Pascoe Ltd (in Liquidation) v Lucas (No 2) No. Scgrg-94-2029 Judgment No. S7008

[1998] SASC 7008

PASCOE LTD (IN LIQUIDATION) v LUCAS (No 2)
[1998] SASC S7008

Civil

Debelle J

1. This action has been dismissed.  The defendant is entitled at least to receive party and party costs.  Instead, the defendant seeks an order that the plaintiff Pascoe Ltd (in liq) (“Pascoe”) pay his costs of the action on a solicitor and client or indemnity basis.  In the alternative, the defendant seeks an order that the costs of Pascoe’s  application should be paid on a solicitor and client or indemnity basis.

2. The circumstances in which indemnity costs should be awarded have been discussed in a number of cases.  I refer in particular to Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Casley-Smith v F S Evans & Sons (1989) 148 LSJS 483 and especially to Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225. It is well settled that the general rule is that a successful party should recover only party and party costs and that special or unusual circumstances are required to justify the making of a different order: Fountain Selected Meats (supra) at 400;   Colgate-Palmolive (supra) at 230 to 231. In Colgate-Palmolive at 233 to 234 Sheppard J noted instances of cases which would justify departure from the general rule. The question must always be whether the particular facts and circumstances of the case in question warrant a departure from the usual rule that costs be awarded on a party and party basis. Thus, the court will not make an order that costs be paid on a solicitor and client basis merely because the losing party’s case lacked merit: Wentworth v Rogers (No 5) (1986) 6 NSWLR 534. A court’s discretion to award solicitor and client or indemnity costs is activated when a plaintiff has failed in an action which has been commenced or continued in circumstances where the plaintiff, properly advised, should have known he had no chance of success: Fountain Meats at 401; Colgate-Palmolive at 233.

3. Pascoe commenced this action on 23 November 1994.  On 26 May 1994 Pascoe had failed in an application for leave to commence proceedings against DFC Overseas Investments Ltd (“DOI”) and DFC New Zealand Limited (“DFC”).  Both DOI and DFC were companies which were involved in the transactions the subject of this action.  Both companies had been placed under statutory management pursuant to the provisions of the Reserve Bank of New Zealand Act, 1964 (NZ) and on 3 April 1990 the statutory management was subject to the Reserve Bank of New Zealand Act, 1989 (NZ).  As the companies were subject to statutory management, Pascoe had to seek leave of the High Court of Justice in New Zealand to issue legal proceedings. 

4. Pascoe sought leave to commence legal proceedings against both DOI and DFC.  In the proceedings the subject of the application for leave, Pascoe had alleged that, by making the loan of $50 million to DOI, the directors of Pascoe had acted in breach of their fiduciary duties to Pascoe and that DOI was a constructive trustee of the money as it had received the loan with knowledge of the breach of trust of the directors of Pascoe.  Alternatively, Pascoe alleged that DOI was liable to account to it for the funds as moneys had and received as a result of a total failure of consideration or on grounds of unjust enrichment. Gallen J refused leave to proceed. The decision is reported as Pascoe Ltd (In Liquidation) v DFC Overseas Investments Ltd [1994] 3 NZLR 627. A central issue was whether the directors of Pascoe had acted in breach of their fiduciary duties to Pascoe in making the loan.

5. The criterion which Gallen J applied was whether Pascoe had an arguable case which His Honour described (at 630) as being a case “where tenable arguments can be put forward so that it cannot immediately be predicated that the proceedings will fail”.  Gallen J went on to explain the proposition in these terms (at 630):

   “Although I am not sure that it adds a great deal to the formulations in the cases to which reference has already been made, perhaps it could be said that if an applicant can succeed in convincing the Court that if it could succeed in establishing the factual base upon which the claim depends, the application of relevant legal principles would lead to a successful claim, then leave should be granted.  The situation differs from that which applies in the case of striking-out applications, in that I think the obligation to establish a factual basis, must at least go beyond a mere allegation.”

Thus, Pascoe did not have to discharge a particularly heavy onus in order to obtain leave to proceed.

1. Gallen J found that Pascoe had established that it was at least arguable that the transaction had been carried out in a manner so as to disguise it from persons who might have taken exception to it and, to that extent, it was to be regarded as a questionable transaction.  However, he held that the directors had not acted in breach of their duties to Pascoe as they had acted as directed by the sole shareholders of the company and neither minority shareholders or creditors were affected.  So Gallen J held that Pascoe did not have an arguable case.  At 639 he said:

   “Looked at all in all and bearing in mind the nature of the transaction and the involvement of the various parties, I do not think the evidence is sufficient to establish an arguable case that there were breaches of duties sufficient to provide a foundation for the claim for which the applicant seeks to bring.  The Company cannot, I think, on the line of authority of which Salomon is the example, complain about an action or actions which had the approval of its sole shareholder and where neither minority shareholders or creditors are affected.”

The court held that it did not, therefore, have to consider the claim for a constructive trust.  The court went on to hold that the alternative claim could not succeed.

1. Pascoe gave notice of an appeal from that decision.  However, the appeal was not heard because the respondents offered $10 million in settlement of the claim and Pascoe accepted the offer. 

2. The defendant first submits that Pascoe instituted this action knowing that it had failed to satisfy the High Court of New Zealand that such an action was arguable.  Pascoe knew, he says, that its case was hopeless, or at least nearly hopeless.  He submits, therefore, that there are special or unusual circumstances which warrant a departure from the general rule that costs should be paid on a party and party basis.  In essence, he submits that Pascoe, properly advised, should have known that it had no chance of success, or little chance of success. 

3. Pascoe submits that there are several grounds which show that it properly pursued this action notwithstanding the decision of Gallen J in the New Zealand proceedings.  It says that Gallen J’s decision included errors of fact and was subject to appeal.  It also says that Gallen J did not have the benefit of fresh evidence which Pascoe had applied to adduce before the Court of Appeal in New Zealand.  Pascoe says that it believed that the evidence addressed the factual basis upon which Gallen J refused leave to proceed and adds that neither it nor its advisers could have anticipated that a judge of this court would infer that Dolfinne Developments knew and approved of the conduct of the directors of Pascoe, including Lucas, by imputing the knowledge and conduct of the executives of Bond Corporation Holdings Limited to Dolfinne Developments and inferring that the directors of Pascoe knew and approved the transaction by reason of the fact that they were directors of Bond Corporation Holdings Limited.

4. I do not accept this argument.  Mr England, the liquidator of Pascoe, is also the liquidator of Bond Corporation Holdings Limited, J N Taylor Holdings Limited, J N Taylor Finance Ltd, and Dolfinne Developments Pty Ltd as well as of other companies in the Bond Corporation group.  He, therefore, has an extensive knowledge of the affairs of the Bond group of companies and of the J N Taylor group of companies.  His solicitors have been actively involved in advising him for more than five years in relation to the winding up of these companies and later in relation to the administration of the liquidation of the companies and the legal actions and other proceedings which have come in the wake of the administration.  Mr Hoffmann, a member of the firm which is advising Mr England, has been actively involved in investigating a number of transactions, including the transaction the subject of this action.  Mr Hoffman appeared as junior counsel for Pascoe in this action and appears on this application.  The liquidator and his solicitors have also obtained expert accounting advice in relation to the issues in this action from Mr B Morris.  By the time this action was prosecuted, Mr England and his advisers were in possession of a great deal of information concerning Bond Corporation Holdings and its subsidiaries and J N Taylor Holdings and its subsidiaries.  Without using hindsight in any way, it can be fairly said that Mr England and his advisers knew or ought to have known the following facts:

5. Throughout November 1988 and at all other material times, Bond Corporation effectively controlled J N Taylor Holdings and J N Taylor Finance and their subsidiaries.

6. Bond Corporation thereby controlled Dolfinne, Dolfinne Finance and Pascoe.

7. Throughout November 1988 and at all other material times, Bond Corporation also controlled its subsidiaries Bond Corporation Finance and Catton.

8. Pascoe was a wholly owned subsidiary of Dolfinne, and the directors of Dolfinne were Messrs Bond, Beckwith, Mitchell and Oates. Messrs Bond, Beckwith, Mitchell and Oates were members of the Board of Bond Corporation Holdings Limited and were also directors of J N Taylor Holdings, J N Taylor Finance and Dolfinne.  Thus, the decisions of Dolfinne were effectively made by the directors of Bond Corporation or by its employees, whose actions must be deemed to have been approved by Messrs Bond, Beckwith, Mitchell and Oates.

9. In November 1988 and at all other material times employees of Bond Corporation and other officers in the Bond group effectively managed the affairs of J N Taylor Holdings and its subsidiaries including J N Taylor Finance, Dolfinne Finance, Dolfinne and Pascoe. 

10. The directors of Pascoe carried resolutions as directed by employees of Bond Corporation, such as Messrs Baker and McPherson, Maureen Noonan and Mary Tagliaferri.

11. The persons who in fact made the decisions which were put into effect by the several companies in the J N Taylor Group and by Catton and Bond Corporation Finance were executives of the Bond group who wore whatever hat suited the occasion and made decisions without any regard for the question whether it was in the best interests of the separate companies and without regard to conflicts of interest.

12. Pascoe was expressly incorporated for the purpose of participating in the transactions the subject of these proceedings.

They would also have been aware that most of the steps in these transactions were all directed by the executives in Bond Corporation I have mentioned.  The fact that a number of executives in the Bond group made decisions for subsidiary companies of Bond Corporation without regard to the question whether those decisions were in the best interests of the separate companies, and the fact that their decisions were effectively the decisions of Messrs Bond, Beckwith, Mitchell and Oates, is not unique to these transactions.  In particular, Ms Noonan and Mr Baker were plainly directing operations.  All of this would have been well known to Mr England and his advisers.

1. The decision of Gallen J was a clear warning that the transactions impugned in these proceedings might be held to be subject to the line of authority extending from Salomon which holds that a company cannot complain of the actions of its directors where those actions have had the approval of its sole shareholder and no creditors were involved.  The fact that the liquidator later ascertained that there was no resolution of Dolfinne Developments which approved the transaction only served to reinforce the fact that the transaction was being manipulated from Perth by Bond executives, and by Ms Noonan and Baker in particular.  The fact is that there is very little in the minutes of Dolfinne Developments and a number of letters show quite clearly the role of Ms Noonan and Mr Baker.

2. Furthermore, the involvement of Pascoe was but one small step in an extensive series of transactions which, to put it kindly, were extremely strange and whose purpose could not be clearly elicited.  It would offend one’s commonsense to single out one director only of one company only out of the several which participated in these transactions and hold that director responsible for what was said to be a loss to Pascoe, when the funds had been contributed by the sole shareholder of Pascoe, the directors of that shareholder were Messrs Bond, Beckwith, Mitchell and Oates, and the funds had ultimately been derived from J N Taylor Finance, a company controlled by J N Taylor Holdings, the directors of both companies being Messrs Bond, Beckwith, Mitchell and Oates.  In this case, not only did the decision to prosecute this action against the defendant offend commonsense, but Mr England and his advisers had the benefit of a yellow, if not a red, light in the form of the judgment of Gallen J.  Had they considered the position a little more carefully, they would have realised that the outcome of the action could be no different from the application for the leave to proceed which had failed in New Zealand.

3. This was, of course, a different action with different parties.  It was an action in which Pascoe sued one of its directors.  But the central issue was the same as in the action the subject of the leave action in New Zealand, namely, whether the defendant’s actions were in breach of his duties as a director.  I acknowledge also that the facts were relatively complex.  But the relevant facts were well known to Mr England and his advisers.  In particular, the most relevant facts, namely, those relating to the decision to incorporate Pascoe, the injection of capital into Pascoe, and its participation in the series of loan transactions were relatively straightforward.

4. Mr Hoffmann, on behalf of Pascoe, submitted that the defendant’s conduct of the proceedings disqualified him from an order for solicitor and client or indemnity costs.  The defendant had put Pascoe to proof of such matters as the corporate structures of the J N Taylor group and the control of that group by Bond Corporation, the flow of money in these loan transactions, and the financial position of some of the relevant companies.  This necessitated the preparation of a substantial volume of documentary evidence which ran into some hundreds of exhibits in 25 lever arch files of documents.  Only at a late stage did the defendant agree certain facts.  While I acknowledge the force of Mr Hoffman’s contentions, I am not persuaded by them.  Much of the information would have had to have been prepared in any event for the purpose of presenting the plaintiff’s case. Mr Hoffmann also contended that the defendant had put Pascoe to proof on facts which were ultimately admitted.  I do not think that is relevant.  The fact which is most material concerning the issue of costs is that Pascoe instituted this action notwithstanding the decision of Gallen J in New Zealand.

5. While I am particularly mindful of the general rule that a successful party is entitled only to party and party costs, I think that, given the decision of Gallen J, Pascoe was re-running an issue where, properly advised, it knew it had no real prospects of success.  The central issues of fact were substantially the same.  The additional facts did not justify the issues being re-litigated and, in any event, had proper advice been obtained, it would have been realised that the action should not be commenced.  It is a case which merits the award of solicitor and client costs.  However, that award of costs must be subject to one qualification which I will mention in a moment. 

6. The defendant also relied on the fact that the Statement of Claim contained allegations of fraud by the plaintiff, knowing that it had no evidence of fraud and that the claim must fail.  There is a lot of force in this contention but, given the conclusion already given, it is not necessary to decide whether the defendant is entitled to costs on that basis also.

7. There is one qualification upon the order that the defendant be paid his costs on a solicitor and client basis.  On 10 September 1997 the defendant applied for an order striking out the action or, in the alternative, that the action be stayed.  The application was ultimately withdrawn.  Pascoe seeks an order that it should be paid its costs on a solicitor and client basis.  I do not think that such an order should be made.  The defendant’s application was ultimately withdrawn after Mr England, as liquidator, had taken further steps to shore-up his position.  In all the circumstances, the most appropriate course is that each party bear its own costs of the defendant’s application to strike out this action.

8. I should add that, in any event, the defendant is entitled to an order for costs on a solicitor and client basis in respect of the plaintiff’s application for immediate relief.  Even allowing for the fact that, when the application was made, Mr England had additional evidence, that application had no prospects of success since the decision of Gallen J would indicate that, at least, there were arguable questions of law.  Further, there was nothing about the action which merited an application for immediate relief.  There was no urgency and the issues were not capable of speedy resolution since it was necessary to make a detailed enquiry as to the facts.  Mr Hoffmann submitted that the grounds of opposition to the application for immediate relief were not pursued at the trial, and that the defendant should not, therefore, be entitled to an order for solicitor and client costs.  I do not agree.  An important fact bearing upon the application for costs is that Pascoe’s application for immediate relief would not have succeeded and should not have been brought.

9. I think it appropriate to order that the defendant’s costs be taxed on a solicitor and client basis rather than an indemnity basis since the plaintiff should be liable only for costs reasonably incurred: cf Citibank Savings Ltd v Pirotta (unreported, 1 April 1998, Judgment No S6603). 

10. For these reasons, there will be an order that the plaintiff pay the defendant’s costs on a solicitor and client basis as taxed or agreed save and except for the costs of and incidental to the defendant’s application dated 10 September 1997 on which there will be no order as to costs.