Mischel v Mischel Holdings Pty Ltd (in liq) (No 2)

[2012] VSC 421

IN THE SUPREME COURT OF VICTORIA Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

No. SCI 2011 6065

IGO NORBERT MISCHEL (as Executor of the Estate of Maria Mischel)	Plaintiff
v
MISCHEL HOLDINGS PTY LTD (ACN 082 817 261) (In liquidation)	Defendant

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JUDGE:	CROFT J
WHERE HELD:	Melbourne
DATE OF HEARING:	17 August 2012 (with further written submissions received on 24 and 30 August 2012, and 3 September 2012)
DATE OF JUDGMENT:	13 September 2012
CASE MAY BE CITED AS:	Igo Mischel (as Executor of the Estate of Maria Mischel) v Mischel Holdings Pty Ltd (in liq) (No 2)
MEDIUM NEUTRAL CITATION:	[2012] VSC 421

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COSTS – Discretion of the Court to award costs – effect of Calderbank offers – whether Plaintiff entitled to indemnity costs – payment of costs by non-party liquidator – whether non-party liquidator entitled to be remunerated and have legal costs paid from company funds –  Supreme Court Act 1986 (Vic), s 24 – Hazeldene’s Chicken Farm Pty Ltd v Victorian Workcover Authority (No. 2) (2005) 13 VR 435 – Bischof v Adams [1992] VR 198 – Bent v Gough (1992) 36 FCR 204 – JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3) [2010] VSC 623 – Macks v Hedley (1999) 94 FCR 188 – Mead v Watson [2005] NSWCA 133 – 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq) (1999) 30 ACSR 377 – Sanderson v Classic Car Insurances Pty Ltd (1985) 10 ACLR 115 – Re Lemon Tree Passage & Districts RSL and Citizens Club Co-operative Ltd (1987) 11 ACLR 796.

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	Mr M. Osborne	Lovegrove Solicitors
For the Defendant and the Non-Party Liquidator	Mr N. Magee QC	Foster Nicholson Jones Lawyers

HIS HONOUR:

Introduction

1. On 27 July 2012, I delivered a judgment in favour of the Plaintiff[1] with respect to an originating motion dated 14 November 2011 whereby the Plaintiff sought, among other things, declarations that:

   [1]Igo Mischel (as Executor of the Estate of Maria Mischel) v Mischel Holdings Pty Ltd (in liq) [2012] VSC 292 (“the Primary Judgment”).

(a)         the joint ownership of the premises by Maria Mischel and the Defendant was severed prior to her death;  and

(b)         $357,000 of the proceeds of sale of the premises, being half of the sale price, is held in trust by the Defendant for the Estate of Maria Mischel;  alternatively,

(c)          an amount equalling half of the net proceeds of sale, after costs and repayment of bank loans, is held on trust by the Defendant for the Estate of Maria Mischel.

1. The factual background is set out in the Primary Judgment[2] and it is not necessary to repeat those matters again.[3]

   [2]Igo Mischel (as Executor of the Estate of Maria Mischel) v Mischel Holdings Pty Ltd (in liq) [2012] VSC 292 at [1]-[35] (Croft J).

   [3]I note that for the purposes of these reasons, I have adopted the same abbreviations as contained in the Primary Judgment.

1. The Primary Judgment reserved the question of costs and permitted the parties to make submissions in this regard.  I subsequently received written submissions[4] and heard the parties’ oral submissions.[5]  In support of its application, the Plaintiff also sought to rely on the affidavit of Alexander Milne sworn 2 August 2012 (“Milne Affidavit”). 

   [4]The Plaintiff’s Submissions on Costs dated 7 August 2012 (“Plaintiff’s Submissions”) and the Defendant’s Submissions on Costs dated 15 August 2012 (“Defendant’s Submissions”).

   [5]Heard on 17 August 2012.

1. At that hearing, I granted the parties leave to file and serve supplementary submissions with respect to a case which I thought may be of some importance.[6]  Consequently, I received supplementary written submissions from both parties.[7]

   [6]Mead v Watson [2005] NSWCA 133, which is discussed below at paragraph 63.

   [7]The Plaintiff’s Further Submissions dated 23 August 2012 (“Plaintiff’s Supplementary Submissions”); the Supplementary Costs Submissions of the Defendant Pursuant to Leave Granted on 17 August 2012 dated 24 August 2012 (“Defendant’s Supplementary Submissions”); and the Defendant’s Reply to Plaintiff’s Supplementary Costs Submissions Pursuant dated 30 August 2012 (“Defendant’s Second Supplementary Submissions”).

1. Assisted with these submissions, I now deal with the question of costs.

Costs issues to be considered

1. It is clear from the oral and written submissions that there are three questions to be determined with respect to costs in these proceedings.

(a)         First, whether the Plaintiff’s costs of the proceedings should be awarded on an indemnity basis (”the First Question”)?

(b)         Secondly, whether the liquidator of the Defendant, Mr Samuel Richwol (“the Liquidator”), a non-party, should be ordered to pay costs personally (“the Second Question”).

(c)          Thirdly, whether the Liquidator ought to have his remuneration and legal costs paid from the proceeds of the sale of the premises which are currently placed in a solicitor’s trust account (“the Third Question”).

1. As the Defendant noted during the oral submissions, there is an important common theme interweaving through all three questions: whether the Liquidator acted reasonably in proceeding with the Defendant’s defence to the claim.[8]    

First Question – Should indemnity costs be ordered against the Defendant?

[8]Transcript, page 20.

The Plaintiff’s claim for costs

1. The Plaintiff submitted that, being the successful party in these proceedings, he ought to be paid his costs.  The Plaintiff requested that the following costs order be made:[9]

(a)         party and party costs be awarded with respect to costs incurred from the commencement of the proceedings to 14 June 2012; and

(b)         indemnity costs be awarded with respect to costs incurred from 14 June 2012 onwards.[10]

[9]Plaintiff’s Submissions, paragraph 11; Transcript, page 1. 

[10]I note that paragraph 3 of Milne Affidavit suggested that the application would be for solicitor and client costs; however, I acknowledge that the Plaintiff in its written and oral submissions only referred to indemnity costs.

1. The claim for party and party costs was not a disputed issue.

1. The claim for indemnity costs was, however, disputed.  The Plaintiff submitted that it was entitled to costs on this basis as a consequence of service upon the Defendant of a letter dated 14 June 2012 – a letter which contained a settlement offer in the form of a Calderbank offer (“the Calderbank Letter”).[11] 

   [11]Plaintiff’s Submissions, paragraph 2.

General principles

1. The jurisdiction of the Court to award costs is conferred by section 24 of the Supreme Court Act 1986 in the following terms:

“24Costs to be in the discretion of Court     

(1) Unless otherwise expressly provided by this or any other Act or by the Rules, the costs of and incidental to all matters in the Court, including the administration of estates and trusts, is in the discretion of the Court and the Court has full power to determine by whom and to what extent the costs are to be paid.”

1. The general discretion conferred by these provisions must be exercised subject to and in accordance with the operation of other legislation and the rules of the court.[12] This is reflected in Order 63.02 of the Supreme Court (General Civil Procedure) Rules 2005 (“the Rules”).

   [12]See Knight v F.P. Special Assets Ltd (1992) 174 CLR 178; (1992) 107 ALR 585; (1992) 8 ACSR 1.

1. Costs usually follow the event, and in this regard the usual order is to award costs to the successful party on a party and party basis.[13] There may, however, be circumstances where a special costs order is warranted,[14] and in this regard there are a number of categories of circumstances accepted as possible bases for the making of a special costs order.[15]

   [13]See Supreme Court (General Civil Procedure) Rules 2005, Order 63.31; and as to the policy considerations underlying the general rule see Oshlack v Richmond River Council (1998) 193 CLR 72 at 97-8; (1998) 152 ALR 83 at 101-102, [67]–[69] (McHugh J).

   [14]See Supreme Court (General Civil Procedure) Rules 2005, Orders 63.28-63.31.

   [15]For a further discussion on this, see Auswest Timbers Pty Ltd v Secretary to the Department of

   Sustainability & Environment (No. 2) [2010] VSC 513 at [7]-[10] (Croft J).

1. A well-established category which may warrant a special costs order being made is when a settlement offer (generally known as a Calderbank offer[16]) is unreasonably rejected.[17]  The principle and policy considerations underlying this position have been discussed extensively in the authorities.[18] 

   [16]Arising from the oft-cited decision of Calderbank v Calderbank (1975) 3 All ER 333.

   [17]Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435; [2005] VSCA 298; Berrigan Shire Council v Ballerini (No 2) [2006] VSCA 65; Thomopoulos v Faulks (No 2) [2006] VSC 286 at [8]-[10] (Cavanough J); Lollis v Loulatzis (No 2) [2008] VSC 35; Chen v Chan [2009] VSCA 233 at [17] (Maxwell P, Redlich JA and Forrest AJA); Southern Region Ltd & Anor v Wallington Hardware & Timber Pty Ltd & Anor (No 2) [2010] VSC 174. See also G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at [13.42]-[13.69].

   [18]See Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at 441, [21]-[22] (Warren CJ, Maxwell P and Harper AJA). See also ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2012] VSC 177 at [32] (Croft J).

The Calderbank Letter

1. For the sake of clarity, I observe that a settlement offer, where more usually and formally structured, may be made in two different forms.  Thus it may be made as a, less formal, Calderbank offer, or, more formally, in accordance with Order 26 of the Rules as an offer of compromise.

1. It was not suggested in these proceedings that the Calderbank Letter could be classified as being an offer of compromise in accordance with Order 26 of the Rules.[19]  Notwithstanding the distinction between the two forms an offer may take, they are both, in effect, very much different sides of the same coin.[20]

   [19]Milne Affidavit, paragraph 21.

   [20]See the comments in Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd (No. 2) [2010] VSC 70 at [13] (Croft J) which were not questioned on appeal in Tenth Vandy Pty Ltd v Natwest Markets Australia Pty Ltd [2012] VSCA 103.

1. The content of the Calderbank Letter and the context in which the letter was provided is exhibited to the Milne Affidavit.[21] 

   [21]Milne Affidavit, Exhibit AM-4.

1. Although the Calderbank Letter is dated 14 June 2012, the facsimile confirmation sheet indicates that it was only transmitted by facsimile at 2.37pm on 15 June 2012.[22] 

   [22]See Milne Affidavit and Exhibit AM-4.

1. The Calderbank Letter is marked “without prejudice save as to costs”, and the relevant passages are as follows: [23]

   [23]Milne Affidavit, Exhibit AM-4.

“2.      We are instructed to make the following offer on behalf of our client in full and final settlement of our client’s claim against the defendant.

3.        The offer is as follows:

A.       The defendant receive $30,000 of the proceeds of sale of 27/185 Barkly Street, St Kilda presently held in trust.

B.        The balance of the moneys held in trust be paid to the plaintiff.

C.       Each party bear their own costs of the proceeding.

4.        This offer is open for acceptance until 10.00am on Wednesday 20 June 2012.

5.        If the offer is not accepted then our client reserves the right to rely upon it on the question of costs.

6.        Such reliance shall include, if necessary, relying on it for the purposes of seeking an order that our client’s costs of the proceeding be paid by the defendant on an indemnity basis pursuant to the principles of Calderbank v Calderbank 1975 3 All ER 333 and Cutts v Heads 1994 1 All ER 597, and additionally that to the extent to which our client’s costs of the proceeding are not recoverable from the defendant, that the liquidator be ordered personally to pay such costs.”

1. The Defendant did not accept the offer contained in the Calderbank Letter (and, in fact, there is no evidence as to whether the Defendant responded to the Calderbank Letter at all). 

1. Given the findings made and position reached in the Primary Judgment, the Plaintiff now claims that the Calderbank Letter ought to provide the basis of an indemnity costs order against the Defendant and, or alternatively, the Liquidator personally.  The Plaintiff submitted that I should order the Defendant and, or alternatively, the Liquidator to pay his costs up to and including the day on which the offer was served (being 15 June 2012) on a party and party basis, and that his costs thereafter be paid on an indemnity basis.[24]  I make the preliminary observation that indemnity costs orders with respect to rejection of a Calderbank offer are only available on and from the date of the expiry of the offer – rather than when the offer is made[25] – and in this case the offer expired at 10.00am, 20 June 2012; which was the time at which the trial of this proceeding was scheduled to commence, and when it did commence.

   [24]Plaintiff’s Submissions, paragraph 11.

   [25]See the discussion in Auswest Timbers Pty Ltd v Secretary to the Department of Sustainability & Environment (No. 2) [2010] VSC 513 at [16] (Croft J).

Was the Defendant’s refusal of the Calderbank offer unreasonable?

1. The Court of Appeal in Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2)[26] said that the test of unreasonable rejection had to be applied in considering whether the rejection of the Calderbank offer warrants an indemnity costs order:[27]

   [26](2005) 13 VR 435; [2005] VSCA 298 (“Hazeldene”).

   [27]Hazeldene’s Chicken Farm Pty Ltd v Victorian WorkCover Authority (No 2) (2005) 13 VR 435 at 441; [2005] VSCA 298 at [23] and [24] (Warren CJ, Maxwell P and Harper AJA).

“[23]    In our view, these competing considerations can be sufficiently accommodated by applying a test of (un)reasonableness. The critical question is whether the rejection of the offer was unreasonable in the circumstances. We see no justification for a more stringent test such as “manifestly” or “plainly” unreasonable.

[24]      Of course, deciding whether conduct is “reasonable” or “unreasonable” will always involve matters of judgment and impression. These are questions about which different judges might properly arrive at different conclusions. As Gleeson CJ said recently, “unreasonableness is a protean concept”. But a test of reasonableness is, we think, entirely appropriate to the exercise of a discretion such as this.”

1. The Court of Appeal in Hazeldene also provided the following comprehensive (but not exhaustive) guidelines as to the factors to be considered in assessing whether the refusal of an offer was unreasonable:[28]

   [28]Hazeldene’s ChickenFarm Pty Ltd v Victorian Workcover Authority (No 2) (2005) 13 VR 435 at 442; [2005] VSCA 298 at [25] (Warren CJ, Maxwell P and Harper AJA).

(a)       the stage of the proceeding at which the offer was received;

(b)      the time allowed to the offeree to consider the offer;

(c)       the extent of the compromise offered;

(d)      the offeree’s prospects of success, assessed as at the date of the offer;

(e)       the clarity with which the terms of the offer were expressed;  and

(f)       whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it.

1. These guidelines should not, however, be treated as mandatory and exclusive.  Rather they are to be considered and appropriate weight given to each of these factors as seems to the judge appropriate in all the circumstances.[29]  Moreover, the Court must be careful to assess the position on the basis of the circumstances existing at the time of the offer,[30] so that hindsight is not brought to bear on this assessment.  With these matters in mind, I turn now to consider the six factors enunciated in Hazeldene in light of the present circumstances.

   [29]See Foster v Galea (No 2) [2008] VSC 331 at [9] (Byrne J).

   [30]ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2012] VSC 177.

(a)      The stage of the proceeding at which the offer was received

1. The Calderbank Letter was served on the Defendant on 15 June 2012 (which was a Friday) with the trial date scheduled for the following Wednesday, 20 June 2012.  The Calderbank Letter was effectively received approximately between two and three business days before the commencement of the hearing.   By this stage, the proceeding had been on foot for over seven months and the parties by then had the benefit of the filing of their pleadings, they had undertaken and reviewed discovery, filed affidavit material, and also drafted outlines of submissions.  In short, by this stage they had every opportunity to carefully consider their case.

1. Indeed, the Plaintiff submitted that the Calderbank Letter was served at a time when the Defendant was or ought to have been well versed in the issues arising in the proceedings.[31]  The Plaintiff pointed to the fact that the Defendant had received the Plaintiff’s affidavit material on 9 November 2011[32] and 11 November 2011[33] and had also received an initial draft of the Plaintiff’s outline of submissions in late 2011.[34]  On the other hand, the Defendant submitted that by this stage, the only evidence available to it was that all of the money advanced by Maria Mischel had been advanced to Henry Mischel personally in the 1980s.[35] 

   [31]Plaintiff’s Submissions, paragraphs 6(b) and 8; Transcript, page 17.   

   [32]Being the affidavit sworn by Igo Norbert Mischel on 9 November 2011.

   [33]Being the affidavit sworn by Henry Mischel on 11 November 2011.

   [34]Plaintiff’s Submissions, paragraph 6(c).

   [35]Defendant’s Submissions, paragraph 12(a).

1. In my view, the fact that a settlement offer is made at a late stage and close to the trial date is not necessarily a bar to an indemnity costs order being made.  Indeed, offers made an early stage of a dispute or a proceeding are more likely to be rejected on the basis that it is difficult for the offeree to make an informed assessment of the offeror’s claim or defence.[36]  

   [36]Spagnolo & Anor v Body Corporate Strata Plan 418979Q & Anor [2007] VSC 423 at [99] and [100] (Robson J).

1. The Court should, however, discourage the making of a Calderbank offer shortly prior to a trial commencing when it is used “as an indiscriminately wielded tactical weapon”[37] or when offeree might be expected to have made up its mind on a number of matters and incurred considerable costs.[38]  However, this consideration only appears to carry significant weight where the proceedings are complex and a considerable amount of time has already been invested in them.[39]

   [37]Maclean v Rottnest Island Authority [2001] WASCA 323 at [36] (Wallwork, McKechnie JJ and Einfeld AJ).

   [38]See G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at 405, [13.63], citing Colgate Palmolive Ltd v Markwell Finance Ltd [1990] RPBC 197 at 200-1 (Falconer J) and University of Western Australia v Gray (No 21) [2008] FCA 1056 at [40] (French J).

   [39]De Groot v Nominal Defendant [2005] NSWCA 61 at [261] (Bryson JA).

1. Where an offer, though made at the “eleventh hour”, is not used as a tactical weapon, it remains potentially significant to the exercise of the costs discretion.[40]  In Clarke and Anor v ABC and Anor,[41] Ashley J found that:[42]

“…it is plainly the fact that the plaintiffs' offer was late made, and was left open only for a short while. But it was made when the defendants should have been well able, and without much delay, to assess both the probable and possible outcomes of the proceeding; and thus resolve upon a response to the plaintiffs' offer.”

[40]See, for example, Auswest Timbers Pty Ltd v Secretary to the Department of Sustainability & Environment (No. 2) [2010] VSC 513 where an indemnity costs order was made even though the Calderbank offer in that case was made only three days prior to a trial commencing.

[41][2001] VSC 274.

[42][2001] VSC 274 at [18] (Ashley J).

1. In light of these authorities I am of the view that the provision of the Calderbank Letter only a few days prior to the trial date does not render it of no or little significance for the purposes of exercising the discretion with respect to costs.  In my opinion, the Calderbank Letter was provided to the Defendant when, in the particular circumstances of these proceedings, it ought to have been fully aware of the strengths and weaknesses of its case and so should have been well able to assess “probable and possible outcomes” and respond without delay.  In these circumstances it was, in my view, a reasonable step for the Plaintiff to take at this time for the purpose of resolving the proceedings, or, at least, seeking to protect himself from costs.  Consequently it could not be regarded as a tactical weapon in the relevant sense.[43]  Neither do I think that the proceedings were so complex or that such significant time had been invested in them to make it inappropriate or undesirable for a Calderbank offer to be permitted when it was made.  There is no evidence which would support a finding of a relevantly significant investment of time and, consequently, cost and the proceedings are not complex in the relevant sense.[44]  Consequently, the time at which the offer in the Calderbank Letter was made is not a factor that assists the Defendant in contending that its rejection of that offer was reasonable.

   [43]See above, paragraph 28.

   [44]See above, paragraph 28 .

(b)     The time allowed to the offeree to consider the offer

1. The Plaintiff contended that as the Calderbank Letter was open for acceptance until 10.00 am on 20 June 2012, the Defendant had reasonable time to consider and accept the offer.[45]  Accepting that the Defendant received the Calderbank Letter on 15 June 2012, it had approximately between two and three business days to consider the offer.

   [45]Plaintiff’s Submissions, paragraphs 6(a) and 9.

1. The Defendant responded that:

“Such a period of time is too short and unreasonable.  A formal offer of compromise, made in accordance with the rules (order 26) is required to be open for not less than fourteen days after the making of the offer (order 26.03).

In considering the reasonableness of the time available to the Defendant to consider the matter, the Court should conclude that the time was unreasonably short and should not allow such short duration offers to be effective. The effect of a Calderbank letter is the same as a formal offer of compromise and insofar as the time during which the offer was open, the time of 14 days in Order 26 is a reflection of what is a reasonable time during which the offer should be open.”

1. There is no requirement that a Calderbank offer must be open for the same amount of time as a formal offer of compromise under Order 26 of the Rules. Moreover, a Calderbank offer is not constrained to the formal requirements of the Rules, so what constitutes a reasonable period for the offer to be accepted is more flexible than a formal offer of compromise in that it will vary depending upon particular circumstances. Consequently, the period of time during which a Calderbank offer should remain open depends on the stage of the proceedings at which it is made[46] and the duration of the proceedings to the time the offer is made.[47] That said, the time requirements set out in the Rules with respect to offers of compromise may, nevertheless, influence whether the period of time set out in the Calderbank Letter is to be regarded as reasonable. This is clear from the decision of Cavanough J in Thomopoulos v Faulks (No 2)[48] where his Honour said:[49]

“[13] As to factor (b), the time allowed to the offeree to consider the offer, I consider that the offer made in this case allowed an unduly short time for consideration. The letter of offer was sent at 2.24 pm by fax on Friday 12 May 2006. It was stated to be open for acceptance until 4 pm on Monday 15 May, after which it would lapse. The period allowed was barely in excess of one working day, which I regard as quite a short period in the circumstances of this case. Indeed I think it would be regarded as a short period in most cases, particularly by comparison to the time which is allowed under the rules applicable to formal offers of compromise pursuant to O 26 of the Supreme Court Rules. The minimum time to be allowed under those rules is 14 days. That period is, I recognise, no more than a guide or a yardstick and of course it is not applicable in its own terms to an informal offer, but nonetheless I think there is a significant difference between the time allowed in this case and the time that would be the minimum required under a formal offer of compromise.”

[46]That is, an offer made at an early stage in the proceedings should have a longer period for acceptance as oppose to one that is made late in the proceedings: G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at 406-7, [13.64] citing Elite Protective Personnel Pty Ltd v Salmon [2007] NSWCA 322.

[47]G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at 407, [13.64] citing Aldag v Eistis (No 2) [2008] NSWDC 186 at [14] (Gibson DCJ).

[48][2006] VSC 286.

[49][2006] VSC 286 at [13] (Cavanough J).

1. The more flexible attributes of Calderbank offers mean that regard must be had to the complexity of the proceedings and the extent to which the offeree might reasonably be thought to have fully understood the claims and evidence in a proceeding and been able to assess its position in a fully informed and considered manner.  It follows that, as a general proposition, a shorter time limit for acceptance of a Calderbank offer would seem to be justified in a number of instances, “especially if the offer is made at a time sufficiently advanced that the parties are positioned to asses the respective strengths and weakness of the offeror’s position on the issues in dispute at trial.”[50]   Nevertheless, it does depend, very much on the particular circumstances. 

   [50]G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at 408, [13.6] citing Red Engine Group Pty Ltd v Hotel Agencies Pty Ltd [2007] VCC 398 (where the Calderbank letter was dated eight days before the date on which the trial was to commence, Wodak J considered this ‘as reasonable and sufficient time for [the offeree] to consider the offer’, in view of the fact that the letter was written at a time when all materials (including expert reports) on which each party may rely at trial had been provided by each party to each other party; ultimately, though, the rejection of the offer was held not to be unreasonable because its acceptance would not have brought the proceeding to an end and the letter was ambiguous: at [22]).

1. Returning to this proceeding, I am of the opinion that, although the Plaintiff’s offer was only open for a short period of time, the offer was made at a stage when the Defendant ought to have known the strength of the Plaintiff’s case and the weakness of its case and been able to respond promptly.  Whilst the Plaintiff’s offer could have been made earlier and provided the Defendant with further time, I think the period of time was, in all the circumstances, reasonable.

(c)       The extent of the compromise offered

1. The compromise offered in the Calderbank Letter was not for a substantial amount of money relative to the amount that could have been received had the Defendant been successful (the Defendant believed it had assets to which it was entitled in the amount of approximately $357,000).[51]  However, the offer was an “all-in” offer which extended to the parties bearing their own costs. 

   [51]Milne Affidavit, paragraphs 12-16.

1. According to the Plaintiff, the offer of $30,000 would have met in large part the Liquidator’s legal costs for running the Defendant’s case.[52]  On the other hand, the Defendant submitted that the offer was not an attractive offer given that there was no offer to pay costs.[53] 

   [52]Transcript, page 17.

   [53]Transcript, page 31.

1. Nevertheless, one must consider the offer in the context of all facets of the proceedings, both legal and factual.  In this case, although the offer was not, on first impression, an attractive offer given the amount that was in dispute between the parties, having regard to the fact that the Defendant was in a position to evaluate the strengths and weaknesses of its case when the offer was made, I am of the opinion that offer put was reasonable in all the circumstances and ought to have been considered favourably.

(d)      The offeree’s prospects of success, assessed as at the date of the offer

1. In my view, the Defendant’s prospects of success at the date the Calderbank Letter was sent were not good.

1. The Defendant submitted that:[54]

   [54]Defendant’s Submissions, paragraphs 13-16.

“The liquidator was entitled to contend that as a consequence of the joint ownership of the premises it became entitled to the whole of the proceeds of sale of the premises. That is, the liquidator had as an asset, the proceeds of the sale of the premises available to creditors.

The Plaintiff’s action was based on the proposition that the joint ownership as severed prior to the deceased’s death and that consequently the proceeds were held on trust for the tenant in common.

The liquidator was bound, not to simply surrender an asset on the basis of assertions that the joint tenancy had been severed. The liquidator had a duty to rigorously test all the evidence to see whether or not there had in fact been a severance. After all, the liquidator was being asked to give up what on its face, was clearly an asset available for creditors in the winding up.

No criticism can be made of the liquidator for his conduct in vigorously defending these proceedings.”

1. Whether the Defendant’s rejection of the offer contained in the Calderbank Letter was reasonable also depends upon the process of reasoning undertaken by the Defendant.  This was emphasised by McDougall J in Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd:[55]

“…the failure to accept a Calderbank offer does not create a presumption as to indemnity costs when the offeror receives a more favourable outcome than that offered, then the corollary is that it is necessary to show that there exist sufficient circumstances to displace the general rule as to costs (where the offeror was a defendant and the offeree a plaintiff). In many cases — maybe most — that will be done by demonstrating that rejection of the offer was unreasonable in some way. In this context, I think, “unreasonable” may mean either that the rejection was not supported by any process of reasoning whatsoever or that the reasons for rejection that were advanced, or that may be inferred, were legally or factually (or both) inadequate.” (emphasis added)

[55][2005] NSWSC 481 at [30] (McDougall J).

1. The quick or prompt rejection of an offer would tend to suggest that the rejection was unreasonable.[56]  Additionally, although an offeree is not compelled to disclose legal advice (so as to waive privilege over the advice), “a failure to disclose advice means that one circumstance that is possibly relevant to the characterisation of the rejection as reasonable or unreasonable is not available.”[57]

   [56]See, for example, Primus Telecommunications Pty Ltd v CCP Australian Airships Ltd (No 2) [2003] VSC 141 at [8] (Habersberger J); and Orrong Strategies Pty Ltd v Village Roadshow Ltd (No 2) [2007] VSC 205 at [28] (Habersberger J).

   [57]Rickard Constructions Pty Ltd v Rickard Hails Moretti Pty Ltd [2005] NSWSC 481 at [32] (McDougall J).

1. The fact that an offeree’s prediction of its prospects of success in the litigation is erroneous does not, of itself, indicate that the rejection of the offer was unreasonable, as indicated by Byrne J in Premier Building & Consulting Pty Ltd v Spotless Group Ltd (No 13):[58]

“A decision to accept or not an offer of this kind will ordinarily be based upon the offeree’s perception of its ultimate chances of success, that is, it involves a prediction as to the likely outcome of the trial. At the time the debate about costs occurs the trial will normally be over; the event will have demonstrated that the prediction which underlay the decision was not fulfilled, that it was erroneous or even imprudent. I put to one side the case where the decision was one based on factors other than the prospect of success. A decision to commence or to press on with litigation which is based on the desire to grind a less resourced opponent into capitulation or to put it out of competitive business could hardly be countenanced by the court. If an offeree sought to justify its decision to refuse an offer by reference to some consideration other than the prospect of success, this would be a matter for it to raise, leaving always the ultimate onus on the issue upon the offeror. In the same way that the failure to achieve a more advantageous result will not automatically put the offeree at risk, so too it is not sufficient for it to avoid the consequence of its erroneous prediction that it says only that the outcome was uncertain. The outcome of almost all litigation is uncertain. The erroneous prediction may not, however, be an unreasonable one if the predictor was not, at the time, for good reason in possession of sufficient information to make an assessment or if the circumstances upon which it was based later changed. It must be acknowledged that it is part of the ordinary function of a lawyer to make predictions of this kind. The lawyer must make them at the outset and during the litigation in order to enable the client to make responsible and informed decisions to commence the litigation, to pursue it and to make the various decisions in the course of the proceeding’s progress to trial and judgment.” (citations omitted)

[58][2007] VSC 516 at [13] (Byrne J).

1. There is no evidence as to how the Defendant responded to the Calderbank Letter.  No evidence was put or submissions made as to the reasoning process behind the Defendant’s failure to accept the Plaintiff’s offer.  However, what is known as a result of the trial is that the Defendant’s case was, as submitted by the Plaintiff, substantially based on collateral credit attacks on the evidence provided by the principal witnesses for the Plaintiff, Igo Mischel and Henry Mischel,[59] a basis which I rejected.[60]  The Defendant emphasised that it was entitled to give weight to the position that documentary evidence indicated that the premises had been mortgaged or charged to an extent which exceeded its realisable value.  Nevertheless once one stripped away these credit attacks and had regard to the fact that the sale of the premises did in fact yield surplus proceeds, in spite of claims that it had been mortgaged or charged to the extent that all the equity of Maria Mischel in it had been extinguished, the Defendant would have to have had significant doubts as to its prospects on these points.  Add to this position the evidence upon which the Plaintiff’s case relied which was contained in reasonably detailed witness statements, which the Defendant had ample opportunity to consider fully, I think that the Defendant must have realised, or ought to have realised, that it had a very weak case.

   [59]Transcript, page 16.

   [60]See Igo Mischel (as Executor of the Estate of Maria Mischel) v Mischel Holdings Pty Ltd (in liq) [2012] VSC 292 at [24] and [25] (Croft J).

(e)       The clarity with which the terms of the offer were expressed

1. The Calderbank Letter contained a clear offer.  There does not appear to be any controversy in this respect.

(f)       Whether the offer foreshadowed an application for an indemnity costs in the event of the offeree’s rejecting it

1. Paragraphs 5 and 6 of the Calderbank Letter clearly reserved the Plaintiff’s right to make an application for indemnity costs if the offer were not accepted. 

Conclusion

1. For these reasons,[61] I find that the Defendant’s rejection of the offer contained in the Calderbank Letter was unreasonable.  I think that in the context of these proceedings, the offer made by the Plaintiff was one which ought to have been considered favourably and, given the difficulties with the Defendant’s case which were, or ought to have been, readily apparent, it was an offer that should have been accepted.  It follows that the Defendant should pay the Plaintiff’s costs of the proceedings from the time when the offer in the Calderbank Letter expired, being 10.00am on 20 June 2012, onwards on an indemnity basis.

   [61]See above, paragraphs 25 – 46.

1. It also follows, for the preceding reasons, that the Plaintiff should be awarded costs on a party and party basis with respect to costs incurred from the commencement of the proceedings until 10.00am on 20 June 2012.  The usual order as to costs is not made mechanically in the sense that the “winner” is automatically awarded costs; an exercise of discretion is often involved in determining degree of success and failure of the parties’ claims and, in any event, costs are discretionary.[62]  Nevertheless, such an order is appropriate in these proceedings given the findings contained in the Primary Judgment and the Defendant’s position in not opposing a costs order of this kind.

   [62]See ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2) [2012] VSC 177 at [24] (Croft J) for a discussion of the principle and authorities.

Second Question – Costs order to be made against the non-party Liquidator?

1. Given the Defendant’s liquidation and its current asset holdings, any costs order against the Defendant is likely to prove to be futile.[63]  The Plaintiff’s contention that the Liquidator ought to bear a costs order is grounded in the reality that the Defendant currently has no assets and would not be able to comply with any costs order made against it.[64] 

   [63]Milne Affidavit states that the Defendant has no assets to pay any costs, see paragraphs 8-16.

   [64]Plaintiff’s Submissions, paragraphs 12-17.

1. By way of background in relation to this issue I note that:

(a)         the Plaintiff commenced these proceedings against the Defendant on 14 November 2011;

(b)         the Defendant then went into liquidation on 29 November 2011 (“the Relevant Date”) and Paul Burness was appointed as liquidator;[65]

[65]Milne Affidavit, paragraph 4, Exhibit AM-1.

(c)          the Liquidator was appointed on 16 December 2011 in place of Paul Burness;[66]

[66]Milne Affidavit, paragraph 5, Exhibit AM-1.

(d)        the current proceedings have since been maintained by the Defendant upon the instructions of the Liquidator;[67]

(e)         the Plaintiff applied for leave to proceed against the Defendant in liquidation on 23 December 2011; and

(f)          the Plaintiff was granted leave to proceed against the Defendant on 7 February 2012.

[67]Plaintiff’s Submissions, paragraph 12; Milne Affidavit, paragraph 4.

1. It is clear that any costs order against the Defendant with respect to costs incurred after the Relevant Date would not be admissible as proof against the company. Subsection 553(1) of the Corporations Act 2001 (Cth) provides that:

“(1)     Subject to this Division and Division 8, in every winding up, all debts payable by, and all claims against, the company (present or future, certain or contingent, ascertained or sounding only in damages), being debts or claims the circumstances giving rise to which occurred before the relevant date, are admissible to proof against the company.”

Thus only debts incurred prior to the relevant date are provable in the winding up of a company.[68] The Defendant submitted that “by reason of the operation of section 533 of the Corporations Act and the timing of the winding up of the Defendant occurring after the commencement of the proceedings, the costs of the Plaintiff could never be provable against [or] recoverable from the Defendant in the winding up.”[69]  Nevertheless, were any costs orders made against the Defendant prior the Relevant Date the sum ordered would be provable; but such orders would necessarily be with respect to the costs incurred by the Plaintiff during the period from when it commenced the proceedings until the Relevant Date.

[68]The Defendant referred me to the decision of Re Crawford House Press Pty Ltd (1995) 17 ACSR 295 (where an administrator was appointed on 13 December 1993. A deed of company arrangement was entered into and the company then traded from 13 December 1993 to June 1994, with the company being ultimately wound up on 6 June 1994. Cohen J held, applying section 533 of the Corporations Law (Cth) that only debts incurred by the company prior to the relevant date were provable in the winding up.

[69]Defendant’s Submissions, paragraph 9.  This position appeared to have been accepted by the Plaintiff; see Transcript, page 2.

1. It is in that context that the Plaintiff made an application for a costs order against the Liquidator[70] (who was appointed by the Court).[71] 

   [70]Plaintiff’s Submissions, paragraph 3.

   [71]Transcript, page 16.

General principles

1. As discussed previously,[72] the Court’s power to award costs is conferred by section 24 of the Supreme Court Act 1986. The Court’s powers are wide enough to encompass a costs order being made against a non-party to the proceeding.[73]  Nevertheless, care must be taken when exercising the discretion to make an order against a non-party, and such an order should only be made in exceptional circumstances.[74]  The categories of non-parties who can be the subject of a cost order is not exhaustive, though there are well-established categories and these include liquidators and receivers and managers of impecunious companies.[75]

   [72]See above, paragraph 11.

   [73]See, for example, Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203 at 210 (Brooking J); Bischof v Adams [1992] 2 VR 198; Wright v Keon-Cohen (1992) 77 A Crim R 67; Ken Morgan Motors Pty Ltd v Toyota Motor Corp Aust Ltd (VSC, Hayne J, No 2163/91, 23 November 1993, unreported, BC9304156); Cabot v City of Keilor [1994] 1 VR 220; (1993) V ConvR ¶54-485.

   [74]         Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 at 980; [1986] 2 All ER 409 at 416 (House of Lords). See also Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 204; 107 ALR 585 at 605 (Dawson J); Yates Property Corp Pty Ltd v Boland (No 2) (1997) 147 ALR 685 at 695 (Branson J).

   [75]         Bischof v Adams [1992] 2 VR 198 at 202 (Gobbo J); see also, Bent v Gough (1992) 36 FCR 204 (FC); Health & Life Care Ltd v SA Asset Management Corp (1995) 18 ACSR 153 at 163-4 (Doyle CJ); Katherine Stores Pty Ltd (in liq) v B & D Lane Pty Ltd (1996) 5 NTLR 152 at 153 (Master Coulehan). As such, the New South Wales Court of Appeal’s obiter statement in Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 at 123 (Meagher J, with whom Kirby P and Cripps JA concurred) that there is no jurisdiction in the court to order liquidators personally to pay the defendant’s costs where a company in liquidation sues and fails, can no longer be seen to be correct.

1. The general policy underlying a special costs order against a non-party such as a liquidator or a receiver and manager is that they are, in certain circumstances, the real parties to the proceeding.  The general principles and authorities were set out in ACN 074 971 109 Pty Ltd (as Trustee for the Argot Unit Trust) and Pegela Pty Ltd v The National Mutual Life Association of Australasia Ltd (No 2)[76] which I have extracted below:

   [76][2012] VSC 177 at [50]-[53] (Croft J).

“[50]    The parties relied upon the leading authority on the making of costs orders against third parties, Knight v FP Special Assets Ltd [(1992) 174 CLR 178]. In Knight, the receivers, who were non-parties, were held liable for costs brought by the company in receivership under their control. The relevant statement of principle, elements of which were relied upon by all parties, is as follows [(1992) 174 CLR 178 at 192–3 (Mason CJ and Deane J)]:

For our part, we consider it appropriate to recognize a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where a party to litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made.

[51] The plaintiffs also relied upon a passage from the judgment of Dawson J in Knight that [(1992) 174 CLR 178 at 202 (Dawson J)]:

The cases therefore establish a long-asserted jurisdiction to award costs in appropriate cases against a person who is not a party to the proceedings where that person is the effective litigant standing behind an actual party or where there has been a contempt or abuse of the process of the court.

Dawson J did, however, consider that such an award would only be made in an exceptional case [(1992) 174 CLR 178 at 203; see also Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965 at 980 per Lord Goff); Symphony Group Plc v Hodgson [1994] QB 179 (CA) at 191 (Balcombe LJ); and Manderson M & F Consulting v Incitec Pivot (No 3) [2011] VSC 441, at [20]–[27] (Croft J) and the authorities to which reference is made].

[52]     Further, in Bischof v Adams, Gobbo J said [1992] VR 198 at 205]:

… there may be cases where the connection is significant but not material to the issue of costs. Thus a person may benefit greatly from a particular proceeding but may not have any real part in supporting the proceeding.

The most convenient course is, in my view, to look at both factors in considering the connection between the proceedings and the non party, namely, the connection between the non party and the proceedings and secondly, the causal connection between the non party and the costs.

I have concluded that, without limiting myself to these two matters, I should take both factors into account in any exercise of discretion. The connection must be real and direct and I t must be material to the issue of costs. The mere fact that a person may benefit from the litigation will not, without more, suffice.”

1. In Egankarra Pty Ltd v Vince[77] Fullagar J dismissed an application for costs against a non-party liquidator and held that no orders should be made against the liquidator when the proceedings were instituted bona fide and failed through no personal fault or neglect of the liquidator.[78]

   [77](1990) 2 ACSR 463. I note the decision was not followed by Debelle J of the Supreme Court of South Australia in Health & Life Care Ltd v SA Asset Management Corp (1995) 18 ACSR 153 with respect to the distinction drawn between actions brought by a liquidator in his own name and actions brought by a liquidator in the name of a company is no longer material in relation to the power of the court to order costs.

   [78]Egankarra Pty Ltd v Vince (1990) 2 ACSR 463 at 467-9 (Fullagar J).

1. In Bent v Gough[79] a costs order was made against the liquidator when:[80]

   [79](1992) 36 FCR 204.

   [80]As summarised in G.E. Dal Pont, Law of Costs (LexisNexis, 2009, 2^nd edn) at [22.41].

“…the liquidator embarked upon the proceedings the success of which depended on several difficult issues of fact and law without obtaining funds from the promoters or other relevant persons.  That the liquidator was never in funds, instead pressing on with an action that was both expensive and hazardous, and which ultimately ended in failure, led the Full Federal Court to uphold the trial judge’s decision to order costs against the liquidator personally.  Underlying the court’s decision seems to be that the liquidator acted improperly in proceeding with the suit.” (emphasis added)

In Green (as liquidator of Arimco Mining  Pty Ltd) v CGU Insurance Ltd,[81] Hodgson JA observed that:[82]

“The statement that there is no jurisdiction to order the liquidators personally to pay costs when a company in liquidation sues and fails is not universally correct; see Mead v Watson (2005) 23 ACLC 7 ; [2005] NSWCA 133. But that jurisdiction is only exercised where the liquidator’s conduct is improper…” (emphasis added)

[81](2008) 67 ACSR 105.

[82](2008) 67 ACSR 105 at 114, [27] (Hodgson JA).

1. The special position that liquidators hold which requires them to act in the interests of creditors and, in effect, perform a public function pursuant to statute has been seen as a consideration relevant to the exercise of the discretion to order costs.  Thus in JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3)[83] where Bell J said:[84]

“[103]Generally speaking, the responsibility of a liquidator is to take control and management of the company, to get in and realise its assets, to identify its liabilities, to meet the debts of the creditors as far as is possible, to distribute the balance (if any) to the shareholders and to take all necessary other steps to wind the company up. In performing this function, a liquidator is an officer of the court and is answerable to the court. The courts are therefore loathe “to discourage liquidators from performing their public duty in pursuing litigation by an undue readiness to impose on them personal liability for the costs of successful parties.” Those words were spoken by Northrop and Ryan JJ in Bent v Gough. Their Honours went on to say that the correct approach was that the discretion to order a liquidator personally to pay costs –

should be exercised sparingly, not by way of punishing an imprudent liquidator, but only where the circumstances may make it just or appropriate for the successful party to be indemnified against his or her costs.”

[83][2010] VSC 623.

[84]JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3) [2010] VSC 623 at paragraph [103] (Bell J).

1. It was held in Macks v Hedley[85] that although the liquidator’s conduct was not beyond criticism, and could be described as falling below prudent conduct, this did not present a compelling case in the interests of justice to order costs against him.  The decision contains a useful summary and application of the principles:[86]

   [85](1999) 94 FCR 188.

   [86]Macks v Hedley (1999) 94 FCR 188 at 217-8, [82]-[87] (Gallop, Moore and Madgwick JJ).

“Whether Macks should be ordered to pay the costs

82. Bent v Gough was decided three weeks before Knight v F P Special Assets Ltd. In Bent it was unanimously held that, in exercising the discretion as to whether to award costs against a non-party liquidator, it is proper to give significant weight to the special position of an official liquidator. Black CJ said (at 210-211):

"In his careful argument, counsel for the appellant emphasised the special position and the duties of an official liquidator and the undesirability of liquidators being deterred in the performance of their important functions by the prospect of a personal liability for costs. The special position of a liquidator is undoubtedly a matter that ought to be given substantial weight when consideration is being given to an order that a liquidator pay costs personally, although it must be borne in mind that the circumstances in which a liquidator is appointed, can vary greatly from case to case.

In my view, it has not been shown that Fogarty J was in error in the way in which he dealt with these important matters. His Honour noted that the circumstances where a person who is not a party is ordered to pay costs need to be "exceptional or unusual and of a compelling nature (or) power" and his Honour added:

This is particularly so in a case such as this where the liquidator initiated the proceedings in his capacity as liquidator, a capacity which carries with it the connotations of an officer of the court and a person carrying out a public duty.

Later his Honour said:

It would not be in the interests of justice if liquidators were discouraged from performing their largely public duty and duty as officers of the court in taking curial proceedings because of the risk of having to bear personally the costs if the litigation proved unsuccessful.

His Honour's reference to "unusual" circumstances was not a reference to circumstances that were merely unusual and not otherwise compelling. He expressly referred to the need for the circumstances to be of a compelling nature and I think it clear that his discretion was exercised on that basis. In the great majority of cases it would no doubt not be right to order a liquidator who is not a party to pay costs personally."

Northrop and Ryan JJ said (at 219):

"It was also conceded on behalf of the appellant that Fogarty J correctly took into account the need not to discourage liquidators from performing their public duty in pursuing litigation by an undue readiness to impose on them personal liability for the costs of successful parties. However, it was then said that the reference to Latoudis v Casey (1990) 170 CLR 534 distracted attention from "the real issue". We do not understand his Honour to have given himself any direction other than that the discretion should be exercised sparingly, not by way of punishing an imprudent liquidator, but only where the circumstances make it just or appropriate for the successful party to be indemnified against his or her costs. We regard that approach as unexceptionable."

83. Thus there is recent authority of a Full Court of this Court that liquidators do stand in a special position (indeed, as Black CJ said, this has been "undoubted") and their position is, in general, deserving of more benign consideration than that of receivers. Knight was a case of a receiver and manager. Primarily it dealt with the power of a court to make orders against non-parties and it was held that, under a statutory formulation commonly used to confer a discretionary power to award costs, the Queensland Supreme Court had such power. Accordingly, Mason CJ and Deane J, with whom Gaudron J agreed said (at 192):

"The conclusion that [there was such power] does not, of course, mean that a judge has an unfettered discretion to make any order that he or she chooses. The wide jurisdiction conferred by the rule "must be exercised judicially and in accordance with general legal principles pertaining to the law of costs", to take up the words of Lambert JA in Oasis Hotel Ltd v Zurich Insurance Co (1981) 124 DLR (3d) 455.

Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognised that it may be appropriate for such an order to be made. "

However they added:

"For our part, we consider it appropriate to recognise a general category of case in which an order for costs should be made against a non-party and which would encompass the case of a receiver of a company who is not a party to the litigation. That category of case consists of circumstances where the party to the litigation is an insolvent person or man of straw, where the non-party has played an active part in the conduct of the litigation and where the non-party, or some person on whose behalf he or she is acting or by whom he or she has been appointed, has an interest in the subject of the litigation. Where the circumstances of a case fall within that category, an order for costs should be made against the non-party if the interests of justice require that it be made."

84. It seems to us that their Honours were at most stating a mere prima facie rule as to how the discretion should be exercised in such a case. Their view was that, in addition to the conditions set out, "the interests of justice [should] require that [a costs order] be made".

85. We do not consider that Knight was erecting a new rule with the result that the "special position" of liquidators should not continue to be recognised in the exercise of the discretion or that the circumstances in which a costs order should be made against a non-party liquidator need not be "unusual and of a compelling nature": cf Bent. Among other things, the "interests of justice" is a notion apt to refer to the interests of classes of persons broader than the actual parties to litigation (including, within the concept of litigation, a costs application): see, for example, Queensland v J L Holdings Pty Ltd (1997) 189 CLR 146.

86. Once it is acknowledged that there is to be restraint in the exercise of the discretion to order a non party to pay costs where that non party is a liquidator, an inquiry into a wider range of matters than in the case of somebody not entitled to the special protection of a liquidator will often be necessary. Whether a liquidator has been inexcusably indifferent to the possible consequences of his conduct for one or more of the parties to the litigation would normally involve an investigation of whether the liquidator has displayed reasonable prudence. A judgment about that would naturally include consideration of whether he or she obtained and acted in accordance with legal advice. We accordingly consider the question of legal advice a relevant matter for inquiry. If a liquidator non-party should avoid a costs liability for costs personally because he or she had behaved prudently in relation to legal advice which, as it happens, was bad enough to amount to an abuse of the Court's processes, the disappointed applicant for costs may yet have a remedy against the perpetrator: see Flower & Hart v White Industries (Qld) Pty Ltd (1999) 87 FCR 134.

87. As discussed earlier, while this is an appeal against the exercise of a wide discretionary power to award costs, the reception of fresh evidence in the appeal alters the basis upon which the appellate court approaches its task. Moreover, in this case, the exercise of the discretion was based on an erroneous finding of fact. Proper and due weight must be given to the views of the primary judge on issues unaffected by that erroneous finding or the material tendered in the appeal. However the fact that Macks did act on advice and retained lawyers himself through the relevant period is a matter of considerable significance and materially alters the mix of considerations bearing upon the exercise of the discretionary power.” (emphasis added)

1. In my view, consistent with these authorities, two elements need to be considered before a costs order can be made against a liquidator:

(a)         whether the liquidator was the effective litigant standing behind an actual party; and

(b)         whether there are exceptional circumstances justifying the special costs order against the non-party liquidator given the special position held by a liquidator appointed by a court.

Was the Liquidator the effective litigant in the proceedings?

1. The Defendant’s submissions indicate that the Liquidator was the driving force behind prosecuting the Defendant’s defence and resistance to the Plaintiff’s claims.[87]  Additionally the evidence and the manner in which the Defendant conducted the trial, including its written and oral submissions, are consistent with this position and there is no evidence (or submissions) to the contrary.

   [87]Transcript, page 30.

Are there exceptional circumstances justifying a non-party costs order against the Liquidator?

1. In determining whether there are exceptional circumstances in these proceedings to warrant a non-party cost order against the Liquidator, consideration needs to be given to a number of factors and general policy issues.  In terms of the latter the courts have maintained the position that a liquidator ought not to be discouraged from performing his or her functions (especially where he or she is a court appointed officer) and nor should a liquidator’s position be made so onerous that people will be discouraged from accepting the office.  These policy considerations are, however, to be balanced with the general principle that a successful party is entitled to its costs.  Thus in Bischof v Adams[88] Gobbo J said:[89]

“The second category of case was said to be that represented by decisions wherein costs were ordered against non parties being the receivers and managers of companies that were parties to the proceedings.

In these cases the receiver, usually appointed by a secured creditor, commenced or continued proceedings in the name of the impecunious company. Where the company eventually went into liquidation and the successful party was unable to recover its costs from the company, it was recognised that these costs could be recovered from the receiver and manager of the company. The successful party was not confined to an order for costs against the impecunious company. The three cases that may be said to illustrate this approach are Bacal Contracting Ltd v Modern Engineering (Bristol) Ltd [1980] 2 All ER 655; Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 and Forest Pty Ltd v Keen Bay Pty Ltd (1991) 9 ACLC 460.

In Forest's Case the company brought proceedings which were eventually abandoned. The trial judge found that the company's receiver and manager was the "real instigator" of the litigation and the person who was conducting it. The judge made an order for costs against the receiver and manager who was not a party to the proceedings. On appeal, the order for costs was sustained. Ryan J. said, at 476: "In my view, it would have been 'monstrously unfair' (to use an expression of Pearson J. quoted in Bacal Contracting Ltd v Modern Engineering (Bristol) Ltd [1980] 2 All ER, at 661) to confine the applicants to orders against impecunious companies, and it was not sufficient to decline to make the orders for costs against the receivers that orders had been made for security for costs." (the Plaintiff’s emphasis)

[88][1992] 2 VR 198 (“Bischof”).

[89][1992] 2 VR 198 at 202 (Gobbo J).

1. The Plaintiff relied upon this passage from Bischof and argued that it would be “monstrously unfair” if costs order were not made against the Liquidator, as this would leave the Plaintiff, in effect, without a remedy in costs.[90]  Whilst one might have some sympathy with this argument, in a general sense, the development of case law since Bischof indicates that before a costs order can be made against a non-party liquidator the court needs to consider whether the liquidator’s conduct in the proceedings was reasonable or prudent in pursuing the claim or defence. 

   [90]Plaintiff’s Submissions, paragraph 17; Transcript, page 2.  

1. An example of unreasonable conduct in this respect is provided by the decision of Mead v Watson.[91]  In that case the New South Wales Court of Appeal found that the liquidator, as plaintiff, persisted in opposing clearly sustainable defences which was “unreasonable and without justification”.  The Plaintiff’s written submissions provided a concise summary of that case, a summary which I adopt for present purposes:[92]

   [91][2005] NSWCA 133 (“Mead v Watson”); see also Re Networking Welding (in liq) (No 2) [2001] NSWSC 809.

   [92]Plaintiff’s Supplementary Submissions, paragraphs 1-6.

“1.      In Mead v Watson…the Court of Appeal of the Supreme Court of New South Wales heard an appeal in respect of a decision from the primary judge dismissing an application that a liquidator personally pay the costs of a successful defendant in defending proceedings initiated by the liquidator. 

2.        The trial judge in determining whether it was appropriate to make an order against the liquidator personally proceeded from an analysis which initially arose out of a consideration of principles informing a trustee’s right to be indemnified out of trust assets in respect of costs, charges and expenses properly incurred by the trustee for the benefit of the truth.  Such an entitlement arises where the expenses are properly and reasonably incurred.

3.        By necessary corollary if the expenses are so incurred unreasonably or unnecessarily there is no right under the general rule to indemnity because the expense is not “properly incurred”.

4.        Applying those principles, the trial judge concluded that it was appropriate to order that a liquidator personally pay costs which had been ordered against the company as a result of litigation instigated and carried through by the liquidator only where the liquidator’s conduct of the litigation is improper in the sense referred to in Re Beddoe; Downes v Cottam [1893] 1 Ch 547, 562.

5.        The trial judge held that applying that standard, the question to be answered was whether the conduct of the litigation was “negligent or unreasonable”.

6.        The Court of Appeal, although not expressly determining the relevant standard to apply approved the approach of the trial judge observing that “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 were sufficient to constitute the relevant degree of impropriety to justify an order that the costs be paid by the liquidator personally…”  

1. In light of Mead v Watson, the Plaintiff contended that the Liquidator’s prosecution of the defence was unreasonable, for four reasons. 

1. First, the Plaintiff submitted that the only evidence relevant to the facts in issue was contained in the affidavits of Igo Mischel and Henry Mischel, which had been sworn in November 2011, being seven months prior to the trial hearing.[93] The Defendant provided no direct response to this particularly contention, though the Defendant said that it was reasonable to defend against the claim as it had indefeasible title to the premises until the court ruled that there had been a severance of the joint tenancy,[94] and that it was reasonable to test the evidence given the suspicion raised by the evidence put forth by the Plaintiff.[95]  In that regard, the Defendant referred[96] to the comments of Bell J in JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3):[97]

“It was legitimate and appropriate for the liquidator to do so because the objective documentation and other evidence gave rise to suspicions which it was the liquidator’s responsibility — as a liquidator — to address.”

[93]Plaintiff’s Supplementary Submissions, paragraph 13.

[94]Transcript, page 21.

[95]Transcript, page 22.

[96]Defendant’s Submissions, paragraph 17.

[97][2010] VSC 623 at paragraph [95] (Bell J).

1. Secondly, the Plaintiff argued that the Liquidator did not seek directions from the Court as to the maintenance of the proceedings[98] when it could have done so. The Plaintiff referred to subsection 479(3) of the Corporations Act which provides that:

“The liquidator may apply to the Court for directions in relation to any particular matter arising under the winding up.”

[98]Plaintiff’s Supplementary Submissions, paragraph 14.

1. The Plaintiff noted that this was a relevant (but not determinative) factor in Mead v Watson.[99]A passage from Young J’s judgment in Sanderson v Classic Car Insurances Pty Ltd[100] was also cited:[101]

“It is usually only proper to exercise [the power under s 479(3)] where the matter involves guidance to the liquidator on matters of law or principle or to protect him against accusations of acting unreasonably.” (Plaintiff’s emphasis)

[99][2005] NSWCA 133 at [70] and [71] (Sheller, Ipp and Tobias JJA).

[100](1985) 10 ACLR 115.

[101](1985) 10 ACLR 115 at 117 (Young J).

1. In relation to this argument, the Defendant contended that section 479(3) of the Corporations Act was not available to be used in the manner suggested by the Plaintiff.  It submitted that:[102]

   [102]Defendant’s Second Supplementary Submissions, paragraphs 2-4.

“2.      …the Plaintiff’s contention logically would require the liquidator to have gone to the Court for advice on the prospects of succeeding in the defence of this proceeding. This would require the liquidator to have a dry run before the Court and the Court giving advice without the benefit of cross-examining witnesses and hearing evidence. The Court would not give such advice to the liquidator.

3.        Advice should be sought only in cases of extreme difficulty and this is not such a case. See Sanderson v. Classic Car Insurances (1985) 10 ACLR at page 2.

4.        The Plaintiff’s contentions would invite liquidators in every case to seek directions as insurance against the possibility of error as well as an assurance that they are on the right track. That is not the purpose of seeking directions. See Young J. in Sanderson’s Case. If the Plaintiff’s contention is correct, advice should be sought as to the way litigation is conducted, it would lead to liquidators seeking directions of the Court solely to avoid it being later alleged that they engaged in mis-conduct by not seeking advice and therefore should become personally liable on costs.”

In my view the authorities with respect to the operation of subsection 479(3) and its predecessors do not support the limited operation of those provisions for which the Defendant contends. It is to these that I now turn.

1. Subsection 479(3) is effectively a codification of the Court’s inherent jurisdiction to assist its officer (the court appointed liquidator) by determining any question arising in the winding up.[103]  The history and development of this provision was extensively explored by McLelland J in Re GB Nathan & Co Pty Ltd (in liq)[104] who found that:[105]

   [103]Re Reid Murray Holdings Ltd (in liq) [1969] VR 315.

   [104](1991) 24 NSWLR 674; 5 ACSR 673 (McLelland J).

   [105](1991) 24 NSWLR 674 at 679-80; 5 ACSR 673 at 678 (McLelland J).

“Modern Australian authority confirms the view that s 479(3) “does not enable the court to make binding orders in the nature of judgments” and that the function of a liquidator's application for directions “is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation”…”

This position has been confirmed in recent authorities such as Re Currabubula Holdings Pty Ltd (in liq)[106] where it was held that:

“The court’s power to give directions is not there to provide a liquidator with comfort before he or she takes any step with legal consequences. In most cases the liquidator should apply the law (taking such advice as he or she may think appropriate) and act accordingly, without application to the court. Intervention by the court under s 479(3) is justifiable only to resolve some genuine doubt or in the other circumstances discussed in the G B Nathan case.”

[106](2004) 48 ACSR 734 at 737; [2004] NSWSC 255 at [13] (Austin J).

1. A decision, which is, in my opinion, relevant in the present circumstances is that of Young J in Re Lemon Tree Passage & Districts RSL and Citizens Club Co-operative Ltd.[107] In that case the liquidator approached the court seeking guidance, in the form of directions, as to whether he should commence proceedings.  The liquidator’s application was under subsection 379(3) of the Companies (NSW) Code, a predecessor of the current subsection 479(3) of the Corporations Act.  The relevant passages are at odds with the Defendant’s submissions on the operation of those provisions.  In this respect I note, particularly, his Honour’s observations that:[108]

   [107](1987) 11 ACLR 796 (“Lemon Tree Passage”), which was applied in Re Tietyens Investments Pty Ltd (in liq) (rec and mgr apptd) (1999) 31 ACSR 1; [1999] FCA 206.

   [108](1987) 11 ACLR 796 at 798-9 (Young J); see also the comments in Re Addstone Pty Ltd (in liq) (1997) 25 ACSR 357 at 362-3 (Mansfield J).

“Ordinarily, however, a question as to whether a liquidator should commence proceedings or settle proceedings which involve questions of law and procedure are proper cases for the court to consider under s 379(3) of the Code.

In Re Atkinson [1971] VR 612 at 615–6, Gillard J said:

In cases of real doubt, the proper course for a … trustee to adopt is to seek the court's decision as to whether or not action should be brought, otherwise the representative or trustee might find itself paying the costs of any proceedings which a court might subsequently say were not ‘properly incurred’: see Re Beddoe Downes v Cottam [1893] 1 Ch 547 at 557 and 562. On an originating summons seeking such direction, however, a court is not bound to investigate the evidence in order to make a finding that on the material before it, the proposed proceedings will or will not be successful. It has merely to determine whether or not the proceedings should be taken: Fitzgerald v Smith (1889) 15 VLR 467 at 473; Re Kay's Settlement [1939] Ch 329 at 339; 1 ALL ER 245. On the other hand, the matter should be sufficiently investigated to determine whether or not the proceedings would be fruitless: cf Re Brogden (1888) 38 Ch D 546.

It seems to me, with respect, that that passage correctly sets out the law and practice. In Re Kay's Settlement, supra, Simonds J said at 339: “On a consideration of Re Pryce [1917] 1 Ch 234, it seemed to me that so far as this court was concerned the matter was concluded and that I ought not to give any directions to the trustees to take the suggested proceedings.”

On the material that I have adverted to so far, it would seem to me that the liquidator has, against someone, an arguable case, so that the matter is certainly not in the class of fruitless cases that the liquidator should be advised not to take. That being so, the question is whether the chances of success and the expense involved make it a worthwhile course for the liquidator to pursue the litigation.

There is insufficient material before the court to enable this question to be answered, despite the metre high pile of material. Although the court has, I believe, an obligation to answer the liquidator's questions, those representing the liquidator have an obligation to place before the court the necessary materials for the court to be able to fulfil its function. In cases of this nature, it is not of great assistance to supply the judge with the evidence that the liquidator has unless it can be set out within a small compass. What is required is that the court have material to enable it to assess: (1) the reasonable chances of the liquidator succeeding; (2) the estimated cost of the litigation; and (3) how the litigation is to be funded in the first instance. The first requirement will usually be satisfied by the court being given an opinion from senior counsel, or at least very experienced counsel who has reviewed the evidentiary material and who has researched the legal points involved, and who can give some indication as to the prospects of success.” (emphasis added)

1. In my opinion the analogy drawn between the operation of the predecessor provisions to subsection 479(3) of the Corporations Act by Young J in the Lemon Tree Passage case and a “Beddoe application” by a trustee is a most useful and appropriate one having regard to the content, history and development of these provisions and the manner in which they have been interpreted and applied by the courts.  It is also an approach which follows from the view of the authorities in relation to these provisions taken by Young J in Sanderson v Classic Car Insurances Pty Ltd.[109]

   [109](1985) 10 ACLR 115 (“Sanderson”).

1. Reference was made by the Defendant in its argument to Sanderson in support of the proposition that the provisions of subsection 479(3) of the Corporations Act could only be invoked in “cases of extreme difficulty”.[110]  In my view, Sanderson does not support such a restrictive view.  It must be remembered that in Sanderson there was an issue in relation to the extent to which the court was being invited to make a commercial decision for the liquidator under these provisions.  This invited and explains the following statement of Young J in that case:[111]

“Although s 379(3) of the Companies Code is expressed in wide terms, it seems to me clear that it does not permit the liquidator or a provisional liquidator to come to the court whenever he feels some unease about a situation and wishes to obtain some sort of insurance against the possibility of error, as well as assurance that he is on the right track. A liquidator is an officer of the court, and the modern liquidator today performs many of the functions which in former ages, were dealt with by a judge, master or registrar, at least in the first instance. In addition, the persons eligible to be registered as liquidators and to be appointed liquidators only are so eligible because they possess not only the appropriate qualifications in accountancy, but also are experienced in the world of commerce. The Companies Code and the orders of the court these days usually commit the entire conduct of the liquidation to the liquidator, and empower him to do what in his commercial judgment he thinks best in the interests of the creditors as a whole, leaving persons aggrieved [sic] to their remedy by appeal to the court, and also leaving the liquidator free where he can foresee a challenge to his powers, or where there is some extremely difficult problem, to apply to the court whose officer he is for directions. In another connection namely when dealing with the court's powers of review of a liquidator's decision at the instance of a creditor, the present Chief Justice, when Chief Judge in Equity, said in both Duffy v Super Centre Development Corp Ltd [1967] 1 NSWR 382 at 383 and Re Mineral Securities Australia Ltd (in liq) [1973] 2 NSWLR 207 at 231–2, that the court will only embark in itself considering the commercial view of the liquidator if there is some serious problem in which it is alleged that there is some want of good faith, or some erroneous approach in law or in principle.

…

The court does not usually consider it proper to intervene and make the liquidator's commercial decision for him. Indeed, the court is always reluctant to credit itself with any degree of competence in this field at all. Indeed the present Chief Justice said in Re Mineral Securities, supra, at p 232, “When the court is required to pronounce upon the commercial prudence of a transaction, it enters upon a slippery and uncertain field. Apart from the lawyers’ disclaimer of expert qualifications in matters of business prudence, the very process of litigation and the necessary limitations upon the scope of admissible evidence restrict the available material to far less than is necessary for the making of a commercial decision.” Again, in a different context, Lindley LJ said in Re English Scottish & Australian Chartered Bank [1893] 3 Ch 385 at 409, that creditors acting on sufficient information with sufficient time to consider what they are about are much better judges of what is to their commercial advantage than a court can be. This passage has been cited many times since, concluding by Bowen CJ in Eq in [Re Codisco Pty Ltd [1974] ACLC 40–126] at 27909.”

[110]See above, paragraph 68.

[111](1985) 10 ACLR 115 at 116-7 (Young J).

1. Against this background Young J provided, in Sanderson, a list of the class of cases, with reference to authorities, illustrative of the nature and scope of, now, the subsection 479(3) Corporations Act jurisdiction.  His Honour said:[112]

   [112](1985) 10 ACLR 115 at 117-8 (Young J).

“In Re Statewide Investments Ltd (in liq) (1981) 6 ACLR 265, Master Lee, in the Supreme Court of Queensland, indicated his doubts as to whether the court could give directions under this section where the question presented was one of the commercial prudence of a transaction in a field where the liquidator had full power to act. Doubts, however, are precluded in New South Wales because of the decision of Bowen CJ in Eq (as his Honour then was) in Re Codisco Pty Ltd [1974] ACLC 40–126, as applied by Needham J in Newmont Pty Ltd v Laverton Nickel NL (1978) 3 ACLR 830 at 832. However, it is also true to say that virtually all the cases on s 379(3) or its predecessors, involve one of the following four classes of cases:

(a)       guidance to the liquidator on matters of law: see eg Re Australian Home Finance Pty Ltd [1956] VR 1 and Re Standard Insurance Co Ltd (1963) 80 WN (NSW) 1355;

(b)       questions involving legal procedure (eg whether a liquidator should settle curial proceedings, and if so, on what terms);

(c)       whether a liquidator should act on his commercial judgment to postpone a sale because he recognizes his legal duty ordinarily requires him to reduce the company's assets into cash as soon as possible and to distribute (an example is Re Statewide Investments Ltd, supra,); or

(d)      where there are two or more competing purchasers for the company's property and the liquidator can see that it may be alleged that the liquidator has acted mala fide or in an absurd or unreasonable or illegal way, see Re Bayswood Pty Ltd (1981) 6 ACLR 107 at 113.

Essentially, then, though there is wide jurisdiction given to the court under s 379(3) of the Code, it is usually only proper to exercise that power where the matter involves guidance to the liquidator on matters of law or principle or to protect him against accusations of acting unreasonably.

…

Another limitation that the court imposes on itself in the use of s 379 is set out in the judgment of Blackburn CJ in Re Security Provident Fund Ltd (in liq); Rodger v Gourlay (1984) 9 ACLR 56 at 57, “The function of a liquidator's summons for directions is to give him advice as to his proper course of action in the liquidation; it is not to determine the rights and liabilities arising from the company's transactions before the liquidation.”

It must also be emphasized that the liquidator is only to seek directions as the representative of the creditors. From time to time it may happen, indeed it almost happened in this case, that the liquidator personally will be affected by the problem which confronts him. Where this is so, he must rely on his own legal advice or his own professional indemnity policy of insurance, because it is only in his role as the court's officer to protect the interests of the creditors as a whole, that he is given the special right conferred by s 379 of the Code.”

In my view this makes very clear the width of the jurisdiction and the similarity of an application under those provisions with a “Beddoe application” by a trustee, as indicated in Lemmon Tree Passage.

1. On the basis of the these authorities, I am of the opinion that the Liquidator could and should have sought the Court’s assistance in deciding whether the Defendant ought to have continued resisting the claim brought by the Plaintiff.  In terms of the nature of the assistance which the Court might have given the Defendant submitted that the Court would have directed the Defendant to either “make up its own mind” as to whether to continue with the proceeding, or, alternatively, have directed it to defend the proceeding.[113]  The nature and extent of the assistance would, naturally, have depended very much on the materials that could have been provided to the Court by the Liquidator; but, as indicated previously the state of the evidence for the Plaintiff had been clear, pending testing at trial, and the Defendant would reasonably have been expected to raise the matters it relied upon at trial.[114] In any case, for the purposes of exercising the discretion under subsection 24(1) of the Supreme Court Act 1986, I think it is clear that the Liquidator had an opportunity to approach the Court to seek directions as to whether the Defendant ought to have continuing defending these proceedings, though accepting that this is not a determinative factor.

   [113]Transcript, page 21.

   [114]See above, paragraphs 44 and 65.

1. Thirdly, there is no evidence before the Court that the Liquidator received independent legal advice with respect to the subject of the proceeding.[115]  In relation to the question whether the Liquidator ought to have received independent legal advice, the Liquidator submitted that:[116]

“It is not misconduct not to seek independent advice. The liquidator was represented by solicitors and the overwhelming probability is that he did receive advice from the solicitors as to the prospects of success of this case. The solicitors must have been satisfied that there was a good defence. The fact that this did not turn out to be the case is irrelevant.”

[115]Plaintiff’s Supplementary Submissions, paragraph 16.

[116]Defendant’s Second Supplementary Submissions, paragraph 6.

1. The Liquidator’s response does not, on the basis of long established authority, provide an ameliorating factor.  The proposition underlying this submission was, for example, dismissed long ago by Bowen LJ in In re Beddoe[117] where his Lordship said:[118]

   [117][1893] 1 Ch 547 (CA).

   [118][1893] 1 Ch 547 at 588 (Bowen LJ); and see at 557 (Lindley LJ).

“While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgement which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse.  Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault.  No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him.

If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance as to render it desirable in the interests of the estate that the necessary risk should be incurred.  If a trustee is doubtful as to the wisdom of prosecuting or defending a lawsuit, he is provided by the law with an inexpensive method of solving his doubts in the interest of the trust.  He has only to take out an originating summons, state the point under discussion, and ask the Court whether the point is one which should be fought out or abandoned.  To embark in a lawsuit at the risk of the fund without this salutary precaution might often be to speculate in law with money that belongs to other people.”

A similar approach underlies the decision of the New South Wales Court of Appeal in Mead v Watson.[119]

[119][2005] NSWCA 133, particularly at [71] to [76] (Sheller, Ipp and Tobias JJA).

1. I am of the view that the Plaintiff’s argument on this point is not decisive but it is a consideration which supports his position, particularly absent any application to the Courts for directions under subsection 479(3) of the Corporations Act and having regard to the observations in the cases considered in relation to these provisions with respect to the obtaining of legal advice by the liquidator.  I do, however, think that in all the circumstances, and having regard to the authorities to which reference has been made in the immediately preceding paragraph, it would have been reasonable and prudent on the Liquidator’s part to ensure that he obtained independent counsel’s advice on the prospects of success having regard to the state of the evidence.  Whilst the incurring of unnecessary costs is to be strongly discouraged it is difficult to see how such a course could be criticised or that recompense from any assets of the company would be denied, where such recompense was possible.

1. Fourthly, the Plaintiff contended that the nature of the cross-examination of Igo Mischel and Henry Mischel further indicated the absence of any proper basis to defend the proceedings.[120]  It was submitted that there was limited cross-examination of Igo Mischel with respect to issues of unequal contributions, words of severance and other conduct.[121]  Further Henry Mischel was not cross-examined on matters dealing with the debt incurred by Maria Mischel to Henry Mischel (or an associated entity) or the events of 2011; rather, the cross-examination seem to be exclusively confined to the attack of Henry Mischel’s credit.  The Plaintiff submitted that the manner in which the cross-examination was conducted highlighted the lack of contrary evidence which the Defendant was able to lead on substantive matters or on matters which could affect the assessment of the creditability of the witnesses.[122]  In relation to the manner of the cross-examinations of Igo Mischel and Henry Mischel, the Defendant submitted that this cannot amount to misconduct by the Liquidator.[123]

   [120]Plaintiff’s Supplementary Submissions, paragraphs 17-22. 

   [121]Plaintiff’s Supplementary Submissions, paragraph 17.

   [122]Plaintiff’s Supplementary Submissions, paragraph 20.

   [123]Defendant’s Second Supplementary Submissions, paragraphs 7-8.

1. As I have already indicated with respect in relation to the First Question,[124] the manner in which the Defendant proceeded with its case certainly raised some questions as to the strength of its case.  It provided no objective documentary evidence and the manner in which the trial was conducted, suggested its only real point of focus was the attack of the evidence given by Igo Mischel and Henry Mischel, with the emphasis being an attack on their credit.  In my view, this supports the Plaintiff’s submissions.

   [124]See above, paragraphs 39-44.

1. The Plaintiff also contended that another factor favouring a costs order in favour of the Plaintiff was the fact that had the Defendant initiated the proceedings then the Plaintiff would have been able to obtain security for costs.  Thus, it was contended that the Plaintiff ought not to be in “any different position simply because he had to bring a claim”.[125]  In my view it is highly undesirable that matters of procedure and form be allowed to affect substantive outcomes.  This only invites tactical positioning by parties and is at odds with the approach of the courts to costs issues, which address substance rather than form.[126]

   [125]Plaintiff’s Submissions, paragraph 14; Transcript, page 2.

   [126]See, for example, Bischof v Adams [1992] 2 VR 198.

1. The Liquidator submitted that the Plaintiff ought to have given him notice if the Plaintiff was concerned that the Liquidator was conducting the proceedings unreasonably.  The Liquidator further submitted he had never had to address any allegation of “delinquent conduct” such as might attract an order for costs against him.[127]   That does not, in my view, appear to be a submission that carries any weight.  First, the authorities discussed previously do not suggest any requirement that a liquidator ought to be put on notice that his or her  conduct is claimed to be unreasonable before a non-party costs order can be made against him or her.  Secondly, even if such notice were required, the Liquidator was, in my view, relevantly put on notice in this respect when the Calderbank Letter raised the possibility that a costs order, including indemnity costs, might be sought against him personally.[128]

   [127]Defendant’s Supplementary Submissions, paragraph 2.

   [128]See above, paragraph 19 where the relevant parts of the Calderbank Letter is set out.

Conclusions

1. The Liquidator also raised a public policy issue with respect to the prospect of a liquidator having an indemnity costs order made against him or her personally in cases where a Calderbank offer is made.  The Liquidator submitted that this prospect would restrict a liquidator’s ability to carry out his or her duties and create a conflict between a duty to the court and his or her own interests in avoiding personal liability to costs.[129]  In my view, there is no issue here any more than that arising with respect to the imposition of personal liability for costs on liquidators more generally.  The fact that a Calderbank letter has been made merely serves to emphasise – as it should in the mind of the liquidator – the need to carefully consider the prospects of success of the claim or defence, the need to approach the Court for directions and, or alternatively, the need to seek an indemnity from creditors.

   [129]Transcript, page 32.

1. The possibility of an indemnity costs order being made, either as a result of not accepting a Calderbank offer or on some more general basis only serves to emphasise this position.  In this context, I do, nevertheless, have regard to the following statement of the Court in Macks v Hedley:[130]

“A further matter might be mentioned. It was the primary judge's view, expressed in the context of a discussion of the practical futility of an order for indemnity costs against the plaintiffs in the action, that "no responsible [legal] adviser of any of the plaintiffs could have advised or encouraged the continuance of these proceedings on the part of the "men of straw" without themselves being guilty of complicity in a serious abuse of process". If that were correct, it might, in our view, be another reason for not ordering costs against the liquidator. But his Honour's view was that: "The liquidator should, in my view, not escape liability on the grounds that others may have been equally culpable." The liquidator was not a lawyer and it is incorrect, in our view, to say that he was equally culpable. There is a special position of official liquidators which is to be protected, absent serious delinquency on their part. Lawyers, by contrast, are supposed to be adequately trained guardians of the court against abuse of its process.” (emphasis added)

These observations are, however, directed to circumstances where costs liability may flow from a “serious abuse of process” rather than a circumstance such as the present where the Liquidator has had the opportunity to consider whether the defence should be pursued, to take independent legal advice for this purpose and to seek directions from the Court as thought necessary, with or without a creditors’ indemnity.  Thus, this is a circumstance where the Liquidator is able to take steps to protect his position – where the Plaintiff is not, as the Liquidator is a defendant.

[130](1999) 94 FCR 188 at 217, [89] (Gallop, Moore and Madgwick JJ).

1. As I have sought to indicate in the discussion of the authorities there is a potentially difficult balance to be struck between maintaining, effectively, the usual position of a party with respect to costs and the position of a liquidator of an opposing party.  Where the company in liquidation is a plaintiff these issues are less likely to arise as it is open to the defendant to seek security for costs.  The issues are, however, more likely to arise where, as here, the plaintiff does not have that protective option.

1. In circumstances like the present, the party in control of the risk with respect to costs is the Defendant and its Liquidator.  The Liquidator is able to protect his position by a variety of means, as discussed, and would be expected to do so in circumstances like the present when it must, on any reasonably considered basis, have been far from clear that the Defendant had or would have any assets against which the Liquidator could have recourse to meet a costs order or any basis.

1. Consequently, I am of the opinion that in all the circumstances the Liquidator must be held to have a personal obligation to meet the costs of the Plaintiff recovered in these proceedings.

Third Question – Should the Liquidator’s remuneration and legal costs be paid from the proceeds of sale?

1. The Liquidator contended that its costs and the Plaintiff’s costs “should be ordered to be paid from the balance of proceeds of sale in the solicitors trust account”[131] and taxed pursuant to Order 63.33 of the Rules.[132]  Maria Mischel’s share of the proceeds are currently held in the trust account of Mr Benjamin Ian Zylberszpic, a solicitor acting for the vendors in the sale of the premises.[133]  

   [131]Defendant’s Submissions, paragraph 23.

   [132]Defendant’s Submissions, paragraph 25.

   [133]See the affidavit of Henry Mischel sworn on 11 November 2011, paragraph 44.

1. It is uncontroversial that liquidators and receivers ought to receive remuneration for costs and services provided in the care, preservation and realisation of the property and assets of the company in question.  Thus in Re Universal Distributing Co Ltd (in liq)[134] in which Dixon J (as he then was) said:[135]

“In the present case the liquidator has employed a material part of his time and energies in recovering moneys, both uncalled capital and debts, which ensure for the debenture-holder, and in so far as these services increase the remuneration which he receives, I see no reason why the burden should not be thrown upon the proceeds. The question is not whether moneys available for unsecured creditors should be relieved at the expense of the security. In such a case it may be said that the service of collecting enough to discharge the debenture must in any event be performed in order that a surplus may then arise in which the unsecured creditors may participate. The question in the present case is whether the liquidator can charge against the fund passing through his hands as between himself and the person to whom it is payable, so much of the remuneration fixed for work done in the winding up as is referable to the calling in and conversion of the assets producing the fund. I see no reason why remuneration for work done for the exclusive purpose of raising the fund should not be charged upon it.”

[134](1933) 48 CLR 171.

[135](1933) 48 CLR 171 at 174-5 (Dixon J).

1. In Re S & D International Pty Ltd (in liq) (rec & mgr apptd),[136] Robson J examined the principal authorities in relation to liquidator’s costs and expenses and concluded: [137]

   [136][2009] VSC 225.

   [137][2009] VSC 225 at [273] (Robson J).

“From these authorities the following principles referable to a liquidator may be stated:

a.        At equity, an equitable lien arises in favour of a liquidator over the funds realised from the sale of company property for the costs he incurs for the care, preservation and realisation of the property in priority to those otherwise interested in the fund. …

b.        The costs include those that the liquidator fairly incurs in the discharge of his duty to care, preserve and realise the property. …

c.        The lien may arise whether or not the ultimate sale is affected (sic) by the liquidator and entitles the liquidator to be paid in priority out of the fund whether or not he is in possession of the fund. …

d.        The costs and expenses secured by the lien must be incurred exclusively for the care, preservation or realisation of the property and not otherwise expended in the general administration of the mortgagor. …

e.        The costs and expenses include the liquidator’s reasonable remuneration. …” (citations omitted)

1. Further, in support of its claim, the Liquidator also relied[138] on a passage contained in JGM Nominees Pty Ltd & Ors v Australvic Pty Ltd (in liq) (No 3):[139]

   [138]Defendant’s Submissions, paragraph 24.

   [139][2010] VSC 623 at [107]-[112] (Bell J); Transcript, page 28.

“[107]  Turning now to the liquidator’s application with respect to costs, whether the liquidator is entitled to be indemnified for his remuneration and Australvic’s legal costs must be considered on the basis that the liquidator’s participation in the proceeding was appropriate at all times.

[108]    This was a case in which the plaintiffs and the company being liquidated were in dispute about whether the funds in court belonged to the plaintiffs or the company. The ultimate destination of the funds depended on the resolution of that question. The funds would follow that resolution either to the plaintiffs or the company. The company was a proper party to the proceeding, which necessitated the participation of the liquidator. The liquidator’s participation in the proceeding was an incident of the discharge by the liquidator of his functions in that capacity. That was so even though the property was sold and the funds were paid into court during a period when the order appointing the liquidator was stayed, for that did not alter the issues in, the parties to, or the need for the liquidator’s participation in the proceeding.

[109]    Liquidators are entitled to access estate funds for their reasonable remuneration and legal costs. As was held by Finkelstein J in the Federal Court of Australia in 13 Coromandel Place Pty Ltd v CL Custodians Pty Ltd (in liq) [(1999) 30 ACSR 377]:

provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to persons beneficially entitled to them.

This principle is applied in this court, even in respect of trust property of a trading trust [See Nolan v Connie (2003) 7 VR 287 and Re Enhill Pty Ltd [1983] VR 561].

[110]    In the present case, the Oxford Street property was trust property of Australvic. The company was not a trading trust as such, but that makes no material difference. After the property was sold by the mortgagee, the balance of the funds were paid into court, not to Australvic, to await an entitlement determination. Australvic is entitled to the funds in law, but Mr Calderone has a superior entitlement to the funds in equity. That is court’s determination of the legal position, but it has been in legitimate dispute in the proceedings at first instance before the associate justice and on appeal before me.

[111]    In my view, in such proceedings the same principle should inform the exercise of the court’s discretion as to the liquidator’s costs and expenses. The company was properly named as a defendant in legal proceedings in which the plaintiffs have asserted an entitlement to the property constituted by the funds in court. The liquidator has incurred reasonable costs and expenses in prosecuting the company’s competing entitlement to the funds, as was his duty and function as a liquidator. Those costs and expenses (including the liquidator’s remuneration) may be recovered against the funds on the discretionary order of the court.

[112]    Likewise the executor of a will is the trustee of the testator’s estate on behalf of the beneficiaries. The same principle applies. The executor is entitled to access the funds of the estate to meet their reasonable legal and like expenses as an executor. Where the executor is a proper party to legal proceedings over a trust estate (actual or disputed) which is constituted by funds in court, the court can order that their costs be paid from those funds even where they are not successful.”

1. In response to the Defendant’s submissions, the Plaintiff sought to distinguish between situations where there is a dispute as to “trust assets” and dispute as to the ownership of “assets”.[140]  The Plaintiff also referred[141] to the decision of Finkelstein J in 13 Coromandel Place Pty Ltd v C L Custodians Pty Ltd (in liq)[142] and the following passages:[143]

   [140]The Plaintiff also sought to distinguish between a court appointed liquidator (a provisional liquidator) and a liquidator in the general sense, though those arguments are irrelevant given that the Liquidator in this case was court appointed, as the Plaintiff ultimately acknowledged: see Transcript, page 16.

   [141]Transcript, pages 5 and 6.

   [142](1999) 30 ACSR 377; [1999] FCA 144 (“13 Coromandel”)

   [143](1999) 30 ACSR 377; [1999] FCA 144 at [22]-[23], and [34] (Finkelstein J).

“[22]    When the court appoints a receiver it in effect assumes control of the assets over which the receiver is appointed: Gardner v London Chatham & Dover Railway Co (No 1) [1867] 2 Ch App 201 at 211 per Lord Cairns; Burt, Boulton & Hayward v Bull [1895] 1 QB 276 at 279-280 per Lord Esher. The receiver is not the agent of the parties to the action in which he is appointed and nor are they liable for his costs. The court itself cannot indemnify the receiver but it will ensure that the receiver will have his costs and expenses paid out of the assets under his control (Boehm, supra, at 161) or out of assets over which he was appointed but that did not come under his actual control (Mellor v Mellor [1992] BCC 513 at 521-522).

[23]      The fact that the assets do not beneficially belong to a party to the suit in which the receiver is appointed (as in this case) cannot effect the receiver's entitlement. That this should be so accords both with principle and authority. As regards principle, a receiver is appointed by the court because the court is satisfied that such an appointment is necessary to safeguard the interests of all persons who are interested or who may be interested in the assets placed under receivership: Tullett v Armstrong (1836) 48 ER 371; Owen v Homan (1853) 10 ER 997 at 1032. Once the court has decided that particular assets should be subjected to a receiving order it is right and proper that those assets should be applied to satisfy the receiver's costs. It would be extraordinary if a receiver's entitlement to costs was dependent upon it being established that the assets under his control, a control authorised by the court, were beneficially owned by a party to the proceedings. There will be many cases where a receiver will be appointed over property the ownership of which is not known at the time of appointment. If the receiver is not entitled to have his costs paid out of that property unless it is determined that the property belongs to a party to the proceeding few people will be willing to undertake the onerous task of acting as receiver.

...

[34]     These cases establish, clearly enough in my opinion, that provided a liquidator is acting reasonably he is entitled to be indemnified out of trust assets for his costs and expenses in carrying out the following activities: identifying or attempting to identify trust assets; recovering or attempting to recover trust assets; realising or attempting to realise trust assets; protecting or attempting to protect trust assets; distributing trust assets to the persons beneficially entitled to them.”

1. These passages, in my view, emphasise the safeguards afforded to liquidators who are appointed and supervised by the Court, and whose costs and activities are controlled by the Court.  However, the Plaintiff argued that paragraph 34 of the passage from 13 Coromandel set out above contains two important limitations:

(a)          first, the liquidator must act reasonably; and

(b)         secondly, the liquidator is only able to be indemnified from trust assets.

In the present context it is relevant to observe that this approach is entirely consistent with the approach reaffirmed in the leading case of In re Beddoe[144] where Bowen LJ said:[145]

“The principle of law to be applied appears unmistakeably clear.  A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust – a proposition in which the word “properly” means reasonably as well as honestly incurred.”

Again, in the present context, it is important to stress that there was no question in that case whether or not there were trust assets – hence a fund from which the trustee could be indemnified.

[144][1893] 1 Ch 547 (CA).

[145][1893] 1 Ch 547 (CA) at 562 (Bowen LJ); and see similar statements by Lindley LJ, at 558.

1. The Plaintiff then referred to the case of JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3)[146] where Bell J quoted paragraph 34 of the Finkelstein J’s judgment in 13 Coromandel in support of the proposition that:[147]

“Liquidators are entitled to access estate funds for their reasonable remuneration and legal costs.”

[146][2010] VSC 623 (“JGM Nominees”)

[147][2010] VSC 623 at [109] (Bell J).

1. In this context, the Plaintiff made detailed oral submissions on this point,[148] which I summarise as follows:

   [148]Transcript, pages 9-14.

(a)          There must be a distinction drawn between a trust asset and an estate asset as oppose to an asset which the liquidator claims to be a trust or estate asset, and which is ultimately neither;

(b)         The decision of 13 Coromandel suggests that a liquidator be paid from the pool assets which the liquidator is appointed to control (i.e. the “trust assets”) – and not any assets which the liquidator believes to part of the trust assets but which are, ultimately, not;

(c)          Bell J’s judgment in JGM Nominees, although said to be an “unwarranted” extension of the observations in 13 Coromandel, can be distinguished because, in that case, the plaintiff argued that the relevant asset was a “trust asset”, and that the relevant estate funds were a trust fund;[149] and

(d)         Any assets which are the subject of a dispute and which are never the company’s assets do not fall within the parameters of the principles set out in JGM Nominees and 13 Coromandel.

[149]Transcript, page 34.

1. The Liquidator contended that it would be incorrect to limit the applicable principle by reference to that applied with respect to trusts, and that, rather, the critical issue here is that there exists a fund of money from which the Liquidator could be paid – which is not a trust fund.[150]  The Liquidator submitted that the principle stated by Finkelstein J in 13 Coromandel ought to inform the exercise of the Court’s discretion with respect to the liquidator’s costs and expenses.[151]  The Liquidator also referred to the passage in Bell J’s judgment in JGM Nominees where an analogy was drawn between an executor of a deceased’s estate and liquidator, and where the liquidator’s remuneration and legal costs were paid from the funds in court.[152]

   [150]Transcript, page 24.

   [151]Transcript, page 29.

   [152]Transcript, pages 30 and 31; JGM Nominees Pty Ltd v Australvic Pty Ltd (in liq) (No 3) [2010] VSC 623 at [113] (Bell J).

1. In relation to the position put by the Plaintiff, I raised the policy concern that this may leave liquidators in a very difficult position when they have to take control of a company which effectively has no assets from which the liquidator can be paid.  The Plaintiff responded, acknowledging these potential difficulties but submitting that, in such circumstances the liquidator would only pursue the action if appropriately indemnified by the creditors.[153]  If the creditors saw no merit in providing the liquidator with an indemnity to enable the pursuit of assets then it would follow that there the matter must rest – the parties with the real interest in so doing, the creditors, in effect, declining to proceed further.  If the liquidator decides to proceed in spite of the lack of any creditors’ indemnity or the ability to have recourse to assets then the liquidator assumes the risk of not recovering the costs of so doing – and, possibly, incurring an order for costs personally, for the reasons already discussed.[154]

   [153]Transcript, pages 11 and 12.

   [154]See above, paragraphs 49-86.

Conclusions

1. The Plaintiff submitted that in these proceedings, the fund was never an asset to which the Defendant was entitled.  The fund was an asset owed by Maria Mischel, as there had been a severance of the joint tenancy and the funds represented her share of the proceeds of sale of the premises, reflecting her interest, as a tenant in common.[155]  The Plaintiff submitted that it was a sale of the joint property, and that because between the sale and settlement of the premises, Maria Mischel died so that by virtue of survivorship the money was paid to the Defendant as the registered proprietor of the premises at law it was received as her asset, not as a trust fund held by the Defendant.[156]

   [155]Transcript, page 15.

   [156]Transcript, page 35.

1. I am of the opinion that to the extent that the fund could be said to be held by the Defendant as trustee it was held as a bare trustee where Maria Mischel had an absolute beneficial entitlement to that fund insofar as it represented her share of the proceeds of sale of the premises.  It follows that there was no asset of the Defendant to which the Liquidator could have recourse for payment of his costs and expenses.

1. With respect to the argument that the Liquidator was not incurring costs reasonably, the Plaintiff argued that:

(a)          the Liquidator could have sought directions from the Court to protect itself;[157]

(b)         there is no evidence as to the advice that the Liquidator received and whether such advice was independent;[158] and

(c)          the Liquidator proceeded with the Defendant’s defence despite there, ultimately, being no contrary or objective evidence that supported its case, and when the Plaintiff’s evidence had been provided early in the proceedings.[159]

[157]Transcript, page 16.

[158]Transcript, page 16.

[159]Transcript, page 16.

1. The Liquidator submitted that it was reasonable for him to participate in the proceedings and the Defendant’s defence to the claim, and that it an incident of the discharge by the Liquidator of his functions in that capacity.[160] The Liquidator argued that:[161]

“The company was properly named as a defendant in legal proceedings in which the plaintiff asserted an entitlement to property constituted by funds in court...in our particular case, funds that were raised from the sale of property to which we had an indefeasible legal title save and except by order of the court saying that there was no acceptance of joint tenancy.

The liquidator has incurred reasonable costs and expenses in prosecuting the company's competing entitlement to the funds, as was his duty, and (indistinct) with the liquidator.  Those costs and expenses, including the liquidator remuneration, may be recovered against the funds on the discretionary order of the court.”

[160]Transcript, page 28.

[161]Transcript, pages 29 and 30.

1. In my opinion, for the reasons already indicated, the Liquidator did not incur costs reasonably for the reasons submitted by the Plaintiff.  The Defendant’s submissions in opposition do not, in my view, address these points and, in effect, simply assert that because the Defendant was registered proprietor of the premises which, on sale, provided the funds it followed that there was a company asset which the Liquidator should, or was obliged, to protect.  This does not address the requirement that the Liquidator properly assess the case, properly advised, consider whether directions from the Court ought to be sought or (and perhaps additionally) indemnity sought from the Defendant’s creditors for the conduct of the proceedings.

Conclusions and orders

1. For these reasons the Plaintiff is entitled to the relief sought against both the Defendant the Liquidator; but on the basis that indemnity costs are payable from 10.00am on 20 June 2012, rather than from 14 June 2012.  Moreover, the Liquidator’s liability for costs can, at the earliest, only commence on the date of his appointment, on 16 December 2011, although the Defendant went into liquidation on 29 November 2011.[162]

   [162]See above, paragraph 50.

1. Orders are to be brought in to give effect to these reasons.