Re Swan Services Pty Ltd (in liq)

[2017] NSWSC 692

Supreme Court

New South Wales

Medium Neutral Citation:	In the matter of Swan Services Pty Limited (in liquidation) [2017] NSWSC 692
Hearing dates:	12 May 2017
Decision date:	02 June 2017
Jurisdiction:	Equity - Corporations List
Before:	Black J
Decision:	The Court holds that the Plaintiff should pay the costs of her claim and the Cross-Claim in respect of the Plaintiff’s 2013 charge on an ordinary basis to 18 July 2016 and an indemnity basis from 19 July 2016 to 6 December 2016, including the costs of the Cross-Claimants’ proof of the First Cross-Claimant’s insolvency in that Cross-Claim (being a proportion of their wider costs of proof of insolvency); and that the Cross-Claimants pay the Cross-Defendant’s costs of their Cross-Claim for insolvent trading, excluding costs referable to proof of insolvency, on an ordinary basis.
Catchwords:	PRODEDURE — Costs — Departing from the general rule – where Plaintiff and Cross-Claimants did not accept Calderbank offers in respect of the Plaintiff’s claim and the cross-claim respectively – whether it was unreasonable for the parties not to accept the Calderbank offers   PROCEDURE — Costs — General rule – where First Cross-Claimant required to prove insolvency of a company as at particular dates in defending the Plaintiff’s claim and prosecuting a Cross-Claim as to the 2013 charge and Cross-Claimants required to prove insolvency as at other dates in prosecuting a cross-claim for insolvent trading – whether Cross-Defendant should be ordered to pay the Cross-Claimants’ costs of proving insolvency where she was successful in defending a cross-claim for insolvent trading but unsuccessful in her own claim and in defending the cross-claim relating to the 2013 charge – whether costs ordered in favour of the Cross-Defendant of the unsuccessful cross-claim for insolvent trading should exclude the costs of proof of the companies’ solvency
Legislation Cited:	- Civil Procedure Act 2005 (NSW), ss 98, 100 - Corporations Act 2001 (Cth), ss 588E(3), 588FF, 588FM, 588G, 588M, 588W, 1317S - Uniform Civil Procedure Rules 2005 (NSW), Pt 42, rr 20.26, 42.1, 42.5, 42.15
Cases Cited:	- Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 - Calderbank v Calderbank [1975] 3 WLR 586 - Commonwealth of Australia v Gretton [2008] NSWCA 117 - Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1423 - County Securities Pty Ltd v Challenger Group Holdings Pty Ltd (No 2) [2008] NSWCA 273 - Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219 - Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 - Hamod v State of New South Wales [2011] NSWCA 375 - Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 - Kraissa v Hair Industrie Penrith Pty Ltd [2015] NSWSC 1905 - Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 - Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 81 - Re Alsafe Security Products Pty Ltd atf The Alsafe Trust (in liq) [2016] NSWSC 575 - Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 1509 - Re Swan Services Pty Ltd (in liq) [2016] NSWSC 1724 - The Owners – Strata Plan No 61162 v Lipman [2014] NSWSC 622
Category:	Costs
Parties:	Judith Louise Swan (Plaintiff/First Cross-Defendant) Robert John Swan (Second Cross-Defendant) Swan Services Pty Limited (in liquidation) (Defendant/First Cross-Claimant) Anthony Wayne Elkerton (Second Cross-Claimant) Superior Cleaners WA Pty Limited (in liquidation) (Third Cross-Claimant) Cleaners ACT Pty Limited (in liquidation) (Fourth Cross-Claimant) Cleaners Vic Pty Limited (in liquidation) (Fifth Cross-Claimant) Cleaners SA Pty Limited (in liquidation) (Sixth Cross-Claimant) Cleaners Qld Pty Limited (in liquidation) (Seventh Cross-Claimant) Cleaners New South Wales Pty Limited (in liquidation) (Eighth Cross-Claimant)
Representation:	Counsel: P S Braham SC/M Rose (Plaintiff/First Cross-Defendant) C R C Newlinds SC/J Hynes (Defendants/Cross-Claimants)   Solicitors: Hall & Wilcox (Plaintiff/First Cross-Defendant) TressCox Lawyers (Defendants/Cross-Claimants)
File Number(s):	2014/34940

Judgment

1. Over several days in late September 2016 and early October 2016, I heard proceedings brought by Ms Judith Swan, who sought an extension of time to register a charge granted by Swan Services Pty Limited (in liq) (“Swan Services”) in her favour in April 2013 (“2013 Charge”). By Cross-Claim in those proceedings, the liquidator of Swan Services sought to recover payments made to Ms Swan pursuant to the 2013 Charge as voidable transactions and sought other relief. By that Cross-Claim, Swan Services and several associated companies (together, “Companies”) also brought a claim for insolvent trading against Mr Robert Swan, who was a director of Swan Services and the Companies, and against Ms Swan, who was alleged to be a de facto director of Swan Services and the Companies. In my judgment delivered on 6 December 2016 ([2016] NSWSC 1724), I held that Ms Swan was not a secured creditor prior to the grant of the 2013 Charge, and that the grant of the 2013 Charge would have been set aside as an uncommercial transaction, if it were otherwise effective, and that an extension of time to register the 2013 Charge should accordingly not be granted. I held that Swan Services and the Companies were insolvent during the period claimed by the liquidator and I did not accept several defences to the insolvent trading claim on which Mr Swan and Ms Swan relied. However, I also held that Ms Swan was not a de facto director of Swan Services or any of the Companies during the relevant period so as to be held liable in an insolvent trading claim.

2. The parties largely agreed orders to give effect to my earlier judgment, which were made on 21 March 2017, but agreement was not then reached as to the question of costs as between the liquidator, Swan Services and the Companies on the one hand and Ms Swan on the other or interest payable on the amount of the judgment against Ms Swan. Pursuant to those orders, Ms Swan was to pay the amount of $868,200 to the liquidator pursuant to s 588FF of the Corporations Act 2001 (Cth); the insolvent trading claim against Ms Swan was dismissed; judgment was given against Mr Swan in the insolvent trading claim; and Mr Swan was ordered to pay the costs of the insolvent trading claim against him on a party/party basis as agreed or as assessed.

3. It now remains to deal with the position as to costs as between the liquidator, Swan Services and the Companies on the one hand and Ms Swan on the other and the question of interest. The liquidator, Swan Services and the Companies originally claimed an order for costs in their favour fixed in a gross sum of $796,850.69. That amount was quantified on the basis that Ms Swan should pay the entirety of their costs of proof of insolvency of Swan Services and the Companies and I have not accepted that position below. Ms Swan accepted that she should pay part of the liquidator’s costs referable to the claim against her in respect of the 2013 Charge and sought an order that the Cross-Claimants should pay her costs in relation to the insolvent trading claim on the ordinary basis from 27 May 2014 to 13 September 2016, in a gross sum of $520,400, and on an indemnity basis from 14 September 2016 to 6 December 2016, in a gross sum of $321,831. That amount was quantified on the basis that the liquidator should pay the entirety of Ms Swan’s costs of her defence of the insolvent trading claim against her, including in respect of the proof of the insolvency of Swan Services and the Companies, and I have also not accepted that position below.

4. Ms Swan relies on the detailed affidavit dated 4 May 2017 of her solicitor, Mr Stephen Klotz, and the liquidator relies on the detailed affidavit dated 9 May 2017 of his solicitor, Ms Kirsten Farmer. Those affidavits dealt with several issues of principle that I will address below. Those affidavits also included detailed information that would be relevant to a quantification of recoverable costs on a gross sum basis, and further issues as to the quantification have emerged in the parties’ submissions. Both parties agreed that it was likely to be preferable if the Court first determined several issues of principle, before allowing the parties an opportunity to seek to agree the more detailed issues of quantification, and then address any remaining questions of quantification in respect of the applications for gross sum costs orders. That is the preferable course, particularly where each party quantified his or her costs on the basis that he, she or it would be wholly successful and the other party wholly unsuccessful in respect of key issues in the costs application and, perhaps predictably, that has not occurred.

Whether Ms Swan should pay the liquidator’s costs of her application for an extension of time and the Cross-Claim in respect of the 2013 Charge on an indemnity basis from 18 September 2014 to 18 July 2016

5. By Ms Swan’s Originating Process filed 4 February 2014, she sought an order extending the time for registration of the 2013 Charge under s 588FM of the Corporations Act. That claim was amended on 12 May 2014 to add claims for declaratory relief and rectification. It was common ground that Ms Swan should pay the Defendants’ costs of this claim on an ordinary basis from 4 February 2014 to 17 September 2014. There was a dispute as to whether Ms Swan should pay the Defendants’ costs on an indemnity, rather than an ordinary, basis from 18 September 2014 to 18 July 2016. An overlapping issue arose in respect of an aspect of the Cross-Claim filed by, relevantly, the liquidator and Swan Services which brought a voidable transaction claim in respect of payments that Ms Swan had received and sought declarations that the 2013 Charge was voidable. It was common ground that Ms Swan should pay the Cross-Claimants’ costs in respect of that claim, but there was a dispute as to the period for which indemnity costs should be ordered, which turns on the same matters as the dispute in respect of Ms Swan’s claim for an extension of time to register the 2013 Charge and whether those costs should extend to the costs of proof of insolvency of Swan Services and the Companies.

6. Whether Ms Swan should be required to pay indemnity costs for the period from 18 September 2014 to 18 July 2016 turns on the effect of a letter dated 17 September 2014, sent by the liquidator’s solicitors to Ms Swan’s then solicitors on a without prejudice except as to costs basis. By that letter, the liquidator offered to settle the proceedings, which then did not include the insolvent trading claim against Ms Swan, on the basis that Ms Swan pay the sum of $650,000 within 28 days, the Amended Originating Process and Cross-Claim would be dismissed and there would be no order as to costs. The liquidator’s solicitors made several observations in that letter which were intended to communicate the strength of his case, albeit in very general terms, stating that:

“(a)   [the liquidator] has conducted extensive investigations in relation to the circumstances surrounding the matters the subject of the present proceedings;

(b)   he is well advanced in relation to the preparation of lay and expert evidence;

(c) he is confident that the expert evidence of an independent practitioner will establish that Swan Services, as a sole single entity, was insolvent as at 30 November 2012 and by the presumptions available under s 588E(3) of the Corporations Act remained insolvent up to 22 May 2013;

(d)   [Ms Swan] had intimate knowledge of the financial position of the company and of her exposure as an unsecured creditor of the company;

(e)   having retained Mr Allsop and Mr Wickenden, [Ms Swan] unsuccessfully took steps in the dying stages of the life of the company to shore up her position.”

The settlement offer was left open for 14 days from the date of the letter and was expressly made in accordance with the principles in Calderbank v Calderbank [1975] 3 WLR 586 (“Calderbank”). It was common ground that the offer made in that letter did not operate as an offer of compromise under r 20.26 of the Uniform Civil Procedure Rules 2005 (NSW) (“UCPR”) and that no presumptive entitlement to costs arose.

7. Turning now to the applicable legal principles, s 98 of the Civil Procedure Act 2005 (NSW) confers a discretionary power to determine costs on the court and requires that that discretion be exercised judicially. Rule 42.1 of the UCPR provides that:

“Subject to this Part, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs.”

Rule 42.2 in turn provides that, unless the court orders otherwise or the rules otherwise provide, costs payable are to be assessed on an ordinary basis. Rule 42.5 deals with an order for costs on an indemnity basis.

8. The principles applicable to whether an order for indemnity costs should be made by reason of a Calderbank offer were summarised by Ward J (as her Honour then was) in Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9]–[15], where her Honour observed that:

The rationale for the principles applied in relation to Calderbank offers was outlined in Commonwealth v Gretton [2008] NSWCA 117 by Beazley JA, her Honour noting (at [41]) that the public policy considerations underpinning the making of favourable costs orders where a Calderbank offer has been made (and not accepted) are the encouragement of settlement of disputes as soon as possible and the discouragement of wasteful and unreasonable behaviour by litigants.

The Court of Appeal in Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 recently reiterated the public policy objectives of special costs orders in the context of offers of compromise. Basten JA (with whom McColl and Campbell JJA agreed) referred at [6] to the objects underlying the formal offer of compromise procedures under the then court rules that were identified in Maitland Hospital v Fisher (No 2) (1992) 27 NSWLR 721 at 724 as including:

1.   To encourage the saving of private costs and the avoidance of the inherent risks, delays and uncertainties of litigation by promoting early offers of compromise by defendants which amount to a realistic assessment of the plaintiff’s real claim which can be placed before its opponent without risk that its “bottom line” will be revealed to the court;

2.     To save the public costs which are necessarily incurred in litigation which events demonstrate to have been unnecessary, having regard to an earlier (and, as found, reasonable) offer of compromise made by a plaintiff to a defendant; and

3.   To indemnify the plaintiff who has made the offer of compromise, later found to have been reasonable, against the costs thereafter incurred. This is deemed appropriate because, from the time of the rejection or deemed rejection of the compromise offer, notionally the real cause and occasion of the litigation is the attitude adopted by the defendant which has rejected the compromise. In such circumstances, that party should ordinarily bear the costs of litigation.

The onus is on the party seeking to rely on a Calderbank offer (in this case, the defendants) to satisfy the court that it should exercise the costs discretion in its favour (Evans Shire Council v Richardson (No 2) [2006] NSWCA 61). An indemnity costs order will not automatically follow from the fact that a genuine offer of compromise more favourable than the final judgment was made nor is there any presumption to that effect (Cat Media Pty Ltd v Allianz Australia Insurance Ltd [2006] NSWSC 790; Rolls Royce Industrial Power (Pacific) Ltd v James Hardie & Co Pty Ltd [2001] NSWCA 461). What must be considered is the reasonableness of the offeree’s rejection or non-acceptance of the offer, having regard to the relevant circumstances at the time that the offer fell to be considered (ie, here, as at September 2006) (citing MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd [1996] 70 FCR 236 per Lindgren J). The question is whether, in all the circumstances, the failure to accept the offer “warrants departure from the ordinary rule as to costs” (SMEC Testing Services Pty Ltd v Campbelltown City Council [2000] NSWCA 323 per Giles JA at [37]).

Counsel for the defendants (Mr Stitt) submits that, insofar as the Court is to have regard to the particular circumstances of the case, this includes the evidence advanced, the conduct of the parties and the ultimate result (referring to Knight v Clifton [1971] Ch 700; Hally v Dennis (1955) 95 CLR 661 at 664) and that relevant conduct of the parties to be taken into account may include not only conduct in the course of the proceedings (Beoco Ltd v Alfa Laval Co Ltd [1995] QB 137) but also conduct leading up to commencement of the proceedings (Peters v Peters (1907) 7 SR (NSW) 398 at 399).

Save where there is a special costs order by reference to the procedure provided for under the Rules or in accordance with the principles in Calderbank v Calderbank [above], it has been said that a court should depart from the general rule (and award indemnity costs only where the conduct of the party against whom the order is sought is “plainly unreasonable” (Sydney City Council v Geftlick [2006] NSWCA 280; Dunstan v Rickwood (No 2) [2007] NSWCA 266). In Leichhardt Municipal Council v Green [2004] NSWCA 341, Santow JA (at [57]) said that indemnity costs orders should be reserved for the most unreasonable actions by unsuccessful plaintiffs.”

9. In Re Alsafe Security Products Pty Ltd atf The Alsafe Trust (in liq) [2016] NSWSC 575 at [8], I summarised the principles applicable in determining the effect of a Calderbank offer as follows:

“[T]he fact that a party ultimately achieves a worse result than he or she would have achieved if he or she had accepted a Calderbank offer does not itself establish that the other party should be awarded indemnity costs, unless it can be said that it was unreasonable for the first party not to accept that offer, so as to warrant a departure from the general rule as to costs: Nu Line Construction Group Pty Ltd v Fowler (aka Grippaudo) [2012] NSWSC 816 at [9]–[15]; Perisher Blue Pty Ltd v Nair-Smith (No 2) [2015] NSWCA 268 at [14], [16]. In Lawrence v Gunner; Gunner v Lawrence [2015] NSWSC 1229 at [26], Stevenson J observed that:

‘If a Calderbank offer is made, but not accepted, the court’s discretion to make a special order is enlivened. The court’s discretion is an open one, but is commonly enlivened if (a) the party that made the offer achieves a better result than the amount offered, (b) the offer was a genuine offer of compromise, and (c) it was unreasonable of the offeree not to accept: for example Miwa Pty Ltd v Siantan Properties Pte Ltd (No 2) [2011] NSWCA 344 at [7]–[8].’”

10. Mr Braham, who appears with Mr Rose for Ms Swan, submits that her non-acceptance of the offer made in the letter dated 17 September 2014 from the liquidator’s solicitors was not unreasonable in circumstances that no evidence had then been served by the Cross-Claimants at the time that offer was made, although pleadings had closed, subject to further amendments that later followed. Mr Braham also points out that that letter gave no indication of the substance of the expert evidence to be led by the liquidator. Mr Newlinds, who appears with Mr Hynes for the liquidator, Swan Services and the Companies, in turn submits, and I accept, that Ms Swan was on notice of issues as to the validity of her 2003 security at that time and her advisers had recommended that she obtain replacement security in the form of the 2013 Charge. Mr Braham responds that the issues as to the validity of Ms Swan’s 2003 security were complex and that an issue as to certainty of that security which was significant to the failure of Ms Swan’s claim was not identified by the letter dated 17 September 2014 from the liquidator’s solicitors or, on one view, until Mr Newlinds’ closing submissions or, possibly, supplementary submissions made by the parties at the Court’s invitation.

10. The case law to which I have referred above emphasises that, in determining whether an order for indemnity costs should be made by reason of the offer made by the liquidator by the letter dated 17 September 2014, the Court should have regard to the reasonableness of Ms Swan’s rejection or non-acceptance of that offer, having regard to the relevant circumstances at the time that the offer fell to be considered by her. It seems to me that it was not unreasonable for Ms Swan not to accept the liquidator’s offer at that time. I will assume, without deciding, that Ms Swan was on notice of the substantial risk that Swan Services would be held to be insolvent as at May 2013, as was ultimately the result in the proceedings. However, whether Ms Swan would obtain an order extending the time for registration of the 2013 Charge also partly depended on whether the grant of that charge would have been set aside as a voidable transaction and that in turn partly depended on whether an earlier security taken by Ms Swan in 2003 was effective. If that earlier security was effective, then the grant of the 2013 Charge would likely not have improved Ms Swan’s position in a liquidation or amounted to a voidable transaction.

11. It does not seem to me that Ms Swan or her advisers could reasonably have appreciated, in September 2014, the nature of the issues which were ultimately determinative in respect of her application to extend the time for registration of the 2013 Charge and the liquidator’s Cross-Claim in respect of that charge. For that reason, the liquidator’s solicitors’ letter dated 17 September 2014 does not support an order for indemnity costs against Ms Swan from 18 September 2014 either in respect of Ms Swan’s claim or the liquidator’s Cross-Claim in respect of the 2013 Charge.

12. Ms Swan accepts that a further offer of compromise made by the liquidator and Swan Services on 18 July 2016 under UCPR r 20.26 operated as an offer of compromise in accordance with that rule, and that has the consequence under Pt 42 of the UCPR that Ms Swan should pay the Defendants’ costs of her claim and the liquidator’s Cross-Claim in respect of the 2013 Charge on an indemnity basis from 19 July 2016 to 6 December 2016. It was common ground between the parties that, if I reached this result, an order for costs on an ordinary basis should be made against Ms Swan in respect of these claims (subject to an issue as to the treatment of the costs of proof of insolvency that I address below) for the period up to 18 July 2016 and an order for costs on an indemnity basis should be made from 19 July 2016 to 6 December 2016.

Whether the costs payable by Ms Swan in respect of the Cross-Claim in respect of the 2013 Charge should include the liquidator’s costs of proving insolvency

14. There was also a dispute as to whether costs payable by Ms Swan in respect of the Cross-Claim concerning the 2013 Charge should extend to the liquidator’s costs of proving the insolvency of Swan Services and the Companies. This issue is of some complexity because (subject to Ms Swan’s position in her opening, which I will address below) the liquidator needed to establish, and did establish, the insolvency of Swan Services at least as at April and May 2013 in order to establish his voidable transaction claim in respect of the grant of the 2013 Charge. The liquidator also needed to establish, and did establish, the insolvency of Swan Services and the Companies over a significantly longer period in order to establish his insolvent trading claim against Mr Swan as a director of Swan Services and the Companies, which succeeded, and his insolvent trading claim against Ms Swan, which failed because she was not shown to be a de facto director of Swan Services or the Companies.

15. Mr Braham submits that there was no need for the liquidator to incur costs in proving insolvency in respect of the Cross-Claim against Ms Swan as to the 2013 Charge, because he had accepted, in opening her case on the first day of the hearing, that that claim would succeed or fail depending on whether Ms Swan was a secured creditor on 2 April 2013 by reason of her security taken in 2003. Ms Swan submits that she did not defend the voidable transaction claim on the basis that Swan Services was not insolvent at April or May 2013 and insolvency was only relevant at trial to the insolvent trading claim. In oral submissions, Mr Braham also submitted that he had made clear in his oral opening that Ms Swan accepted that the question as to the validity of her 2013 Charge was to be determined by reference to whether her earlier 2003 security was valid or not.

16. Mr Braham also submits that the relevant dates for insolvency in respect of Swan Services on the claim as to the 2013 Charge were 2 April 2013 and 21 May 2013 and that the solvency of the Companies was not in issue in respect of the claim as to the 2013 Charge. Mr Braham submits that the liquidator’s evidence was primarily directed to seeking to prove that Swan Services and the Companies were insolvent during the period November 2012 to May 2013 for the purposes of the insolvent trading claim. Mr Braham submits that the vast majority of the evidence relating to insolvency was only material to the insolvent trading claim.

17. Mr Newlinds responds, correctly, that, although Ms Swan served no evidence as to the question of insolvency, she cross-examined both the liquidator and an expert witness called by the liquidator, Mr Lombe, to challenge the proposition that Swan Services and the Companies were insolvent at the relevant dates. Mr Newlinds also submits that it is common in voidable transaction claims for a liquidator to prove insolvency over a broader period to ensure that the date of the payment as determined by the Court is captured.

18. It seems to me there is a degree of artificiality in Ms Swan’s position as to whether the insolvency of Swan Services was in issue in that part of the Cross-Claim that related to the 2013 Charge. The position that Mr Braham took on opening did not amount to a concession that Swan Services was insolvent at April or May 2013, a matter which Ms Swan contested in the insolvent trading claim against her, and therefore did not obviate the necessity for the liquidator to prove the insolvency of Swan Services in his Cross-Claim as at April and May 2013, which was an essential factual aspect of his voidable transaction claim and of his resistance to Ms Swan’s application. Irrespective of Mr Braham’s opening as to the 2013 Charge, the liquidator’s voidable transaction claim as to the 2013 Charge could not succeed if the liquidator failed to establish Swan Services’ insolvency as at April or May 2013 in the insolvent trading claim, where Ms Swan had put it in issue. The Court could not coherently have determined the proceedings on the inconsistent bases that Swan Services was insolvent as at April and May 2013 for the purposes of the part of the Cross-Claim relating to the 2013 Charge, merely because Mr Braham had not taken the point as to its solvency in that part of the Cross-Claim, but was not insolvent at the same dates in the other part of the Cross-Claim relating to the insolvent trading claim against Ms Swan, where she did not admit its insolvency. Although Ms Swan did not expressly resist that part of the Cross-Claim that related to the 2013 Charge on the basis that the liquidator had not proved its insolvency, the fact that she resisted the insolvent trading claim on that basis put the fact of Swan Services’ insolvency at those dates in issue in the case against her for all purposes.

19. This seems to me to have the result that the liquidator is, subject to the matters noted below, properly entitled to the costs of establishing Swan Services’ insolvency as at April and May 2013 (and extending, for the reason noted below, to a part of his costs as to proof of insolvency in the prior period) in the claim as to the 2013 Charge. Since Ms Swan did not adopt the position on which she relies until Mr Braham’s opening at the hearing, that position is also no answer to the liquidator’s claim for the work that would have been directed to the proof of insolvency in the period prior to the commencement of the hearing, if that amount is otherwise properly recoverable against Ms Swan.

20. Mr Newlinds also submits, and I accept, that proof of Swan Services’ insolvency as at April and May 2013, as distinct from a mere temporary lack of liquidity, likely required an assessment of Swan Services’ position for that prior period and not only at two points in time in April and May 2013. Although the liquidator’s insolvency evidence took the position in May 2013 as its starting point, and projected the earlier period by working backward to an earlier point in time from that date, the liquidator is therefore also entitled to recover the costs of proving the insolvency of Swan Services for the period prior to April and May 2013.

21. In support of the liquidator’s claim that he should recover all of his costs of the proof of insolvency in respect of the claim relating to the 2013 Charge, Mr Newlinds submitted that it would not be possible to determine what was involved in proof of a narrower insolvency case, directed only to the insolvency of Swan Services in April and May 2013 and the immediately prior period, as distinct from the wide insolvency case that the liquidator brought. I accept that there would be significant practical difficulty with such a determination in an assessment process, where an assessor would no doubt have difficulty in including or excluding the costs of particular attendances on that basis. However, it seems to me that it is open to the Court to address that difficulty by ordering that Ms Swan pay a percentage of the liquidator’s and Swan Services’ total costs of the proof of insolvency, which can be determined by a broader assessment of the extent of the evidence that would have been needed to establish a narrower insolvency claim in respect of Swan Services alone as at April and May 2013 and the immediately prior period.

22. It seems to me that the proper course is therefore to order that Ms Swan pay the liquidator’s and Swan Services’ costs of proving the insolvency of Swan Services as at April and May 2013 in the defence to Ms Swan’s claim and in the Cross-Claim concerning the 2013 Charge. The costs recoverable on that basis will include a proportion of the costs of the preparation of documentary evidence and Mr Elkerton’s and Mr Lombe’s evidence as to these matters. The liquidator is not, however, entitled to recover the costs of proof of the Companies’, as distinct from Swan Services’, insolvency in respect of this claim. The authorities indicate that, where costs of proceedings should be apportioned as between different issues, the Court will generally take a relatively broad brush approach, largely as a matter of impression and evaluation: Fexuto Pty Ltd v Bosnjak Holdings Pty Ltd (No 3) (1998) 30 ACSR 20 at 22. Bearing in mind that the affairs of Swan Services were more complex than the affairs of the Companies, and the time spent in cross-examination on its position as distinct from the Companies’ position, my preliminary view is that the liquidator and Swan Services would likely recover between 25% and 35% of their total costs of proof of insolvency (without distinguishing corporate entities) on that basis, and a mid-point between those figures may well commend itself to the parties to avoid the costs of further dispute. It seems to me that the parties should have little difficulty in agreeing a “broad brush” assessment of the costs recoverable on that basis. However, I will hear the parties if they seek to be heard further as to that issue.

Whether the costs payable by the liquidator, Swan Services and the Companies to Ms Swan in respect of the insolvent trading claim should exclude the costs referable to insolvency

23. The insolvent trading against Ms Swan was introduced by amendment to the Points of Cross-Claim on 19 December 2014. Ms Swan submits that the Cross-Claimants were unsuccessful against her in relation to the insolvent trading claim and that she is entitled to her costs of defending that claim. The liquidator, Swan Services and the Companies accept that they should be required to pay Ms Swan’s costs in respect of the insolvent trading claim against her on an ordinary basis, but contend that such costs should exclude costs relating to the issue of insolvency as to which they succeeded, having failed against Ms Swan on the basis that she was not shown to be a de facto director of Swan Services or the Companies.

24. Ms Swan refers to my summary of the principles applicable to the making of a costs order generally in my judgment in Re Colorado Products Pty Ltd (in prov liq) [2014] NSWSC 1509 at [5]–[11]. These include that the making of a costs order involves a broad evaluative exercise, regarding an assessment of what is fair and reasonable in all of the circumstances; that the “event” for the purposes of UCPR r 42.1 encompasses both the overall outcome of the litigation and the parties’ success on distinct issues and extends to any disputed question of fact or law; that there may be sufficient justification to depart from the usual order to reflect a party’s failure on particular issues if a particular issue or group of issues on which it failed was clearly dominant or separable or took up a significant part of the trial; and, where a successful party fails on particular issues, it may be reasonable that it bear the costs of litigating that portion of the case on which it failed and it may not only be deprived of the cost of those issues but also ordered to pay the other parties’ costs of them, particularly where an unsuccessful claim took up a significant part of the trial.

25. As I noted above, UCPR r 42.1 provides that, subject to Pt 42, if the court makes any order as to costs, the court is to order that the costs follow the event unless it appears to the court that some other order should be made as to the whole or any part of the costs. In Commonwealth of Australia v Gretton [2008] NSWCA 117, Hodgson JA with whom Mason P agreed observed (at [121]) that:

“In my opinion, underlying both the general rule that costs follow the event, and the qualifications to that rule, is the idea that costs should be paid in a way that is fair, having regard to what the court considers to be the responsibility of each party for the incurring of the costs. Costs follow the event generally because, if a plaintiff wins, the incurring of costs was the defendant’s responsibility because the plaintiff was caused to incur costs by the defendant’s failure otherwise to accord to the plaintiff that to which the plaintiff was entitled; while if a defendant wins, the defendant was caused to incur costs in resisting a claim for something to which the plaintiff was not entitled … Departures from the general rule that costs follow the event are broadly based on a similar approach.” [Citations omitted]

That observation was cited, with apparent approval, by the Court of Appeal in Heath v Greenacre Business Park Pty Ltd [2016] NSWCA 34 at [98].

26. The case law recognises that the Court generally does not attempt to differentiate between the issues on which a party was successful and those on which it failed, although it may deprive a successful party of the costs relating to an issue on which it lost when that issue is clearly dominant or separable: Bostik Australia Pty Ltd v Liddiard (No 2) [2009] NSWCA 304 at [38]; Corbett Court Pty Ltd v Quasar Constructions (NSW) Pty Ltd [2008] NSWSC 1423 at [28]–[31]; The Owners – Strata Plan No 61162 v Lipman [2014] NSWSC 622 at [241]; Monie v Commonwealth of Australia (No 2) [2008] NSWCA 15 at [64]; Doppstadt Australia Pty Ltd v Lovick & Son Developments Pty Ltd (No 2) [2014] NSWCA 219 at [17]. The liquidator in turn relied on my observations as to when an issue by issue approach was appropriate in making an order for costs in Kraissa v Hair Industrie Penrith Pty Ltd [2015] NSWSC 1905 at [5] as follows (omitting references to authority):

“The authorities also recognise that a costs order in favour of a successful party can be modified to reflect its failure on particular issues even if the successful party did not act unreasonably in raising those issues, and it may be appropriate to deprive a successful party of costs or a portion of its costs if the matters upon which it was unsuccessful took up a significant part of a trial, either by way of evidence or argument, and an issue by issue approach may be adopted if it will allow a fairer result than giving a party all of its costs.”

27. The question whether the liquidator, Swan Services and the Companies should be required to pay the costs of the insolvency issue in the insolvent trading claim overlaps with the question of the liquidator’s costs of proving the insolvency of Swan Services as at April and May 2013 (and the immediately prior period) in his Cross-Claim against Ms Swan in respect of the 2013 Charge. However, as Mr Braham points out, the proof of the Companies’ (as distinct from Swan Services’) insolvency was not necessary to that Cross-Claim and arose only in the insolvent trading claim.

28. I have held above that Ms Swan should pay the liquidator’s costs of proving the insolvency of Swan Services as at April and May 2013, and the immediately prior period, to be quantified on the broad brush basis to which I have referred above. As I noted above, the costs of proving the insolvency of the Companies, as distinct from Swan Services, do not fall within that claim. It seems to me that the Cross-Claimants could not fairly be required to pay Ms Swan’s costs of defending their claim against her in respect of the issue of insolvency, where that was a discrete issue as to which they were successful. Ms Swan could have, but did not, defend the proceedings on the basis that she accepted that Swan Services and the Companies were insolvent at relevant times, as she had been invited to do in correspondence, and that her defence was limited to the issue whether she was a de facto director of Swan Services and the Companies, as to which she was successful, or the other defences or claim to relief under s 1317S of the Corporations Act, as to which she was unsuccessful. Equally, it seems to me that the liquidator and the Companies (as distinct from Swan Services) should not be entitled to recover their costs of proving insolvency against Ms Swan, so far as it was part of their unsuccessful claim for insolvent trading against Ms Swan, as distinct from Swan Services’ successful defence of Ms Swan’s claim under the 2013 Charge and the voidable transaction claim relating to the 2013 Charge, which I have addressed above. The result of the proceedings would not properly be reflected by an order that the liquidator, Swan Services or the Companies pay Ms Swan’s costs of a substantial issue on which it succeeded.

29. Accordingly, the liquidator, Swan Services and the Companies should pay the costs of the insolvent trading claim against Ms Swan, but excluding any costs referable to the proof of insolvency, a part of which will be recoverable in respect of the Cross-Claim as to the 2013 Charge as set out above. Again, it seems to me that the parties should have little difficulty in agreeing a “broad brush” assessment of the costs recoverable on that basis.

Whether the costs payable by the liquidator, Swan Services and the Companies to Ms Swan should by payable on an indemnity basis

30. Ms Swan submits that, by reason of an offer of compromise made by her on 13 September 2016, the first day of the hearing, she is entitled to her costs of defending the insolvent trading claim on an indemnity basis from 14 September 2016 onwards. By that offer, Ms Swan offered to compromise the Cross-Claimants’ claims under ss 588G, 588M and 588W of the Corporations Act, namely the insolvent trading claims, on the basis that judgment be entered in her favour with no order as to costs. That offer was expressed to be made as an offer of compromise in accordance with UCPR r 20.26 and was open for a period of three days. As Ms Swan points out, UCPR r 20.26(5)(b) provides that the closing date for acceptance of an offer made within two months of the date set down for the commencement of trial “is to be such date as is reasonable in the circumstances”. Ms Swan submits that she obtained a judgment on the insolvent trading claim no less favourable than the terms of the 13 September 2016 offer, since that claim against her was dismissed. By a covering email to Ms Swan’s offer of compromise dated 13 September 2016, her solicitors indicated that that offer should be treated as a Calderbank offer if it was not effective as an offer of compromise under UCPR r 20.26.

30. Mr Braham rightly accepted that Ms Swan’s offer of compromise on the first day of the hearing did not take effect as an offer of compromise under UCPR r 20.26, because it did not comply with the requirement of r 20.26(2)(b) that, where an offer related only to part of a claim in the proceedings, it must include a statement as to whether the balance of the proceedings would be defended or conceded. That offer was also unclear as to what was meant by “no order as to costs”, on the assumption that Ms Swan intended to press her claim as to the 2013 Charge and her defence of the Cross-Claim as to that charge, even if the liquidator’s insolvent trading case was not pressed. In these circumstances, the cost consequences of an offer of compromise under UCPR r 42.15 do not apply. It is therefore not necessary to address the liquidator’s further submission that the offer was not a genuine compromise, at least for the purposes of UCPR r 20.26.

31. The question whether that offer supports an order for costs against the liquidator on an indemnity basis under the Calderbank principle requires an assessment whether it was unreasonable of the liquidator, Swan Services and the Companies not to accept that offer. Mr Newlinds submits that, for the same reasons that that offer should not be treated as an offer of compromise, it was not effective as a Calderbank offer. It seems to me that the uncertainty as to the costs implications of acceptance of the offer was a significant barrier to it taking effect as a Calderbank offer.

32. In any event, it also seems to me that it was not unreasonable for the liquidator, Swan Services and the Companies not to accept that offer, where Swan Services and the Companies had a seriously arguable case, with a substantial amount of documentary support, that Ms Swan was a de facto director of Swan Services and the Companies, the success or failure of which would depend in large part on matters that emerged in cross-examination at the trial. It does not seem to me that the liquidator, Swan Services or the Companies had reason to anticipate, at that point, that it was likely (as distinct from a possibility) that the case would be determined, as it was, on the basis that Ms Swan had not become a de facto director, notwithstanding that she had unsuccessfully sought to exercise the level of control that would be characteristic of such a position. While the liquidator, Swan Services or the Companies could plainly have recognised that was a possible result, it did not follow from that possibility that the liquidator, Swan Services or the Companies did not have reasonable prospects of success that warranted the continuance of the proceedings rather than the acceptance of Ms Swan’s offer to, in effect, abandon the case against her, for a saving as to costs. For that reason, Ms Swan’s offer of 13 September 2016 does not support an order for indemnity costs against the liquidator, Swan Services or the Companies in respect of the insolvent trading claim.

33. I note, for completeness, that an issue also arises from the fact that that offer was made at the commencement of a trial, where the need to address the terms of such an offer may be a distraction from the other party’s conduct of the case. I will address that issue although it is not strictly necessary to do so given the conclusion that I reached in paragraph 33 above. Ms Swan draws attention to the fact that the parties had here exchanged several offers over the course of the litigation and that her position had always been that she was not a director of Swan Services or the companies and that the parties had exchanged voluminous evidence, a significant part of which was directed to that issue. Ms Swan also refers to the observations of McColl JA (with whom Spigelman CJ and Beazley JA agreed) in County Securities Pty Ltd v Challenger Group Holdings Pty Ltd (No 2) [2008] NSWCA 273 at [35], where her Honour expressed scepticism as to a proposition that the parties in that case were so busy devoting their time to preparation for trial that they could not consider an offer, and observed that experienced practitioners know that decisions as to whether offers should be accepted are often made in hours, not days. I accept that, as Mr Newlinds points out, he and other members of the liquidator’s legal team were occupied with the opening of the liquidator’s case on 13 September 2016 when Ms Swan’s offer was made. I do not, however, accept that their focus on that issue would have prevented an adequate assessment of that offer, which involved a relatively simple decision whether, in effect, to abandon the liquidator’s insolvent trading case against Ms Swan.

Other orders

35. Both parties have approached the matter on the basis that they will seek a gross sum costs order and it seems to me that, subject to the issues of quantification which I have noted above and which the parties referred to in submissions, this is likely an appropriate case for such an order: Hamod v State of New South Wales [2011] NSWCA 375 at [816]–[817]; Re Colorado ProductsPty Ltd (in prov liq) above at [41]. However, it will be necessary for the parties to lead additional evidence as to quantification, to permit quantification on a gross sum basis, since neither has addressed the contingencies reflected in the findings that I have reached above.

36. It is now common ground between the parties that Ms Swan should be ordered to pay interest on the judgment amount of $868,200 under s 100 of the Civil Procedure Act at the prescribed rate from 22 May 2013 to 6 December 2014. It is also common ground that order 15 made on 21 March 2017, which stayed orders made on that date, should now be vacated.

37. The parties should bring in agreed orders to give effect to this judgment within 28 days or, if there is no agreement between them, their respective draft short minutes of order and submissions, indicating whether an oral hearing is required.

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Decision last updated: 02 June 2017