Mead v Watson - [2005] NSWCA 133

No judgment structure available for this case.

Reported Decision:
(2005) 23 ACLC 718

Court of Appeal

CITATION:
Mead v Watson as Liquidator for Hypec Electronics [2005] NSWCA 133

HEARING DATE(S):
On the papers

JUDGMENT DATE:

28 April 2005

JUDGMENT OF:
Sheller JA; Ipp JA; Tobias JA

DECISION:
(1) Leave to appeal granted; (2) Appeal allowed; (3) Set aside Order 4 made by Justice Campbell on 13 August 2004 in proceedings No. 1268/02 and in lieu thereof order that David Patrick Watson pay the costs of the First Defendant in those proceedings, being costs of and incidental to claims made by the Plaintiff to recover the four properties, on an indemnity basis; (4) Set aside Order 5 made by Justice Campbell on 13 August 2004 in proceedings No. 1933/02 and in lieu thereof order that the costs of the applicant and of David Patrick Watson in proceedings begun by interlocutory process filed 13 December 2001, to the extent that that interlocutory process was heard together with proceedings No. 1268/02, be paid by David Patrick Watson personally on an indemnity basis; (5) The First Opponent to pay personally the claimant's costs of the summons for leave to appeal and the appeal but to have a certificate under the Suitor's Fund Act 1951 if otherwise qualified

CATCHWORDS:
PROCEDURE - Costs - Circumstances in which a liquidator may be ordered to pay personally costs which have been ordered against the company in liquidation - - Liquidator caused company to bring proceedings to recover corporate assets - Proceedings unsuccessful due to estoppel and Ex parte James defences - Personal costs order sought against liquidator - Whether liquidator's conduct of litigation was "improper" - Whether liquidator acted reasonably in opposing estoppel and Ex parte James defences - Whether "exceptional circumstances" established justifying personal costs order against liquidator - PROCEDURE - Costs - Indemnity costs - Whether conduct of litigation such as to warrant award of indemnity costs against liquidator

LEGISLATION CITED:
Corporations Act 2001 (Cth)

CASES CITED:
Hypec Electronics Pty Limited (in liq) v Mead (2003) 202 ALR 688
Hypec v Mead [2004] NSWCA 221
Ex parte James; In re Condon (1874) LR 9 Ch App 609
NMFM Property Pty Limited v Citibank Limited (No 11) (2001) 109 FCR 77
Adsett v Berlouis (1992) 37 FCR 201
In re Beddoe; Downes v Cottam [1893] 1 Ch 547
Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387

PARTIES:
Colin Anthony Mead
David Patrick Watson as Liqduiator for Hypec Electronics Pty Limited (in liq) & Anor

FILE NUMBER(S):
CA 40770/04

COUNSEL:
CL: D Fagan SC / V Bedrossian
1 OPP: P W Taylor / A Justice

SOLICITORS:
CL: Etheringtons, North Sydney
1 OPP: Horton Rhodes, Sydney

LOWER COURT JURISDICTION:
Supreme Court - Equity Division

LOWER COURT FILE NUMBER(S):
ED 1268/02; ED 1933/01

LOWER COURT JUDICIAL OFFICER:
Campbell J

CA 40770/04

SHELLER JA
IPP JA
TOBIAS JA
Thursday 28 April 2005

COLIN ANTHONY MEAD v DAVID PATRICK WATSON as Liquidator for HYPEC ELECTRONICS PTY LIMITED (IN LIQUIDATION) & Anor [2]

This was an appeal against costs orders made by Campbell J arising out of proceedings (the substantive proceedings) in which the liquidator of Hypec Electronics Pty Limited (In liq) (Hypec) sought to recover certain properties (the four properties) from Mr and Mrs Mead on the basis that they were assets of Hypec. Mr Mead defended that claim on the basis, firstly, that the liquidator was estopped from claiming the properties as assets of Hypec (the estoppel defence) and, secondly, that the liquidator was precluded from recovering them under the principle in Ex parte James; In re Condon (1874) LR 9 Ch App 609 (the Ex Parte James defence). Both these defences were successful.

On the issue of costs, Mr Mead submitted that, firstly, he should have his costs of the substantive proceedings paid on an indemnity basis and, secondly, that those costs should be paid by the liquidator personally. These submissions were based upon the contention by Mr Mead that the events out of which the estoppel and Ex parte James defences arose were fully within the liquidator's knowledge. In particular, Mr Mead contended that the liquidator was aware that Mr Mead had relied upon the former's representation that he would not claim the four properties as assets of Hypec. A critical point, Mr Mead submitted, was the fact that he had, to the knowledge of the liquidator, applied to the Family Court for an order releasing the four properties for the purpose of using them to finance his defence, on behalf of Hypec, in common law proceedings involving another company (the common law proceedings). The liquidator deposed in an affidavit sworn on 10 April 2002 (the 10 April affidavit) that he was unaware of this Family Court application by Mr Mead. However, this statement was ultimately proved, in cross-examination of the liquidator, to be incorrect.

In determining costs, Campbell J ultimately rejected Mr Mead's submission that the liquidator should pay Mr Mead's costs personally and on an indemnity basis. The substantive proceedings had been constituted by "the liquidator's proceedings", which involved the liquidator's claim to recover the four properties, and "the winding up proceedings" which relevantly concerned an application filed by Mr Mead raising issues similar to those litigated in the liquidator's proceedings with respect to the four properties. His Honour relevantly ordered the costs of Mr Mead in the liquidator's proceedings, and the costs of both Mr Mead and the liquidator in the winding up proceedings, to be paid by Hypec. It was against these orders that Mr Mead appealed to the Court of Appeal.

HELD by the Court:

1 The liquidator's continued opposition to Mr Mead's estoppel defence was inappropriate in the circumstances, given that, subject to one matter, the evidence revealed no basis upon which the liquidator could reasonably oppose that defence ([47], [65], [69]).

2 The only basis upon which the continued opposition to the estoppel defence could be justified was the liquidator's denial of his knowledge of Mr Mead's Family Court application in the 10 April affidavit, which was ultimately conceded to be false. The failure of the liquidator's legal advisers to identify and correct this error, in circumstances where counsel for Mr Mead had no difficulty in ascertaining it, was, of itself, relevantly negligent ([113]-[114], [130]-[134]).

3 Accordingly, the liquidator's conduct of the litigation in continuing to oppose the estoppel defence was "improper" such as to justify an order that the liquidator personally pay Mr Mead's costs of defending the claim to recover the four properties ([134]).

In re Beddoe; Downes v Cottam [1893] 1 Ch 547 applied.

4 The circumstances of the case warranted a finding that there were "exceptional circumstances" which, as a consequence of the finding that the liquidator acted unreasonably in continuing his opposition to the estoppel defence, justified a finding that the liquidator should personally pay the costs of Mr Mead's application in the winding up proceedings ([139]).

5 The liquidator's conduct of the litigation, involving in particular his unreasonable opposition to the estoppel and Ex parte James defences, justified an award of costs on an indemnity basis ([155], [159]).

CA 40770/04

SHELLER JA
IPP JA
TOBIAS JA
Thursday 28 April 2005

COLIN ANTHONY MEAD v DAVID PATRICK WATSON as Liquidator for HYPEC ELECTRONICS PTY LIMITED (IN LIQUIDATION) & Anor [2]

Judgment

1 THE COURT: This application for leave to appeal arises out of what was described by the primary judge, Campbell J, as "an unusually complex set of applications for costs" concerning proceedings (the substantive proceedings) in which his Honour gave judgment on 3 November 2003: Hypec Electronics Pty Limited (in liq) v Mead (2003) 202 ALR 688 (the substantive judgment). An appeal to this Court as presently constituted was dismissed on 6 July 2004: [2004] NSWCA 221 (the appeal judgment).

2 At the time the appeal judgment was delivered, the primary judge had heard argument but had not determined the applications for costs in the substantive proceedings (the costs proceedings). This Court therefore determined that it would not deal with the question of the costs of the appeal until the primary judge had delivered his decision in the costs proceedings. The Court therefore reserved liberty to apply with respect to those costs.

3 On 13 August 2004 the primary judge published his reasons in the costs proceedings (the costs judgment) and made orders in accordance therewith. Relevantly, he rejected applications by Mr Mead that, firstly, he should have his costs of the substantive proceedings paid on an indemnity basis and, secondly, that those costs should be paid by the liquidator of Hypec Electronics Pty Limited (In liq) (Hypec) personally rather than out of Hypec's assets.

4 It will be recollected from the appeal judgment that the substantive proceedings were constituted by "the liquidator's proceedings" (being proceedings SC 1268/02) and the "winding up proceedings" (being proceedings SC 1933/01), both instituted in the Equity Division of the Court. It will further be appreciated that the contested hearing in the substantive proceedings related to a number of properties which were referred to in the various judgments as "the four properties". Speaking generally, the liquidator had sought to recover the four properties from Mr and Mrs Mead on the basis that they were, in truth, assets of Hypec having been acquired by Mr and Mrs Mead with Hypec's money and that they were, therefore, held by them upon trust for that company. Mr Mead defended that claim on the basis, firstly, that the liquidator was estopped from claiming the properties as assets of Hypec (the estoppel defence) and, secondly, that he was precluded from recovering them under the principle in Ex parte James; ' In re Condon (1874) LR 9 Ch App 609 (the Ex parte James defence). Both these defences succeeded.

5 In the costs proceedings the primary judge relevantly ordered the plaintiff in the liquidator's proceedings, Hypec, to pay the costs of the first defendant (Mr Mead) in those proceedings being his costs of and incidental to his claims to retain the four properties. Mr Mead's submission that those costs should be paid by the liquidator personally and then on an indemnity basis was, as we have said, rejected.

6 The winding up proceedings relevantly concerned an interlocutory application filed by Mr Mead on 13 December 2001. The application raised issues similar to those litigated in the liquidator's proceedings with respect to the four properties. In the costs proceedings the primary judge ordered that the costs of the applicant (Mr Mead) and of the liquidator (Mr Watson) of that application, to the extent to which it was heard together with the liquidator's proceedings, be paid from the assets of Hypec. As we have said, his Honour rejected a submission by Mr Mead that those costs be paid by Mr Watson personally on an indemnity basis.

7 It is against the orders made in the costs proceedings involving his Honour's rejection of Mr Mead's submission that he seeks leave to appeal. The appeal itself has been heard concurrently with that application.

The principles upon which indemnity costs are awarded

8 The primary judge set out these principles in [40]-[46] inclusive of the costs judgment and there is no challenge to their accuracy. In summary, although the discretion to award indemnity costs is absolute and unfettered, it must be exercised judicially in the sense that there is some special or unusual feature in the case justifying such an award. Thus, for instance and relevantly, the discretion is enlivened where a party persists in what should have been seen to be a hopeless case.

9 Furthermore, the impugned conduct of the party against whom such an award of indemnity costs is sought must be connected with the litigation itself. In particular, it must be related to the way the litigation is conducted. It is thus insufficient that the party against whom the award is sought has engaged in unconscionable conduct or breaches of fiduciary duty in a particularly deplorable way. The latter conduct comprises the subject matter of the litigation rather than a delinquency in its conduct. Thus, as Lindgren J observed in NMFM Property Pty Limited v Citibank Limited (No 11) (2001) 109 FCR 77 at 92,

as litigant

10 It follows from the foregoing, and the primary judge acknowledged, that indemnity costs could only be awarded in the costs proceedings if there was found to be inappropriate conduct on the part of Hypec or Mr Watson in the conduct of the litigation itself.

Principles upon which a liquidator may be ordered to pay personally costs which have been ordered against the company in liquidation

11 Again, the principles articulated by the primary judge with respect to this aspect of the matter were not in dispute. Relevantly, the primary judge's discussion commenced with a comparison of the entitlement to costs of a liquidator with that of a trustee in bankruptcy. At [97] of the costs judgment in the context of unsuccessful litigation by a trustee in bankruptcy who was ordered to pay the costs of the successful party, his Honour referred to the trustee's right to recover those costs from the bankrupt's estate in accordance with the general law entitling trustees to an indemnity from the trust estate for all costs, charges and expenses properly incurred. The decision upon which his Honour relied as setting out the relevant principles was that of the Full Federal Court (Northrop, Wilcox and Cooper JJ) in Adsett v Berlouis (1992) 37 FCR 201.

12 In that case, the Court in a joint judgment (at 211) approved the following passage from the judgment of Bowen LJ in In re Beddoe; Downes v Cottam [1893] 1 Ch 547 at 562 (and cited by the primary judge in [97]):

cestui que

means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness,

bona fides

if his solicitor has been wrong-headed and perverse

cestui que

13 In [98] of the costs judgment, the primary judge cited the following passage from the joint judgment in Adsett at 211-12:

Beddoe

that is, whether the expenditure was reasonably, as well as honestly, incurred

Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as

Beddoe

If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not 'properly incurred'

14 The primary judge concluded (at [104]) that, consistent with the principles which he had discussed, a court should make an order that the liquidator personally pay the costs which have been ordered against the company as a result of litigation instigated and carried through by the liquidator only when the liquidator's conduct of the litigation is improper in the Beddoe sense. Accordingly, the question to be answered in the present case was whether Mr Watson's conduct of the litigation on behalf of Hypec, which resulted in an order that Hypec pay Mr Mead's costs of the substantive proceedings insofar as they related to Hypec's claims to recover the four properties, was negligent or unreasonable. A degree of personal misconduct or wilful recklessness on the part of the liquidator was not required: mere negligence or mistake or the incurring of costs unreasonably or unnecessarily was sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally.

15 His Honour thus concluded (at [116]) that the

Beddoe

16 Accordingly, although as his Honour observed (at [119]) the costs order to which Mr Mead was entitled against Hypec in connection with the estoppel defence and the Ex parte James defence represented the coming home of a risk which was inherent in the liquidator's decision that those defences be opposed, the question was whether that opposition was, in the circumstances, unreasonable, unnecessary or dishonest.

The primary judge's application of the principles to the facts

17 It is convenient to consider together the individual factual findings of the primary judge, the submissions made with respect to them by the parties and our determination as to whether error has been demonstrated. In so doing we shall employ in this judgment the abbreviations adopted by Tobias JA in the appeal judgment. A reading of [3]-[10] of that judgment is sufficient to identify those abbreviations.

Was Mr Watson's conduct of the litigation dishonest in that it lacked bona fides?

18 The primary judge considered (at [120]) that there had been no challenge by Mr Mead to Mr Watson's honesty in having Hypec undergo the risk of opposing Mr Mead's defences based on estoppel and Ex parte James. At [156] his Honour again noted that there had been

bona fides

19 Mr Mead submitted that he had, in his written submissions in the costs proceedings, submitted that Mr Watson's asserted lack of knowledge in the 10 April affidavit of Mr Mead's application to the Family Court to be heard in October 2001, and his further assertion in that affidavit that he was unaware that that application would be pursued by Mr Mead, which assertions, in cross examination, he conceded to be erroneous, could not have been deposed to by mistake but were, in fact, deliberately false to Mr Watson's knowledge at the time he swore the affidavit.

20 Mr Watson submitted that Mr Mead's written submissions in the costs proceedings did not allege that Mr Watson swore a false affidavit to his knowledge. Those submissions did suggest that Mr Watson could hardly have deposed to the matters that he ultimately agreed were incorrect, by mistake. However, they did not assert that he was aware that he was swearing a false affidavit at the time he did so. It was asserted that it was improper conduct for Mr Watson to have mounted his claim to the four properties upon an affidavit which was erroneous but that, in our opinion, is a different matter and one to which we return below at [103] and following.

21 Mr Watson had, in the costs proceedings, sworn an affidavit on 23 February 2004 (Mr Watson's costs affidavit) in which he deposed in [102] that when he swore his 10 April affidavit, he believed that it was accurate and correct. This assertion was not challenged in cross-examination. If it was to be contended in the costs proceedings that Mr Watson knew that his 10 April affidavit was false to his knowledge at the time of swearing, then his assertion in his costs affidavit – that he believed it was accurate and correct at the time of swearing – needed to be directly challenged. In our opinion, the primary judge was correct in his finding that there was no attack on the honesty or bona fides of Mr Watson in running the litigation.

Why Mr Watson opposed Mr Mead's estoppel and Ex parte James defences and was he justified in doing so?

22 His Honour considered (at [134]) a submission that, whereas in the usual case the relevant events, the subject of the litigation, have occurred before the liquidator is appointed so that it is often appropriate for him to put allegations to the test through the litigation process, in the present case the events out of which the estoppel and Ex parte James defences arose, were entirely ones relating to Mr Watson's own conduct in the course of his administration. Accordingly, it was submitted that the relevant facts had at all times been fully within Mr Watson's knowledge.

23 His Honour accepted (at [135]) that Mr Mead had made Mr Watson aware of his contention that there was an estoppel in respect of the four properties and the basis thereof by at least 14 December 2001. His case was also contained in affidavits by himself and Mr Dominello (his solicitor) sworn on 29 and 24 January 2002 respectively and served shortly thereafter. Further, his Honour noted that it was never put to Mr Mead or Mr Dominello in cross-examination in the substantive proceedings that they knew that four properties "would" be claimed by the liquidator.

24 However, his Honour considered that it would be incorrect to assert that the totality of the facts relating to the estoppel defence was in the knowledge of the liquidator. One of the six elements of the defence was the assumption or expectation of Mr Mead which, his Honour concluded (at [136]), was not within Mr Watson's knowledge.

25 Those six elements are set out in the passage from the judgment of Brennan J in Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387 at 428-9 extracted in [44] of the appeal judgment. The first element was that Mr Mead assumed or expected that a particular legal relationship then existed between himself and the liquidator or expected that a particular legal relationship would exist between them. The second was that the liquidator had induced Mr Mead to adopt that assumption or expectation. There seems to us to be some inconsistency between a finding that Mr Mead had the necessary assumption or expectation but that this was not within Mr Watson's knowledge, and his Honour's finding in the substantive proceedings that it was Mr Watson's conduct which had induced Mr Mead to adopt that assumption or expectation.

26 His Honour also considered (at [137]) that whether Mr Mead had acted or abstained from acting in reliance upon the assumption or expectation was also not a matter within the liquidator's knowledge. Reference was made (in [138]) to two occasions in July 2001 when Mr Connolly (Mr Watson's solicitor) said to Mr Fagan SC (senior counsel for Mr Mead) that the properties which Mr Mead was seeking to have released by the Family Court to fund his defence and cross-claim in common law proceedings between BL&GY International Co Limited (BL&GY) and Hypec were "probably" not his and, on another occasion, were "property of the company". His Honour then said:

"The fact that the liquidator and his solicitor were showing to Mr Mead and his legal advisors some equivocation about their preferred position, that the monies had been lent, provided them with some basis for wondering whether Mr Mead had indeed relied on the representation he claims to have relied on – when they have been playing two different tunes to Mr Mead, was it right that he had heard only one of them?"

27 The relevance of this rhetorical question is that in the costs proceedings and before this Court, Mr Watson submitted that his opposition to the estoppel defence was justified or reasonable because Mr Mead was aware that he, Mr Watson, was continuing to investigate the affairs of Hypec for the purpose of identifying its assets and was further cognisant of the fact that there was a risk, if he proceeded to defend the common law proceedings, that the liquidator might claim a proprietary interest in the four properties in respect of which he was seeking access for the purpose of funding that defence. Accordingly, Mr Mead's reliance upon Mr Watson's representations was always a live issue if he and/or Mr Dominello were aware either that the liquidator reserved his rights to claim the properties as belonging to Hypec or that there was a risk that he might (as distinct from would) make such a claim.

28 It was further submitted that Mr Watson's strategy in the substantive proceedings was to meet the estoppel defence by seeking to establish that Mr Mead and/or Mr Dominello were aware of the ongoing investigations as to the assets of Hypec and aware that the liquidator was contending or may have wished to contend that those assets had been purchased with funds which belonged to the company, so that it could not be said that, knowing of these risks, Mr Mead and/or Mr Dominello genuinely proceeded on the basis, as Mr Mead alleged, that no claim might be made by the liquidator with respect to the four properties. It was in the foregoing context that Mr Watson and/or Mr Connolly may have wondered whether Mr Mead had, in his Honour's words,

"indeed relied upon the representation that he claims to have relied on – when they had been playing two different tunes to Mr Mead"

29 Apart from the conversations between Mr Connolly and Mr Fagan SC referred to in [26] above, the only evidence of Mr Watson which might be said to have played a different tune was that deposed to in his affidavit of 13 August 2001 sworn in the proceedings before Einstein J, where he said that he had

"an apprehension that the matrimonial property, which Mr Mead is said in Annexure B to be wishing to sell for the purpose of funding of the common law proceedings may, in whole or in part, comprise assets belonging to Hypec."

30 Notwithstanding that "apprehension", on 11 September 2001 Mr Watson wrote to Mr Ian Mitchell, the solicitor for the plaintiff in the common law proceedings (BL&GY) and Mrs Mead, referring to an undertaking of BL&GY to provide funds in the sum of $20,000 to the liquidator. The letter acknowledged that Mr Watson had read Einstein J's reasons for judgment and that it had been fundamental to his Honour's reasoning that he had accepted Mr Mead's evidence. He then wrote that the issues raised by Mr Mead (presumably in his defence to and cross-claim in the common law proceedings) needed to be addressed by BL&GY as well as by Mrs Mead "by the provision of proper documentation and evidence in proofs of debt for me".

31 The letter then expressed concern that the Court had before it the evidence of the petitioning creditor (that is, BL&GY) in order to establish that the expert's report relied upon by Mr Mead for the purpose of pursuing Hypec's cross-claim against BL&GY was based on incorrect assumptions or conjecture and hearsay inconsistent with, for example, bank statements which were objective records. It seems that Mr Watson was calling for evidence to be provided by BL&GY in opposition to Mr Mead's application to Sully J to have that company's default judgment against Hypec in the common law proceedings set aside.

32 However, it is the concluding paragraphs of that letter which are of particular relevance – they were in these terms:

"In that regard even if the proceedings of Colin Mead for Hypec are successful, I will wish to obtain Judgment against both Lucy Mead and Colin Mead, and I will wish also to recover Judgment monies by the sale of real estate currently in the name of Lucy and Colin Mead.

Given the statements made by Lucy Mead to Mr Connolly, possibly she will consent to Judgment against her in favour of Hypec and to the enforcement of those Judgments by way of execution against real estate."

33 In our opinion, the foregoing paragraphs reveal with some clarity that as at 11 September 2001 Mr Watson still considered that the funds of Hypec utilised by Mr and Mrs Mead to acquire the properties were unpaid loans in respect of which he would wish to obtain judgment and then enforce that judgment by executing against the properties.

34 We return at this point to the passage from the primary judge's judgment that we have extracted in [26] above. With respect, we have some difficulty in seeing the basis for the rhetorical question which his Honour asked and which is now the subject of challenge by Mr Mead. This is so for a number of reasons. Firstly, as appears from [94] of the substantive judgment, his Honour accepted the evidence of Mr Mead that at no time prior to 12 December 2001 did he understand that the liquidator intended to make any claim upon the four properties which would prevent him from applying to the Family Court to release them so that they could be sold and the proceeds used for the purpose of paying his legal costs in the common law proceedings.

35 Secondly, the conversation in question took place between Mr Connolly and Mr Fagan SC: apparently neither Mr Mead, his solicitor nor Mr Watson was present. There was no evidence from Mr Watson that as at July 2001 he was equivocating about his preferred position, namely, that Hypec had lent the money to Mr and Mrs Mead. In these circumstances, as between Mr Watson and Mr Mead only one tune was being played.

36 Thirdly, as the primary judge observed in [33] of the costs judgment

[t]he liquidator asserted

37 The foregoing conclusion is supported by Mr Watson's affidavit sworn 27 July 2001 in the winding up proceedings in which, relevantly, he deposed as follows:

"4. I have not yet finalised my investigations or report into the financial position of Hypec. However, at the date of swearing this affidavit I have identified funds in the sum of $4,907,725 which at this stage in my opinion were funds properly belonging to Hypec but which were used by the Directors of Hypec for their own personal use during the period 1989 to 1997. Annexed hereto and marked with the letter "B" is a schedule of the funds so identified. Notwithstanding this, further investigations are continuing.

…

16. I am presently considering the legal avenues open to me as liquidator of Hypec to recover from the directors of Hypec:

(a) The amount of $2,861,844 owed to Hypec in respect of the Directors Loan Account; and

(b) The amount of $2,045,881 in additional Hypec funds which I have identified as being used by the Directors for their own use, together with any further monies (if any) so identified pending completion of my investigations.

17. My examination of the books and records of Hypec has not disclosed any minute or other record of any resolution authorising the Directors of Hypec to establish a Directors Loan Account or to draw the funds in the sum of $2,861,844 referred to in (a) above against such account. My examination of the books and records of Hypec also has not disclosed any minute or other record authorising the Directors of Hypec to utilise for their own purpose the additional Hypec funds in the sum of $2,045,881 referred to in paragraph (b) above."

38 The Schedule referred to in [4] of the affidavit is headed "Reconstruction of Directors Loan Account" and on page 4 shows a total of the reconstructed loan account in the sum of $4,907,725.64. This is the total of the two amounts referred to in [16(a)] and [16(b)] of Mr Watson's affidavit where he speaks only in terms of the recovery of monies and not property.

39 Entwined with the rhetorical question posed by his Honour in [138] of the costs judgment is the evidence of Mr Watson and Mr Connolly as to how they saw the estoppel defence after it was pleaded.

40 Mr Connolly, in [12] of his affidavit of 23 February 2004 read in the costs proceedings (Mr Connolly’s costs affidavit), deposes that he was aware that Mr Mead's Family Court application had been stood over to 25 October 2001. He understood that Mr Mead's purpose in making the application was to obtain orders from that Court allowing him to dispose of real estate in his name to fund his lawyers. However, he said that he

"treated that proposal as one that was wholly without merit."

41 In [15] of the affidavit, Mr Connolly noted that he had not diarised the date of the adjourned hearing of Mr Mead's application to the Family Court. He deposed that Mr Mead's application to Einstein J was, in part, based upon the fact that Mr Mead had no assets. He said:

"That meant, to my mind, that he could not properly go to the Family Court and get access to properties he did not own. Further, there was no mention at all of the Family Court application again by Mr Mead's lawyers."

42 It should be noted that Einstein J on 21 August 2001 had granted Mr Mead leave to act on behalf of Hypec to defend the common law proceedings. On 17 September 2001 Mr Mead pursuant to that leave applied in the common law proceedings to Sully J to set aside the default judgment obtained by BL&GY, the plaintiff in those proceedings, with leave to file a defence and cross-claim. Mr Watson was aware of that application, as counsel representing him and Hypec had sought leave to appear before Sully J on 19 September 2001 to seek the deferral of the application. Sully J refused the adjournment and granted the orders sought by Mr Mead on 25 September 2001.

43 The position, therefore, was that Mr Watson was fully aware that Mr Mead, at considerable expense, was pursuing Hypec's defence in the common law proceedings to the claim of BL&GY and that he had given an indemnity, as noted by Einstein J in his orders of 21 August 2001, to the liquidator to indemnify him and Hypec in respect of any costs incurred in the common law proceedings. Mr Watson considered this indemnity to be worthless as Mr Mead had no assets except for his interest in the properties. Mr Connolly, although swearing that there was no mention at all of the Family Court application by Mr Mead's lawyers after 21 August 2001, nevertheless did not suggest in his costs affidavit that he had made any enquiry of Mr Mead's solicitor as to whether that application was being pursued.

44 Yet both he and Mr Watson were aware that Mr Mead was pursuing Hypec's defence of the common law proceedings and that he was incurring significant expense in so doing in circumstances where his only assets (to the extent that they were his assets) were the properties the subject of injunctive orders of the Family Court with respect to which there was an outstanding application to that Court by Mr Mead to have at least some of them released for the purposes of paying his legal costs. Neither Mr Watson nor Mr Connolly suggested in their respective costs affidavits that they believed Mr Mead's legal representatives (including Mr Fagan SC) were prepared to conduct Mr Mead's case in the common law proceedings pro bono or on a "no win, no pay" basis. As the primary judge observed in [97] of the substantive judgment, Mr Watson was represented in court every day of the hearing of the common law proceedings when

"it would have been obvious to anyone who thought about it that Mr Mead was spending money at a significant daily rate in conducting those proceedings."

45 Further, Einstein J's judgment of 21 August 2001 (which Mr Watson had read) made it clear that the evidence was that Mr Mead could only proceed with the common law proceedings if his application to the Family Court for access to some of the matrimonial properties succeeded: see substantive judgment [73].

46 In his costs affidavit Mr Watson makes no reference to any conversation between himself and Mr Connolly to the effect that the latter had, to his knowledge, made it clear to Mr Fagan SC that Mr Mead could not apply to the Family Court for release of properties which probably did not belong to him but to Hypec for the purpose of funding the common law proceedings. In that affidavit, Mr Watson deposed to the fact that as at 11 September 2001 he had no intention of recognising the default judgment as a proper proof of debt by BL&GY as a consequence whereof he considered that Mr Mead's application to set aside that judgment was "premature and possibly unnecessary". Notwithstanding his instructions to Mr Connolly to oppose the application by Mr Mead to set aside the default judgment, he became aware that that application had been granted.

47 From the foregoing circumstances, we have great difficulty in accepting the primary judge's finding that Mr Watson and Mr Connolly were showing to Mr Mead and his legal advisors some equivocation about their preferred position which provided Mr Watson with some basis for wondering whether Mr Mead had indeed relied on the subject representations. In our opinion, there was simply no evidence before the primary judge to support that suggestion which would, if otherwise established, have provided some basis for Mr Watson's decision to contest Mr Mead's estoppel and Ex parte James defences.

48 Mr Connolly deposed to his reaction to the pleading by Mr Mead of the estoppel defence in February 2002 in [23] and [24] of his costs affidavit, in the following terms:

"When a Defence of Estoppel was pleaded by Colin Mead I examined that aspect of his Defence. I sought Counsel's advice and was advised that I should not accept the Defence of estoppel without the allegations that founded it being tested in the Court. This view was further supported by the advice of Mr T Hughes QC whom I had briefed in the Equity proceedings. I did not believe that Mr Dominello (Mr Mead's solicitor) and Mr Mead had the beliefs that they stated they did during the course of events in the latter part of 2001. Nor did I think that the Liquidator had induced those beliefs or that the Liquidator's failure to lodge caveats earlier had been a fact that had been relied upon by those persons in the prosecution of the cross-claim and the Defence of the debt claim by BL&GY.

49 In his costs affidavit, Mr Watson dealt with the estoppel defence in the following paragraph:

"118. Mr Connolly advised me when the estoppel Defence was pleaded that, in his opinion, the Court would not accept the Defence for a variety of reasons that I should not accept the Defence. That advice never changed and received support from Counsel briefed in the matter, including Mr Hughes QC. This was communicated to Etheringtons by letter of 15 February 2002 … Given the events that occurred, I believed I had no choice but to maintain the proceedings for declaratory relief in relation to all the properties and have them adjudicated upon by the Court as to do otherwise may have prejudiced the company, its creditors and the contributors."

50 The estoppel defence is set out in [22]-[34] of Mr Mead's Defence dated 14 November 2002 to the Further Amended Statement of Claim. Paragraph 23 pleaded that on and after 5 July 2001 Mr Watson was aware of some five facts. Paragraph 25 pleaded that throughout the hearing on 17 August 2001 before Einstein J and thereafter, Mr Watson knew certain other facts. Paragraph 27 pleaded that Mr Watson was at all material times aware of a series of facts occurring between 7 September and 4 October 2001. Paragraphs 28 and 29 recited the proceedings before the Family Court in October 2001 and the decision of Cohen J in November. Paragraph 30 pleaded certain instructions given by Mr Mead to his solicitors to proceed with the conduct of the common law proceedings in the expectation and with the intention that the orders of the Cohen J would be implemented and the proceeds of sale of the four properties would be available to pay legal costs and expenses incurred in those proceedings.

51 Paragraph 31 pleaded the fact that the common law proceedings commenced and concluded and [32] alleged knowledge on the part of Mr Watson on and after 2 November 2001 that Mr Mead, having obtained orders from Cohen J with respect to the four properties, embarked upon preparation for the conduct of the trial of the common law proceedings with the expectation that he would have available the proceeds of sale of the four properties to pay his costs and expenses. Paragraph 33 then pleaded that Mr Watson gave no notice to Mr Mead that he intended to claim the four properties. Paragraph 34 pleaded that by failing to claim the four properties, and failing to do so until after the conclusion of the common law proceedings, Mr Watson encouraged and confirmed to Mr Mead his belief that the properties could be sold and the proceeds utilised to pay his costs and expenses of the common law proceedings.

52 It will be seen from the foregoing that so much of the pleading as we have summarised is concerned only with allegations as to Mr Watson's knowledge of a number of facts, many of which were a matter of record. However [36] alleged that Mr Mead relied upon the conduct of Mr Watson in not asserting any interest in respect of the properties and thereby encouraging him in his expectation that they could be sold and the proceeds applied in accordance with the Family Court's orders for the benefit of Mr Mead's conduct of the common law proceedings. Paragraph 37 also pleaded that as a consequence of that reliance, Mr Mead took a number of steps (of which he had earlier pleaded that Mr Watson had knowledge) involving the incurring of expense in the conduct of the common law proceedings.

53 It will thus be appreciated that the only issue in the estoppel defence in which Mr Mead's credit or state of mind might be an issue concerned his assertion that he relied upon the failure of Mr Watson prior to 12 December 2001 (when caveats were lodged) to make any claim upon the four properties that would have prevented him selling them for the purposes of paying his legal costs of the common law proceedings.

54 Both Mr Dominello and Mr Mead swore affidavits in the substantive proceedings that at no time prior to 12 December 2001 did they understand that the liquidator intended to make a claim that he had a proprietary right to the four properties although Mr Mead and Mr Dominello were aware of Mr Watson's "apprehension" at the time of the proceedings before Einstein J in August 2001: see [29] above and [91]-[93] of the substantive judgment where his Honour finds that Mr Mead was aware that Mr Watson retained that "apprehension" up until the conclusion of the common law proceedings. We return to this aspect of the matter below at [58] and [59].

55 Further, in that same judgment the primary judge found firstly, that Mr Watson did not take the position before Einstein J or thereafter that he wanted to preserve the right to recover the properties in specie if his investigations showed that they were held on a resulting trust in favour of Hypec; secondly, that Mr Watson said nothing to Mr Mead or Mr Dominello that would bring into question in their minds that Mr Mead would have access to the four properties as a source of funding; and thirdly, that up until the conclusion of the common law proceedings, Mr Watson had only framed his claim against Mr Mead in terms of repayment of a director's loan account: see [97] of the substantive judgment.

56 In the foregoing circumstances, we cannot see how Mr Watson or Mr Connolly could have had any justifiable basis for wondering whether Mr Mead was proceeding with the common law proceedings and incurring significant expense with respect thereto without expecting to be able to obtain access through the Family Court to the four properties for the purpose of effecting their sale and using the proceeds for the purpose of defraying those expenses. At no time does Mr Connolly say that he wrote or spoke to Mr Dominello to the effect that he had informed Mr Fagan SC that it would be inappropriate for Mr Mead to approach the Family Court to seek access to the four properties for the purpose of defraying his expenses of the common law proceedings because those properties, as well as the balance of the properties claimed, belonged or even might belong, to Hypec.

57 In our opinion, at least by the time of the commencement of the hearing of the substantive proceedings on 16 September 2003 when Mr Mead conceded the liquidator's claims (except in respect of the four properties), there could have been no real issue as to Mr Mead's credit so far as his asserted reliance upon the conduct of Mr Watson in not claiming any proprietary interest in respect of the four properties so that Mr Mead could feel free to seek orders from the Family Court with respect to those properties to enable their sale to fund Hypec's defence in the common law proceedings.

58 In the substantive proceedings, there was some cross-examination of Mr Dominello relevant to the issue of reliance when it was put to him that he knew that the liquidator was asserting that many of the properties may well have been acquired with company funds and probably belonged to the company: see the cross-examination extracted at [92] of the substantive judgment. Two observations should be made with respect to this evidence. The first, as appears in [91] of the substantive judgment, is that Mr Dominello considered that Mr Watson's "apprehension" had been mentioned by Mr Watson

"merely as a possibility by which [he] sought to raise doubt regarding the value of an indemnity from Mr Mead to the liquidator in respect of the liquidator's own costs."

59 The second is that the cross examination of Mr Dominello extracted in [92] of the substantive judgment established no more than that he was aware that Mr Watson was investigating the question of whether all or any of the assets in the joint names of Mr and Mrs Mead properly belonged to Hypec. However, as his Honour noted, his understanding was that the claim which Mr Watson was making was for the repayment of money, not for the properties themselves. Furthermore, at no time in the cross-examination of Mr Dominello was it suggested to him that he was aware there was even a chance that the liquidator might claim the properties as arrears which belonged to Hypec. No doubt this was because Mr Watson had no material in his possession which could justify such a line of cross-examination. After all, there had been no correspondence or other communication with Mr Dominello after 13 August 2001 to suggest that Mr Watson's "apprehension" still existed.

60 Of equal if not greater relevance to the present issue is the cross-examination of Mr Mead in the substantive proceeding. That cross-examination extended over 19 pages of transcript (Black 82-101). Most of it did not touch on or concern the issue of reliance or otherwise relate to the estoppel defence with respect to the four properties. The only cross-examination that could be said to have touched on the defence occupied some two pages of transcript at Black 100-101. It commenced with the cross-examiner referring Mr Mead to [4] and [6] and Annexure B to Mr Watson's affidavit of 27 July 2001 (to which we have referred in [37] above). It constituted a reconstruction from Hypec's records of the directors' loan account and purported to assert a debit balance in the sum of $4,907,725. Mr Mead agreed that he understood from the affidavit (including Annexure B) that Mr Watson was asserting that the $4.9 million was "company funds apparently used by directors". The cross-examiner did not take this any further.

61 Mr Mead was then referred to Mr Watson's affidavit sworn on 13 August 2001 for the purpose of resisting his application to Einstein J for leave to defend the common law proceedings on behalf of Hypec. As we have observed in [43] above, in that affidavit Mr Watson expressed concern as to the effectiveness of any indemnity which Mr Mead could offer him against any adverse costs order in the event that Mr Mead took over Hypec's defence of the common law proceedings. In [8] of that affidavit, Mr Watson considered as unsatisfactory the indemnity previously offered by Mr Mead because of [5] of a letter from Mr Dominello to Mr Connolly of 12 July 2001 in which he referred to the interim property proceedings fixed for hearing in the Family Court on 23 and 24 July 2001 and to the injunction obtained by Mrs Mead to restrain the sale of the matrimonial property which Mr Mead wished to have varied to enable him to sell some of the properties to fund his representation in the common law proceedings.

62 Mr Mead was then asked to read [9] of Mr Watson's affidavit of 13 August 2001 in which he had deposed to his "apprehension" that the matrimonial property, which Mr Mead wished to sell for the purpose of funding the common law proceedings may, in whole or in part, comprise assets properly belonging to Hypec. He was then cross-examined as follows:

"Q. And you understood that the liquidator at that time when you read this paragraph had an apprehension that the property that you were seeking in the Family Court to have released to you for sale may, in whole or in part, comprise assets properly belonging to the company?

A. I was acting for the company. I was trying …

Q. Again Mr Mead, I am asking you about your understanding of what the liquidator's belief was at the time?

A. I don't know what the liquidator thought. I can read this but I am not inclined to agree with what he thinks.

Q. What am I asking you to do is see what is written in this affidavit.

A. Hmm.

Q. Then tell us whether or not it is the case that when you read it, you understood the liquidator was apprehensive that the property in the Family Court that what you were seeking to have released was in whole or in part assets properly belonging to the company?

A. That appears to be the liquidator's point of view.

Q. That so far as you are aware remained in the liquidator's position as at the hearing before Justice Einstein, correct?

A. Quite conceivably.

Q. And right through, up to and including the hearing before Justice Matthews?

A. The same applies. It is quite conceivable.

Q. And through to the end of 2001?

A. It would appear to be so."

63 The primary judge referred to that cross-examination in his substantive judgment at [93]. However, what is clear from the cross-examination is not what was put to Mr Mead but what was not put to him. In particular, it was not suggested to him that he knew that there was a risk that the liquidator would, on further investigation, claim the properties which were the subject of the application to the Family Court as property belonging to Hypec. Nor was it put to him that he knew that Mr Watson intended to claim those properties as belonging to the company as a consequence whereof he could not have relied upon any conduct of Mr Watson in not asserting any proprietary interest in respect of the properties including the four properties. It was not suggested to Mr Mead that he was not given any encouragement by Mr Watson whereby he was confirmed in his belief that the properties could be sold and their proceeds applied to the legal costs incurred with respect to the common law proceedings. It was not put to him that he was aware that he could not apply to the Family Court to have the four properties released for the purpose referred to without fear of any competing claim to those properties by the liquidator.

64 Finally, and importantly, it was not put to Mr Mead that he was, himself, aware or at least conscious in November 2001 of the fact that Mr Watson still harboured the "apprehension" he had first expressed in his affidavit the previous August. In fact, Mr Mead's answers to the last three questions recorded in [62] above clearly suggest that he had no such knowledge although "it would appear" or it was "quite conceivable" that Mr Watson's apprehension did continue until the end of 2001.

65 In our opinion, the cross-examiner properly limited his questioning and did not ask any of the questions that we have postulated in the preceding paragraphs simply because he had no factual basis upon which he could properly do so. Furthermore, it was never suggested to Mr Dominello or Mr Mead that either of them was aware, as a consequence of Mr Connolly's conversations with Mr Fagan SC in July 2001, that Mr Watson considered that the four properties or any of them belonged to Hypec. The simple fact was that, to Mr Watson's knowledge, the highest his "claim" to the properties was ever put prior to December 2001 was that he had an "apprehension" that the properties may, in whole or in part, comprise assets belonging to Hypec. No evidence in the form of correspondence or conversations between Mr Connolly and Mr Dominello and/or Mr Mead and Mr Watson points to any repeat or firming up of Mr Watson's "apprehension" prior to December 2001 when the caveats were lodged. Accordingly, as that "apprehension" in August 2001 did not take on any greater or more positive status between then and the time the common law proceedings were concluded, in our opinion the basis upon which Mr Mead's reliance upon the conduct of Mr Watson as pleaded in his estoppel defence could be legitimately challenged on the ground that there was a risk that the liquidator might claim a proprietary interest in the four properties, was slim to the point of non-existence.

66 In truth, the reason why there was no further communication between Mr Mead and his solicitor on the one hand and Mr Watson and his solicitor on the other hand, which might have advanced Mr Watson's "apprehension" to which he deposed in his affidavit of 13 August 2001, was because Mr Watson on the advice of Mr Connolly (as to which see [152] and [153] below) had decided to await the outcome of the hearing of the common law proceedings and, in particular, to see what was revealed in the evidence elicited in those proceedings. In a passage in the cross-examination of Mr Dominello in the substantive proceedings quoted by the primary judge in [92] of the substantive judgment (at Red 91 B-F), it was put to Mr Dominello that Mr Mead had told him that company funds had been used to acquire the properties. Mr Dominello responded by saying that he always laboured under the impression that they were loan sums and that it was not until caveats were placed against the titles to the properties that he realised that the liquidator was now asserting title to those properties. The following exchange then took place (Black 75T-76E):

"Q. What did you understand by the words assets properly belonging to Hypec?

A. They had made and were investigating and they were waiting to see what the evidence of Lucy Mead was before Justice Mathews. I don't know how they went in their investigations but that was something that were investigating.

Q. You understood it was an ongoing process of investigation and waiting to see what Lucy Mead may say?

A. I can't comment on how the liquidator conducted his investigation.

Q. If you thought about it at the time, that would have been obvious to you that was what was going on with the liquidator?

A. What was?

That the liquidator was continuing his investigations and was wanting to see what happened in the proceedings before Justice Matthews?

A. You have to ask the liquidator but, yes, that is a fair assumption." (emphasis added)

67 The point we seek to make is that it was Mr Watson's counsel who put to Mr Dominello that the liquidator wanted to see what happened in the proceedings before Matthews A-J. Until that occurred he had no idea as to whether there was any basis upon which he might make a claim on behalf of Hypec to a proprietary interest in the properties.

68 Finally, we refer to [100] of his costs affidavit where Mr Watson deposed that following the hearing before Einstein J, there was no mention to him by anyone of the Family Court proceedings that in July 2001 had been stood over to 25 October 2001 as a consequence whereof he had not entered that date in his diary when first informed of it. Importantly for present purposes, Mr Watson did not depose that because he apprehended that the monies which had been used by Mr and Mrs Mead for the purpose of acquiring the properties in respect of which the Family Court application was being made might be Hypec's monies, it made him wonder whether Mr Mead had in fact relied upon the representation pleaded in his estoppel defence to the liquidator's proceedings.

69 The foregoing analysis leads us to the conclusion that there was, indeed, only one tune that Mr Watson was singing to Mr Mead and Mr Dominello. He may, as was submitted by Mr Watson on the appeal, have been keeping his powder dry but he did not convey this to Mr Mead or Mr Dominello in any reasonably indirect, let alone direct, way. Even Mr Connolly recognised that he could not advise Mr Watson to make a claim on the properties until the common law proceedings were concluded: see [17]-[20] of his costs affidavit. In these circumstances, no proper basis existed which would support a challenge to Mr Mead's asserted reliance on Mr Watson's failure to make any such claim.

The nature of the legal advice received by Mr Watson

70 The primary judge commenced his consideration of this issue by noting that Mr Watson had not sought advice from the court pursuant to s 479(3) of the Corporations Act 2001 (Cth) as to whether he should oppose Mr Mead's estoppel defence or whether he should take any particular course of action concerning the Ex parte James defence. Although a factor, his Honour considered (at [124]) that Mr Watson's failure to seek that advice did not, of itself, mean that he acted unreasonably. There is no challenge to this finding.

71 Relevantly, the primary judge next considered the legal advice which Mr Watson had obtained prior to the commencement of the liquidator's proceedings on 25 January 2002. He had first engaged Mr Connolly in June 2001. His Honour found that it was on Mr Connolly's advice that those proceedings were commenced. He accepted (at [103]) that Mr Watson had been advised by Mr Connolly that the estoppel defence pleaded by Mr Mead would not be accepted by a court "for a variety of reasons" and that that advice had never changed and had been supported by counsel briefed in the matter, including Mr Hughes QC. The "variety of reasons" referred to were never identified.

72 In [131] his Honour set out the evidence of Mr Connolly deposed to in [23] and [24] of his costs affidavit, which we have recorded in [48] above.

73 His Honour (at [132]) noted that the advice which Mr Connolly gave to Mr Watson was not in writing. Further, when the estoppel defence was first pleaded, Mr Connolly sought advice from Mr Morahan of counsel and then from Mr Hughes QC, with whom he had at least two (and possibly three) conferences in early to mid-2002. Having observed that no notes of the advice in conference with Mr Hughes QC and/or Mr Morahan had been tendered nor any backsheet, observations or brief of documents which might have been provided to either of them, his Honour concluded that the evidence concerning the advice given by Mr Hughes QC, Mr Morahan and Mr Connolly to Mr Watson was "not fully satisfactory".

74 Nevertheless, his Honour (at [133]) accepted that that advice had been sought and that its thrust was that the liquidator should persist with the litigation notwithstanding the raising of the estoppel and Ex parte James defences. However, he did not accept that the fact that independent legal advice had been sought, received and acted on by a liquidator who had no reason to believe that the advice was incorrect, was sufficient to support a conclusion that he was acting reasonably or properly. But he did consider that the fact that advice had been sought, that it had come from several legal practitioners and spoke with one voice, were significant factors tending towards the conclusion that the liability to pay Mr Mead's costs was one which was reasonably incurred for the benefit of Hypec.

75 A critical point in both the substantive and costs proceedings concerned Mr Watson's incorrect evidence about his knowledge of the Family Court application. As the primary judge recognised at [145] of the costs judgment, the extent of Mr Watson's knowledge of Mr Mead's Family Court application was very important in the litigation and was of particular relevance to the estoppel defence.

76 Mr Watson was cross-examined in the costs proceedings with particular reference to the advice that he received from Mr Connolly and counsel with respect to the estoppel defence. He confirmed that he did not receive advice from Mr Connolly in writing and that as far as he was aware no notes were taken either by Mr Connolly or anyone else in conferences with counsel. He agreed (Tpt p.9(40)) that the advice given to him by Mr Connolly was in words to the following effect:

"Well, I have looked at the papers and as far as I am concerned you should resist this."

77 At Tpt p.10 in answer to a question as to whether he had seen any written advice from counsel, Mr Watson replied that his recollection was that Mr Connolly had the made the position plain to him that

"the estoppel matter had no application, it wouldn't have application."

"Q. Are you saying as far as other counsel, apart from Mr Hughes was concerned, it was simply a case of Mr Connolly telling you, 'well, we have the support of counsel'?

A. No, I think Mr Connolly and Mr Hughes formed the view that the estoppel situation didn't apply. The situation was letters which had been presented before Sully J, a letter I think it was of 17 September, together with my affidavit I believe of 18 September, clearly indicated that there was no case for estoppel, having regard to the fact that the judgment debt – we tried to adjourn the matter or have the matter adjourned so we could do our full and complete investigation around the judgment debt. We believed the cross-claim was without merit, and having regard to that the estoppel issue would not be able to be applied."

78 The letter to Mr Dominello of 17 September 2001 to which Mr Watson referred in the above exchange is at Blue 2/496. Amongst other things, it asserted that he, Mr Watson, had not been served with any documentation in relation to the application by Mr Mead on behalf of Hypec to set aside the default judgment. He attached to the letter what he said was the current state of his investigation in relation to Mr Mead's claims, this being a reference to Mr Mead's defence on behalf of Hypec to the claim by BL&GY in the common law proceedings and Hypec's cross-claim against that company. The letter continued:

"Contrary to Mr Mead's claims my current view is that monies were never remitted to BL&GY and instead the funds were used for other purchases and in particular the purchases of real estate by Mr and Mrs Mead.

…

I believe that it is very likely that the proposed cross-claim is without substance."

79 The affidavit of Mr Watson sworn 18 September 2001 is at Blue 2/498-501. The purpose of the affidavit was to support an application to Sully J for an adjournment of Mr Mead's application to set aside BL&GY's default judgment. Mr Watson deposed that he had examined Mr Mead's proposed cross-claim in the common law proceedings and the supporting evidence relied upon with respect thereto. He noted that on 17 September 2001 he had prepared a report that was served on the solicitors for the judgment creditor (BL&GY) and upon Mr Mead's solicitor. That report was directed at understanding the reconciliation process employed by Mr Mead in quantifying his cross-claim against BL&GY. The first part of the report related to BL&GY's judgment debt of $4.88 million plus interest. It was on the basis of that debt that BL&GY petitioned the Court for an order that Hypec be wound up. After going into some detail with respect to various invoices and payments made on BL&GY's account with Hypec, Mr Watson concluded that his

"investigations are continuing to confirm the above matters and ultimately verify the claim made by BL against the company."

80 Paragraph 2 of the report related to the proposed cross-claim and to an investigation of amounts allegedly invoiced by BL&GY to Hypec in respect of which payments were made. Mr Mead's cross-claim was, apparently, based upon payments made by Hypec to BL&GY which, so he alleged, ought not to have been made. Mr Watson's investigations revealed that there were numerous cheques that had been coded as payments to BL&GY for purchases of computer equipment which were false. He concluded:

"Having regard to these cheques I have identified to date through my investigations of the director's loan account that a number of these payments in fact relate to the director's personal use of company funds to purchase properties."

81 In other words, Mr Watson was saying that the monies were used by the directors for the purpose of purchasing properties and not for the purpose of making payments to BL&GY. After setting out a list of the cheques in question and noting that investigations were continuing into further payments which were coded to BL&GY in Hypec's cheque books but which were the director's personal expenses, Mr Watson concluded that until certain issues had been clarified, Mr Mead's cross-claim on behalf of Hypec against BL&GY had been potentially reduced from $4.321 million to $304,448.

82 Mr Watson then considered a document prepared by Mr Mead for the purpose of demonstrating the process by which Australian Custom Service's records had been matched by him to BL&GY invoices to establish over-payments to BL&GY by Hypec. Ultimately, Mr Watson concluded that after taking into consideration the findings in his report, the potential effect on the cross-claim, as per the figures he then set out, was that it was reduced to nil. Mr Watson was at that point resisting the setting aside of the default judgment and the incurring of expenditure by Mr Mead on behalf of Hypec in bringing a cross-claim against BL&GY which he considered had no substance.

83 It is apparently because of Mr Watson's conclusions set out above that he believed, on the advice of Mr Connolly and Mr Hughes QC, that there was no applicable estoppel. However, the connection between the material put before Sully J by Mr Watson for the purpose of seeking an adjournment of Mr Mead's application to set aside the default judgment on the one hand and the assertion in the exchange which we have recorded in [77] above that as a consequence "there was no case for estoppel" on the other, remains a mystery.

84 In re-examination in the costs proceedings (at Tpt p.13), Mr Watson was asked whether Mr Connolly said any more other than that he should resist the estoppel defence. Mr Watson responded as follows:

"The gist of it was that it had no application, and not to worry about it because it was a situation that couldn't be applied. The estoppel issue wouldn't apply, especially having regard to the letter of 17 September and my affidavit of the 18th, which was placed before Sully J when we tried to adjourn the matter, or have the matter adjourned, so until we had actually considered in more detail the judgment debt and the cross claim."

85 When asked whether there were conversations with Mr Connolly on more than one occasion with respect to the estoppel defence, Mr Watson replied:

"Your Honour, it would have been a situation, or it was situation whereby this was ongoing. We were finding more and more proof about fraudulent transactions, about the situation of the judgment debt. There would have been going on regular meetings with Mr Connolly about the need to be focused upon the matter, and I was assured from my legal advisor it was not going to be a consideration. It just would not apply, having regard to those findings that we were making. The fraud transactions, and about the judgment debt."

86 Again, it is difficult to see the link, if any, between these responses by Mr Watson on the one hand and the continued opposition to the estoppel defence so far as it related to the four properties on the other. Accordingly, in our opinion the evidence concerning the nature of the legal advice obtained by Mr Watson was either insufficient to support a conclusion that he was acting reasonably or properly in opposing the estoppel and Ex parte James defences or else irrelevant to that issue as it was based on immaterial considerations.

Did the reasons for judgment of Matthews A-J support Mr Watson's opposition to the estoppel and

Ex parte James

defences

?

87 We have already referred to [118] of Mr Watson's costs affidavit. In it, Mr Watson deposes that the legal advice he received never changed and that it received support from counsel briefed in the matter including Mr Hughes QC. He then said that this was communicated by Mr Connolly to Etheringtons (Mr Dominello's firm) by letter dated 15 February 2002 which was written the day after Matthews A-J delivered judgment in the common law proceedings. Paragraph 2 of that letter stated that

"The decision of Matthews A-J delivered yesterday is a substantial indictment of your client and of Mrs Lucy Mead with the Court deciding that, rather than refer the matter to the DPP, it should be left to the discretion of the Liquidator."

88 Paragraph 4 of the letter stated that Mr Hughes QC and Mr Morahan were to be briefed to examine the findings in the transcript of evidence before her Honour to form a view as to the legal effect of her findings and in particular "whether they were issues of estoppel that will be pertinent to the equity proceedings". The letter noted that although the claim of BL&GY failed, so did Mr Mead's cross-claim on behalf of Hypec against that company. The letter went on to note concern that Mr Mead's evidence before Matthews A-J was "less than frank in regard to the endeavours made by the liquidator to interview him".

89 Finally, the letter asserted that there was

"overwhelming evidence now that the liquidator is merely taking proceedings to recover property which your client has improperly vested in his name."

90 Some of the assertions in this letter sit uncomfortably with her Honour's findings. In [47] of her judgment, she considered that Mr Mead in his research had shown himself to be overzealous in his attempt to support Hypec's cross-claim against BL&GY although she was satisfied that he had made a "genuine attempt" to find the best possible match between BL&GY's invoices and certain custom data and that the results arrived at were likely to be predominantly accurate. In [146] her Honour found that Mrs Lucy Mead had lost all credibility. In a number of other paragraphs of her judgment, she criticised the truthfulness of Mrs Mead. Thus in [173], her Honour found that Mrs Mead was the author of the deception there referred to and, in [178], that Mrs Mead and her two sisters had shown themselves to be "entirely lacking in credibility and plausibility".

91 Importantly, in [136] her Honour found that Mr Mead knew little of Hypec's financial affairs and in [130] that it was Mrs Mead who acknowledged that many of the payments purported to have been made to BL&GY in fact represented cheques that had been used for private purposes, principally to purchase or improve properties in the name of herself and Mr Mead or to fund other aspects of their lifestyle. She identified a large number of cheques which she said had been misapplied by Mrs Mead in this manner and that in a number of cases she had altered the Hypec records by deleting the true payee. Her Honour found that Mrs Mead's stated reasons for doing this were "extraordinary".

92 Her Honour concluded (at [178]) that it was Lucy Mead who admitted falsifying Hypec's records so as to conceal the misapplication of company funds and that she and her sisters had similarly falsified BL&GY's records so as to support its false claim against Hypec. She found that Mrs Mead's motive for doing this was that Hypec would have no funds to meet BL&GY's judgment against it so that if that judgment was not set aside, recourse would be had against both Mr and Mrs Mead as directors which, if successful, would ensure that the properties in their joint names (which were the subject of the property dispute in the Family Court) would presumably have been sold in order to meet BL&GY's judgment. In this way, the total value of those properties would ultimately devolve upon Mrs Mead and her sisters (as shareholders of BL&GY) and Mr Mead would receive nothing. In this way, the Family Court property proceedings could be circumvented.

93 The only criticism made by her Honour of Mr Mead was, as we have noted above, that she considered him "overzealous" in the compilation of a schedule of payments which he said Hypec had made to BL&GY and which constituted overpayments. This was the subject of Hypec's cross-claim against BL&GY. The difficulty with that cross-claim was that that schedule assumed that the Hypec records, as written up by Lucy Mead, were accurate except where proved otherwise. As her Honour had concluded that no reliable assessment could be made of Hypec's records due to the defaults of Mrs Mead, it was not possible to establish that Hypec's payments to BL&GY exceeded the value of goods purchased from that company as a consequence whereof Hypec's cross-claim could not be substantiated.

94 Her Honour concluded her judgment in these terms (at [188]):

"In conclusion I should say this. At one time I seriously considered recommending that the papers in this case be forwarded to the Director of Public Prosecutions, for a number of breaches of the criminal law have arguably been demonstrated during the course of these proceedings. During Lucy Mead's evidence in chief I warned her against giving answers which might incriminate her. However, she continued to give incriminating evidence about the falsification of entries in Hypec's books. On the other hand, Hypec's affairs are now in the charge of the liquidator, who has the power, if he deems it appropriate, to instigate proceedings against the company's previous directors. I think I should leave it to him to take such action, if any, as he considers appropriate in the circumstances."

95 It is clear from a reading of the judgment that nowhere does Matthews A-J criticise the credibility or bona fides of Mr Mead. Paragraph 188 is clearly directed solely against Mrs Mead. It was only she and her sisters who were found by her Honour to be lacking in credibility. It was only Mrs Mead who was found to have falsified Hypec's records and there was no suggestion in her Honour's judgment that Mr Mead had any knowledge thereof. In fact, her Honour found, as we have already noted, that Mr Mead knew little of Hypec's financial affairs. These findings were confirmed by the primary judge in [31] of the costs judgment.

96 Further, the judgment of Matthews A-J reveals that the Hypec funds that were used for the purpose of acquiring properties for the personal use of Mr and Mrs Mead, were generated by Mrs Mead who falsified (without any suggestion, let alone finding, that Mr Mead was aware of her conduct) the records in order to cover the real purpose of those payments.

97 In light of the foregoing, it is difficult if not impossible to understand Mr Watson's evidence that the findings of Matthews A-J in her judgment in the common law proceedings, which were the subject of Mr Connolly's letter of 15 February 2002, could provide any basis upon which advice could be given to Mr Watson initially to oppose and then to maintain opposition to the estoppel defence with respect to the four properties. It is true that in [113] of his costs affidavit, Mr Watson referred to the hearing before Matthews A-J and the fact that Mr Mead had given evidence that the properties had been acquired with Hypec's funds, there being no other source of funds available to him and Mrs Mead to fund those acquisitions. It was as a consequence of the foregoing that he instructed Mr Connolly to issue caveats over the properties.

98 In the substantive proceedings, certain pages of the transcript of Mr Mead's cross-examination in the common law proceedings by senior counsel for BL&GY and Mrs Mead were tendered. In the course of that cross-examination, Mr Mead conceded that the properties had been purchased with Hypec's money. Mr and Mrs Mead were not estranged at the time of these purchases. Accordingly, as Mr Mead said in his evidence, at that time he believed what his wife told him. That included statements by her that she had sold other properties in order to purchase new properties. However, he accepted that he did not "baulk at the proposition that [he] owed money to Hypec". The following exchange also took place (Blue 1/711):

"Q. You have already given evidence that none of the properties that are in yours and Lucy's names are held in trust for Hypec.

A. Yes, that's correct.

Q. And you know that they have been paid for by Hypec or with Hypec's money don't you?

A. That's correct.

Q. And you acknowledge that it follows that you owe money to Hypec?

A. According to the books.

Q. You know that that follows as a matter of logic that if over $4million worth of property has been bought in yours and Lucy's name and paid for with company money, you owe money to the company?

A. It would seem to be that way."

99 Later (at Blue 1/36) it was put to Mr Mead that the amount of his and his wife's indebtedness to Hypec was $4,907,725.64 – he responded that as he had not been able to investigate the records, he would have to disagree. However, he accepted that the records did indicate indebtedness of $2.8 million. The foregoing accords with the matters referred to in [37] above.

100 Our point is that firstly, in that part of the cross-examination in the common law proceedings that was tendered by Mr Watson in the substantive proceedings, it was only put to Mr Mead that he was indebted to Hypec on the basis of loan monies. However, he accepted that as it turned out, the monies used to acquire the properties were those of Hypec, a fact which apparently had been hidden from him by Mrs Mead. The evidence to which we have referred is consistent with the findings of Matthews A-J as recorded above.

A further purported reason why Mr Watson's opposition was reasonable

128 It was submitted by Mr Watson that no proper basis existed for not accepting his evidence and that of Mr Connolly relating to their bona fides and reasonableness in opposing the estoppel defence as neither was cross-examined in the costs proceedings to suggest that they were lacking in honesty or that there was no substance in the somewhat elliptical reasons for that opposition which were the subject of their affidavits. It is true that there was no direct attack upon the honesty of either Mr Watson or Mr Connolly. The attack was of a more collateral nature. In any event, one can take the relevant material in their respective costs affidavits at face value, examine it and draw conclusions from it and other uncontested evidence as to whether their opposition to the estoppel defence was justified. This we have sought to do.

129 If the material relied upon by Mr Connolly and Mr Watson to justify their continued opposition to the estoppel defence did not bear out that fact, and in our opinion it did not, then one can understand why, forensically speaking, it would be neither appropriate nor wise to cross-examine those witnesses in circumstances where responses may be elicited which might provide a basis for that continued opposition which, when the written material is examined, does not exist.

130 Accordingly, in our opinion the evidence contained in the costs affidavits of Mr Watson and Mr Connolly as to the basis upon which they continued to oppose the estoppel defence, when examined, and subject to one matter only, reveals what we consider to be an inappropriate continuation of that opposition. The one exception is Mr Watson's 10 April affidavit which was ultimately conceded to be incorrect. On the basis of that affidavit and given that in cross-examination Mr Connolly said that Mr Hughes QC was involved in its preparation as well as Ms Riger of his firm and Mr Morahan, and that Mr Hughes QC was supplied with the affidavit for the purpose of giving advice, it becomes apparent that, in truth, the continued opposition to the estoppel defence was only justified on the basis of the denials in that affidavit.

131 Given that the primary judge found that the errors in that affidavit arose as a consequence of "the taking of insufficient care", that of itself, in our opinion, is sufficient to fall within the principles adumbrated by Bowen LJ in Beddoe cited by his Honour in [97] of the costs judgment as requiring a finding that the continued expenditure of funds in opposition to the estoppel defence was relevantly improper.

132 However, we would go further. Although Mr Watson deposed in [102] of his costs affidavit that at the time he swore his 10 April affidavit, he believed that it was accurate and correct, Mr Connolly made no reference to that affidavit or the errors it contained in his evidence in the costs proceedings. He simply ignored it. Although in cross-examination he stated that he was not involved in its preparation, there can be no doubt that he must have been aware of it and, in any event, junior counsel was involved in its preparation as well as a solicitor in Mr Connolly's office.

133 Given the primary judge's finding that senior counsel for Mr Mead

"had no difficulty in taking the liquidator to various pieces of contemporaneous documentation which showed that the statements in the affidavit were wrong,"

central importance to the estoppel case

134 At the very least, it was unreasonable for them not to have ascertained the error, corrected it and reconsidered their position with respect to their continued opposition to the estoppel defence insofar as it related to the four properties. It must follow that, in the Beddoe sense, Mr Watson in his continued opposition to that defence acted in a way which involved an improper performance of his duties to the creditors and contributories of the company. It was, in our opinion, a clear case of Beddoe impropriety.

The

Ex parte James

defence in the winding up proceedings

135 The only proceeding in which the Ex parte James defence was advanced was in the application by Mr Mead in the winding up proceedings. In those and the liquidator's proceedings Mr Mead pleaded the estoppel defence. The application in the winding up proceedings by Mr Mead had the liquidator as a respondent and was brought to decide, as a matter of administration, whether the liquidator ought to persist in the claim that he was making with respect to the four properties. After discussing the authorities where a liquidator is a defendant, the primary judge found that in that circumstance the costs ordered against a liquidator were to be paid from the fund he administered "save in exceptional circumstances". It was this general principle which his Honour said (at [158]) was borne out by the costs orders which had been made in cases which had invoked the principle in Ex parte James.

136 There was no challenge by Mr Mead to the principle which his Honour adopted. However, it was submitted firstly, that the position of the Mr Watson as respondent to the application made by Mr Mead in the winding up proceedings was purely formal and had been provoked by his having lodged caveats against the properties in December 2001. Secondly, in substance Mr Watson was the moving party or the instigator of the dispute as Ex parte James had only been raised, in effect, as a further defence to the claims of the liquidator in the liquidator's proceedings. Thirdly, it was submitted that as both the estoppel defence and the invocation of the principle in Ex parte James by Mr Mead related, in effect, to the same factual matrix with respect to the four properties, reliance had been placed on both by Mr Mead in order to resist Mr Watson's claim in the liquidator's proceedings. Consequently, Mr Watson was in truth a plaintiff rather than a defendant. It was submitted that this was sufficient to constitute "exceptional circumstances" within the meaning of the authorities to which the primary judge had referred.

137 Mr Watson submitted that where proceedings are taken against a liquidator in connection with the administration of a winding up, it is frequently the case that the liquidator, given the obligation to protect and administer the fund in the interest of all creditors and contributories, has no practical choice other than to contest proceedings instituted against him or the company in liquidation. For that reason there is a special reluctance to order costs personally against the liquidator or otherwise to deny him the right to claim those costs out of the assets of the company. In the present case, given the finding of the primary judge that Mr Watson had acted reasonably in opposing the estoppel defence, it must follow that having complied with the lowest standard which governs the award of costs against a liquidator/plaintiff, the higher standard required to be achieved before a liquidator is denied his costs out of the assets of the company could not be satisfied.

138 There is no doubt that if his Honour was correct in his finding that Mr Watson was not acting, in the relevant sense, improperly or unreasonably in opposing the estoppel defence in the liquidator's proceedings, then clearly he was justified in resisting the Ex parte James claim in the winding up proceedings. However, in our opinion, his Honour's conclusion with respect to Mr Watson's opposition to the estoppel defence was in error. That finding withdrew one of the planks that underpinned Mr Watson's submissions on this issue.

139 Furthermore, in our opinion the circumstances of the present case, involving as it did both Mr Mead's application in the winding up proceedings and his defence in the liquidator's proceedings (in each case based upon the same factual considerations), warranted a finding that there were exceptional circumstances which, as a consequence of the finding that Mr Watson acted unreasonably in continuing his opposition to the estoppel defence, justified a finding that he should personally pay the costs of the application in the winding up proceedings.

140 There can be no doubt that the primary judge's conclusion that the present was not an appropriate case to order Mr Watson to pay personally the costs of the Ex parte James defence was based upon his concurrent finding that it was not an appropriate case to order Mr Watson to pay personally the costs of the estoppel defence. Once the latter finding is reversed it must follow that his Honour's discretion miscarried with respect to the costs of the Ex parte James defence. So much was eventually conceded by senior counsel for Mr Watson (see Tpt of argument p.64 (7-10)).

141 Mr Mead's application in the winding up proceedings was filed on 13 December 2001 and sought relief based upon the principle in Ex parte James that, as a matter of administration, Mr Watson ought not to persist in his claim to the four properties. This was because firstly, the assets of Hypec had been increased by virtue of Mr Mead's successful defence on behalf of Hypec of the claim by BL&GY in the common law proceedings and secondly, that had been achieved only because of the release of the four properties to enable the costs of that successful defence to be paid.

142 At all material times Mr Watson opposed Mr Mead's application to Einstein J to represent Hypec in defending the common law proceedings and, further, opposed the application to Sully J to set aside the default judgment. It was submitted by Mr Watson before the primary judge in the substantive proceedings that the incurring by Mr Mead of the expense of defending the common law proceedings on behalf of Hypec was unnecessary because, although the liquidator would have needed to have taken action to set aside the default judgment which BL&GY had obtained, once that had occurred it would have been open to the liquidator to call for proof of debts and then to reject BL&GY's proof. This was rejected by the primary judge in [190] of the substantive judgment. His Honour found that there was no real likelihood of that course being followed. This was because Mr Watson's approach had, prior to the hearing of the common law proceedings, been to accept what Mrs Mead told him – that his investigations were being funded by Mrs Yang (Mrs Mead's sister) who, like Mrs Mead, was a director and shareholder of BL&GY. His Honour found that funding was not likely to be continued if Mr Watson took a stand contrary to the interests of BL&GY. In any event, there was no reason to think that if BL&GY's proof of debt had been rejected by Mr Watson, that company would not have pursued its claim in the common law proceedings as in fact occurred.

143 Correspondence between Mr Watson and Mr Mitchell, the solicitor for BL&GY, Mrs Mead and Ms Yang bears out his Honour's finding. Thus, by letter dated 9 August 2001 Mr Watson noted that

"Your client [BL&GY and Ms Yang] is not prepared to fund unnecessary additional legal costs, therefore can you please confirm the quantum that she is prepared to fund so as to deal with the Colin Mead matter."

144 Mr Watson was represented by counsel before Einstein J at the hearing on 17 August 2001. She opposed the granting of the application. As we have already observed in another context, comments made by Einstein J during the course of that hearing made it clear firstly, that Mr Mead needed to pursue his application to the Family Court for release of the properties for the purpose of funding the common law proceedings and, secondly, that the liquidator was opposing Mr Mead's application before Einstein J on the basis that he had no funds to secure any indemnity in favour of the liquidator in respect of any costs order that might be made against him in the common law proceedings.

145 It is clear that at that point of time Mr Watson had a conflict of interest. He was seeking funds from the principal of BL&GY whose default judgment against Hypec Mr Mead was seeking to have set aside so he could defend the common law proceedings on Hypec's behalf. Yet Mr Watson would not agree to the setting aside of that judgment in circumstances where he was being funded by that company and/or one or more of its shareholders.

146 Mr Watson wrote to Mr Mitchell on 11 December 2001 referring to a meeting of creditors on 17 July 2001 wherein the latter personally undertook on behalf of BL&GY to provide funds to the liquidator in the sum of $20,000. According to that letter, Mrs Mead had made clear to Mr Watson that the basis of any cross-claim by Hypec against BL&GY was without foundation.

147 On 17 September 2001 Mr Watson wrote to Mr Dominello indicating that further investigations of the state of accounts between Hypec and BL&GY supported Mrs Mead's contentions so that had he been asked to determine whether Hypec should apply to set aside the default judgment, he "would firmly say no".

148 Accordingly, Mr Mead submitted that Mr Watson resisted the Ex parte James defence on the basis that there would be no benefit to Hypec if the common law proceedings continued as he, Mr Watson, would reject BL&GY's proof of debt. Mr Watson therefore continued to oppose that defence on the false premise that he would reject the proof of debt.

149 In his costs affidavit Mr Watson indicated that, as he had made plain in his letter to Mr Mitchell of 11 September 2001, he had no intention of recognising BL&GY's default judgment as a proper proof of debt. He considered that "in due course" with the discovery of bank statements and cheques, all would be revealed. His opinion, therefore, was that any application to set aside the default judgment against Hypec was premature and possibly unnecessary. Having sworn an affidavit on 18 September 2001 that was used before Sully J in Mr Mead's application to set aside the default judgment, counsel was instructed to appear on Mr Watson's behalf on 19 September 2001 to inform Sully J of his position.

150 The difficulty with Mr Watson's explanation, such as it is, is that he (or Mr Connolly) must have been aware that the common law proceedings had been set down for trial commencing on 5 November 2001. It was then 19 September 2001. There is a gap in Mr Watson's evidence between the time Sully J ordered the default judgment to be set aside (25 September 2001) and 5 November 2001 apart from the fact that Mr Watson deposed that in October he was requested to provide a report for use in the upcoming common law proceedings relating to his then current investigations. However, he declined to do so upon the basis that he wished to maintain an independent position as between the parties. Nevertheless, in early November 2001 he attended conferences with legal representatives of both parties.

151 It is reasonably apparent that between 25 September 2001 and 5 November 2001, Mr Watson's investigations had not proceeded to the point where he had formed the view that BL&GY's claim against Hypec in the common law proceedings should be resisted – although it may be that he had a degree of misgiving with respect to the possible success of the cross-claim. In our opinion, the appropriate inference is that after the default judgment was set aside by Sully J on 25 September 2001, Mr Watson realised that the common law proceedings would proceed to a hearing and that, during the course of those proceedings, all would be revealed. In particular, he must have known that Hypec's financial records would be subjected to detailed analysis and that Mrs Mead and her sisters would be the subject of vigorous cross-examination. He therefore decided to await the outcome of those proceedings which, as we have already indicated, provided Mr Watson with a sufficient basis upon which to accept Mr Connolly's advice to place caveats against the titles to the subject properties and to institute the liquidator's proceedings for their recovery. However, the fact remained that as a consequence of standing by and allowing Mr Mead to conduct Hypec's defence in the common law proceedings, the indebtedness of Hypec to BL&GY disappeared to the benefit of the company. That was solely as a consequence of the efforts of Mr Mead and his legal advisors.

152 The foregoing is confirmed by Mr Connolly in his costs affidavit where, in [16] and [17], he deposed to receiving from Mr Dominello on 11 October 2001 the timetable set by the court for the preparation of the hearing of the common law proceedings and acknowledging that shortly before those proceedings commenced he advised Mr Watson to

"watch the evidence given before Matthews and I believe from that I'll be able to advise you concerning the instituting of proceedings to recover the real estate."

153 In [19] and [20] Mr Connolly further deposed that notwithstanding an interview with Mrs Mead on 7 August 2001 which, although firming in his mind the misuse of corporate funds, left him unsure about what the accounts and records of Hypec actually revealed, he was also left with some degree of confusion as to whether the properties belonged to BL&GY or Hypec which he considered would be resolved in the proceedings before Matthews A-J. It was only as a result of those proceedings that he felt confident enough to advise Mr Watson to place caveats against the titles to the properties and to take steps to recover them.

154 In our opinion, Mr Mead has established the exceptional circumstances necessary to justify requiring Mr Watson to pay personally the costs of Mr Mead's application in the winding up proceedings.

Indemnity costs

155 We have already set out the principles adopted by the primary judge upon which indemnity costs may be ordered. The findings we have made with respect to the conduct of Mr Watson in the litigation and, in particular, in his unreasonable opposition to the estoppel defence and the Ex parte James defence with respect to the four properties is, in our opinion, of significance in our consideration of whether the circumstances were such as to warrant an award of costs on an indemnity basis.

156 Various epithets have been used in the cases to justify an award of indemnity costs as appears in the passages from the authorities referred to by the primary judge in [40]-[45] of the costs judgment. Such expressions include "some special or unusual feature", "persisting in what should have been seen as a hopeless case", "the undue prolongation of a case by groundless contentions", "delinquency in the conduct of the proceedings", "delinquency approaching that considered to justify special order as to costs", "knowledge of the party against whom such an award is sought that, promptly advised, he or she should have known their claim would fail", "totally frivolous and thoroughly unjustified defences". Of course, these categories are not closed.

157 In our opinion, had Mr Watson been properly advised and, in particular, had his 10 April affidavit been correct and had he and Mr Connolly been more attentive to Mr Mead's application to the Family Court in October 2001, they would have realised that their continued opposition to the estoppel defence and the Ex parte James defence was next to hopeless. Moreover, they would have realised that Mr Mead had conducted the common law proceedings in circumstances where not only had he sought and obtained an order from the Family Court releasing the four properties to enable their sale in order to fund those proceedings, but also that he had made that application and continued his conduct of the common law proceedings in the belief that there was no intention by the liquidator to claim a proprietary interest in those properties. The fact is that Mr Connolly simply forgot about the Family Court application. Although he deposed in his costs affidavit that he treated that application as one wholly without merit, he never took the obvious step of checking with Mr Dominello as to whether the application was proceeding so he could be represented at the Family Court hearing to oppose the application. He remained mute and allowed it to go ahead by default.

158 Furthermore, at no time did Mr Connolly write to Mr Dominello making it clear that the liquidator reserved his position with respect to claiming the properties in specie. No caveat was placed upon the properties prior to December 2001 for the reasons that Mr Connolly deposed to in [19] and [20] of his costs affidavit. He simply did not have a sufficient basis upon which to do so. There was nothing wrong with that: the problem was that neither he nor Mr Watson indicated to Mr Dominello and/or Mr Mead that the latter was at risk with respect to the four properties for, if evidence was elicited during the common law proceedings that they had been purchased with Hypec's funds so that they were held in trust by Mr and Mrs Mead for the company, then a claim would be made for their recovery in specie.

159 In our respectful opinion the disregard by Mr Connolly, and his disparaging of the merits, of the Family Court application was entirely misplaced and bordered on the reckless. Regrettably, it affected his and Mr Watson's conduct of the litigation that was thereafter instituted for the recovery of the four properties. Further, the conduct of Mr Connolly and Mr Watson when taken as a whole justifies a special order for costs against Mr Watson. Accordingly, in our view Mr Mead has made out a case for an award of costs on an indemnity basis.

Conclusion

160 In our respectful opinion the primary judge erred in his finding that the present was not an appropriate case to order Mr Watson to pay personally the costs of the estoppel and Ex parte James defences. For the reasons we have set forth above, in our view the continued opposition by Mr Watson and his solicitor to those defences with respect to the four properties was unreasonable and without justification.

161 Accordingly, we make the following orders:

(1) Leave to appeal granted.

(2) Appeal allowed.

(3) Set aside Order 4 made by Justice Campbell on 13 August 2004 in proceedings No. 1268/02 and in lieu thereof order that David Patrick Watson pay the costs of the First Defendant in those proceedings, being costs of and incidental to claims made by the Plaintiff to recover the four properties, on an indemnity basis.

(4) Set aside Order 5 made by Justice Campbell on 13 August 2004 in proceedings No. 1933/02 and in lieu thereof order that the costs of the applicant and of David Patrick Watson in proceedings begun by interlocutory process filed 13 December 2001, to the extent that that interlocutory process was heard together with proceedings No. 1268/02, be paid by David Patrick Watson personally on an indemnity basis.

(5) The First Opponent to pay personally the claimant's costs of the summons for leave to appeal and the appeal but to have a certificate under the Suitor's Fund Act 1951 if otherwise qualified.

**********

Citations

Mead v Watson [2005] NSWCA 133

Most Recent Citation

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CITATION:	Mead v Watson as Liquidator for Hypec Electronics [2005] NSWCA 133
HEARING DATE(S):	On the papers
JUDGMENT DATE:	28 April 2005
JUDGMENT OF:	Sheller JA; Ipp JA; Tobias JA
DECISION:	(1) Leave to appeal granted; (2) Appeal allowed; (3) Set aside Order 4 made by Justice Campbell on 13 August 2004 in proceedings No. 1268/02 and in lieu thereof order that David Patrick Watson pay the costs of the First Defendant in those proceedings, being costs of and incidental to claims made by the Plaintiff to recover the four properties, on an indemnity basis; (4) Set aside Order 5 made by Justice Campbell on 13 August 2004 in proceedings No. 1933/02 and in lieu thereof order that the costs of the applicant and of David Patrick Watson in proceedings begun by interlocutory process filed 13 December 2001, to the extent that that interlocutory process was heard together with proceedings No. 1268/02, be paid by David Patrick Watson personally on an indemnity basis; (5) The First Opponent to pay personally the claimant's costs of the summons for leave to appeal and the appeal but to have a certificate under the Suitor's Fund Act 1951 if otherwise qualified

CATCHWORDS:	PROCEDURE - Costs - Circumstances in which a liquidator may be ordered to pay personally costs which have been ordered against the company in liquidation - - Liquidator caused company to bring proceedings to recover corporate assets - Proceedings unsuccessful due to estoppel and Ex parte James defences - Personal costs order sought against liquidator - Whether liquidator's conduct of litigation was "improper" - Whether liquidator acted reasonably in opposing estoppel and Ex parte James defences - Whether "exceptional circumstances" established justifying personal costs order against liquidator - PROCEDURE - Costs - Indemnity costs - Whether conduct of litigation such as to warrant award of indemnity costs against liquidator
LEGISLATION CITED:	Corporations Act 2001 (Cth)
CASES CITED:	Hypec Electronics Pty Limited (in liq) v Mead (2003) 202 ALR 688 Hypec v Mead [2004] NSWCA 221 Ex parte James; In re Condon (1874) LR 9 Ch App 609 NMFM Property Pty Limited v Citibank Limited (No 11) (2001) 109 FCR 77 Adsett v Berlouis (1992) 37 FCR 201 In re Beddoe; Downes v Cottam [1893] 1 Ch 547 Waltons Stores (Interstate) Limited v Maher (1988) 164 CLR 387
PARTIES:	Colin Anthony Mead David Patrick Watson as Liqduiator for Hypec Electronics Pty Limited (in liq) & Anor
FILE NUMBER(S):	CA 40770/04
COUNSEL:	CL: D Fagan SC / V Bedrossian 1 OPP: P W Taylor / A Justice
SOLICITORS:	CL: Etheringtons, North Sydney 1 OPP: Horton Rhodes, Sydney

LOWER COURT JURISDICTION:	Supreme Court - Equity Division
LOWER COURT FILE NUMBER(S):	ED 1268/02; ED 1933/01
LOWER COURT JUDICIAL OFFICER:	Campbell J