Re Locktronic Systems Pty Ltd (No 2)
[2009] VSC 523
•16 November 2009
| IN THE SUPREME COURT OF VICTORIA | Not Restricted | |
AT MELBOURNE
COMMERCIAL AND EQUITY DIVISION
COMMERCIAL COURT
CORPORATIONS LIST
No. 10001 of 2005
| RE LOCKTRONIC SYSTEMS PTY LTD (in liquidation) (receivers appointed) (ACN 005 724 149) | |
| GEORGE GEORGES AND JOHN ROSS LINDHOLM (in their capacities as joint and several liquidators of LOCKTRONIC SYSTEMS PTY LTD (in liquidation) (receivers appointed) and LOCKTRONIC SYSTEMS PTY LTD (in liquidation) (receivers appointed) | Plaintiffs |
| v | |
| THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA | Defendant |
| and | |
| PETER KING | First third party |
| MICHAEL DAVID WALSH | Second third party |
| JOHN ANDREAS NISSEN | Third third party |
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JUDGE: | ROBSON J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 15 September 2009 | |
DATE OF JUDGMENT: | 16 November 2009 | |
CASE MAY BE CITED AS: | Re Locktronic Systems Pty Ltd (No 2) | |
MEDIUM NEUTRAL CITATION: | [2009] VSC 523 | |
---
CORPORATIONS – application for costs - plaintiffs and defendant Commissioner of Taxation consent to judgment against the Commissioner to recover preferential payments of tax under s 588FF of the Corporations Act 2001 – Commissioner proceeds against third party directors to be indemnified under s 588FGA(2) of the Corporations Act 2001 – whether Commissioner or third parties ought to pay plaintiffs’ costs for period after Commissioner admits plaintiffs’ claim – third parties ordered to pay costs for period after Commissioner admitted plaintiffs’ claim - rule 11.09 Supreme Court (General Civil Procedure) Rules 2005
APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr P D Crutchfield | Middletons |
| For the Defendants | Ms E Strong SC with Mr S D Hay | Wisewould Mahony |
| For the Firstnamed & Thirdnamed Third Party | Mr G T Bigmore QC with Mr P Fary | McDonald Partners |
| For the Secondnamed Third Party | In person |
Allen v Oakey (1890) 62 LT 724
Archard v Ellerker (1888) 10 ALT 196
A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd [2009] VSCA 208
Commissioner of Taxation v Sims [2008] 72 NSWLR 716; [2008] NSWCA 298
Donald Campbell & Co Ltd v Pollak [1927] AC 732
Duncan v Commissioner of Taxation [2006] FCA 885
Keddie v Foxall [1955] VLR 320
London Steam Dyeing Co v Digby (1888) 36 WR 497
Noxequin Pty Ltd v Deputy Commissioner of Taxation [2007] NSWSC 87
Ritter v Godfrey [1920] 2 KB 47
Sims v Commissioner of Taxation [2007] NSWSC 1359
Trickey v Maynard (1893) 5 QLJ 115
HIS HONOUR:
By an originating process of 19 December 2005, the first and second plaintiffs, the liquidators of Locktronic Systems Pty Ltd (in liquidation) (receivers appointed) (“Locktronic”) and the third plaintiff, Locktronic, applied under s 588FF of the Corporations Act 2001 for orders and declarations that certain alleged preferential payments entered into between Locktronic and the defendant, the Commissioner of Taxation, are insolvent transactions of Locktronic which are voidable by the liquidators pursuant to s 588FF of the Act.
By an amended third party notice of 23 March 2007, the Commissioner claimed to be entitled to be indemnified by the third parties, who had been directors of Locktronic, under s 588FGA of the Act, in the event that the Commissioner was found to be liable to the plaintiffs to pay an amount equal to the alleged preferential payments.
On 11 March 2008, in Re Locktronic Systems Pty Ltd (No 1),[1] I ordered by consent that pursuant to s 588FF of the Act the Commissioner pay Loctronic the sum of $341,633.54 together with interest of $177,902.69. I reserved the question of costs until the hearing of the third party claims. The third party claims were resolved on 21 August 2008 when the Commissioner and each Third Party executed terms of settlement.
[1][2008] VSC 626.
By a summons dated 14 July 2009, the plaintiffs seek an order that the Commissioner pay the plaintiffs’ costs of the proceedings, including reserved costs.
For the reasons that follow, I have found that the Commissioner should only pay the plaintiffs’ costs until 11 December 2006 and that thereafter the third parties ought to pay the plaintiffs’ costs until 11 March 2008 save the costs of Mr Georges’ third affidavit. Each party should bear their own costs of this application.
CHRONOLOGY OF THE PROCEEDINGS
The following is a chronology of the proceedings:
19 December 2005 The plaintiffs, George Georges and John Lindholm, in their capacity as liquidators of Locktronic commenced the current proceeding against the Commissioner, claiming that certain payments made by Locktronic were voidable pursuant to ss 588FA and 588FE of the Act.
The plaintiffs filed an affidavit of George Georges sworn 15 December 2005 (“first Georges affidavit”) in support of the application.
16 February 2006 The plaintiffs filed a statement of claim.
10 March 2006 The Commissioner filed a defence which did not admit a number of matters, including the insolvency of the company.
23 March 2006 The Commissioner served third party notices on the directors of Locktronic, Peter King, Michael Walsh and John Nissen, seeking indemnity from the directors pursuant to s 588FGA(4) of the Act in respect of any ‘loss or damage’ suffered by the Commissioner resulting from any order of the court made under s 588FF of the Act.
27 April 2006 George Georges made an affidavit of documents.
11 May 2006 The directors filed and served a defence to the third party notice and defence to the plaintiffs’ statement of claim in which they denied a number of matters including the insolvency of the company.
11 December 2006 The Commissioner filed and served its amended defence in which it admitted the plaintiffs’ claim in full.
22 March 2007 The Commissioner filed an amended third party notice with a minor change to correct a typographical error.
30 March 2007 The first and third third parties issued a subpoena returnable on 17 April 2007 seeking production of documents relating to the Hawaiian Claim and the Ferrier Hodgson review.
27 July 2007 The parties filed consent to orders, including:
a. that the plaintiffs file and serve a supplementary affidavit of documents containing any discoverable documents which are of the type requested by the first and third third Parties in the facsimile of 29 June 2007 on or before 10 August 2007;
b. that the plaintiffs file and serve any further material they intend to rely upon on or before 24 August 2007.
25 October 2007 George Georges made a second affidavit (“second Georges affidavit”).
14 February 2008 The first and third third Parties:
a. issued an interlocutory process returnable on 29 February 2009 seeking production of “All documents relating to or recording advice given to the first, second or third plaintiffs or Poltech International Limited in relation to potential claims that they or any of them may have against Dato Ding Pei Chai, Isyoda Corporation Behad and Home Wilkinson Lowry...”;
b. issued a subpoena to George Georges and John Lindholm in their capacity as trustees of the Poltech Trust seeking production on or before 25 February 2008 of documents concerning the advice referred to in (a).
3 March 2008 George Georges made a third affidavit (“third Georges affidavit”).
11 March 2008 The trial of the proceeding commenced. Counsel for the first and third third parties advised that they no longer disputed insolvency. Mr Walsh (who is self-represented) also admitted insolvency. The orders set out above are made and the plaintiffs have no further involvement in the trial. The trial proceeded as between the Commissioner and the third parties.
THE PARTIES’ SUBMISSIONS
The plaintiffs seek the following orders:
(a) that the Commissioner pay the plaintiffs’ costs of the proceeding; or
(b) alternatively, that the Commissioner pay the plaintiffs’ costs of the proceeding up to and including 23 March 2007 and the third parties pay the plaintiffs’ costs of the proceeding from 23 March 2007.
The plaintiffs have chosen 23 March 2007 as a cut off date as this was the first directions date after the Commissioner admitted the plaintiffs’ claim in full on 11 December 2006. The plaintiffs submit that notwithstanding the consent orders, the Court needs to be “satisfied” that the transaction the subject of the proceeding is voidable and that in the events that happened this could not have taken place until March 2007.[2]
[2]Duncan v Commissioner of Taxation [2006] FCA 885 at 131 per Young J.
The plaintiffs rely on the following grounds:
(a) the Commissioner has not been successful;
(b) the Commissioner caused the involvement of the directors by issuing a third party notice;
(c) the directors may be impecunious; and
(d) it was the plaintiffs who incurred the cost of filing evidence in opposition to the directors’ claim that Locktronic was solvent by reason of the financial support it received (or expected to receive) from its parent company, Poltech.
The Commissioner accepts that until the filing of the amended defence on 11 December 2006, he disputed aspects of the plaintiffs’ claim and he should pay the plaintiffs’ costs for this period. The Commissioner has indicated that he will not seek those costs from the directors. The present application, therefore, only concerns the costs incurred by the plaintiffs since 11 December 2006. The Commissioner contends that he should not pay the plaintiffs’ costs of the principal proceeding incurred after 11 December 2006 but that the directors should.
The Commissioner submits that since he admitted the whole of the plaintiffs’ claim in his amended defence dated 11 December 2006, it was the directors, and not the Commissioner, who prevented the plaintiffs from obtaining an order pursuant to s 588FF of the Act after 11 December 2006 until 11 March 2008, being the date on which the third parties withdrew their opposition to the allegation of insolvency. The Commissioner submits that for this reason, the third parties were responsible for causing the plaintiffs’ expense after that date and ought pay those costs.
In their written submissions the first and third third parties submit that the plaintiffs ought to bear their own costs incurred since 11 December 2006.[3] They say the plaintiffs’ original evidence as to insolvency was fundamentally flawed and this was not corrected until days before the trial. In oral submissions, however, the first and third third parties at one stage submitted that if I order that the third parties should pay the plaintiffs’ costs after 11 December 2008 then those costs should not include the costs of and incidental to the second and third Georges affidavits.[4] Subsequently, Mr Bigmore QC submitted that if I agree that the plaintiffs did not get the affidavit in support of the application right in the first place, there should be no costs to the plaintiffs.[5] The third parties do not seek to rely on any other grounds in opposition to an order for costs.
[3]Submissions of first and third third parties [23].
[4]Transcript 83 lines [11]-[14].
[5]Transcript 85-86 lines [30]-[4].
Each of the parties make other alternative submissions which for reasons that will become apparent are not necessary for me to consider.
THE AUTHORITIES
In opposition to the plaintiffs’ application and in support of his contention that the third parties ought to pay the plaintiffs’ costs after 11 December 2007, the Commissioner relies principally on three cases. In Duncan v Commissioner of Taxation,[6] Young J of the Federal Court of Australia was faced with similar facts as in this case. The liquidator of two companies had claimed that certain payments to the Commissioner were unfair preferences pursuant to s 588FA of the Act. Other payments were said to be uncommercial transactions pursuant to s 588FB of the Act. The liquidator sought to avoid the payments pursuant to s 588FF. The Commissioner claimed an indemnity against the directors. The liquidator and the Commissioner settled the claims as between themselves and agreed upon orders for the money to be repaid to the liquidator. The Commissioner’s claim against the directors was defended. Their principal defence was that the companies were not insolvent at the relevant times. Young J gave judgment for the Commissioner against the directors.
[6][2006] FCA 885.
The directors wished to contest the liquidator’s claims that the payments were preferences and that the companies were insolvent at the relevant times. When the directors raised these issues, Young J ordered that the third parties have leave to defend the liquidator’s claim against the Commissioner on terms that: (a) they each be bound by all decisions made in those actions; and (b) they each be treated as if they were parties to the action on any issue relating to costs.
The liquidator sought orders that the directors pay the liquidator’s costs from 14 November 2005, that being the date upon which the liquidator and the Commissioner arrived at a settlement agreement. The Commissioner supported this submission. Young J agreed that the liquidator was entitled to recover his costs from the directors. He said that it would be too harsh to run the calculations from 14 November 2005. He said that the more appropriate date from which to calculate costs would be 13 December 2005 when Finkelstein J made directions for the contested hearing of the proceedings.[7]
[7]Ibid at [131].
It will be noted that unlike this case, the liquidator did not seek costs from the Commissioner for the period after settlement of his claim against the Commissioner was reached.
In Noxequin Pty Ltd v Deputy Commissioner of Taxation,[8] Barrett J dealt with a case similar to this case. The liquidator took proceedings against the Commissioner to recover preferential tax payments. The Commissioner then sought an indemnity from a director. On 4 July 2006, the Commissioner advised the other parties that the Commissioner would not be defending the liquidator’s claim or leading evidence. Barrett J found that from that day, the merits of the claim the liquidator sought to pursue against the Commissioner were to be fought between the liquidator and the director alone.[9]
[8][2007] NSWSC 87.
[9]Ibid at [32].
As to the question of costs, Barrett J said:
The final matter to be addressed is costs. On the basis that costs follow the event, the plaintiffs should have a costs order against the Commissioner and Mr Soong [the director]. As between the Commissioner and Mr Soong, however, it should be recognised that the Commissioner would have brought the proceedings to an end on 4 July 2006 had it not been for the continuing opposition of Mr Soong. I accept the submission made on behalf of the Commissioner that the Commissioner should be ordered to pay the costs of the plaintiff up to and including 4 July 2006 and that Mr Soong should be ordered to pay the costs of the plaintiffs after 4 July 2006.[10]
[10]Ibid at [40].
Barrett J also added on the question of costs:
I should add one brief observation about costs. There may, I think, be a suggestion in Woodgate (as liquidator of Fairlight ESP Pty Ltd) v Commissioner of Taxation [2006] NSWSC 778 at [83]and [84] that a third party in the position occupied here by Mr Soong cannot, in a proceeding of this present kind, be subjected to any liability for costs not forming part of the “loss or damage” referred to in s 588FGA(2). I agree that, if a costs order is made against the Commissioner in respect of recovery of the kind with which s 588FGA is concerned, those costs form part of the “loss or damage” referred to in the section. This has been recognised in several cases: see, for example, Superior Press Pty Ltd v Deputy Commissioner of Taxation (2004) 55 ATR 541 (at [39] – [40]) and Duncan v Commissioner of Taxation (above) at p 582 ([126]). But the fact that the third party actually becomes a party to the proceedings brought initially by the liquidator against the Commissioner (see paragraphs [9] and [31] above) means that that person also faces the full exposure to costs that is the lot of any party to proceedings in the ordinary course.
Barrett J ordered that the Commissioner pay the plaintiffs’ costs of the proceedings up to and including 4 July 2006 and he declared the director liable to indemnify the Commissioner for a certain portion of those costs. He said that the order against the director followed from the order against the Commissioner and s 588FGA(2). He also ordered the director to pay the plaintiffs’ costs of the proceedings after 4 July 2006. He said that this was based on the Court’s ordinary jurisdiction on costs in relation to parties.
Noxequin differs from this case, in as much that the Commissioner did not consent to judgment and the plaintiffs participated in the hearing of the proceedings against the director.
Finally, in Sims v Commissioner of Taxation[11] Hammerschlag J dealt with a liquidator’s and the company’s preference claim against the Commissioner and the Commissioner’s claim for indemnity against two directors. He referred to the plaintiffs as the liquidator. At an early stage of the proceedings, the Commissioner admitted the liquidator’s case on the pleadings including the insolvency of the company at all material times. The Commissioner then sought orders in the proceedings against the directors who put solvency in issue. Directions were made to enable them to directly contest that issue in the liquidator’s case. The Commissioner did not consent to judgment and the liquidator and the Commissioner took it upon themselves to prove insolvency before the trial judge. Hammerschlag J said that the insolvency issue was only in play because of the joinder of the directors. He said that the outcome was that the liquidator in turn succeeded entirely against the Commissioner and the Commissioner in turn succeeded entirely against a director. He said:
[10] The outcome was that the [liquidator] succeeded entirely against the Commissioner and the Commissioner in turn succeeded entirely against Mr Maine [the director].
[11] There is in those circumstances no reason in my view why Mr Maine should be ordered to pay anything more than the costs of the Commissioner in prosecuting the claim against him and no reason why costs should not otherwise follow the event in the ordinary way.
[12] The order of the Court will be that the Commissioner is to pay the costs of the [liquidator], and Mr Maine is to pay the costs of the Commissioner.[12]
[11][2007] NSWSC 1359 and on appeal, Commissioner of Taxation v Sims [2008] 72 NSWLR 716; [2008] NSWCA 298.
[12][2007] NSWSC 1359 at [10]-[12].
The matter went on appeal on the issue of the trial judge’s refusal to order that the directors indemnify the Commissioner under s 588FGA(2) for the Commissioner’s liability to pay the costs of the liquidators. The Court of Appeal (Beazley, Ipp and Macfarlan JJA) allowed the appeal and made the order sought. The Commissioner had also sought a Sanderson or Bullock order that would have had the effect of the directors indemnifying the Commissioner for the costs she was ordered to pay the liquidator, but the point fell away when the Court of Appeal upheld the claim for an indemnity under s 558FGA(2). There was no issue on the appeal on the costs orders against the Commissioner and the director below in favour of the liquidator.
Nevertheless, Ipp JA (with whom Beazley and Macfarlan JJA agreed) did take issue with the trial judge on the issue of who the contest as to solvency was between, holding that in reality it was between the liquidator and the director. He said:
[42] In dealing with who was responsible for the costs incurred in connection
with the insolvency issue, Hammerschlag J said (at 1830):“[8] Whatever the status of the Commissioner's admissions, she did not consent to judgment, and both the plaintiffs and the Commissioner took upon themselves the burden of proving insolvency before me.
[9] Had the Commissioner consented to judgment, or not claimed against Mr Maine and Mrs Maine in the same proceedings, there would have been no issue as to insolvency in the proceedings (or, given the Commissioner's admissions, any issues between the plaintiffs and the Commissioner).The insolvency issue was only in play because of the joinder of the directors.”
[43] In my opinion, however, the statement that the Commissioner took upon herself the burden of proving insolvency does not accurately reflect what occurred.
[44] I repeat that, as between the liquidators and the Commissioner, the
Commissioner admitted that Newsnet was insolvent. The Commissioner joined Mr and Mrs Maine and they (not the Commissioner) disputed Newsnet's insolvency. The Commissioner then, as Macfarlan JA observed during argument, acted as if she were interpleading in the case. In reality, the contest as to the solvency or otherwise of Newsnet was between the liquidators and Mr and Mrs Maine. The solvency issue was “in play” because Mr and Mrs Maine raised it. Had Mr and Mrs Maine not raised that issue, the costs incurred in proving that Newsnet was insolvent would not have been incurred.[13]
[13][2008] 72 NSWLR 716 at 726, [42] – [44].
The observations of Ipp JA do support the contention that the third parties are responsible for the liquidator’s costs arising out proving the company was insolvent.
A difference between Sims and this case, is that the in this case, the Commissioner consented to judgment at the commencement of the trial. Nevertheless, the costs in issue in this case are the costs incurred by the plaintiffs after 11 December 2005 up to the time when the Commissioner consented.
As indicated above, there are two sources of liability at play in this case. There are the normal rules as to costs in proceedings involving third parties. In addition, there is the statutory entitlement of the Commissioner to an indemnity under s 588FGA(2) which has been held to cover the costs the Commissioner is ordered to pay on the claim by the liquidator against the Commissioner.
In my opinion, I should follow the decision of Young J in Duncan v Commissioner of Taxation[14] and Barrett J in Noxequin Pty Ltd v Deputy Commissioner of Taxation.[15] In Duncan, in my opinion, the observations of Ipp JA quoted above support their decisions. Young J held that the third parties should bear the costs from the day the court made directions for the hearing of the issues they raised against the liquidator. In Noxequin, Barrett J made the order from the day the Commissioner effectively consented to judgment.
[14][2006] FCA 885.
[15][2007] NSWSC 87.
In this case, there was no need for directions for the third parties to be at issue with the plaintiffs in the proceedings Due to the raising of a defence by the third parties to the plaintiffs claim of insolvency, the plaintiffs were required to prove the allegation of insolvency. If the plaintiffs failed to do so, they could not have established insolvency against the Commissioner despite the Commissioner’s admission of insolvency. Rule 11.09 of the Supreme Court (General Civil Procedure) Rules 2005 has that effect.[16]
[16]Re Locktronic Systems Pty Ltd (in liq) [2008] VSC 626 per Robson J at [17] -18].
Accordingly, I find that subject to the issue of quantum and whether the plaintiffs should bear their own costs which I discuss below, the third parties should pay the plaintiffs’ costs after 11 December 2005 up to and including 11 March 2008 when they admitted insolvency.
SHOULD THE PLAINTIFFS BEAR THEIR OWN COSTS FOR ALL OR PART OF THE PROCEEDING?
As indicated above, in their written submissions the first and third third parties submit that the plaintiffs ought to bear their own costs incurred since 11 December 2006.[17] They say that the plaintiffs’ original evidence as to insolvency was fundamentally flawed and this was not corrected until days before the trial. In oral submissions, however, the first and third third parties submitted that if I order that the third parties should pay the costs after 11 December 2008 (which I propose to order), then those costs should not include the costs of and incidental to the second and third Georges affidavits (which I refer to below).[18] I now turn to that issue
[17]Submissions of first and third third parties [23].
[18]Transcript 83 lines 10-14.
Generally, a successful party should receive his or her costs unless special circumstances exist.[19] In Ritter v Godfrey, Lord Sterndale MR said:
…there is such a settled practice of the courts that in the absence of special circumstances a successful litigant should receive his costs, that it is necessary to show some ground for exercising a discretion by refusing an order which would give them to him. The discretion must be judicially exercised, and therefore there must be some grounds for its exercise, for a discretion exercised on no grounds cannot be judicial.[20]
[19] Ritter v Godfrey [1920] 2 KB 47 (Lord Sterndale MR).
[20][1920] 2 KB 47 at 52-3. Cited in Gladstone Park Shopping Centre Pty Ltd v Wills (1984) 6 FCR 496 and Raybos Australia Pty Ltd v Tectran Corp Pty Ltd (No 2) (1988) 77 ALR 190 at 191.
In Donald Campbell & Co Ltd v Pollak, Viscount Cave LC said:
But (a successful party) has no right to costs unless and until the court awards them to him, and the court has an absolute and unfettered discretion to award or not to award them. This discretion, like any other discretion, must of course be exercised judicially, and the judge ought not to exercise it against the successful party, except for some reason connected with the case.[21]
[21][1927] AC 732 at 809, 811.
The Supreme Court rules reinforce the Court’s discretion to award costs in a manner which departs from convention and to award costs to a party in relation to a particular part of the proceeding. Section 24(1) of the Supreme Court Act1986 provides:
Costs to be in the discretion of Court
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.
Rule 63.04 of the Supreme Court Rules provides:
Costs of question or part of proceeding
(1) The Court may make an order for costs in relation to a particular question in or a particular part of a proceeding.
(2) Where the Court makes an order under paragraph (1), the Court shall by order fix the proportion of the total costs of the proceeding which is attributable to the particular question in or the particular part of the proceeding.
In London Steam Dyeing Co v Digby,[22] the plaintiffs could have proceeded with less expense by summons and consequently North J only allowed the plaintiffs such costs as would have been incurred by a summons in chambers.[23] In Allen v Oakey,[24] the plaintiff could have proceeded with less expense by summons and North J again only allowed the plaintiffs such costs as would have been incurred by a summons in chambers. His Honour said:
In this case the plaintiff was entitled to move in court for judgment, and he is entitled to the order he asks for, but the costs are in the discretion of the court. The plaintiff is entitled to his costs of the action, but the question is, what costs? I am of the opinion that he is only entitled to the cost of obtaining his order in the cheapest way.[25]
[22](1888) 36 WR 497.
[23](1888) 36 WR 497 at 498.
[24](1890) 62 LT 724.
[25](1890) 62 LT 724 at 724.
A similar result was reached by Harding J in Trickey v Maynard.[26] In A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd, Redlich JA and Beach AJA of the Victorian Court of Appeal cited London Steam Dyeing Co v Digby and said:
Courts have long held that a party may be deprived of its costs where multiple applications are brought in circumstances where one would have sufficed or in cases where a less expensive procedure could have been adopted.[27]
[26](1893) 5 QLJ 115.
[27][2009] VSCA 208 at [64].
In Keddie v Foxall, the Victorian Supreme Court (Lowe, Martin and O’Bryan JJ), after considering a number of authorities said:
The cases do show, we think, that in exercising his discretion on costs a Judge may have regard to conduct – not necessarily misconduct – of any party which is calculated to occasion unnecessary expense…[28]
The Court said further:
…the conduct need not be misconduct at all, but only such as can be seen by the Judge to have brought about or substantially contributed to the costs which he is considering.[29]
[28][1955] VLR 320 at 324.
[29][1955] VLR 320 at 325.
In Archard v Ellerker,[30] it was submitted that the defendant might have settled the action earlier if he was not given a wrong inference by the plaintiff. Williams J agreed with the submission and said that the fact that a case is shaped in such a way that it may mislead the defendant and prevent him from acknowledging some liability may be a ground for refusing costs to the plaintiff. The appeal, in that case, was dismissed without costs by Higinbotham CJ, Williams and Wrenfordsley JJ.
[30](1888) 10 ALT 196.
In deciding whether the plaintiffs in this case should have all or part of their costs awarded, I find that the following principles apply:
(a) Generally, a successful party should receive his or her costs unless special circumstances exist: Ritter v Godfrey;[31]
[31][1920] 2 KB 47.
(b) The court has a discretion to award costs in a manner which departs from convention and this discretion must be exercised judicially: s 24(1) Supreme Court Act1986; Donald Campbell & Co Ltd v Pollak;[32]
(c) A successful plaintiff may be deprived of all or part of his or her costs where the plaintiff could have proceeded at less expense as, for instance, by adopting another procedure: London Steam Dyeing Co v Digby;[33] Allen v Oakey;[34] A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd;[35] Keddie v Foxall;[36] Trickey v Maynard;[37] and
(d) A successful plaintiff may be deprived of all or part of his or her costs where the case of the plaintiff was framed so that the defendant was misled and prevented from admitting liability: Archard v Ellerker[38].
[32][1927] AC 732.
[33](1888) 36 WR 497.
[34](1890) 62 LT 724.
[35][2009] VSCA 208.
[36][1955] VLR 320.
[37](1893) 5 QLJ 115.
[38](1888) 10 ALT 196.
Bearing these principles in mind, I turn to consider the effect of the plaintiffs’ actions, if any, on this case and whether the plaintiffs should be prevented from recovering all or part of their costs against the third parties.
DID THE LIQUIDATORS ENGAGE IN FLAWED METHODOLOGY WHEN PRESENTING THE EVIDENCE?
The plaintiffs sought orders that certain transactions entered into between Locktronic and the Commissioner between the period 12 May 2003 and 12 November 2003 were insolvent transactions pursuant to s 588FE of the Act. In his first affidavit, George Georges deposed that in assessing the solvency of Locktronic, he examined the company based on technical or balance sheet solvency and on commercial or cash flow solvency.[39] He assessed the company’s solvency for the period of 30 June 2002 to 12 November 2003 and concluded that the company was insolvent from as early as 30 June 2002.[40]
[39]First Georges Affidavit [14].
[40]First Georges Affidavit [15].
In the third Georges affidavit, Mr Georges explained:
I have reconsidered the methodology which I used to ascertain the net assets of Locktronics (sic) as described in paragraph 20 of My First Affidavit. With the benefit of further analysis, I am of the view that the methodology failed to properly consider the intercompany loans and investments held by Poltec in Locktronic (as recorded in the Parent Entity Accounts).[41]
[41]Third Georges Affidavit [12].
He said:
I should have added the inter-company loans and investments to the Economic Entity accounts, prior to deducting the Parent Entity figures from the Economic Entity figures to produce Locktronics’ accounts. Furthermore, the debt due by Locktronic to the Parent Entity (Poltech) should have been included as a liability in Loctronic’s accounts for the purposes of calculating the company’s net asset position in paragraph 19 of My First Affidavit.[42]
[42]Third Georges Affidavit [15].
Mr Georges explained in evidence in chief:
What I wanted to do was try to explain what I believed was not the correct analysis that I'd carried out in my earlier affidavit and I wanted to clarify the analysis that I'd actually performed and how to actually have carried it out better. That's what I tried to explain in the third affidavit.
Mr Georges’ initial calculations did not include a loan of $7,055,144 owed to Poltech by Locktronic. It also did not include the shares that Poltech, the parent entity, held in Locktronic, which amounted to $8,000,000 on 30 June 2002 and $2,000,000 on 30 June 2003.
On the balance sheet test of insolvency, Mr Georges calculated the net assets of Locktronic as follows:
Month Ending Net Assets (First Georges Affidavit) Net Assets (Third Georges Affidavit) 30 June 2002 ($3,636,030) $2,351,064 30 June 2003 ($569,667) ($6,219,667) 30 September 2003 ($6,677,932) ($6,677,932) 12 November 2003 ($2,075,486) ($2,075,486)
On the test of commercial insolvency, Mr Georges calculated the working capital of the company, i.e. the difference between a company’s current assets and current liabilities:
Month Ending Working Capital (First Georges Affidavit) Working Capital (Third Georges Affidavit) 30 June 2002 ($7,621,976) ($8,689,996) 30 June 2003 ($2,127,328) ($9,777,328) 30 September 2003 ($10,105,026) ($10,105,026) 12 November 2003 ($1,836,276) ($5,672,274)
It is clear from the figures above that the evidence in the third Georges affidavit paints a better picture of Locktronic’s position in June 2002, but a worse one in June 2003, which was the critical time.
The third parties submit that the plaintiffs were not in a position to prove insolvency until the plaintiffs filed the third Georges affidavit shortly before the trial commenced. The plaintiffs, however, say that the first Georges affidavit already showed that Locktronic was manifestly insolvent and evidence provided in the third Georges affidavit made no difference to the insolvency case at all and caused no prejudice to the third parties’ case. The third parties say that it was appropriate for them, given the flawed methodology in the first Georges’ affidavit, to maintain a defence.
I find that the liquidators sought to calculate the assets and liabilities of Locktronic by taking the consolidated balance sheet for Poltec and its wholly owned subsidiary Locktronic (which by its nature would exclude investments and loans by Poltech to and in Locktronic) and deducting the assets and liabilities of Poltec which would have included the loans to and investments in Locktronic. As Mr Georges concedes, that method does not accurately give the assets and liabilities of Locktronic. The methodology adopted in the third Georges’ affidavit should have been adopted from the beginning.
While it may be that the first Georges affidavit already suggested that Locktronic was insolvent, I accept the third parties’ submission that there is no onus on the third parties to show a causal link between the errors made by the plaintiffs and the damage suffered by the third parties. It is sufficient on the question of costs that the plaintiffs could have proceeded at less expense by, for example, adopting another procedure,[43] or in this case the correct methodology from the beginning.
[43]London Steam Dyeing Co v Digby (1888) 36 WR 497; Allen v Oakey (1890) 62 LT 724; A Team Diamond Headquarters Pty Ltd v Main Road Property Group Pty Ltd [2009] VSCA 208; Keddie v Foxall [1955] VLR 320; Trickey v Maynard (1893) 5 QLJ 115.
Further, I find that if the third parties had the figures provided in the third Georges affidavit, they may have admitted liability earlier.[44]
[44] Archard v Ellerker (1888) 10 ALT 196.
WAS DISCOVERY BY THE PLAINTIFFS UNSATISFACTORY?
The third parties initially made an allegation that the plaintiffs failed to comply with their discovery obligations but this allegation was abandoned during the hearing on costs.[45] They now allege that none of the Commissioner and the three third parties had possession of or control over the documents shown as missing in exhibit MFID5 which were material to the third parties’ case. Further, they submit that the plaintiffs did not, at any time, advert to or exhibit any of those missing documents. The first and third third parties no longer rely on discovery in resisting an order for costs.
[45]Transcript 67.
Ultimately, I find that the plaintiffs’ flawed methodology in presenting the evidence resulted in unnecessary costs and it would be unfair to order the Commissioner or the third parties to pay all the plaintiffs’ costs. Part of the reason the third parties continued with the proceeding can be attributed to the plaintiffs’ side. After considering all the matters submitted to me, I find that the third parties have established special circumstances that entitle me to depart from the usual order as to costs and to refuse the plaintiffs’ costs of and incidental to the third Georges’ affidavits.
COSTS OF THIS APPLICATION
The plaintiffs have been unsuccessful in their application that the Commissioner pay the costs of the proceedings after 11 December 2006. Further, the plaintiffs have been unsuccessful in their application that their costs should include the costs of the third Georges’ affidavit. In the circumstances, I consider in my discretion that there should be no order for costs on the plaintiffs’ application for costs.
ORDERS
For the above reasons above, I order that:
(a) The defendant pay the plaintiffs’ costs of the proceeding up to and including 11 December 2006 including any reserved costs.
(b) Each of the third parties pay the plaintiffs’ costs of the proceeding after 11 December 2006 and up to and including 11 March 2008, including any reserved costs save for the costs of and incidental to the affidavit of Mr Georges of 3 March 2008.
(c) There be no order as to the costs of the defendant and the third parties in the proceedings.
(d) The third party proceedings be otherwise dismissed.
(e) Each party bear their own costs on the plaintiffs’ application of 14 July 2009.
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