Re Chambeyron Pty Ltd (No 2)

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMERCIAL COURT

CORPORATIONS LIST

S ECI 2015 00489

IN THE MATTER OF CHAMBEYRON PTY LTD (NO 2)

COLBART PTY LTD	Plaintiff
v
KATE PARSONS (AS LITIGATION GUARDIAN FOR KEVIN FRANCIS GERRATY)	First Defendant
KATE PARSONS (AS LITIGATION GUARDIAN FOR ROSEMARIE CECILIA GERRATY)	Second Defendant
FRANCINE MARIE GERRATY	Third Defendant
CHAMBEYRON PTY LTD	Fourth Defendant

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JUDGE:	Robson J
WHERE HELD:	Melbourne
DATE OF HEARING:	20 June 2017
DATE OF JUDGMENT:	3 August 2017
CASE MAY BE CITED AS:	Re Chambeyron Pty Ltd (No 2)
MEDIUM NEUTRAL CITATION:	[2017] VSC 410

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COSTS – Jurisdiction to award costs against non-parties – Section 24 of the Supreme Court Act 1986 (Vic) – Discretion to award costs against non-parties – Whether plaintiff corporation used as a front for individuals behind the litigation – Whether benefit to non-parties sufficient to justify an award of costs against them – Whether it is in the interests of justice to order non-parties pay costs.

COSTS – Whether solicitors should be liable for costs – Rule 63.23 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) – Section 29 of the Civil Procedure Act 2010 (Vic).

COSTS – Whether litigants in person and litigation guardian can claim certain expenses – Meaning of ‘costs’ – Section 24 of the Supreme Court Act 1986 (Vic).

CORPORATIONS – Whether costs order can be made against non-parties – Availability of a security of costs order against a corporation – Section 1335 of the Corporations Act 2001 (Cth).

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APPEARANCES:	Counsel	Solicitors
For the Plaintiff	No appearance	Pearce Webster & Dugdales
For the First and Second Defendants	Mr W Keogh solicitor for the litigation guardian for the First and Second Defendants	W Keogh solicitor
For the Third Defendant	Ms F Gerraty in person
For the Fourth Defendant	No appearance
For Paul Edward Gerraty	Mr P E Gerraty in person
For John Francis Gerraty	No appearance
For Philip Andrew Gerraty	No appearance
For Kevin Anthony Gerraty	Mr K A Gerraty in person

TABLE OF CONTENTS

Introduction.......................................................................................................................... 1
Summary............................................................................................................................... 2
Background.......................................................................................................................... 2
Submissions.......................................................................................................................... 9
Mr Keogh on behalf of the litigation guardian for Frank and Marie............. 9
Francine.................................................................................................................. 14
Kevin...................................................................................................................... 15
Paul......................................................................................................................... 16
Frank....................................................................................................................... 17

Financial beneficiaries of the trust structure................................................................. 17
Relevant legal principles.................................................................................................. 19
Beneficiaries of a trust able to bring an action.............................................................. 25
Costs against a solicitor.................................................................................................... 26
Tolhurst Druce & Emmerson submissions...................................................... 29
Discussion............................................................................................................. 29

Findings.............................................................................................................................. 31
Relevance of defendants not joining the four sons to the proceedings.................... 32
Failure to apply for security of costs.............................................................................. 33
Conclusions........................................................................................................... 34

What costs can be recovered?.......................................................................................... 34
What costs can be claimed?.............................................................................................. 36
Conclusion.......................................................................................................................... 39

HIS HONOUR:

Introduction

I have before me the issue of how costs should be awarded following my decision in this matter, which is recorded in Re Chambeyron (No 1).[1] The proceeding involved a family dispute over family property.
[1]Re Chambeyron (No 1) [2017] VSC 241 (‘Re Chambeyron (No 1)’).

Mr Kevin Francis Gerraty (Frank) and Mrs Rosemarie Cecilia Gerraty (Marie) have seven children. The dispute involved four of their sons, John, Paul, Philip and Kevin (the four sons), causing the plaintiff, Colbart Pty Ltd (Colbart), to take proceedings against their parents, their sister Francine and a family company, Chambeyron Pty Ltd (Chambeyron). Frank and Marie’s other two children, David and Kate, have sided with their parents in this dispute, as has Francine.

The dispute was over the ownership and control of the company Chambeyron, which owns the home that Frank and Marie live in, and the freehold of a nursery at Boundary Road, Heatherton, (the former business of Frank and now where Kevin conducts his business). In substance, the four sons claimed Colbart was the owner of the shares in Chambeyron. Frank, Marie, Francine, David and Kate denied that Colbart was the owner of the shares. Frank counterclaimed that he and Marie were, and remain, the owners of the shares. Colbart was the trustee of a unit trust. The four sons claimed to own units in the unit trust. I found against Colbart and in favour of Frank and Marie.

At the time of dismissing Colbart’s application and setting a date for a hearing on costs, I advised the parties before me that it may be open to the Court to make a costs order against the four sons individually. I directed Mr Keogh, the solicitor for the litigation guardian for both Frank and Marie, to give notice to the four boys of the costs hearing and of the possibility of a costs order against them.

When the matter of costs came back before me, I was informed by Mr Keogh that notice had been duly given to each of the sons.[2] At the costs hearing, Kevin and Paul appeared personally and sought to appear for John and Philip. I informed Kevin and Paul that they were not entitled to appear for John and Philip. I was informed by Kevin that both John and Philip were aware of the hearing and were aware that it was possible that a costs order would be made against them. At the costs hearing, Francine also sought an order that the solicitors for Colbart be ordered to pay the costs of all the defendants.
[2]Exhibit A.

Summary

I find that the four sons were the real protagonists to the claims made by Colbart and that the claims could have been appropriately made by the four sons in their own names. I find that exceptional circumstances exist and that the interests of justice require a costs order be made against the four sons individually.

I find that the failure of the defendants to join the sons to the proceedings, or to seek a security for costs order, does not disentitle the defendants to recover costs from the four sons individually.

I find that it would not be in the interests of justice to order that the solicitors for Colbart be made to pay the defendants’ costs.

I find that it is appropriate to award a lump sum for costs to avoid the costs of taxation. I find that a fair and reasonable award would be $45,000.

Background

The full facts of the case can be found in my earlier judgment in this matter, Re Chambeyron (No 1). Relevantly, Frank and Marie owned the shares in Chambeyron. Frank also controlled Colbart, which was the trustee of a unit trust.

The Colbart unit trust was established by deed, with Colbart appointed as trustee. Frank and Francine, the sole unit holders, were each issued 1000 units. Colbart does not trade in its own right. It merely acts as a trustee of the Colbart unit trust.

As a result of financial concerns, Frank proposed, in substance, that he and Marie would give their shares in Chambeyron to Colbart, and that he and his seven children (John, Paul, Philip, Kevin, David, Francine and Kate) would equally own the units in Colbart and would have control of Colbart. Frank said that the proposed structure was intended to ensure Frank and Marie had financial security in their retirement.

The four sons contend that this proposal was validly carried out and that the gift by Frank and Marie of their shares in Chambeyron to Colbart was completed. The family carried on the business of the two companies as if the shares had been gifted to Colbart. In 2001, the accountant for Chambeyron and Colbart, and at one time also the company secretary, Mr Ivan Clyne of Davis Clyne, on the instructions of Frank, informed the Australian Securities and Investments Commission (ASIC) that Colbart was the holder of the shares in Chambeyron. The four sons assumed de facto control of Chambeyron, even though if the gift of the shares to Colbart was carried out, the four sons would have only constituted four of the eight directors of Colbart. Frank lost control of Chambeyron to the four sons.

I have found that at all relevant times, Frank and Marie were the only shareholders of Chambeyron; Frank held three shares and Marie held two shares. Chambeyron’s assets include properties at Boundary Road, Heatherton (at which address Kevin conducts his business) and Wattle Valley Road, Canterbury (the home of Frank and Marie), and the company Marindi Park Pty Ltd (Marindi Park), which previously owned land in Queensland (this land is now owned by Paul and is where Paul conducts his business). The four sons, through Colbart, alleged that Frank and Marie effectively gifted control and ownership of these assets.

If it had been found that Frank’s proposal had been effected and that the gift of five shares in Chambeyron from Frank and Marie to Colbart, (as trustee of the Colbart unit trust) and that the gift of units from Francine and Frank to each of the children was effective, each of the children and Frank, by virtue of their share of units in the Colbart unit trust, would have an equal share in the assets of Chambeyron.

In 2000, prior to the restructuring that Colbart unsuccessfully claimed to have taken place, the two directors of Colbart were Kevin and Paul. Annual returns for 2001 and 2002 for Colbart show that Frank and all seven children are directors of Colbart. No evidence was led in any change of directors since then. It was not disputed before me that there were eight directors of Colbart prior to and during the proceeding.

In 2014, Francine convinced ASIC to amend its records to show that Frank and Marie were, and remained, the sole shareholders of Chambeyron. Francine, Kate and Frank sought to regain control of Chambeyron by removing John and Kevin as directors of Chambeyron on 13 January 2014.

On 24 March 2014, Kevin, Philip, Paul and John signed a notice convening an extraordinary general meeting of Colbart and Chambeyron on 24 April 2014. The meeting was attended by Kevin, who held Philip’s proxy, and John, who held a proxy for Paul. The minutes of meeting record that it was resolved that Francine be removed as director of Chambeyron, Frank be removed as company secretary of Chambeyron and Paul be appointed as director and company secretary of Chambeyron.

On 21 December 2015, Paul emailed a notice of meeting of directors of Colbart to John, Kevin, David, Francine, Philip, Frank and Kate, advising that a meeting of the company directors was to take place on 23 December 2015, to discuss the commencement of legal proceedings against the four defendants. The letter advised that directors may participate in the meeting by telephone by calling a number ‘to be announced.’

The meeting was held on 23 December 2015, and was attended by John (chairman), Paul (by telephone), Philip (by telephone) and Kevin. The other four directors (Frank, Francine, Kate and David) did not attend, either in person or by proxy.

The minutes of meeting record that it was resolved by John, Paul, Philip and Kevin, that Colbart commence legal proceedings against Frank, Marie, Francine and Chambeyron to have it declared that Colbart was the sole shareholder of Chambeyron; and to appoint Tolhurst Druce & Emmerson (now Pearce Webster & Dugdales) as the lawyers for Colbart.

Tolhurst Druce & Emmerson were at this time also acting for Landscapelink Pty Ltd (Landscapelink) (which is Kevin’s company and which operates at the Boundary Road property), in a separate proceeding between Landscapelink and Chambeyron.

The board of Colbart made no decisions on how the proceedings were to be conducted, possible settlement proposals, how Colbart was to pay for legal representation, or meet the costs of the defendants if Colbart failed in the proceedings.

Colbart commenced the proceeding having engaged a firm of solicitors and also counsel for this purpose. Having regard to the email showing that the notice of meeting of directors (sent by Paul on 21 December 2015) was forwarded by Kevin to Mr David Phelan of Tolhurst Druce & Emmerson on 21 December 2015, and the proper basis certification provided by Tolhurst Druce & Emmerson, it may be inferred that Colbart commenced the proceeding with the benefit of legal advice.

Thereafter, Colbart conducted the proceedings, including making an open settlement offer, without any reference to the board of Colbart as a whole, but only answering to the four sons. Frank, David, Francine and Kate (all being directors of Colbart) were not consulted at any stage on the conduct of the proceedings.

Thus, the four sons, without the consent of the other four directors, instigated and procured Colbart to institute the proceedings and thereafter controlled the proceedings without reference to the board. During the hearing on costs, I put this proposition to Kevin and he agreed with it.

At all material times, Colbart acted solely as the trustee of the Colbart unit trust. It had no business of its own. Colbart was obliged to act solely in the bests interests of the trust.

The proceedings disclosed that there is also a dispute within the family as to who the beneficiaries of the trust are. Prior to the proceedings, the purported unitholders had held several meetings to discuss family business and to agree on the management of family assets.

The four sons caused Colbart to institute the proceedings without calling any meeting of the beneficiaries of the trust or consulting the wishes of the beneficiaries of the trust, who were all sui generis.

As mentioned above, at the trial Frank and Marie were supported by Francine, Kate and David, even though if Colbart’s case was made out, Francine, Kate and David would have a beneficial interest in the shares of Chambeyron.

The four sons each gave evidence in support of Colbart’s case. Each confirmed that they would benefit from a finding that Colbart was the sole shareholder of Chambeyron, and that they held units in the Colbart unit trust. Evidence led at that the trial disclosed that each of the four sons had received significant financial benefits from Chambeyron whilst it was under their control.

At the costs hearing, Kevin informed the Court that Colbart’s legal costs were being met by Paul and Kevin.

As is discussed further below, the defendants did not seek a security for costs order against Colbart. There is no evidence that Colbart would have any assets to meet a costs order against it. It was not disputed that the only assets that Colbart could have had access to were the assets of Chambeyron, had its application been successful.

Rent payable to Chambeyron by Kevin, for the Boundary Road property, was being held in a trust account with Tolhurst Druce & Emmerson, the solicitors for Colbart. It was submitted that the funds were being so held because Chambeyron became deregistered due to failure to lodge certain documents with ASIC. Just prior to the commencement of the trial, Chambeyron was re-registered. Mr Mereine, counsel for Colbart, made clear that the money in the trust account was not being used to fund the litigation for the plaintiff.[3]
[3]Transcript of hearing, Re Chambeyron (No 1) (6 March 2017) T588, L22–26.

In summary, all of Frank and Marie’s assets were under the control of the four sons. Frank and Marie did not have access to the assets of Chambeyron, they had not been paid any distributions from Colbart and did not have any access to funds held on behalf of Chambeyron.

On day six of the trial, counsel for Colbart announced in court an open offer to settle the matter. Terms of the settlement included that it be agreed that:

(a) Colbart holds the shares in Chambeyron as trustee for the Colbart unit trust and Chambeyron owns 1000 shares in Marindi Park.

(b) The two directors of Chambeyron will not be members of the Gerraty family. Frank, Francine, David and Kate will nominate one director; and the four sons will nominate the other director.

(c) Frank and Marie can reside at 73 Wattle Valley Road for as long as they like.

(d) Each month, $4000 from the rent paid in respect of the Boundary Road property is to be paid to Frank and Marie. The balance is to be used to meet all expenses of Chambeyron, and thereafter is for the benefit of Frank and Marie.

(e) If Marie requires aged care accommodation, either:

(i) a daily fee of $106 per day is to be paid from the rent (reducing the $4000 amount to $3000); or

(ii) if a bond is required, the monthly amount is reduced to $3000, and Chambeyron will borrow up to $670,000 secured against the Boundary Road or the Wattle Valley Road property. Any balance of the bond is to be repaid to Chambeyron and applied to reduce the mortgage. The loan interest repayments are to be paid by Chambeyron from the rent.

(f) Landscapelink Holdings will enter into a long term lease of the Boundary Road property, on the current rent for the next five years, then on the exercise of each of the three five-year options, the rent will be assessed within the terms of the lease.

(g) The assets of the unit trust are to be sold and the trust dissolved within six months of both Frank and Marie having passed away.

(h) Upon Frank’s passing, his units and shares in Colbart are to be surrendered to Colbart for no consideration.

(i) All claims of the unitholders or their companies against Frank, Marie, Chambeyron or Colbart are to be held in abeyance until the unit trust is dissolved.[4]

(j) None of the unitholders share in the assets until Frank and Marie pass away.[5]

[4]Exhibit P32; transcript of hearing, Re Chambeyron (No 1) (6 March 2017) T528–523.

[5]Transcript of hearing, Re Chambeyron (No 1) (16 March 2017) T1087, L2–9.

The open offer made by Colbart to settle the matter would have also allowed the defendants to access the funds held in the Tolhurst Druce & Emerson trust account to meet legal costs.

For various reasons, the defendants felt they should not accept the terms of the open settlement offer.

Kate said of the open offer:[6]

I don’t think it’s a good scenario for Marie and Frank and their quality of life. Also I don’t believe it’s a good scenario for the assets for the family because there’s a few clauses that have been inserted into the lease or excluded from the lease which place the family in a very precarious situation in relation to insurance and costs. I don’t think it’s a good deal for Marie and Frank at all.

[6]Transcript of hearing, Re Chambeyron (No 1) (7 March 2017) T646, L17–24; T731 L13–18.

Francine said she did not accept the offer as it would not adequately cover Frank and Marie’s living costs and because Marie feels vulnerable and wants title to her house.[7] In relation to Francine’s objections to the settlement offer, Mr Mereine asked Francine about the $197,000 she had paid to discharge the mortgage on the Wattle Valley Road property:[8]

MR MEREINE: You are encouraging your parents, Ms Gerraty, not to accept the offer because it ties up your $197,000 until they pass away doesn’t it?
FRANCINE: No, not at all, I’m not doing that. Dad and Mum have discussed this and said that they do not want to perpetuate the issues inside the trust, they need to know who owns what shares in this trust, and if a court must make that decision then so be it.

[7]Transcript of hearing, Re Chambeyron (No 1) (9 March 2017) T943 L5–6; T1007.

[8]Transcript of hearing, Re Chambeyron (No 1) (9 March 2017) T944 L8–15.

Frank and Marie did not accept the settlement offer and did not have any access to funds to allow them to obtain legal representation. Mr Keogh had acted for the defendants (save for Chambeyron, who was represented by Mr Robinson of Best Hooper until it became de-registered) from 15 February 2017, but sought leave to cease acting for the defendants on 21 February 2017 due to lack of funding. Leave was granted. Mr Keogh agreed to appear at the trial as the solicitor for Kate, as the litigation guardian for Marie and, later also Frank.

Submissions
Mr Keogh on behalf of the litigation guardian for Frank and Marie

Mr Keogh sought an order that the four sons each be ordered to pay the costs of his client (the litigation guardian for both Frank and Marie).

Mr Keogh referred to Knight v FP Special Assets Ltd,[9] where the High Court held that the court’s discretion in relation to the award of costs under the rules was sufficiently wide so as to empower a court to make an order against non-parties to a proceeding so long as such discretion was judicially exercised and was not arbitrary or capricious.
[9][1992] 174 CLR 178 (‘Knight’).

Mr Keogh submitted that Knight established the following criteria by which it is appropriate for a costs order to be made against a non-party:

(a) where the party to the litigation is an insolvent person or a man of straw (inquiry is directed to the ability of the person to satisfy an award of costs);

(b) whether the non-party has played an active role in the conduct of the litigation;

(c) whether the non-party has an interest in the subject matter of the litigation; and

(d) whether the interests of justice require that an order be made.

With respect to the second criteria, Mr Keogh submits that the question for determination is whether the non-party controls the proceeding, or is to benefit from the proceedings.

Mr Keogh referred to Dymocks Franchising Systems (NSW) Pty Ltd v Todd (No 2),[10] where the Privy Council held that where a non-party was funding the litigation in order to gain access to justice for his own purposes, as opposed to facilitating access to justice by the party funded, the non-party is the ‘real-party’ to the litigation.[11]
[10][2004] 1 WLR 2807.
[11][2004] 1 WLR 2807 [25].

Mr Keogh submits that Bakers Investment Group (Australia) Pty Ltd v CaasonInvestments Pty Ltd[12] made clear that a non-party could have an order for costs made against it in circumstances where the non-party had more than a mere right to recover funds advanced to a litigant because of the non-party’s substantial entitlement to the fruits of the litigation, their right to information and involvement in the decision making, and their ability to deal with the lawyers engaged to handle the litigation.
[12](2015) VSC 644.

In 1165 Stud Road v Power (No 2),[13] Vickery J said:[14]
[13][2015] VSC 735 (‘1165 Stud Road’).
[14]1165 Stud Road [80].

In application of the Knight principles, a number of matters are of relevance:
(a)Making a costs order against a non-party requires exceptional circumstances.[15] In the vast majority of cases it would be unjust to make an award of costs against a non-party;[16]
[15]Kebaro Pty Ltd v Saunders [2003] FCAFC 5, [103] (Beaumont, Sundberg and Hely JJ) (‘Kebaro’); Permark International Interiors Pty Ltd v Amoveo Pty Ltd [2013] VSC 563, [75] (Croft J) (‘Permark’).
[16]Guss v Geelong Building Society (in liq) [2001] VSC 288, [7] (Ashley J).
(b)The principles apply where proceedings have been discontinued;[17]
[17]Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation [2001] HCA 26; Permark.
(c)It is sufficient if a company, which is the relevant party, is insolvent at the time of the application for a non-party costs order;[18]
[18]Permark [39].
(d)A real, direct and material connection with the principal litigation must be established such that the non-party can be described as a ‘real party’ to the litigation.[19] For this purpose, it is sufficient to establish an ‘active role in the conduct of the litigation’ if the non-party is sufficiently closely connected with the prosecution of the litigation and can be fairly described as a ‘real party’ in ‘critical’ or ‘important’ respects.[20]
[19]Kebaro [103].
[20]Kebaro [111]–[114]; Arundel Chiropractic v DCT [2001] HCA 26, 414; (Callinan J). Kebaro was cited with approval in IPEX ITG Pty Ltd (in liq) (receivers appointed) v Victoria [2014] VSCA 315 [42].
(e)For there to be an interest in the subject of the litigation, a direct financial interest is not required.[21] It is not enough that the fruits of success in the litigation either belonged to the non-party or were substantially within his gift;[22]
[21]IPEX ITG Pty Ltd (in liq) v State of Victoria [2011] VSCA 134, [15]–[16] (Tate JA and Macaulay AJA); Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) (No 2) [2014] VSC 147, [16]–[17] (Hargrave J) cf. IPEX ITG Pty Ltd (in liq) v State of Victoria (No 2) [2011] VSC 39, [15] (Sifris J).
[22]IPEX ITG Pty Ltd (in liq) v State of Victoria [2011] VSCA 134, [15] (Byrne J); Ballantyne Suites Pty Ltd v Ballantyne Chambers Pty Ltd (in liq) (No 2) [2014] VSC 147, [16]–[17] (Hargrave J).
(f)It may be appropriate to exercise the power against a person who may be characterised as no more than a real party to the litigation in ‘critical’ and ‘important’ respects, albeit not the only such party. It is not necessary to demonstrate that the relevant non-party exclusively controlled the conduct of the proceedings. It is enough if the role of the non-party is sufficiently closely connected with the prosecution of the litigation, so that the non-party may fairly be described as one of the actors in ‘important’ and ‘critical’ respects;[23]
(g)As the breadth of the concept affirms, there are numbers of factors which may be taken into account in determining whether the interests of justice call for an order to be made. They include factors such as those as illustrated in the current case-law listed below. In making these observations, it is important to recognise that each of the examples is no more than one of the many relevant matters that may be considered when weighing the interests of justice in an application for costs against a stranger to the litigation. The examples include:
(i)a recognition that there are two important principles at stake: on the one hand the proper ambit of limited liability, and on the other a facility to provide fair costs compensation for successful defendants. An application for security for costs at an early stage reconciles these imperatives;[24]
(ii)whether an application for a security for costs order was made promptly at an early stage of the proceeding, and whether any decision not to apply for security for costs was reasonably justified and satisfactorily explained;[25]
(iii)whether the non-party was warned or put on notice of the risk of a non-party cost application at an early stage, and whether the failure to give such a warning was justified or unreasonable in the circumstances and satisfactorily explained;[26]
(iv)whether the plaintiff company was used simply as a vehicle set up to conduct the litigation in order to protect the individuals standing behind it;
(v)whether there are findings of fact at trial which may be relevant in considering the conduct of the non-party; and
(vi)when standing back and weighing each of the relevant factors which relate to a particular case, it would be unjust, in the circumstances, if the successful defendants were unable to recover their costs.

[23]Kabaro [113]–[114]; IPEX ITG Pty Ltd (in liq) (receivers appointed) v Victoria [2014] VSCA 315, [42] (Neave, Santamaria and Kyrou JJA).

[24]Candibon Pty Ltd v Minister of Planning (No 2) [2012] VSC 424, [41] (Emerton J).

[25]Permark [68].

[26]Permark [24], [68].

Of relevance to the present case are his Honour’s observations that:

(a) there must be a real, direct and material connection with the principal litigation such that a non-party can be described as a ‘real party’ to the proceedings;

(b) the non-party has an active role in the litigation;

(c) it is not necessary to demonstrate that the non-party had exclusive control of the litigation; and

(d) for there to be an interest in the subject of the litigation, a direct financial interest is not required.

In Bischof v Adams,[27] where the trial was significantly extended by the conduct of a non-party, Gobbo J found that s 24(1) of the Supreme Court Act 1986 (Vic) gave the Court wide discretion to make an order for costs against a non-party and in exercising such discretion the Court should take into account:[28]

(a) the connection between the non-party and the proceedings; and

(b) the causal connection between the non-party and the costs.

[27][1992] 2 VR 198 (‘Bischof’).

[28]Bischof, 205.

Mr Keogh submits that the ‘causal connection’ is established by considering whether the non-party funded the proceedings, would benefit from the litigation, or had a direct or indirect financial interest in it.[29]
[29]Symphony Group Pty Ltd v Hodgson [1994] QB 179, (Balcombe LJ) (‘Symphony’).

Mr Keogh submits that ‘an order for costs should be made against [a] non-party if the interests of justice requires that to be done,’[30] and points to ‘a number of factors which may be taken into account in determining whether the interests of justice calls for an order to be made’,[31] including:
[30]Knight, 193 (Mason CJ and Deane J).
[31]1165 Stud Road [80].

(a) a recognition that there are two important principles at stake: on the one hand the proper ambit of limited liability; and on the other a facility to provide fair costs compensation for successful defendants;

(b) whether the plaintiff company was used simply as a vehicle set up to conduct the litigation in order to protect the individuals standing behind it; and

(c) when standing back and weighing each of the relevant factors, it would be unjust, in the circumstances, if the successful defendants were unable to recover their costs.

Mr Keogh submits that the nexus between the non-parties and the proceedings and the incurring of costs on the part of the first, second and third-named defendants is inherent in this matter. Mr Keogh says that this case is quintessentially a family dispute that has been litigated through two companies.

Mr Keogh says that Colbart did not commence these proceedings, rather it was at the direction of the four sons that the proceedings commenced, and submits that Colbart is the plaintiff in name only.

Mr Keogh submits that in the present case, ‘the nexus referred to by Gobbo J in Bischof and by Vickery J in 1165 Stud Road, could not be any more apparent nor closer.’[32] Mr Keogh submits that ‘the [four sons] are Colbart and Colbart [is the four sons]’[33] and had Colbart been successful in the proceedings, they would have enjoyed the fruits of the litigation, being the effective control of Chambeyron and, through it, the ownership of the Wattle Valley Road and Boundary Road properties.

Francine

[32]Litigation Guardian’s submissions 19 June 2017 [sic].

[33]Litigation Guardian’s submissions 19 June 2017.

Francine submits that her costs should be paid by each of the four sons and says that the four sons were aware that Colbart had no funds to meet an adverse costs order.

Francine also argued that the solicitors for Colbart should be ordered to pay costs. Francine submits that the solicitors were informed that Colbart was not validly authorised to institute and conduct the proceedings, and their conduct escalated the costs payable by Chambeyron.

Francine says that, despite multiple requests, the solicitors purportedly engaged by Colbart refused to provide any costs agreement the solicitors had with Colbart.

Francine says that the solicitors purportedly engaged by Colbart were also the solicitors for Kevin in other matters involving property issues relating to the Gerraty family.

Kevin

Kevin submits that the four sons should not be ordered to pay the defendants’ costs. He relies on Wieland v Texxcon Pty Ltd,[34] where, despite the Court of Appeal accepting that the relevant parties to the proceeding, Texxcon and Nominexx, were, and remained until the time of judgment, persons of straw, that the non-parties, Mr Henderson and Mr Gray, played an active part in the litigation and that the ultimate beneficiaries of the litigation were Mr Gray and Mr Henderson and/or interests associated with them, the Court (Beach JA and Cameron AJA) were not persuaded that costs orders should be made against the non-parties. Their honours said:[35]

There may be good reasons for making costs orders against non-parties who conduct litigation for their own benefit through (or hiding behind) companies that are either heavily indebted or otherwise have no assets. That criticism, however, is not apposite in the present case. … we accept the submissions of Mr Gray and Mr Henderson that Nominexx and Texxcon were the appropriate plaintiffs in this proceeding. There was no other entity that could have sought to recover the moneys lent by them to the benefit of Austexx and its interests.
…
We are not persuaded that, in the circumstances of this case, it is in the interests of justice that supplemental costs orders be made. Courts should not readily (or even at all) make non-party costs orders merely because funds may be available to satisfy orders from identified non-parties.

[34][2017] VSCA 73 (‘Wieland’).

[35]Wieland [19], [21].

Kevin says that Colbart was not used as a means of hiding the directors from their responsibilities in the case; in fact, he and Paul had used their personal funds to conduct the litigation.

Kevin submits that since 2001, Colbart has had eight directors and has conducted its business as if there were eight directors running the unit trust. He said many legitimate meetings were held to determine the direction Colbart should take and that this was the method used to resolve that Colbart institute proceedings.

Kevin submits that the directors of Colbart would have been negligent if they had not taken proceedings to protect the assets of the trust. Kevin said that Colbart was the only entity that could have protected the assets of the Colbart unit trust.

Finally, Kevin submits that the four sons did not try and seek advantage over the other members of the trust and they believed they were acting in good faith in protecting assets for the benefit of Frank and Marie’s retirement.

Paul

Paul submits that Chambeyron should pay its own costs and the costs of the other defendants. In substance, this would mean that Frank and Marie would bear the costs of themselves and of Francine and Chambeyron in successfully defending the proceedings.

Paul submits that prior to 2001, Chambeyron was Frank and Marie; and it was Frank and Marie that instructed Mr Clyne to set up the trust structure. Paul says that it was Frank and Marie that convinced all children of the existence of the trust structure. Paul asserted that Chambeyron filed tax returns as if the trust structure existed and that all the children acted in accordance with the belief that the trust structure did exist.

Paul submits that prior to Francine procuring ASIC to amend the record of ownership of Chambeyron in 2014, all children were working together to achieve the financial stability for Marie and Frank within this trust structure.

Paul says that now it has been found that the trust structure was not implemented, due to a technical fault between Marie and Frank and Mr Clyne, all the children were not to know of the deficiencies and it was not their fault. Paul says that they (the four sons and presumably Francine) came to court to resolve the issue of ownership and that accordingly, no child should take responsibility for the costs: Chambeyron should pay.

Frank

Frank was given leave to speak on his own behalf. Frank did not appear to be under the same disability as he was at the trial. Fortunately he looked refreshed and alert and closely following the proceedings.

Frank conceded that it was his proposal to give [control of] his assets to the trust, but that it became evident that there was so much ill feeling (which I understood to be within the family) that the trust structure was not going to work. He said it did not, and could not work and it was the wrong structure to be working under. Frank said that control had to be taken back of the company. I inferred that when it was discovered that the shares in Chambeyron were not transferred to Colbart but remained with Frank and Marie, he decided to take back control.

Although Frank did not elaborate, I understood that in referring to the trust structure not working, he was referring to the fact that he and Marie had to live on the age pension whilst the four sons had taken hundreds of thousands of dollars from Chambeyron for their own benefit, as discussed below.

Financial beneficiaries of the trust structure

Frank’s proposal that his and Marie’s assets be controlled by the trust was intended as a means of protecting the assets and financially securing Frank and Marie’s retirement. Frank said that this part of his proposal was never carried out, that Marie was not looked after and that their retirement was not secured.

Rather than being used for the benefit of Frank and Marie, the evidence suggests that the trust structure was used for the benefit of the four sons.

In 2007, Frank and Marie sold their family home at Winfield Road and purchased the property at Wattle Valley Road, a property more suitable for them in their retirement. The Winfield Road property sold for approximately $1.5 million. The Wattle Valley Road property was purchased for $702,000. Kate said that the four sons were not happy about how expensive the new property was and thought that Frank and Marie should have spent no more than $500,000.[36]
[36]Transcript of hearing, Re Chambeyron (No 1) (7 March 2017) T654.

Despite Marie’s wishes that she have a property in her own name, and despite there being sufficient funds from the sale of the family home to purchase the property at Wattle Valley Road, the house was bought for Frank and Marie’s use in the name of Chambeyron, and only $200,000 was put towards the purchase of the home, with the rest mortgaged.[37]
[37]Transcript of hearing, Re Chambeyron (No 1) (6 March 2017) T602.

Francine, Kate, Kevin and Paul all said that Philip handled the division of the proceeds of sale of Winfield Road; Philip said that he was only involved in obtaining bridging finance. He also said that the sale proceeds were used to pay off a mortgage over the Boundary Road property and to pay out mortgages over the family home.

As a result of the four sons assuming control of the assets, Frank and Marie were left without access to funds, and it became necessary for them to apply for the age pension in 2005.[38]
[38]CB 2/388–402, 403–426. Frank and Marie began receiving the pension in 2007.

Nonetheless, at the time of the sale of the property owned by Marindi Park to Paul in 2011, the purchase price of $1,600,000 was reduced by: (a) $460,078.00 for ‘release/discharge of debt owed to Maharg Enterprises Pty Ltd (Paul’s company)’; and (b) $400,000.00 for ‘release/discharge/assignment of debt owed to John Francis Gerraty.’[39]
[39]CB 2/512.

The sale contract states that these debts were owed by Marindi Park. It was unclear precisely what these amounts were for. During the trial, reference was made to John being owed money for trucking services during the 1990s, and Paul being owed for money given to Frank and Marie for living costs.

At the trial, John said that he had not spent the $400,000 and if it was ever recalled, it could be repaid.[40]
[40]Transcript of hearing, Re Chambeyron (No 1) (28 February 2017) T417, L23–25.

Kevin was able to enter a 10-year, renewable lease, on beneficial terms, for his business, Landscapelink, on the Boundary Road property.

Francine said it had always been difficult to obtain financial records from her brothers for Chambeyron, and referred to their vertically integrated business structures being a reason for improper financial records being maintained, or made available.

Relevant legal principles

Section 24 of the Supreme Court Act 1986 (Vic) provides that the Court has a general discretion in relation to awarding costs.

Section 24(1) provides:

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.

The general discretion in relation to costs is ‘absolute and unfettered,’ but it is a discretion which ‘must be exercised judicially, not arbitrarily or capriciously’ and ‘it cannot be exercised on grounds unconnected with the litigation.’[41]
[41] See Hyper Electronics Pty Ltd (in liq) v Mead (2004) 61 NSWLR 169 [42].

By virtue of s 24 of the Supreme Court Act 1986 (Vic), the Court has the power to make an order for costs against a person who is not a party to the action.[42]
[42]Bischof; Permark.

Colbart claimed relief under the Corporations Act 2001 (Cth) (Corporations Act). It is therefore relevant to note s 1335(2) of the Corporations Act, which states that:

The costs of any proceeding before a court under this Act are to be borne by such party to the proceeding as the court, in its discretion, directs.

It is arguable that s 1335(2) of the Corporations Act could be read to limit the Court’s discretion to award costs to only those parties before the Court. However, relevant cases make clear that its operation does not limit the Court’s power to award costs[43] and does not operate so as to prevent the award of costs against a non-party under the Court’s broad discretion.[44]
[43]UTSA Pty Ltd (in liq) v Ultra Tune Australia Pty Ltd [1999] 1 VR 204; see also Consolidated Byrnes Holdings Ltd v Hardel Investments Pty Ltd (2009) 176 FCR 348 (‘Consolidated Byrnes Holdings v Hardel Investments‘).
[44]MG Corrosion Consultants Pty Ltd v Vinciguerra (No 2) (2011) 276 ALR 319 [15]–[18]; cf earlier first instance authority suggesting the opposite: Australian Forest Managers Ltd (in liq) v Bramley (1996) 65 FCR 13.

In Consolidated Byrnes Holdings v Hardel Investments,[45] the relationship between s 1335 of the Corporations Act and s 43(1) of the Federal Court Act 1976 (Cth) (Federal Court Act) (which is in similar terms to s 24 of the Supreme Court Act1986 (Vic)) was addressed. Lander J said s 1335(2) was not intended to limit the jurisdiction or operation of s 43(1) to a party, or a party to a proceeding brought under the Corporations Act, and that therefore s 1335(2) did not prevent the Court from making an order for costs against non-parties in proceedings brought under the Corporations Act.
[45]Consolidated Byrnes Holdings v Hardel Investments.

In any event, an order that costs be borne by non-parties is regarded as ‘exceptional’, in the sense that it is outside the run of ordinary cases where parties pursue or defend claims for their own benefit and at their own expense. Whether it is just in all the circumstances to make such an order is based on an assessment of the circumstances. ‘The authorities also indicate that the discretion, though broad, must be exercised with caution.’[46]
[46]Permark [26].

Dal Pont provides the following summary of the authorities:[47]

… First, the court will only make a non-party costs order where the interests of justice justify a departure from the general rule that only parties to proceedings may be subject to costs orders.[48] Expressed another way, a non-party costs order will be made ‘when, in the circumstances of the particular case, it is just and equitable that a non-party pay the costs of a party to the litigation.’[49]
Second, given that in the bulk of cases it is unjust to award costs against a non-party,[50] the circumstances in which such an order will be made are necessarily confined, as a question of discretion, not of jurisdiction.[51] Courts have cautioned that applications for costs orders against non-parties should be treated ‘with considerable caution,’[52] and granted only ‘sparingly’[53] and ‘when exceptional circumstances make such an order reasonable and just.’[54] But the ‘exceptional’ threshold should not be seen to fetter the curial discretion and may mean no more than ‘outside the ordinary run of cases where parties pursue or defend claims for their own benefit and at their own expense.’[55]
Third, being a discretion vested in a judge, it must be ‘exercised judicially and in accordance with general legal principles pertaining to the law of costs.’[56] Like other costs orders made in the exercise of a curial discretion, the award must be made on principle, not in accordance with whim or private opinion, and usually in accordance with the outcome of the case.[57] Yet the judicial nature of the discretion also requires judges to eschew fixed legal rules, and so the courts have branded it undesirable to lay down rules that would fetter that discretion.[58] It inevitably comes down to a fact-specific inquiry informed by various relevant considerations.

[47]G.E. Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths, 2013) [22.17].

[48]Naomi Marble (No 2) [1999] 1 Qd R 518, 544 (Shepherdson J).

[49]Vestris v Cashman (1998) 72 SASR 449, 468 (Lander J).

[50]Aiden Shipping Co Ltd v Interbulk Ltd [1986] AC 965, 980 (Lord Goff).

[51]Knight, 203 (Dawson J).

[52]Symphony, 193 (Balcombe LJ); Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418, 422 (Waller LJ).

[53]Marriage of McAlpin (1993) 16 Fam LR 888, 896 (Nicholson CJ and Maxwell J); Arundel Chiropractic Centre Pty Ltd v Deputy Commissioner of Taxation (2001) 179 ALR 406, 413 (Callinan J). See also Marriage of Pagliarella (No 3) (1994) 122 FLR 443, 447 (Hannon J).

[54]Murphy v Young & Co’s Brewery plc [1997] 1 All ER 518, 531 (Phillips LJ). See also Re Land and Property Trust Co Ltd plc [1991] 1 WLR 601, 604 (Nicholls LJ); Knight, 203 (Dawson J); Carborundum, 764 (Tompkins J); Separate Representative v J H E and G A W (1993) 16 Fam LR 485, 508 (Nicholson CJ and Fogarty J); O’Neill v De Leo (1993) 2 Tas R 225, 230 (Green CJ); Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418, 424 (Millett LJ); Re JJT (1998) 195 CLR 184, 189 (Gaudron J); Flinn v Flinn [1999] 3 VR 712, 760; Naomi Marble and Granite Pty Ltd v FAI General Insurance Co Ltd (No 2) [1999] 1 Qd R 518, 544 (Shepherdson J); FPM Constructions Pty Ltd v Council of the City of Blue Mountains [2005] NSWSCA 340 [214] (Basten JA, with whom Beazley and Giles JJA concurred); Sanelli v Acee Victoria Pty Ltd (No 2) [2012] VSC 190 [5] (Mukhtar AsJ).

[55]Dymocks Franchise Systems (NSW) Pty Ltd v Todd [2004] 1 WLR 2807 [25] (Lord Brown). See also Globe Equities Ltd v Globe Legal Services Ltd [1999] BLR 232, 239–40 (Morritt LJ) (who considered that an exceptional case in this context ‘is one to be recognised by comparison with the ordinary run of cases not defined in advance by reference to any further characteristic’ at 240); Europeans Ltd v Revenue and Customs [2011] EWHC 948 (Ch) [15] (Proudman J).

[56]Knight, 192 (Mason CJ and Deane J).

[57]See G.E. Dal Pont, Law of Costs (3rd ed, LexisNexis Butterworths, 2013) [6.14-15, 7.2-5].

[58]Vestris v Cashman (1998) 72 SASR 449, 468 (Lander J).

In Ruhani v Director of Police,[59] Kirby J said that ‘there is no doubt that this Court has the power to make an order for costs against a non-party’ and that the ‘jurisdiction to do so is engaged when that non-party has an interest in the litigation and where it is involved in some real way in the outcome.’[60] His Honour observed that ‘the exercise of such powers is, of course, subject to observance of the requirements of procedural fairness.’[61]
[59](2005) 222 CLR 489.
[60](2005) 222 CLR 489, [238]. See also Knight, (Dawson J said the cases ‘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’ at 202).
[61](2005) 222 CLR 489, [238]. See also The Beach Retreat Pty Ltd v Mooloolaba,Marina Ltd [2009] QSC 84 [68] (Martin J) ‘[g]enerally, a non-party should be warned about being at risk as to costs.’

In Knight, Mason CJ and Deane J said that where a party to litigation is ‘an insolvent person or a man of straw’ and a non-party has played an active part in the conduct of the litigation and that non-party ‘has an interest in the subject of the litigation’, it is appropriate for an order for costs to be made against the non-party where the interests of justice require that it be made.[62]
[62]Knight, 192–193 (Mason CJ and Deane J).

A non-party must be sufficiently connected with the proceeding and with the incurring of the costs for a costs order to be made against the non-party. In ‘considering the connection between the proceedings and the non-party’ both ‘the connection between the non-party and the proceedings and secondly, the causal connection between the non-party and the costs’ should be looked at.[63] ‘The connection must be real and direct and it must be material to the issue of costs.’[64] However, a connection with the proceedings is not, of itself, sufficient to ground the award of costs against a non-party.[65]
[63]Bischof, 205 (Gobbo J).
[64]Bischof, 205 (Gobbo J). The principles stated by Gobbo J were summarised and relied on in Kebaro [103] (Beaumont, Sundberg and Hely JJ).
[65] Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203, 219 (Brooking J with whom the court agreed).

The rationale of the order for costs is that it is just and reasonable that the party who caused the other party to incur the costs of litigation should reimburse that party for the liability incurred.[66]
[66]See Latoudis v Casey (1990) 170 CLR 534, 566–7.

In Symphony, Balcombe LJ set out the following matters for consideration on an application that costs be paid by a non-party, noting that there are other relevant matters:[67]
[67] Symphony, 192–194.

1. An order for the payment of costs by a non-party will always be exceptional …
2. It will be even more exceptional for an order for the payment of costs to be made against a non-party, where the applicant has a cause of action against the non-party and could have joined him as a party to the original proceedings …
3. Even if the applicant can provide a good reason for not joining the non-party against whom he has valid cause of action, he should warn the non-party at the earliest opportunity of the possibility that he may seek to apply for costs against him …
4. An application for payment of costs by a non-party should normally be determined by the trial judge …
5. The fact that the trial judge may in the course of his judgment in the action have expressed views on the conduct of the non-party constitutes neither bias nor the appearance of bias …
6. The procedure for the determination of costs is a summary procedure, not necessarily subject to all the rules that would apply in an action … [but] [t]his departure from basic principles can only be justified if the connection of the non-party with the original proceedings was so close that he will not suffer any injustice by allowing this exception to the general rule.
7. Again, the normal rule is that witnesses in either civil or criminal proceedings enjoy immunity from any form of civil action in respect of evidence given during those proceedings … In so far as the evidence of a witness in proceedings may lead to an application for the costs of those proceedings against him or his company, it introduces yet another exception to a valuable general principle …
8. The fact that an employee, or even a director or the managing director of a company gives evidence in an action does not normally mean that the company is taking part in that action …
9. The judge should be alerted to the possibility that an application against a non-party is motivated by resentment of an inability to obtain an effective order for costs against a legally aided litigant.

A non-party costs order might be made where the non-party has not only funded the litigation but has also promoted it and has done so ‘solely or substantially for his or her own benefit.’[68]
[68]Ipex ITG Pty Ltd v Melbourne Water Corporation (No 6) [2009] VSC 571 [62] (Byrne J).

In Permark, Croft J held that more is required than a finding that a non-party has a financial interest in the litigation,[69] or that a director of a plaintiff company is the driving force behind the company’s litigation, and that any benefit will flow to the director (which is ‘highly unsurprising’ where the plaintiff is a commercial entity and a private company), to establish the director is the ‘real litigant.’[70] What is determinative is whether the plaintiff is merely a ‘front’ for the non-parties’[71] and the conduct of the parties and the nature of their interest in the proceedings should be considered.[72]
[69]Permark [64]–[66].
[70]See Permark [33].
[71]Permark [64]–[66], [83].
[72]Permark [33].

His Honour went on to say that ‘the piercing of the corporate veil in applications of this kind is not a step to be taken lightly,’[73] and that the preservation of the separate legal personality of corporate entities is balanced by providing avenues for security for costs.[74]
[73]Permark [79].
[74]Permark [79].

In Carborundum Abrasives Ltd v Bank of New Zealand (No 2),[75] Tompkins J said that ‘costs are not to be awarded against the directors of an insolvent company only because they cause the company to bring or defend proceedings when they know or suspect that the company might not be able to meet an order for costs against it.’[76]
[75][1992] 3 NZLR 757 (‘Carborundum’).
[76]Carborundum, 764 (referring to Newhart Developments Ltd v Co-operative Commercial Bank Ltd [1978] 2 All ER 896 (CA)).

However, if the non-party has caused the insolvent company to bring the proceedings for his own benefit, it may be appropriate that an order for costs be made against him,[77] the rationale being that ‘…it would rarely be just for such a person pursuing his own interests, to be able to do so with no risk to himself should the proceedings fail or be discontinued.’[78]
[77]Carborundum, 765.
[78]Carborundum, 765.

Beneficiaries of a trust able to bring an action

It was submitted by Kevin that, in the circumstance, Colbart was the only party to bring the proceedings. I do not agree. A proper course of action would have been for the four sons to institute the proceedings in their own names, joining Chambeyron and Colbart as defendants and seeking declarations. As well as being directors of Colbart, the four sons claimed to be beneficiaries of the Colbart unit trust. They claimed to have a financial interest arising from Colbart being the sole shareholder of Chambeyron.

As to the appropriateness of beneficiaries bringing an action against a trustee, I note the following principles.

Beneficiaries may institute proceedings to compel the trustee to perform his duty or to protect their beneficial interest in the trust property, even if that interest is only contingent. The proceedings can be in the beneficiaries’ own name/s where the relief sought is in the equitable jurisdiction of the court and even then only where the circumstances are exceptional,[79] the trustee and other beneficiaries being added as defendants.[80]
[79]Jacobs’ Law of Trusts in Australia (5^th ed.) 640–1 [2303]. Citing Bartlett v Bartlett (1945) 4 Hare 631; 67 ER 800; Store v Ford (1844) 7 Beav 333; 49 ER 1093.
[80]Jacobs’ Law of Trusts in Australia (5^th ed.) 640–1 [2303]. Citing Howden v Yorkshire Miners’ Association [1903] 1 KB 308. If they are not exceptional or if the proposed action is to be commenced in the common law jurisdiction, the beneficiary’s remedy is to sue the trustee for the execution of the trust and then apply for the appointment of a receiver and for leave to sue in the name of the trustee or of the receiver. Quoting James LJ stated in Sharpe v San Paulo Railway Co. (1873) 8 CH App 597. See all Fletcher v Fletcher (1844)4 Hare 67, 78; 67 ER 564, 568 (Wigram V-C.).

In the circumstances where the four sons only constituted four of the eight directors of Colbart, where there were doubts as to the ownership of the units, where Colbart was unable to meet a costs order, and where the application was concerned with the Court’s equitable jurisdiction, in my opinion, the proceedings could have been brought in the name of the four sons.

Costs against a solicitor

Francine submits that the solicitors for Colbart should also be responsible for the costs of the proceeding, as they were informed that the defendants did not accept that Colbart had authority to initiate and conduct the proceedings.

As well as the Court’s wide discretion to order costs be paid by non-parties, r 63.23 of the Supreme Court (General Civil Procedure) Rules 2015 (Vic) authorises the Court to order the solicitor for a party to pay costs.[81] The Court is not permitted to make an order against a solicitor under r 63.23 without giving the solicitor the opportunity to be heard (r 63.23(3)).
[81]Although the discretion of the court to order a solicitor to pay costs will ordinarily be exercised on the basis of the duty of the solicitor, or to the court and the solicitor’s client, it is but an aspect of the wider power of superior courts to order costs against a person not a party to litigation, De Stousa v Minister for Immigration, Local Government and Ethnic Affairs (1993) 41 FCR 544, 547.

The power to award costs against a solicitor personally involves special considerations and is a jurisdiction that must be exercised with caution.[82] According to Ridehalgh v Horsefield[83] and Myers v Elman,[84] the jurisdiction to order any such costs requires consideration of the following:
[82]Re Bendeich (1994) 53 FCR 422 (Drummond J) citing Bent v Gough (1992) 36 FCR 204, 207 (Black CJ).
[83][1994] Ch 205.
[84][1940] AC 282.

(a) the jurisdiction is quite distinct from the disciplinary jurisdiction exercised over solicitors;

(b) whereas a disciplinary order against a solicitor requires a finding that he or she has been personally guilty of serious professional misconduct, the making of an order for costs does not;

(c) the jurisdiction to make an order against the solicitor is founded on breach of the duty owed by the solicitor to the court to perform his or her duty as an officer of the court in promoting within his own sphere the cause of justice;

(d) to show a breach of that duty, it is not necessary to establish dishonesty, criminal conduct, personal obliquity or behaviour such as would warrant striking a solicitor off the roll. While mere mistake or error of judgment would not justify an order, misconduct, default or even negligence is enough if the negligence is serious or gross;

(e) the jurisdiction is compensatory and not merely punitive.

In Sitzler Savage Pty Ltd v Northern Mining Holdings Pty Ltd,[85] Zammit AsJ (as her Honour then was) said that ‘it is imperative that solicitors observe the professional requirement and obligation to the court not to institute or conduct litigation without authority. To take such a step will result in an order that the solicitor pay the costs on an indemnity basis.’[86] Her Honour found that the solicitors before her had commenced the proceeding knowing that there was no authority to do so, an act which ‘must amount to a wilful disregard … of the law.’[87]
[85][2012] VSC 104.
[86]Sitzler Savage Pty Ltd v Northern Mining Holdings Pty Ltd [2012] VSC 104, [195] (‘Sitzler Savage’); citing Bray v Dye [2010] VSC 152 [61]; McKewins Hairdressing & Beauty Supplies Pty Ltd v Deputy Commissioner of Taxation (2000) 74 ALJR 1000, 1003 [16].
[87]Sitzler Savage [197].

In addition to the powers of the Court to make costs orders already mentioned, s 29 of the Civil Procedure Act 2010 (Vic) provides, if satisfied on the balance of probabilities that a person has contravened any overarching obligation, the Court may make an order including that the person pay some or all of the legal costs or other expenses of any person arising from the contravention of the overarching obligation.[88]
[88]The principles to be applied in respect of an application under s 29 have been considered in Yara Australia Pty Ltd v Oswal [2013] VSCA 337; Hudspeth v Scholastic Cleaning and Consultancy Services Pty Ltd (No 8) [2014] VSC 567 (Dixon J).

An applicant seeking an order under s 29 must make an application in accordance with s 30;[89] the applicant must file a summons and affidavit setting out the alleged contravention, and the alleged contravener must be given the opportunity to respond.
[89]Section 30 of the Civil Procedure Act 2010 (Vic).

Francine’s application for a costs order against the solicitors for Colbart was made orally at the hearing of 20 June 2017. There was no appearance for Colbart at that hearing. No prior notice was provided to Tolhurst Druce & Emmerson (solicitors for Colbart at the time of the commencement of the proceeding) or Pearce Webster Dugdales (with whom Tolhurst Druce & Emmerson merged and who are presently the solicitors on record for Colbart). Solicitors for Colbart were notified of the application after the hearing and consequently provided response submissions.

Tolhurst Druce & Emmerson submissions

The submissions were made on behalf of both Tolhurst Druce & Emmerson (TDE) and Pearce Webster Dugdales (PWD); however, it is submitted that PWD are not a relevant party for the purposes of Francine’s application as PWD only commenced acting for Colbart after the trial.

TDE submit that Francine’s application is based on the duty of legal practitioners to ensure that they represent a corporation that had the means to pay legal costs and damages if the corporation lost. TDE submit that no such duty is known to the law.

TDE submit that there was no conduct by the solicitors for Colbart that would justify an order for costs being made against them and that, regardless of what is determined in relation to the directors of Colbart, the solicitors were not the true protagonists of the litigation.

Further, TDE submit that no material has been put before the Court to suggest that it was improper for Colbart to commence the proceedings, and there has been no allegation of misconduct in commencing the proceeding and no evidence of any misconduct by Colbart’s solicitors.

Discussion

TDE refer to the resolution of directors of 23 December 2015, resolving to commence the litigation as evidence that they had adequate authority to commence the proceedings in the name of Colbart.

The defences of Frank (3 March 2016), Marie (4 March 2016), and Francine, (4 March 2016), each state:

I deny the authority stated in the Particulars and states the solicitors acting for Colbart Pty Ltd have any due rights to act on behalf of Colbart Pty Ltd as there was an improper meeting held on December 23rd 2015 at the private home of the wife and mother-in-law of Mr Kevin Anthony Gerraty where it was voted to appoint Tolhurst Druce & Emmerson to act on behalf of Colbart Pty Ltd. This was an improperly called meeting and each of the litigants being Mssrs. Paul, John, Kevin Jnr and Philip Gerraty should utilise their own name and title in this matter and not use the phoenixed company and implied trustee position to litigate this matter.

Frank’s counterclaim of 3 March 2015, claimed, inter alia that:

(a) the action in this Court taken by Colbart is an abuse of process and the time of the Court.

(b) the appointment of the solicitors (TDE) was done improperly and the meeting appointing them was improper and in full conflict with the duties of company directors as defined in the Corporations Act.

The evidence before me does not establish that when TDE commenced the proceedings that they were aware that the board of Colbart was evenly divided on the issue of whether the proceedings ought to have been commenced. As it was that split did not become fully apparent until David and Kate gave evidence.

During the trial, however, it became apparent that the board of Colbart was divided evenly and that the company was unable to give instructions on the conduct of the litigation. In particular, it must have been apparent to the solicitors that Colbart had no authority to make the open offer that it purported to make in court to settle the proceedings, on behalf of Colbart.

As discussed above, the case could have been formulated to not involve Colbart as plaintiff. The failure to do so, however, has not caused substantial prejudice to the real litigants, as the same outcome would have been reached. There is no evidence that the proceeding would have been shorter, or any suggestion that the resolution of issues might have been differently managed.

In the circumstances, I find that although the evidence suggests that the conduct of the solicitors raises the possibility of questionable conduct, there was no evidence of damage to the real litigants. I find it would not be in the interests of justice to make an award of costs against the solicitors for Colbart.

Findings

Bearing in mind the legal principles referred to, it is appropriate to make relevant findings.

I find that the proceedings were brought in the name of Colbart on the instructions of the four sons, and primarily for their own benefit. I find that the four sons did so knowing that if Colbart failed in the proceeding, Colbart would have no assets to meet any of the costs of the defendants.

I find that the board of Colbart was equally divided between the four sons who caused the proceedings to be brought in Colbart’s name and the four other directors, Francine, Kate, David and Frank, who opposed the proceedings.

I find that the board of Colbart was not involved in or consulted on any aspects of the proceeding, including the open offer purportedly made in its name, save for resolving to commence the proceedings. I find that the board of Colbart did not give any instructions to the solicitors on the record for the plaintiff on the conduct of the proceeding, save for the instructions to commence the proceedings.

I find that for all intents and purposes the proceedings were conducted by the four sons merely using the name of Colbart. As discussed above, Francine, Frank and Marie all denied that Colbart had authority to institute the proceedings.

In the circumstances where the four sons only constituted four of the eight directors of Colbart, and where there were doubts as to the ownership of the units in the Colbart unit trust, and where Colbart was unable to meet the costs of losing the proceedings, I find that an appropriate course would have been for the four sons to seek declarations joining Chambeyron and Colbart as defendants. The four sons were claiming, through their units in the Colbart unit trust, that they had a beneficial interest in the shares allegedly held by Colbart, in Chambeyron. This proprietary claim would have founded a claim for a declaration as to Colbart’s ownership of the shares in Chambeyron.

The four sons chose not to so proceed. I find that the four sons acted inappropriately in purporting to bring, and to thereafter conduct the proceedings, in the name of Colbart. By doing so, in my opinion, they cannot avoid paying costs, if, in the interests of justice, it is otherwise warranted.

I do not accept that the four sons brought the proceedings in the interests of all the holders in the unit trust or for the benefit of Frank and Marie. It is a difficult proposition to accept as four of the unitholders, Frank, Francine, Kate and David, opposed the proceedings, as did Marie.

Frank was a unitholder, but the trust was not making distributions to him for his and Marie’s support. Frank and Marie had been forced to rely on the age pension since 2007 (having unsuccessfully applied in 2005). Without going into unnecessary detail, both Frank and Marie suffered from medical conditions that required significant care and expense.

If Colbart had been successful in the application, there is no evidence to suggest that the financial situation of Frank and Marie would have been improved. All indications were that the opposite would be true. For example, the four sons had at various times all claimed to be owed money from Frank and Chambeyron,[90] and some of these claims remain unresolved.
[90]Evidence of David: John claimed $400,000 for trucking; Philip claimed $300,000; Kevin claimed $570,000. These were all claims against the family assets held in Chambeyron. As discussed above, Paul received a reduction in the sale price of Marindi Park. See Transcript of hearing, Re Chambeyron (No 1) (9 March 2017) T992–3, L12.

Relevance of defendants not joining the four sons to the proceedings

In Symphony,[91] Balcombe LJ said that an award of costs against a non-party is an exceptional order and is all the more exceptional where an applicant had the opportunity to join the non-parties, but elected not to do so.
[91][1994] QB 179, 192–194.

The defendants, who were unrepresented throughout the proceeding, save for the limited role played by the litigation guardian, sought to allege misconduct on the part of the four sons in relation to their duties in various roles such as director, chairman, and company secretary.

Mr Mereine, counsel for the plaintiff, repeatedly noted that such claims were outside the scope of the proceedings and that if the defendants wished to raise such complaints, they should have joined the four sons to the proceedings as part of a counterclaim.

Francine told the Court that Chambeyron did not seek to join the four sons as its former directors as third parties and did not file a complaint against them, due to the diversion of funds and it consequently becoming de-registered.[92] Chambeyron was re-registered on 17 February 2017, and its position only became clear at this time. The trial began on 22 February 2017.
[92]Transcript of hearing, Re Chambeyron (No 1) (6 March 2017) T583.

During the hearing, I ruled that it was not open to Francine to raise complaints about the four sons’ alleged misuse of Chambeyron’s funds.

Failure to apply for security of costs

Colbart had no assets, and would not have any access to Chambeyron’s assets in the event that their action was unsuccessful (as it was). No security for costs was sought by the defendants to ensure that any adverse costs order made against Colbart could be met.

According to Knight, there is a ‘strong argument’ for ‘refusing to exercise discretion to order costs against the non-party’[93] where a security for costs order was available at an early stage.
[93]Knight; cited in Vestris v Cashman (Lander J).

Where a corporation is involved, s 1335 of the Corporations Act deals with security of costs and states:

1335(1) [Security given by corporation]
Where a corporation is plaintiff in any action or other legal proceeding, the court having jurisdiction in the matter may, if it appears by credible testimony that there is reason to believe that the corporation will be unable to pay the costs of the defendant if successful in his or her or its defence, require sufficient security to be given for those costs and stay all proceedings until the security is given.

The court’s discretion under s 1335 arises if there is reason to believe there is a real chance that, in events which can fairly be described as reasonably possible, the plaintiff corporation will be unable to pay the costs of the defendant, if judgment goes against it.[94]
[94]In cases where the plaintiff is only taking the action in essentially defensive proceedings, security is usually not given. See Livingspring Pty Ltd v Kliger Partners [2008] VSCA 93.

The defendants failed to secure their own costs. This is a relevant factor that I am obliged to take into account but does not prevent me from making an order for costs against a non-party.

Conclusions

In my opinion, for the reasons given above, I find that exceptional circumstances exist such that it is in the interests of justice that the four sons pay the defendants’ costs. I propose to so order.

What costs can be recovered?

Mr Keogh acted for all defendants (save for Chambeyron), from February 2017 (a Notice of Appearance was filed 15 February 2017) until the trial commenced. Kate was appointed the litigation guardian for Marie on the first day of the trial and Mr Keogh was retained as Kate’s solicitor. Francine acted for herself during the whole of the trial. Frank acted for himself until Kate was appointed his litigation guardian. Kate retained Mr Keogh as her solicitor for Frank.

Mr Keogh claims a total of $43,623.87 of professional costs as disbursements, being:

(a) Professional costs and disbursements of Mr Keogh, incurred from 13 February 2017 to the directions hearing on day one of the trial — professional costs: $7,673.95; disbursements: $4,571.50; total: $12,245.45;

(b) Professional costs and disbursements of Mr Keogh, incurred as solicitor assisting the litigation guardian throughout the trial: $2,625.00 per day for 10 days; total: $26,250.00;

(c) Professional costs incurred from 19 April 2017 to 19 June 2017: $3,815.92; and

(d) Professional costs for appearing at the hearing of 20 June 2017: $1,312.50.

Mr Keogh notes that he received $25,000 from Francine, which he has applied to these costs. Mr Keogh proposes to refund this amount to Francine.

Further, Mr Keogh submits the following costs as those incurred by the litigation guardian, totalling $10,468.00:

(a) Loss of earning for attending trial: $10,000.00;

(b) Parking infringement notice dated 7 April 2017, whilst attending court: $78.00; and

(c) Costs incurred as a result of the litigation guardian’s car being towed on 16 April 2017, whilst attending court: $390.00.

Francine submits that as a result of the proceedings, she incurred costs for flights to attend various appearances in court (Sydney–Melbourne; Port Macquarie–Melbourne (return); Brisbane–Melbourne (2); February: France–Melbourne (return and costs for delays and extensions); June: France–Melbourne); mediation ($2,600); preparation of affidavits and defence, costs of copies, printing, filing, scanning, parking, taxis, express post, phone calls, attendances and time since the matter commenced in 2015; preparation of files for VCAT attendances, filing and follow through on all matters.

Secondly, Francine submits that, in assisting Frank and Marie prior to the appointments of the litigation guardian, the following costs were incurred: part of all associated travel costs listed above; preparation of defences; preparation of over ten affidavits at the request of the plaintiff; costs of witnessing; filing; time to drive; appointing persons to assist when travelling to comply with court deadlines; respite care for Marie for three weeks due to stress; loss of income; research time and conference time unsuccessfully seeking legal representation; phone conferences; attending mental capacity and other medical appointments due to stress and impact of proceedings; travel and accommodation for Frank and Marie in Queensland in 2016, due to no access to mesne profits from their assets; assistance with costs for company rates, obligations to ATO, SRO and ASIC; negotiations with Centrelink for two days to comply with notices to admit; attendance to source copies of wills due to notice to admit; payment of legal representation to Best Hooper on the wills matter; $25,000 cash deposited with Mr Keogh to represent parents, with signed costs agreement (this amount is also claimed by Mr Keogh).

Thirdly, Francine claims costs incurred on behalf of Chambeyron in the form of fines and late fees due to all mesne profits being diverted at the request of the four sons acting as directors of Colbart without proper authority; $18,000 paid to local authorities, ATO, SRO, ASIC for Colbart, Chambeyron and Marindi Park and costs to rectify the credit rating and reputation of the companies; loss of capacity to trade, move banking, increase costs of interest paid at bank, costs to file paperwork with financial ombudsmen, ASIC, ATO, letters seeking delay of litigation until this matter on equity was heard in the court.

What costs can be claimed?

Section 24 of the Supreme Court Act 1986 (Vic), copied above, gives the Court ‘full power to determine by whom and to what extent the costs are to be paid.’

Mr Keogh is able to claim for professional costs and expenses incurred.

Costs that can be recovered by a litigant in person do not include the costs of preparing and presenting the case, although a litigant in person can recover out-of-pocket expenses.[95] There are two main types of costs that may be recovered:

(a) ‘disbursements’, which covers costs paid to other people, such as witnesses and counsel, and would also include out-of-pocket expenses, such as court filing fees, printing et cetera; and

(b) ‘costs’, which is ‘intended to cover remuneration for the ‘exercise of professional legal skill.’[96]

[95]Department of Foreign Affairs and Trade v Boswell (No 2) (1992) 39 FCR 288; Lawrence v MD Nikolaidos & Co (2003) 57 NSWLR 355, 363; Australian Super Pty Ltd v Woodward (2009) 262 ALR 402; Cachia v Hanes (1994) 120 ALR 385 (‘Cachia’).

[96]Cachia, 390 citing Buckland v Watts [1970] 1 QB 27, 37–8 (Sir Gordon Willmer).

In Cachia, the meaning of ‘costs’ was discussed. The court said of the Supreme Court Rules 1970 (NSW) that:[97]

The “costs” provided for in the rules do not include time spent by a litigant who is not a lawyer in preparing and conducting his case. They are confined to money paid or liabilities incurred for professional legal services. It is only in that sense that the rules speak of “costs”.

[97]Cachia, 387.

In Cachia, it was found that ‘a litigant who qualifies as a witness is entitled to the ordinary witness fees’,[98] but that travelling expenses incurred for the purpose of hearing judgment and in addition to witness fees for preparation, are ‘not an out-of-pocket expense which would have been recoverable by him or his solicitor in this case had he been legally represented.’[99]
[98]Cachia, 393. The relevant witness fees are set out in Appendix B to Chapter 1 - Supreme Court (General Civil Procedure) Rules 2015, (Witnesses’ Expenses and Interpreters’ Allowances effective 1.1.2017 to date).
[99]Cachia, 393.

In Russo v Russo,[100] the court said that the litigant in person was not able to recover travelling expenses for attending merely to observe or instruct ‘as a mere party’, but was entitled to recover expenses incurred in her capacity as a witness, actual or potential.[101] With the qualification that:[102]

… while a party may recover from the other party the expenses which he reasonably has had to pay a witness who has unreasonably gone to a distance before the trial, the party himself cannot claim against the other party expenses occasioned by his having himself (being a witness) unreasonably done the same thing.

[100]Russo v Russo [1953] VLR 57 (‘Russo’).

[101]Russo, 68.

[102]Russo, 68 (emphasis added).

In relation to the flights claimed by Francine, any travel costs incurred to attend court as a litigant in person, to prepare or present her case (on her own behalf or on behalf of her parents or Chambeyron), may not be claimed.

Francine did attend court as a witness. When sworn in on day eight of the trial, Francine said that she currently lived in France and gave her French address.[103] At the time of affirming her affidavit in September 2016, Francine gave an address in Canterbury Victoria.
[103]Transcript of hearing, Re Chambeyron (No 1) (8 March 2017) T757.

The $25,000 paid to Mr Keogh for Frank and Marie’s legal expenses cannot be claimed by Francine as it is a cost of Frank and Marie. In any event, Mr Keogh will recover his expenses and will repay this amount to Francine.

A litigation guardian is not a party to a proceeding[104] and is entitled to recover from the estate of the defendant all costs incurred on behalf of the defendant in relation to the proceeding in which the litigation guardian has acted.[105] A litigation guardian is not entitled to receive remuneration for acting in that capacity.[106]
[104]Mellhuish v Collier (1850) 15 QB 878; Dyke v Stephens (1885) 30 Ch D 189; Pink v Sharwood Ltd [1913] 2 Ch 286.
[105]Murray v Kilpatrick (1940) 57 WN (NWS) 162.
[106]Re Tyson: Tyson v Webb (1906) 7 SR (NSW) 91.

Kate, as litigation guardian, is entitled to be indemnified by Frank and Marie for all costs incurred on their behalf. Parking fines and related costs are not costs incurred on the defendants’ behalf. Whilst Kate did attend court on behalf of Frank and Marie, her claimed loss of earnings is not a ‘cost’ within the meaning of the Supreme Court Act 1986 (Vic).

Kate attended court as a witness and is entitled to claim witness fees of $161.80 to $756.20 per day — this range is subject to any loss of earnings incurred as a result of attending as a witness, as well as any additional reasonable expenses.

Conclusion

In the circumstances described above, I find that the appropriate order is for John, Paul, Philip and Kevin Gerraty to pay the costs of the defendants (including the litigation guardian) of the proceeding, including all reserved costs.

In my view, this is a case where it is appropriate to award a lump sum for costs to avoid the costs of taxation. I consider that in view of the information provided to the Court by Mr Keogh that a fair and reasonable award would be $45,000.

Accordingly, the order of the Court is that John, Paul, Philip and Kevin Gerraty pay the costs of the defendants fixed at $45,000.

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3 August 2017