against Rocky in the amount of $402,887 despite being asked to do so repeatedly;[28] and
(e)due to the fraud allegations made at the outset and the ‘spectre of fraud’ that hung over the conduct of the proceeding, it was appropriate to ‘revisit and vary all previous costs orders’, to provide that the costs be paid on an indemnity basis.[29]
Costs order against Andy personally
[24]Ibid [101], [105].
[25]Ibid [103].
[26]Ibid [104].
[27]Ibid [108].
[28]Ibid [111].
[29]Ibid [113].
The judge summarised the legal principles relevant to the court’s discretion to order a non-party to pay the costs of a successful party.[30] The judge summarised each party’s submissions.[31] Addressing those submissions in light of the principles, the judge found and reasoned as follows:
[30]Ibid [127]–[130].
[31]Ibid [115]–[126].
(a)it was not a pre-requisite to making a non-party costs order that it be proven that the applicant companies were insolvent or persons of straw, although whether they were was a relevant factor;[32]
[32]Ibid [131].
(b)the total indemnity costs payable to Luke, Rocky and Linfang exceeded $985,532.06;[33]
[33]Ibid [134].
(c)AusPro ‘clearly’ had insufficient assets to meet such a costs order and, although he was not satisfied that MC Wholesaling was insolvent or a person of straw, the judge was satisfied that:
MC Wholesaling is dependent for its healthy financial position upon the recoverability of unsecured loans from companies associated with or controlled by Andy … [and] that whether or not it would choose to meet very substantial adverse costs orders against it lies in the hands of Andy;[34]
(d)as for Andy’s role in the proceeding:
(i)the making and continued pursuit of serious allegations of fraud were at the instigation of Andy as the sole director of the applicant companies;[35]
(ii)Andy made the affidavit in support of the ex parte freezing orders, and provided instructions for the commencement of the proceeding and the application for those orders;[36]
(iii)Andy provided the undertaking as to damages that was necessary to obtain the freezing orders, and provided instructions both for the unreasonable rejection of Rocky’s Calderbank offer and not to agree to discharge the freezing orders;[37] and
(iv)Andy was the ‘driving force’ behind the institution and maintenance of the claims of fraud and serious misconduct, which were then abandoned on his instructions;[38] and
(e)in those circumstances, it was appropriate to order Andy to personally pay the costs of Rocky and Linfang.[39]
[34]Ibid [135].
[35]Ibid [138].
[36]Ibid.
[37]Ibid [139].
[38]Ibid [140].
[39]Ibid [136], [140].
Although the judge considered the appropriateness of ordering indemnity costs in relation to two distinct periods (before and after the Calderbank offer), on two different bases, it is apparent that the second basis — namely, that the applicant companies made unfounded allegations of fraud — was sufficient of itself to justify the award of indemnity costs for the entire proceeding. This was accepted before this Court. It follows that unless the applicant companies can disturb the judge’s finding that indemnity costs were justified due to the unfounded allegations of fraud, the challenge to the award based upon the unreasonable rejection of the Calderbank offer will not assist the applicant companies. For that reason, I propose to deal with proposed ground 3 first.
Did the judge err in finding that allegations of fraud were ‘at the heart’ of, and ‘provided an ongoing basis’ for, the applicant companies’ case (ground 3)?
The full terms of proposed ground 3 were:
Ground 3
(a)The learned trial judge erred in finding that allegations of fraud against, inter alia, Rocky and Linfang were “at the heart of the plaintiffs’ case” (R[99]) and “provided [an] … ongoing basis” (R[96]) and on that basis concluding that the plaintiffs should pay Rocky’s and Linfang’s costs, including reserved costs, on an indemnity basis: R[112], [113].
(b)Although the learned trial Judge correctly found that the allegation of fraud did not flow through to the pleaded case (R[104]), a statement of claim making only breach of duty and knowing assistance claims against Rocky being served several months into the proceeding, the learned trial Judge erroneously in the exercise of his discretion as to costs proceeded on the basis that in substance it did.
(c)The learned trial Judge ought to have found that, while allegations of fraud were initially made against, inter alia, Rocky (including in support of freezing orders) in an affidavit and general indorsement, those allegations were abandoned and did not feature in subsequent pleadings. Accordingly, thereafter, allegations of fraud were not “at the heart of the plaintiffs’ case” and they did not provide the ongoing basis for the claim. The claims, in the form discontinued against Rocky and Linfang, were ordinary claims for breach of duty and/or knowing assistance and/or receipt.
(d)Further in the exercise of his discretion as to costs the learned trial Judge erroneously took into account in relation to Rocky that whilst the quantum of the claims against Rocky was significantly reduced (R[110] – [111]), the plaintiffs did not agree to discharge the freezing order against him. No formal application had [been] made by Rocky to have the freezing order discharged or for compensation to be paid by Andy who gave the usual undertaking as to damages in support of the freezing order.
In short, by this proposed ground the applicant companies contend that the judge wrongly found that allegations of fraud against Rocky and Linfang were ‘at the heart of’ the applicant companies’ case. Instead, he should have found that those allegations — although featuring in early pleadings — were not pressed in subsequent pleadings, which only alleged breach of fiduciary duty and knowing receipt and assistance. The proposed ground also complains about the judge’s reference to the applicant companies’ failure to agree to discharge the freezing order.
Relevant legal principles
Section 24 of the Supreme Court Act1986 confers a wide discretion upon the Court to decide ‘by whom and to what extent’ costs are to be paid. Rule 63.02 of the Rules provides that this discretion is to be exercised ‘subject to and in accordance with’ r 63 of the Rules. Under r 63, costs may be ordered upon a standard basis, indemnity basis or such other basis as the Court may direct and, except as provided by the Rules or any order of the Court, the ‘usual basis’ is to be the standard basis.[40] There is no specific provision of the Rules that would determine which basis of taxation of costs should apply in the present situation, so it is entirely a matter of judicial discretion.
[40]Supreme Court (General Civil Procedure) Rules 2015, rr 63.28, 63.31 (‘Rules’).
In order to appeal a civil judgment, the applicant companies must obtain leave to appeal from this Court. Leave may only be granted if this Court is satisfied that the appeal has a real prospect of success.[41]
[41]Supreme Court Act 1986, ss 14A, 14C.
Since the decision to award costs on an indemnity basis was a discretionary decision, an appeal could only be successful if the applicants established an error of the kind identified in House v The King.[42] That is, the applicants must show that the judge made an error in the exercise of the discretion. To do so they must show that he acted upon a wrong principle, allowed extraneous or irrelevant matters to guide him, mistook the facts, failed to take into account a material consideration, or arrived at a decision that, on the facts, was unreasonable or plainly unjust.
[42](1936) 55 CLR 499, 504–5 (Dixon, Evatt and McTiernan JJ); [1936] HCA 40 (‘House’).
Furthermore, as stated by this Court in Cargill Australia Ltd v Viterra Malt Pty Ltd,[43] appeals from orders as to costs are ‘treated as exceptional and require this Court to exercise particular restraint’.[44] Continuing, the Court said:
The test is not whether we would have exercised the discretion in the same way as the judge did, but whether there was a ground on which the judge could reasonably have made the order in question.[45]
[43][2023] VSCA 301 (‘Cargill’).
[44]Ibid [63] (Sifris, Walker and Whelan JJA).
[45]Ibid.
Because the Court retains a discretion to refuse to grant leave to appeal despite being satisfied that an appeal has real prospects of success,[46] the Court in Cargill explained that:
[T]he leave question may sometimes be approached by considering first whether there are discretionary considerations justifying the refusal of leave, irrespective of the proposed appeal’s prospect of success. One example where that may occur concerns an application for leave to appeal from a costs order, because it is exceptional to grant leave to appeal from such an order.[47]
[46]Kennedy v Shire of Campaspe [2015] VSCA 47, [5] (Whelan and Ferguson JJA).
[47]Cargill [2023] VSCA 301, [64] (Sifris, Walker and Whelan JJA), citing PCCEF Pty Ltd v Geelong Football Club Ltd (No 2) [2019] VSCA 148, [40]–[41] (Whelan, McLeish and Emerton JJA); Bodycorp Repairers Pty Ltd v GDG Legal Pty Ltd [2018] VSCA 32, [18] (Ferguson CJ, Whelan and McLeish JJA); 24 Hour Fitness Pty Ltd v W & B Investment Group Pty Ltd [2015] VSCA 216, [53] (Hansen, Ferguson and McLeish JJA).
It follows that, in approaching the applicant companies’ application for leave to appeal the judge’s decision to award indemnity costs, we must consider:
(a)whether the applicants have established that they have a real prospect of successfully appealing the judge’s exercise of discretion on any of the bases set out in House v The King; and, even so,
(b)whether this is an exceptional case that would warrant leave being given to appeal a costs order.
As will be seen from the reasons that follow, in respect of proposed ground 3, I do not consider that there is anything exceptional about the applicants’ appeal from the judge’s decision to award costs on an indemnity basis. For that reason alone I would refuse leave to appeal on that proposed ground. Nevertheless, I will also explain why I consider that an appeal on proposed ground 3 lacks real prospects of success.
Submissions
The fundamental arguments advanced by the applicant companies on proposed ground 3 may be summarised shortly. They submitted that:
(a)the judge mischaracterised the applicant companies’ claim after the October 2021 re-pleading as if it involved a claim based upon common law fraud (that is, deceit), whereas in fact the case was pleaded as a ‘knowing assistance’ claim based upon equitable fraud, which is different and does not carry the same connotation of dishonesty;
(b)neither Rocky nor Linfang were deprived of a chance to vindicate their reputations because they could have opposed the discontinuance; and
(c)the judge was wrong to rely on the maintenance of the freezing order as a factor justifying indemnity costs when no application was made to discharge the order during the period from October 2020 until September 2022. Further, if the maintenance of the freezing order was unwarranted, Rocky and Linfang can pursue compensation for the consequences of the order by enforcing Andy’s undertaking as to damages.
Consideration
Departing from the ‘usual basis’ on which to order costs generally requires some ‘special or unusual feature’ in the case which warrants doing so in the interests of justice.[48] Examples of such features include making allegations of fraud that are known to be false, or which are irrelevant, or making allegations ‘which ought never to have been made’.[49] Nevertheless, the categories of case in which the discretion may be exercised are not closed, and in each case the ‘question must always be whether the particular facts and circumstances of the case in question warrant the making of an order’ other than on the usual basis.[50]
[48]Colgate-Palmolive Co v Cussens Pty Ltd (1993) 46 FCR 225, 233–4 (Sheppard J); [1993] FCA 801 (‘Colgate-Palmolive’).
[49]Ibid.
[50]Ibid.
In this case, the judge cited NIML Ltd v MAN Financial Australia Ltd (No 2),[51] in which Harper J — after referring to Colgate-Palmolive Co v Cussens Pty Ltd, from which the principles in the preceding paragraph are taken — referred to ‘[l]oose allegations of fraud’ being a ‘blot on the adversarial system’ which may, in some circumstances, amount to an abuse of process.[52] In NIML, after judgment was given for the defendant, Harper J did not order costs on an indemnity basis. A claim had been made against the successful defendant alleging a ‘Barnes v Addy’ breach of trust. Significantly, Harper J found that the allegations made in the pleadings rose no higher than alleging that the defendant ought to have inferred misconduct on the part of a fraudulent employee who had been misusing the plaintiff’s funds. No allegation was made that the defendant participated in that misconduct, or actually knew of the misconduct.[53]
[51][2004] VSC 510 (‘NIML’), cited at Reasons, [95].
[52]Ibid [6] (Harper J).
[53]Ibid [7] (Harper J).
Another case referred to by the judge involved, like the present case, an order for costs made upon the discontinuance of a claim, rather than after the completion of the trial. In Russian Airlines v Leeds,[54] a judge of the England and Wales High Court ordered indemnity costs when the claimant discontinued claims of fraud which had been pursued against the defendants for eight years. The judge considered that an order for indemnity costs should usually follow where a claimant ‘proceeds with allegations of serious dishonesty and fraud against a defendant and discontinues those claims without explanation’.[55]
[54][2018] EWHC 1735 (Ch), cited at Reasons, [97].
[55]Ibid [48]; see also [53], [59] (Rose J).
Although reference to the facts of other cases provides useful illustrations of how other judges exercised the discretion in the particular circumstances of the case that came before them, how the discretion was exercised on other facts is not likely to resolve the case in question. On appeal, in each case the question is whether there was a ground on which the judge could reasonably have made the order in question.
In this case, the applicants contend that, although their claim against Rocky began as a claim of dishonesty, it devolved into a ‘Barnes v Addy’ knowing assistance claim. The applicants interpreted the word ‘fraud’ as used by the judge to mean the state of knowledge about the wrongdoing that would be required for a claim of common law deceit about a representation — that is, actual knowledge of, or being recklessly indifferent as to the existence of, an untruth. So interpreted, the applicants argued that, after the re‑pleading, their case did not allege that level of misconduct on the part of Rocky or Linfang.
Essentially, in House v The King terms, the applicants’ argument was that the judge either took into account an irrelevant matter or acted on a wrong principle (that is, that a Barnes v Addy equitable fraud allegation could constitute a special feature that might warrant a departure from the usual rule as to costs), or failed to take into account a material consideration (being the nature of the pleaded case as it changed).
True it is that a claim of knowing assistance does not require for its proof that the defendant was subjectively dishonest. The necessary degree of knowledge on the part of a defendant of the dishonest and fraudulent design of the errant fiduciary whom the defendant is alleged to have assisted may be: (i) actual knowledge, (ii) wilfully shutting their eyes to the obvious, (iii) wilfully and recklessly failing to make the inquiries an honest and reasonable person would make, or (iv) knowing circumstances that would indicate the facts to an honest and reasonable person.[56]
[56]Farah Constructions Pty Ltd v Say-Dee Pty Ltd (2007) 230 CLR 89, 163–4 [174]–[177] (Gleeson CJ, Gummow, Callinan, Heydon and Crennan JJ); [2007] HCA 22. The fourth form of knowledge identified in Farah Constructions has been described by the Full Federal Court as ‘the surrogate of actual knowledge’: Grimaldi v Chameleon Mining NL (No 2) (2012) 200 FCR 296, 361–2 [261] (Finn, Stone and Perram JJ); [2012] FCAFC 6.
Here, however, such hypothetical possibilities are a distraction. Far more important and informative is what the applicant companies actually alleged against Rocky and Linfang. In the amended statement of claim — upon which the applicant companies rely in asserting that they ‘only’ alleged a Barnes v Addy claim against the respondents, but not a ‘fraud’ claim — the applicant companies pleaded that:
(a)the ‘defendants’ — which included Rocky and Linfang — ‘entered into an agreement, arrangement or understanding between them pursuant to which they agreed to … (a) divert stock from [the applicant companies]’, and ‘(b) sell the stock to third parties at a profit’; and
(b)so far as Rocky and Linfang were concerned, the agreement, arrangement or understanding was to be inferred from Rocky’s and/or Linfang’s conduct — namely, delivering stock to third parties instead of the customers named on invoices, on-selling stock that was the subject of invoices issued to ‘fake email addresses’, at a profit, and only ‘partially delivering stock’ to the applicant companies’ customers.
Whatever else might also have been alleged against Rocky and Linfang, there is no escape from the fact that the applicant companies continued to allege that Rocky and Linfang were actual, agreeing participants to the arrangement to divert or ‘skim’ stock from the applicant companies, and sell the diverted stock to reap a profit for the participants (or one or more of them). This could only be described as an allegation of frank, dishonest conduct on the part of Rocky and Linfang; a plain, deliberate scheme to cheat the applicant companies out of their property or profits.
When pressed, senior counsel appearing for the applicant companies before this Court accepted — as he must have — that even the amended pleading alleged that Rocky and Linfang agreed ‘to do dishonest things’.
Even if, as was submitted, the relief claimed against Rocky and Linfang — an account of profits or compensation — was not dependent upon establishing any dishonest conduct on their part, the allegations actually made against them were of that character.
The judge and the parties before him used the word ‘fraud’ in a loose sense. It certainly was not used to denote the common law action of deceit. Nevertheless, as illustrated by the pleading I have referred to, and as submitted by the senior counsel appearing for the applicant companies before the judge on 22 September 2022, the applicant companies alleged, over the course of the whole proceeding, that Rocky and Linfang acted with others surreptitiously, in a deceptive way, to cheat the applicant companies out of their property or profits.
The judge was not wrong to say that ‘fraud was at the heart’ of the applicant companies’ case against Rocky and Linfang throughout the proceeding overall. He did not err by taking that factor into account in exercising his discretion. It was plainly a material consideration. He did not act on any wrong principle. And, he did not err, as was suggested, by failing to take into account the change of pleading. The changed pleading did not remove the allegation of agreeing ‘to do dishonest things’, as I have identified.
The other significant aspect of the applicant companies’ complaint about the judge’s exercise of the discretion was the attention he gave to the fact that the applicant companies did not agree to discharge the freezing order (set at $402,887) after being repeatedly asked to do so, and even after conceding that the quantum of the claim against Rocky and Linfang would not exceed $60,000. The applicant companies submitted that this was an irrelevant consideration, and that the judge ought not to have had regard to it at all in the evaluative exercise. In support of that argument, the applicant companies submitted that, following an initial challenge by Rocky in October 2020, neither Rocky nor Linfang applied to have the freezing order discharged until September 2022.
This point was not put forward as a determinative or even a major factor in the judge’s consideration. He mentioned it as a final point that was ‘important to record’ after he discussed all other matters.[57] In doing so, the judge listed all of the opportunities that Rocky and Linfang gave to the applicant companies to reconsider their position, by referring to six letters they sent to the applicant companies’ solicitors between 27 October 2020 and 11 August 2022 requesting discharge of the freezing order. This series of repudiated opportunities puts the applicant companies’ maintenance of the freezing order in a more significant light than had they not been asked to reconsider it at all. The applicant companies did not need a formal application for the removal of the freezing order to give the matter proper attention. Their failure to discharge the freezing order was not an irrelevant consideration. This argument lacks any merit at all.
[57]Reasons, [111].
Nothing about the circumstances or elements of the applicant companies’ proposed appeal on ground 3 is exceptional. It is, in substance, a routine challenge to the exercise of a discretion by seeking to identify a House v King error. None of the particular ingredients of that challenge turn on unusual or extraordinary factors, or concern matters of important principle. That being the case, even if I thought that it held reasonable prospects of success, I would decline to give leave to appeal on proposed ground 3, simply because it lacks any exceptional quality to warrant appellate review of the costs order made.
In any case, on proposed ground 3, there is no reasonable prospect of success on the appeal. I am not satisfied that the applicant companies have any reasonable prospect of establishing that the judge made a House error when exercising his general discretion to award indemnity costs against them.
This is sufficient to dispose of proposed ground 3. Disposing of ground 3 makes it strictly unnecessary to deal with proposed grounds 1 and 2. However, I consider that ground 2 may have justified the grant of leave to appeal the costs order in favour of Linfang based upon the rejection of the Calderbank offer, had there been any practical utility in doing so. That being the case, I will address proposed grounds 1 and 2 to the extent necessary to expose that point.
Was it unreasonable for the applicant companies to reject Rocky’s Calderbank offer, and should Linfang have received its benefit (grounds 1 and 2)?
The applicant companies’ proposed grounds 1 and 2 were, like proposed ground 3, long and discursive. I set them out in full:
Ground 1
(a)The learned trial Judge erred in finding that, by the time Rocky served the Calderbank offer on 23 February 2021, the plaintiffs had sufficient information to make an informed assessment of the strength of Rocky’s defence (and, by implication, that of Rocky’s company Linfang R[71]) and that the rejection of Rocky’s Calderbank offer was therefore unreasonable R[56], [60], [64].
(b)The learned trial Judge ought to have found that the rejection of Rocky’s Calderbank offer was not unreasonable because:
(i)The Calderbank offer referred to and relied on correspondence and material not repeated or described in the Calderbank offer and to which the learned trial Judge was not taken in support of the contention that Rocky would succeed in his defence of the claims against him.
(ii)The Calderbank offer stated in substance that the plaintiffs’ fraud claim (so-called) lacked sufficient particulars, the plaintiffs’ forensic accountant PKF’s Report contained inaccuracies and inadequacies and the novation argument pleaded lacked legal merit, but those matters alone or in combination did not amount to reasons why the plaintiffs’ claim against Rocky would fail, but rather were reasons why the plaintiffs should reconsider aspects of their claims against Rocky, which they did. The Calderbank offer did not challenge the fiduciary duties owed by Rocky or the existence of the diversion of stock agreement to which it was pleaded he was a party.
(iii)The Calderbank offer was sent at a time when the proceeding was known by the parties to be at an early and evolving stage and full discovery was yet to be provided by all parties, as was acknowledged in the Calderbank offer. It was too early for the plaintiffs to make an informed assessment of the strength of the case against Rocky.
(iv)The strength of Rocky’s defence depended in part on the strength of the case against Aries for breach of fiduciary duty, the case against Rocky being one of breach of fiduciary duties and knowing receipt and knowing assistance.
(c)The learned trial Judge ought to have found that the plaintiffs’ rejection or refusal of Rocky’s Calderbank offer was reasonable and, accordingly, Rocky was not entitled to an indemnity costs order.
(d)The learned trial Judge ought to have found that the service of the amended statement of claim rendered the Calderbank offer redundant by reason of it having been overtaken by later events being the amended claims and that it could not be relied on as a basis for finding as the learned trial Judge did at R[71] that it was unreasonable that it had not earlier been accepted.
Ground 2
(a)The learned trial Judge erred in finding that Linfang was entitled to an indemnity costs order because “it is questionable whether there was a proper basis to join Linfang to the proceeding”, and the plaintiffs had rejected Rocky’s Calderbank offer and, had the offer been accepted, Linfang would never have been joined: R[71].
(b)The learned trial Judge ought to have found that there was a proper basis to join Linfang to the proceeding and the plaintiffs’ rejection or refusal of Rocky’s Calderbank offer was reasonable and, accordingly, Linfang was not entitled to an indemnity costs order.
Relevant legal principles
It is a well-established feature of the litigation process that a party may make an offer to another party to compromise a proceeding under cover of a letter marked ‘without prejudice except as to costs’, or some similar designation. Such offers, known as Calderbank offers, do not amount to a formal offer of compromise governed by r 26 of the Rules, the acceptance or rejection of which have defined consequences. Nevertheless the rejection of a Calderbank offer may properly be taken into account as a discretionary factor when the judge is considering whether to order costs on an indemnity basis.[58] The critical question when having regard to the rejection of a Calderbank offer is whether that rejection was ‘unreasonable in the circumstances’.[59] A non-exclusive list of factors that ordinarily bear upon that evaluation was set out in Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2). Those factors are:[60]
(a)the stage of the proceeding at which the offer was received;
(b)the time allowed to the offeree to consider the offer;
(c)the extent of the compromise offered;
(d)the offeree’s prospects of success, assessed as at the date of the offer;
(e)the clarity with which the terms of the offer were expressed; and
(f)whether the offer foreshadowed an application for indemnity costs in the event of the offeree’s rejecting it.
[58]Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435, 441 [20] (Warren CJ, Maxwell P and Harper AJA); [2005] VSCA 298 (‘Hazeldene’s Chicken Farm’).
[59]Ibid 441 [23] (Warren CJ, Maxwell P and Harper AJA).
[60]Ibid 442 [25] (Warren CJ, Maxwell P and Harper AJA).
Addressing the proposition that the maker of a Calderbank offer should set out with some specificity the reason why the offeree should accept the compromise, in Hazeldene’s Chicken Farm this Court said that whether or not that is so must depend on consideration of all the circumstances existing at the time of the offer.[61]
Submissions
[61]Ibid 442 [27] (Warren CJ, Maxwell P and Harper AJA).
The applicant companies submitted that the judge was wrong to find that they unreasonably rejected Rocky’s Calderbank offer dated 22 February 2021 (rejected on 23 February 2021) because:
(a)at the date of the letter it was not known what Rocky’s defence might be;
(b)the letter did not explain why the applicant companies’ case would fail;
(c)the failure by the applicant companies’ to give reasons for refusing the offer is not a known, relevant circumstance in the exercise of the Court’s discretion as to costs; and
(d)the Calderbank offer was made redundant by the re-pleading of the applicant companies’ claim in October 2021, and the joining of Linfang by that re‑pleading.
In support of proposed ground 2 specifically, the applicant companies argued that there was a proper basis for joining Linfang, so the judge should not have made an indemnity costs order in its favour based upon the rejection of the Calderbank offer.
Consideration
The applicant companies’ central point in oral submissions was that at the time the Calderbank offer was delivered the case was still at an evolving and developing stage, and they were unable to make an informed decision about the merits of Rocky’s defence.
This point had little or no merit. The evolving and developing nature of the applicant companies’ case was a problem of their own making. As it turned out, their allegations about Rocky’s involvement in producing fake invoices and the implications that were thought to flow from the fake invoices were all shown to be wrong — or at the very least highly unreliable — by Rocky’s persistent investigation into the applicant companies’ own documents. This can be seen from the detailed letters sent by Rocky’s solicitors to the applicant companies in 2021 and 2022, setting out Rocky’s analysis of the invoices and banking documents that emanated from the applicant companies themselves.
The applicant companies’ failure to appreciate the weakness of their own case stemmed from their failure to investigate and analyse their own documents. Their explanation, as put in argument, that they relied upon what Aries said to ground their claims against Rocky and Linfang, cannot exonerate them from failing to look at their own documents.
Secondly, they argued that Rocky’s Calderbank offer did not provide any particular basis for considering that his defence would succeed or that the applicant companies’ case against him was weak and would fail.
There is some merit in the argument that Rocky’s Calderbank offer was largely focused on complaints with the way the case was pleaded, the absence of particulars and the lack of clarity about the delivery contract. Those matters might have been the subject of a separate letter, so that including them in a letter containing a Calderbank offer introduced some extraneous elements. Even so, the letter plainly addressed the weakness in the applicant companies’ own case against Rocky. He stated that, on the pleadings, it was clear that the proceeding was in essence a partnership dispute between the applicant companies and Aries. He repeated his denial — as made in several affidavits and his defence — that he had anything to do with diverting the applicant companies’ stock or engaging in any fraudulent invoicing scheme. He stated in his letter that there was ‘no basis’ for those allegations.
Taking into account the particular facts and circumstances of this case, there was no meaningful way in which Rocky could have provided more specific reasons why the applicant companies should accept his compromise. When only broad and unspecified allegations of dishonesty were made against him at that time, one can ask, rhetorically, what else could Rocky have said? Notwithstanding the somewhat mixed nature of the letter and the fact that a number of the complaints made in it were subsequently addressed, the letter did contain a denial of the alleged wrongdoing and an assertion that the case against him would fail, together with an offer. Had the applicant companies’ properly investigated their own materials they would have known that it was unreasonable to refuse that offer.
In his reasons, the judge noted that, before him, the applicant companies did not submit that they were unable to properly assess the merits of Rocky’s offer because it was made too ‘early’ or because of the lack of an explanation for it.[62] It was in that context that the judge said that the applicant companies had not adduced ‘evidence’ of their reason for refusing Rocky’s offer. Contrary to the implication that the applicant companies urged this Court to draw from that comment, the judge did not imply that the applicant companies were obliged to supply a reason for refusal. The judge was simply observing that the applicant companies did not seek to establish that there was any causal connection between the stage of the proceeding and absence of an explanation for the offer, on the one hand, and their refusal of the offer, on the other. I see nothing wrong with the judge taking that into account in assessing the reasonableness of the refusal.
[62]Reasons, [61].
Finally, the applicants argued that their response to the Calderbank offer was not unreasonable because, in response to the complaints made about the absence of particulars and the lack of clarity about the delivery contract, they re-pleaded their case to address those issues. This shows, they argued, that their response to the offer was not unreasonable, emphasising that it was for the respondents to prove that it was.
It is true that the applicant companies responded to those matters in the Calderbank offer that I have described as somewhat ‘extraneous’ to the offer. Even so, this does not deal with the fact that the applicant companies refused the offer contained in the letter. The question is whether that refusal was unreasonable. Going on to join Linfang and supply further particulars of the alleged wrongdoing — which, as I have already explained, included the allegation that Rocky and Linfang were actual parties to the diversion arrangement — did not cure the unreasonableness of refusing the offer when viewed against the circumstance that the entire claim was ultimately discontinued.
Lastly — turning to proposed ground 2 — the applicant companies argued that, in any event, Linfang should not get the benefit of the Calderbank offer. Linfang was not a party to the proceeding at the time the offer was delivered. And, they submitted, there was proper reason to join Linfang because Rocky had pleaded that Linfang was the delivery contractor and had alluded to issues about the delivery contract in the Calderbank offer.
In finding that Linfang could benefit from the Calderbank offer, the judge relied, in part, upon obiter remarks by Kunc J in Bathurst Real Estate Pty Ltd v Fairbrother (No 2).[63] In that case, Kunc J reiterated the width of the discretion to award indemnity costs, and said that if a defendant who was joined after the refusal of a Calderbank offer could demonstrate that they would not have been sued at all had the matter been settled by acceptance of that offer, the later joined defendant might be able to take advantage of the Calderbank offer.
[63][2022] NSWSC 408, [29] (Kunc J).
Adopting that reasoning, the judge gave Linfang the ‘benefit’ of the Calderbank offer because he concluded that, had the offer been accepted when only Rocky was a defendant, Linfang would never have been joined. There is no House error in this finding. This is because, as the judge found, the applicant companies made the same substantive allegations against both Rocky and Linfang after Linfang was joined; that is, they made no separate or additional substantive allegations against Linfang. Rocky’s primary defence, which formed the basis of the Calderbank offer, was that no liability was owed because he (and by implication Linfang) did not take part in the arrangement, agreement or understanding to divert stock from the applicant companies and sell that stock to third parties for a profit. In my view, nothing turns on the fact that he also denied any agreement with the applicants in his defence, alleging instead an agreement between MC Wholesaling and Linfang. So too, as set out in [78] above, nothing turns on the fact that other matters were raised in the Calderbank offer.
Even if it was established that the judge erred in making an order for indemnity costs in favour of Linfang on this basis, the argument would go nowhere. Once Linfang was joined, the applicant companies made the same allegations of dishonest conduct against it that they made against Rocky, and then discontinued the proceeding. The judge was therefore entitled to make an indemnity costs order in Linfang’s favour on the broader discretionary basis considered under proposed ground 3. In addition, because the judge found that the work and costs involved in the defence of Rocky and Linfang were the same,[64] I would refuse leave to appeal on this proposed ground because the outcome of any such appeal would have no practical effect.
[64]Reasons, [70].
I would refuse leave to appeal on proposed grounds 1 and 2.
Did the judge err in making a non-party costs order against Andy (grounds 4, 5 and 6)?
The full terms of grounds 4, 5 and 6 are as follows:
Ground 4
(a)The learned trial Judge erred in entertaining and granting Rocky’s and Linfang’s applications for a non-party costs order, made without notice by summons with supporting material, but by way of submissions, when the orders made on 18 October 2022 did not provide for any such submissions and no summons or supporting affidavit was filed and served by any defendant: R[115], [119].
(b)The learned trial Judge ought to have required any application for a non-party costs order to be made on summons with a supporting affidavit only after the plaintiffs failed to pay the costs ordered to be paid, and further ought to have permitted Andy as respondent to such an application to file and serve an affidavit in response, together with submissions (of a greater length than three pages).
Ground 5
(a)The learned trial Judge further erred in making the non-party costs orders against Andy on the basis that “whether or not [the plaintiffs] would choose to meet very substantial adverse costs orders … lies in the hands of Andy”: R[135] – [136].
(b)The learned trial Judge ought to have refused to make a non-party costs order against Andy because the costs ordered against the plaintiffs were yet to be taxed or agreed and it was yet to be seen whether the plaintiffs, which according to the evidence before the learned trial Judge had sufficient assets to pay the adverse costs orders, would pay the adverse costs orders.
Ground 6
(a)The learned trial Judge erred in finding that “Andy was the driving force behind the institution and maintenance of the claims of fraud and serious misconduct against Luke, Rocky and Linfang” and it was therefore appropriate that he be ordered to pay, inter alia, Rocky’s and Linfang’s costs personally on an indemnity basis: R[136], [140].
(b)The learned trial Judge ought to have found that for the reasons set out in ground 3(c) above the original fraud claim was replaced in the pleadings by breach of duty and knowing receipt and assistance claims and the proceeding was conducted on that basis, and Andy’s conduct (described in R[139]) consisted of no more than that which a company director would ordinarily engage in to discharge his duties, which was unremarkable, and did not justify a non-party, indemnity costs order.
Submissions
The applicant companies made the following submissions under these grounds:
(a)As a matter of process, the judge should not have allowed an application for a costs order against a non-party to be instituted by submissions alone. A summons and supporting affidavit were required;
(b)The cases the judge relied upon involved insolvent parties and ‘persons of straw’. Because the judge was not satisfied that MC Wholesaling was insolvent or a person of straw, that should have been the ‘end of the matter’;
(c)The judge’s finding that it ‘lies in the hands of Andy’ whether MC Wholesaling would pay the costs ordered against it could not enliven the discretion to order costs against a non-party;
(d)The judge failed to consider relevant facts — namely, that substantial security for costs had been given, there was no evidence that Andy would use his alleged control of intercompany loans to render MC Wholesaling insolvent, and it was inherently unlikely that he would do so given MC Wholesaling’s ongoing case against Aries;
(e)None of the matters relied on by the judge concerning ‘Andy’s role in the proceeding’ went beyond the usual actions of a company director running litigation. For example, there was no evidence Andy funded the litigation; and
(f)The judge neglected to consider whether Andy had an interest in the subject of the litigation and whether the interests of justice required that a non-party costs order be made. Instead, he overemphasised Andy’s apparent role in the proceeding.
It is important to recall that, other than the first, each of these arguments must be pressed into a House analysis — that is, for them to be successful it must be established that the judge made an error of the House variety. Some of the above submissions ((f) and, perhaps, (d)) strayed from the proposed grounds.
Relevant legal principles
The applicable principles were not in dispute. They were carefully laid out by the judge. He cited the wide discretion conferred by s 24(1) of the Supreme Court Act1986 to determine ‘by whom and to what extent’ costs are to be paid and, more particularly, the principles concerning the power to order costs against non-parties as developed by the High Court in Knight v FP Special Assets Ltd,[65] and expounded in later cases.[66] Citing these authorities, the judge appropriately reminded himself that the High Court in Knight had acknowledged that there is a ‘recognised category’ of cases — namely, cases in which a party to the litigation is an insolvent person or a person of straw, and the non-party has played an active role in the litigation and has an interest in the subject of it — in which an order for costs should be made against the non-party if the interests of justice require it.[67]
[65](1992) 174 CLR 178; [1992] HCA 28 (‘Knight’).
[66]Cases cited included FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWCA 340, [210] (Basten JA, Beazley JA agreeing at [1], Giles JA agreeing at [85]) (‘FPM Constructions’); Kebaro Pty Ltd v Saunders [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ) (‘Kebaro’); Dunghutti Elders Council (Aboriginal Corporation) RNTBC v Registrar of Aboriginal and Torres Strait Islander Corporations (No 4) (2012) 200 FCR 154, 170 [87] (Keane CJ, Lander and Foster JJ); [2012] FCAFC 50; Bakers Investment Group (Australia) Pty Ltd v Caason Investments Pty Ltd (No 3) [2015] VSC 644, [12]–[16] (Elliott J) (‘Bakers Investment Group’); JAB Nominees (Aust) Pty Ltd v Auswild [2020] VSC 731, [273] (Riordan J) (‘JAB Nominees’). See Reasons, [128]–[130].
[67]Reasons, [129].
The judge also referred to JAB Nominees (Aust) Pty Ltd v Auswild, in which Riordan J considered that ‘something more’ than the typical conduct of a company director acting in accordance with their duties is required to enliven the discretion to order that costs be paid by the non-party director of a corporate litigant.[68] In that case, Riordan J expressed the view that the discretion may be enlivened if the director gave instructions to pursue a claim with no real prospects of success, or caused the institution of a proceeding based on fraud without reasonable grounds, or continued such a proceeding on a ‘stubbornly or totally unreasonably’ held belief.[69]
[68]Ibid [130], citing JAB Nominees [2020] VSC 731, [273] (Riordan J).
[69]JAB Nominees [2020] VSC 731, [273] (Riordan J).
It is important to emphasise that pronouncements by previous courts of factors that have or have not been taken into account in the exercise of the discretion are not to be treated as some sort of fixed list of ‘ingredients’ or prohibited factors. As the judge recognised, the categories of cases in which a court will order costs against a non-party are not closed. Each case depends on its own facts and circumstances, and a range of factors may be relevant to the exercise of the Court’s discretion.[70]
[70]The judge quoted the list of potential factors set out by Elliott J in Bakers Investment Group: see Reasons, [129], citing Bakers Investment Group [2015] VSC 644, [16] (Elliott J).
Nonetheless, the circumstances that enliven the discretion to order non-party costs have been described as ‘exceptional’ or ‘extraordinary’.[71] I acknowledge that the use of these terms may distract from the ultimate question of whether it is just in all the circumstances to make such an order.[72] Nevertheless, they serve to underscore the proposition that a non-party costs order is out of the ordinary, and requires the Court to be satisfied that circumstances exist to justify such an order.
[71]Flinn v Flinn (1999) 3 VR 712, 761 [163] (Brooking, Charles and Batt JJA); [1999] VSCA 109; Kebaro [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ), cited with approval in Ipex ITG Pty Ltd (in liq) v State of Victoria [2014] VSCA 315, [36] (Neave, Santamaria and Kyrou JJA) (‘Ipex’).
[72]Carter v Caason Investments Pty Ltd [2016] VSCA 236, [50] (Weinberg, Ferguson and Kaye JJA) (‘Carter’); Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807, 2815 [25] (Lord Brown for the Court).
In this application, the consideration or non-consideration of any particular fact by the judge in deciding to exercise the discretion to make a non-party costs order needs to be evaluated, in the light of House principles, by reference to its capacity to bear upon the proper, judicial exercise of the discretion.
Consideration
(a)Proposed ground 4
The applicants’ ‘process’ argument in proposed ground 4 was particularly weak. Senior counsel for the applicants correctly and properly accepted that there was no proposed ground of appeal alleging a breach of natural justice. Applications are routinely handled in the Commercial Court without formal summonses. The applicants were reduced to arguing that the process was ‘sub-optimal’.
Moreover, as the respondents pointed out, the applicants did not complain about the process at the time; the judge gave them opportunities to file affidavits and, in fact, they did; they sought and obtained permission to file reply submissions; and then they had from December 2022 to May 2023 while the decision was reserved to approach the Court to put anything else that they felt they had not been able to put, but did not do so. I would refuse leave to appeal on proposed ground 4.
(b)Proposed grounds 5 and 6
The question for this Court raised by proposed grounds 5 and 6 is whether the judge made an error in the House sense when reaching the conclusion that Andy, who was not a party to the proceeding, was liable for the costs of Rocky and Linfang. In my view, there was no such error: rather the judge took into account the relevant principles set out above and applied them to the facts of this case in the proper exercise of a judicial discretion.
Confined strictly to the express terms of the grounds, the arguments can be disposed of quite succinctly.
By proposed ground 5(a), the applicants do not take issue with the judge’s finding that MC Wholesaling is dependent for its healthy financial position upon the recoverability of unsecured loans from companies associated with or controlled by Andy; instead, they take issue with a non-party costs order against Andy being made in those circumstances. This amounted to an argument that a non-party costs order cannot be made against a director of an unsuccessful corporate party unless the corporation is insolvent (or a ‘person of straw’). Proposed ground 5(b) is simply the practical consequence of that position.
It is not correct to say that a court only has discretion to order that a director of an unsuccessful corporate party pay non-party costs if the corporate party is insolvent (or a ‘person of straw’). The relevance of an unsuccessful party being ‘insolvent’ or a ‘person of straw’ is that the successful party will have no realistic expectation that they will recover their costs against that unsuccessful party and, for that reason, will likely be left ‘exposed and out of pocket’.[73] As the facts of this case demonstrate, there might be good reasons why a court might consider that a successful party has no realistic expectation of recovering costs from a corporate party and will be left out of pocket, even if that corporate party is technically solvent and not a ‘person of straw’. Moreover, it is not suggested that the only basis that the judge relied upon in exercising his discretion was the seemingly thin likelihood that, under Andy’s direction, MC Wholesaling would pay the adverse costs order. In my view, the applicant’s argument that there can be no ‘basis’ for making a non-party costs order against Andy unless MC Wholesaling is insolvent or a ‘person of straw’, must fail.
[73]Carter [2016] VSCA 236, [49] (Weinberg, Ferguson and Kaye JJA).
By proposed ground 6(a), the applicants do take issue with a factual finding. They purport to challenge the judge’s finding that Andy was the ‘driving force’ behind the litigation and the claims of fraud and serious misconduct. To succeed on House principles, they would have to establish that it was not open to the judge to make this finding. In my view, they have not done so. As explained below, there was ample basis for the judge to make this finding. On one view, proposed ground 6(b) is simply the inverse of 6(a). To the extent that it goes further than negating the identified factual finding, I deal with it below.
Notwithstanding these succinct reasons for disposing of proposed grounds 5 and 6, I will turn to some of the broader arguments raised.
(i)Andy’s role as the director of a litigating company (proposed ground 6)
I turn to the argument advanced for Andy that he did no more than what a director would normally be expected to do in relation to a litigating corporation. That is, he merely caused the corporation to obtain advice, gave instructions and made relevant decisions as the corporate mind. First, there is no inherent difficulty in this jurisdiction with a court selecting a director of a company as a non-party who ought to pay costs where the corporate litigant is unable to do so. As explained in Carter v Caason Investments Pty Ltd, this is not a question of ‘piercing the corporate veil’ but, instead, a matter of not allowing the existence of a corporate structure to ‘swamp all other considerations’.[74]
[74]Ibid, [50] (Weinberg, Ferguson and Kaye JJA).
It was not in dispute (and the judge found) that Andy:
(a)gave all instructions on behalf of the applicant companies in relation to the proceeding;
(b)swore the initial affidavits upon which the freezing orders were obtained;
(c)attended the hearings and mediations;
(d)instructed the applicant companies’ solicitors to refuse the Calderbank offer;
(e)gave instructions not to release or modify the freezing order in response to the six letters from Rocky’s solicitors requesting that the applicant companies do so; and
(f)ultimately, gave instructions to abandon the claims that he had caused to be instituted.
Further, quite apart from his role as the sole director of the applicant companies, Andy gave the undertaking as to damages upon which the freezing orders in favour of those companies were obtained. The judge referred to this undertaking as one of the matters that supported making a non-party costs order against Andy.[75] In so doing, the judge did not neglect to consider (as the applicants submitted that he did) whether Andy had an interest in the outcome of the litigation beyond merely that of a director.
[75]Reasons, [139(a)].
The applicants also relied upon the fact that there was no evidence that Andy himself funded the proceeding — rather, all the costs were paid by MC Wholesaling. While this factor is relevant, it is far from decisive. In any event, the judge focused on Andy’s role in the proceeding and did not rely upon who funded the proceeding.[76]
[76]Incidentally, I observe that, in light of the matters set out in [109] and [110] below, the judge would have been well-entitled to conclude that Andy had a significant role in the funding of the proceeding for much the same reason that he concluded that Andy would play a significant role in determining whether MC Wholesaling would choose to pay the adverse costs order.
Overall, I am mindful that, having heard the initial freezing order application and managed most of the litigation from then on through to the application to discontinue the proceeding, the judge below had a detailed, step-by-step perspective on the role Andy played throughout the proceeding. As a result — and as I have already stated — I see no error in the judge’s conclusion that Andy was the ‘driving force behind the institution and maintenance of the claims of fraud and serious misconduct’.[77]
[77]Reasons, [140].
More than that, I see no error in the judge concluding, as he did, that Andy’s role went beyond that of a director merely directing litigation on behalf of a company. The circumstances of Andy’s role in this case are unique, or at least, singular. As the judge emphasised,[78] the list of activities that Andy engaged in over more than 24 months involved causing the applicant companies to make and persist in making serious allegations of fraud, personally supporting the freezing orders by giving the necessary undertaking as to damages, causing the applicant companies to unreasonably reject the Calderbank offer, refusing to discharge the freezing orders in the context of the quantum of the claim against Rocky and Linfang constituting a fraction of the amount preserved by the freezing order and, ultimately, abandoning the claims without explanation.
[78]Ibid [138]–[139].
It is also necessary to bear in mind that Andy’s role was not, of itself, a separate and independent factor that the judge relied upon to make the non-party costs order. It was a factor that he took into account in combination with other factors, each factor having some tendency to interact with others.[79] For example, the judge’s observations concerning Andy’s role in the proceeding — particularly in relation to Andy’s instructions to unreasonably reject the Calderbank offer and persistently refuse to discharge the freezing order — were apt to influence the judge’s impression of the likelihood that Andy would cause MC Wholesaling to have the financial wherewithal to pay the adverse costs orders.
[79]See FPM Constructions [2005] NSWCA 340, [214] (Basten JA, Beazley JA agreeing at [1], Giles JA agreeing at [85]).
I now turn to discuss that issue.
(ii)Andy’s control of MC Wholesaling’s capacity to pay the adverse costs orders (proposed ground 5)
It is not disputed that AusPro had a net deficiency of assets according to its own accounts. As for MC Wholesaling, the picture was somewhat different. On the face of its balance sheet, it had more than sufficient funds to meet the estimated costs. MC Wholesaling’s balance sheet showed that it had assets comprising $5,859,777.16. Indemnity costs were estimated to be $681,532.06 for Rocky and Linfang, and about an additional $300,000 for Luke.[80] Nevertheless, as found by the judge and not challenged as a factual finding, MC Wholesaling’s healthy financial position was dependent upon the recoverability of unsecured loans from companies controlled by Andy. From that point, the judge reasoned that ‘whether or not [MC Wholesaling] would choose to meet very substantial adverse costs orders against it [lay] in the hands of Andy’.[81]
[80]Reasons, [134].
[81]Ibid [135].
The source of the judge’s conclusion as to MC Wholesaling’s dependence on the recoverability of unsecured loans, while not specifically identified in his reasons, was the evidence of Mr Lipohar, a solicitor for Rocky and Linfang, who analysed the financial records discovered by the applicant companies. On Mr Lipohar’s analysis, between 24 October 2019 and 1 February 2020, Andy had caused MC Wholesaling to transfer more than $103 million to a related company, AZ Global Corporation. AZ Global Corporation’s profit and loss statements indicated that it did not appear to trade, and no loan agreements between it and MC Wholesaling had been discovered. MC Wholesaling, itself, ceased trading on 1 July 2021.
After referring in detail to specific transactions and other records, Mr Lipohar concluded his analysis by saying that the ‘transfers of tens of millions of dollars from [MC Wholesaling] and AusPro is largely unexplained in the accounts and reports discovered by’ the applicant companies. Further, Mr Lipohar deposed that the journal records discovered by MC Wholesaling record that ‘whenever [MC Wholesaling] required funds to pay its lawyers, AZ Global would transfer just enough funds to [MC Wholesaling] to enable [MC Wholesaling] to do so’ and that AZ Global Corporation ‘transferred sums back to [MC Wholesaling] to provide security for costs for [Luke] and [Rocky]’. Between 1 July 2021 (when MC Wholesaling ceased to trade) and 30 September 2022, AZ Global transferred $550,000 back to MC Wholesaling which was used to pay the applicants’ lawyers.
On the evidence and submissions before him, the judge was justified in finding that whether MC Wholesaling had the financial capacity to pay the costs ordered against it came down to Andy’s choice. He was also justified in taking that into account (among other factors) as a relevant consideration in determining whether to order that Andy pay Rocky and Linfang’s costs. The judge was justified in taking this view on the whole of the evidence. That evidence included not only MC Wholesaling’s dependency for funds on Andy’s decision to transfer money to it from another source or to recover loans, but also the way the proceeding had been conducted and Andy’s role in it. Despite the apparent ‘health’ of MC Wholesaling’s balance sheet, in the unusual circumstances of this case the judge was entitled to take the view, as he clearly did, that the actuality of that health came down to Andy’s choice. It is plain, in my view, that the judge did not trust Andy to make that choice. I draw that inference from the very fact that the judge made the personal costs order against Andy after concluding that Andy could elect whether or not MC Wholesaling would pay the costs.
If Andy chose not to put MC Wholesaling in funds with which to pay the costs order, the company could not meet the order. In substance and effect, the judge concluded that MC Wholesaling was a person of straw unless Andy chose to cause funds to be transferred to it. The applicants argued (proposed ground 5(b)) that, in the circumstances, the judge ought not to have made a non-party costs order against Andy but, instead, ought to have waited to see whether MC Wholesaling would (at Andy’s election) pay the costs once taxed. Given the disastrous financial impact of the freezing orders on Rocky and Linfang to that point, and the judge’s reasons to doubt that Andy would enable MC Wholesaling to pay the costs in the first instance, it is hardly surprising that the judge did not view that course of action as being in the interests of justice in all the circumstances of the case. I reject the submission that the judge ‘ought’ to have taken that course.
It was in connection with this issue that the applicants also submitted that the judge failed to consider that security for costs had been given by the applicant companies in favour of Rocky. However, the judge expressly referred to the amount then held as security for costs for Luke and Rocky and concluded that this security was ‘insufficient to cover their costs’.[82] As noted above,[83] the total amount of indemnity costs for both Luke and Rocky has been estimated at $985,532.06. In argument, we were informed that the security ordered was $175,000 for one party and $200,000, or thereabouts, for the other. The legal costs incurred by Rocky and Linfang amounted to $721,128.57, of which (as previously noted) their solicitors estimated that $681,532.06 would be recovered on taxation on an indemnity basis.[84]
[82]Ibid [134].
[83]Above, [35].
[84]Reasons, [134].
In short, the existence of the security did not avoid the prospect that Rocky and Linfang would be substantially out of pocket for their costs if they could only pursue MC Wholesaling for those costs. The judge did not fail to consider that security had been given, and the existence of the security did not preclude the judge from exercising his discretion in favour of making the non-party costs order.
(c)Conclusion
For these reasons, I reject the contentions that the judge made any error in considering that it was in the interests of justice to make an order that Andy pay Rocky and Linfang’s costs, having regard to the role Andy played in the litigation, the unlikely prospect that MC Wholesaling could pay the adverse costs order without Andy choosing to put it in funds, and the cause for doubt that he would do so. I repeat, the categories of case in which a court will order a non-party to pay costs are not closed. Each case will depend on its own facts. Nonetheless, the circumstances in which the discretion is to be exercised will be out of the ordinary. Applying those principles, I am not persuaded that, in the unique combination and interaction of facts in this case, the discretion miscarried.
Returning to where I started, the applicant’s proposed grounds of appeal must be confined to arguments within House principles. To the extent that the applicants contend that the judge erred by making the factual findings that he operated on, I reject those contentions. Equally, to the extent that the applicants contend that the judge took into account irrelevant considerations or failed to consider relevant considerations, I also reject those contentions.
While I would grant leave to appeal on proposed grounds 5 and 6, in my view, the appeal on those grounds must therefore be dismissed.
Did the judge err by varying previous costs orders to provide that the respondents’ costs be paid on an indemnity basis (grounds 7 and 8)?
Principally, by proposed grounds 7 and 8, the applicant companies seek to appeal the judge’s order varying previous orders that the applicant companies pay Rocky’s and Linfang’s costs on a standard basis to provide that they be paid by the applicant companies, and by Andy, on an indemnity basis.
To the extent that this complaint concerns the judge’s decision to order non-party costs against Andy, I need not repeat what I have already stated.
The full terms of grounds 7 and 8 are as follows:
Ground 7
(a)The learned trial Judge erred in varying all previous costs orders in favour of, inter alia, Rocky and Linfang on the basis that “the fraud allegations were relied on at the outset to support freezing orders and given that the spectre of fraud … hung over the conduct of the proceeding”: R[113].
(b)For the reasons set out in ground 3(c) above the learned trial Judge’s discretion miscarried and the learned trial Judge should not have varied previous costs orders.
Ground 8
(a)The learned trial Judge erred in exercising his general discretion as to costs, as he did at R[71] and R[112], in ordering the costs of the defendants be paid on an indemnity basis.
(b)The learned trial Judge ought to have found that the defendants were entitled to their costs on the standard basis and that was the appropriate costs order to make.
Submissions
In substance, beyond what has already been argued under the rubric of other grounds, under these proposed grounds the applicant companies argued that the judge was wrong to vary all previous costs orders from the standard to indemnity basis on the footing that the ‘spectre of fraud’ hung over the whole case.
Consideration
The applicant companies accepted that it lay within the judge’s discretion to make the order that he made. That is, it was not contended that the judge did not have power to revisit and vary costs orders that he had already made throughout the proceeding in the light of a new circumstance. It followed that to succeed on these proposed grounds the applicant companies were required to establish error of a House kind. Pressed to identify the House error, the applicant companies rehearsed the argument which I have already determined against them — namely, that the judge wrongly took into account that fraud lay at the heart of the case, even after the re-pleading that occurred in October 2021.
Further, the applicant companies again have to overcome the Court’s general restraint against granting leave to appeal a costs order. Nothing was put forward to suggest that this order or the proposed appeal from it on grounds 7 and 8 amounted to an exceptional case.
On these considerations alone I would refuse leave to appeal on these grounds.
Several other considerations reinforce my conclusion.
The applicant companies were correct to accept that it lay within the judge’s power to revisit earlier orders in the light of new circumstances. When the judge and associate judge made costs orders in the course of deciding interlocutory disputes, they did so in ignorance of the fact that, having begun and persisted with a claim against Rocky and (later) Linfang featuring allegations of serious dishonest conduct, the applicant companies would later discontinue that proceeding without explanation. The unexplained discontinuance put the whole proceeding in a new light. It undoubtably enlivened a discretion to vary previous cost orders that had been made without the benefit of that information.
For the same reason that it was open to the judge in the proper exercise of his discretion to make final costs orders on an indemnity basis, it was also open to him to vary orders previously made on a standard basis to provide that they be paid on an indemnity basis, in the light of information available at the conclusion of the proceeding. He did not have to do so; but it was certainly open to him to do so.
Had costs merely been reserved at each interlocutory decision, as is commonly the case, there could hardly have been a sensible argument against the judge ordering that all reserved costs be paid and taxed on the same basis as the rest of the costs in the proceeding. By ordering that costs be paid by the applicant companies on each relevant interlocutory decision, at the time of the decision, the judge and associate judge demonstrated that they were sufficiently certain that the applicant companies should compensate Rocky and Linfang for their costs of the particular interlocutory step, and not await the outcome of the proceeding. Doing so, however, did not mean that, with new information, the judge could not or should not vary the basis of the costs so ordered.
The logic of this course may explain why, other than resisting the proposition that indemnity costs should be ordered at all, the applicant companies offered little or no resistance to Rocky and Linfang’s written submission that the previous costs orders should be varied to provide that they be paid on an indemnity basis.
Leave to appeal on proposed grounds 7 and 8 should be refused.
Conclusion
In conclusion, I would refuse to grant the applicants leave to appeal against the costs orders on proposed grounds 1–4 and 7–8. I would refuse leave for a collection of reasons: first, in relation to proposed grounds 1, 3, 7 and 8, because, regardless of their prospects of success, they are unexceptional arguments about costs, and also because there is no reasonable prospect that they would succeed on appeal; secondly, in relation to proposed ground 2, because, regardless of any prospect of success on appeal, there is no practical utility in granting leave; and, thirdly, in relation to proposed ground 4, because there is no reasonable prospect that it would succeed on appeal. While I would grant leave to appeal on proposed grounds 5 and 6, I would dismiss the appeal on both of those grounds on the basis that the applicants have failed to establish any error of the House variety.
LYONS JA:
I have had the considerable advantage of reading the reasons of Macaulay JA in this proceeding. For convenience, I will adopt the terms defined in his reasons. I agree with his analysis and conclusions in relation to proposed grounds 1–4 and 7–8. For the most part, I agree with Macaulay JA’s reasons in respect of proposed ground 6. However, I do not agree with the analysis and conclusions of Macaulay JA in respect of proposed ground 5. As a result of the reasons of Macaulay JA, I can state my reasons shortly.
Proposed grounds 5 and 6 relate to whether the judge was entitled to make a non-party costs order against Andy, the sole director of the applicant companies and most relevantly MC Wholesaling. I agree with the principles to be applied in making non-party costs orders referred to by Macaulay JA in [87]–[91]. In summary:
(a)ordinarily, costs are only awarded against a party;[85]
(b)in the exercise of its broad discretion as to costs, the Court may order costs against a non-party: but this is out of the ordinary and the court must be satisfied that circumstances exist to justify such an order;[86]
(c)to make an order for costs against a non-party, there must be a ‘real and direct’ connection between the non-party and the proceeding and also a ‘material’ connection between the non-party and the relevant cost;[87]
(d)usually something more is required than playing an active role in the proceeding, such as an interest by the non-party in the outcome of the proceeding or the non‑party funding the litigation including with knowledge that the proceeding was without merit, or the non-party increasing the costs without a proper basis;[88] and
(e)one category of case where non-party costs orders can be made was recognised by the High Court in Knight: the criteria are the party being ‘insolvent’ or a ‘person of straw’, the non-party having a role in the conduct of the proceeding, and the non-party having a sufficient interest in the proceeding;[89]
(f)the categories of cases are not closed, and a range of factors may be relevant to the Court’s discretion.[90]
[85]Carter [2016] VSCA 236, [11] (Weinberg, Ferguson and Kaye JJA).
[86]Ibid [11]–[13]; Ipex [2014] VSCA 315, [36] (Neave, Santamaria and Kyrou JJA), citing Kebaro [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ).
[87]Bischof v Adams [1992] 2 VR 198, 205 (Gobbo J) (‘Bischof’), cited with approval in Kebaro [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ) and in Ipex [2014] VSCA 315, [36] (Neave, Santamaria and Kyrou JJA).
[88]See, eg, Bischof [1992] 2 VR 198, 204 (Gobbo J); Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, 414 [36]–[37] (Callinan J); [2001] HCA 26; JAB Nominees [2020] VSC 731, [273] (Riordan J).
[89]Knight (1992) 174 CLR 178, 192–3 (Mason CJ and Deane J, Gaudron J agreeing at 205); [1992] HCA 28.
[90]FPM Constructions [2005] NSWCA 340, [210] (Basten JA, Beazley JA agreeing at [1], Giles JA agreeing at [85]); Kebaro [2003] FCAFC 5 [103] (Beaumont, Sundberg and Hely JJ).
Proposed ground 6 relates to whether the judge was entitled to make a non-party costs order against Andy on the basis that he was the ‘driving force behind the institution and maintenance of the claims of fraud and serious misconduct’[91] by the applicant companies. In my view, for the reasons given by Macaulay JA at [100]–[105], the judge was entitled to make this finding and to make a non-party costs order against Andy on this basis. In summary, this is because of Andy’s role and involvement in every aspect of the proceeding, namely that he:
(a)gave instructions to issue and continue the proceeding;
(b)gave the undertaking as to damages in support of the freezing order restraining assets of Rocky to a value of $402,887;
(c)gave instructions to reject (unreasonably) the Calderbank offer;
(d)gave instructions to refuse to discharge (unreasonably) the freezing order notwithstanding the claims made against Rocky did not exceed $60,000; and
(e)gave the instructions to discontinue the proceeding.[92]
[91]Reasons, [140].
[92]Ibid [138]–[140].
Consistent with authorities referred to in [133(c)] and [133(d)] above, in my view these factors by themselves provided a sufficient basis for a non-party costs order against Andy. This is quite apart from the finding of Macaulay JA at [72] (with which I agree), that in light of submissions advanced before this Court the applicant companies’ failure to appreciate the weakness of their own case stemmed from their failure to investigate and analyse their own documents. In light of Andy’s role in the proceeding, that failure was Andy’s failure too.
However, in deciding whether to make a non-party costs order, the judge also relied upon his finding that, notwithstanding his conclusion that MC Wholesaling was not insolvent or a person of straw, ‘whether or not [MC Wholesaling] would choose to meet very substantial costs orders … lies in the hands of Andy’ (the ‘control finding’).[93] This is the subject of proposed ground 5 and in particular, whether the judge was entitled to make a non-party costs orders against Andy on the basis of the control finding.[94] It was not disputed that AusPro, the other applicant company, was insolvent as it had a net deficiency of assets. As a result, the argument on appeal focused on the control finding in relation to MC Wholesaling.
[93]Ibid [135].
[94]Proposed ground 5(a).
In my view, the judge erred insofar as he based his non-party costs order on the control finding in relation to MC Wholesaling. As the judge found, at the time of the costs application, the balance sheet of MC Wholesaling showed net assets of $5,859,777.16.[95] While the fact that Andy controlled the finances of MC Wholesaling might raise suspicions about whether that company would meet the costs order against it, the judge did not conclude that Andy would deal, or that there was a relevant risk that Andy would deal, with the assets of MC Wholesaling in a way to defeat the rights of Rocky and Linfang as judgment creditors as to their costs. Absent a finding to this effect, I am unable to conclude that the fact that Andy controlled the ability of MC Wholesaling to pay the costs orders is a relevant consideration in relation to, or a proper basis upon which to order, non-party costs.[96]
[95]Reasons, [132], [135].
[96]See, eg, FPM Constructions [2005] NSWCA 340, [218] (Basten JA, Beazley JA agreeing at [1], Giles JA agreeing at [85]).
As a result, I consider the judge took into account an irrelevant consideration of the kind recognised in House v The King.[97]
[97](1936) 55 CLR 499, 505 (Dixon, Evatt and McTiernan JJ); [1936] HCA 40.
I am conscious that, in making a non-party costs order against him, the judge had regard to both the nature and extent of Andy’s role in the proceeding, and the control finding.[98] It may be that, in light of the conduct referred to in [134(c)] and [134(d)] above, the judge formed the view that Andy would deal, or that there was a relevant risk he would deal, with the assets of MC Wholesaling in a way to defeat the rights of Rocky and Linfang as to their costs. However, given the nature of such a finding in the context of the liability imposed, I am of the view that it was necessary for the judge expressly to make such a finding, and set out the basis for it, in the reasons.
[98]Reasons, [136].
As a result, I would grant leave in respect of proposed ground 5, allow the appeal in respect of ground 5(a) but otherwise dismiss that ground of appeal. I would also grant leave in respect of proposed ground 6 and dismiss that ground of appeal. However, in light of my conclusions in respect of proposed ground 4 and ground 6, I would not set aside the non-party costs order against Andy.
I would make the following observations about the issues raised by proposed ground 5.
First, as referred to by Macaulay JA, there is a recognised category of cases where non‑party costs orders can be made which relate to the financial position of a party, being that recognised in Knight. It is based on the party being insolvent or a ‘person of straw’. That is not this case here. As set out above, the balance sheet of MC Wholesaling showed net assets of $5,859,777.16. By contrast, in Carter, a case where this Court had regard to the financial position of the relevant corporate entity (the litigation funder), the evidence was that it only had paid up capital of $100 and no other significant assets.[99]
[99]Carter [2016] VSCA 236, [25], [42] (Weinberg, Ferguson and Kaye JJA).
Second, as noted above, I am conscious that the categories in which non-party costs orders are made are not closed and the Court has a broad discretion as to costs under s 24 of the Supreme Court Act1986. Nevertheless, I have reservations about expanding this recognised category with the result that the Court is able to consider the future financial position of a party by reason of the likely future conduct of a non-party. In light of my findings in relation to ground 5, it is not necessary for me to form a concluded view in this regard.
However, it is important to recognise that, if such matters are relevant, it is likely to expand considerably the issues, time and costs involved in the determination of costs issues: for the parties, the Court and judges. This is because it is likely to invite consideration of the financial affairs of a corporate party to determine whether, based on those financial affairs, there is a risk — to whatever degree — that a non-party may cause the corporate party to not be able to meet a costs order against it.
Further, if there are genuine concerns about dealings with the assets of the relevant party liable for costs, there are other remedies available to the party who has a costs order in its favour, such as applying for a freezing order in aid of that costs order under r 37A of the Rules.
Finally, and more generally, it is important recognise the significance of making a non‑party liable for costs, such as the sole director of a corporate party to the proceeding. In this case, that liability was in the order of $700,000. Although it was not relied upon in the proposed grounds of appeal, I consider it desirable that a party who may seek a costs order against a non-party associated with a party to a proceeding should put that non-party on notice as soon as reasonably practicable. In my view, providing such notice serves two purposes. First, it ensures fairness to the non-party. Second, such notice is likely to cause the non-party to review his or her role in the proceeding and/or may make a real difference as to how that non-party conducts the litigation.
ORR JA:
I have had the advantage of reading the reasons of Macaulay JA and Lyons JA.
Like Lyons JA, I agree with the analysis and conclusions of Macaulay JA on proposed grounds 1 to 4 and 7 to 8. As to proposed grounds 5 and 6, we are all agreed that leave to appeal should be granted on those grounds. I agree with Macaulay JA that the appeal should be dismissed.
I wish to briefly record my own reasons in relation to grounds 5 and 6. By these grounds, Andy attacks the two central findings that supported the judge’s order that he, a non‑party, pay Rocky and Linfang’s costs.[100]
[100]For convenience, I will adopt the terms defined in Macaulay JA’s reasons.
The first finding concerned MC Wholesaling’s financial position. The judge found that, although MC Wholesaling was not insolvent, nor a ‘person of straw’, ‘whether or not it would choose to meet very substantial adverse costs orders against it lies in the hands of Andy’.[101] By ground 5, Andy contends that the judge erred in using this finding as ‘the basis’ for making the non-party costs order.[102]
[101]Reasons, [135].
[102]Andy conceded that MC Wholesaling was, as the judge found, ‘dependent for its healthy financial position upon the recoverability of unsecured loans from companies associated with or controlled by Andy’.
The second finding concerned Andy’s role in the proceeding. The judge found that Andy was ‘the driving force behind the institution and maintenance of the claims of fraud and serious misconduct against … Rocky and Linfang’.[103] By ground 6, Andy contends that the judge erred in making this finding, and in concluding that it was therefore appropriate to make the non-party costs order.
[103]Reasons, [140].
Insofar as ground 5 suggests that the judge’s finding about MC Wholesaling’s financial position was an independent or freestanding basis upon which the non-party costs order was made, it is misconceived. The judge made clear that it was the combination of MC Wholesaling’s financial position, and Andy’s role in the proceeding, which warranted the unusual step of ordering Andy to personally pay the respondents’ costs.[104]
[104]Ibid [136].
In other words, the non-party costs order was made because whether the applicant companies would choose to meet costs ordered against them depended on the very person who had been the driving force behind the institution and maintenance of the claims of fraud and serious misconduct against Rocky and Linfang.
To the extent that ground 5 contends that the financial position of a corporate party is irrelevant to whether a non-party costs order should be made unless the company is insolvent or a ‘person of straw’, I reject that contention.
As Macaulay JA and Lyons JA have emphasised, the categories of case in which it will be in the interests of justice to order that the costs of the successful party be paid by a non-party, are not closed. Where the unsuccessful party is insolvent, or a person of straw, the decision of the High Court in Knight indicates that it may be in the interests of justice to make a costs order against a non-party who has played an active part in the conduct of the litigation and has an interest in the subject of the litigation.[105] But Knight does not establish that the unsuccessful party must be insolvent, or a ‘person of straw’ before it will be in the interests of justice to make a non-party costs order. There may be matters that cast doubt on the financial position of the unsuccessful party that fall short of either of these characterisations, but which, when viewed with other circumstances of the particular case, are capable of enlivening the discretion to make a non-party costs order.
[105](1992) 174 CLR 178, 192–3 (Mason CJ and Deane J, Gaudron J agreeing at 205); [1992] HCA 28.
In this case, those other circumstances were supplied by the conduct of Andy in connection with the litigation. It was Andy who gave instructions to apply for the freezing orders, on the basis of allegations of fraud. It was Andy who provided the undertaking as to damages that was necessary to obtain those freezing orders. It was Andy who gave instructions to commence the proceeding and maintain the allegations of fraud. It was Andy who gave instructions to reject the Calderbank offer from Rocky in circumstances that were unreasonable. It was Andy who gave instructions not to discharge the freezing orders, even after it became clear that the frozen assets well and truly exceeded the amount claimed, and the allegations of fraud were abandoned.
In light of all these matters, there is no error in the finding that is challenged by ground 6, namely that Andy was ‘the driving force behind the institution and maintenance of the claims of fraud and serious misconduct’. And it was open to the judge to conclude that it was in the interests of justice not to leave the choice about whether the applicant companies would meet costs orders made against them with Andy, but to instead make Andy personally liable for those costs.
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SCHEDULE OF PARTIES
M C WHOLESALING PTY LTD (ACN 621 035 265) First applicant AUSTRALIA PRODUCTIONS PTY LTD (ACN 629 026 320) Second applicant WENJUN ZHANG (also known as ‘ANDY’) Third applicant and LIN ZHENG (also known as ‘ROCKY’) First respondent LINFANG PTY LTD (ACN 150 877 124) Second respondent
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