Re Vibex Industries Pty Ltd; Abeyratne v Vibex Industries Pty Ltd

[1998] VSC 202

SUPREME COURT OF VICTORIA

CAUSES JURISDICTION

Not Restricted

No. 7283 of 1996

IN THE MATTER OF THE CORPORATIONS LAW IN THE MATTER OF SECTIONS 420, 424 AND 431

AND

IN THE MATTER OF VIBEX INDUSTRIES PTY LTD
(RECEIVER AND MANAGER APPOINTED )

(ACN 006 144 127)

BETWEEN:

WILLIAM BERNARD ABEYRATNE	Applicant
v
VIBEX INDUSTRIES PTY LTD (RECEIVER AND MANAGER	Respondent
APPOINTED)

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JUDGE:	Byrne J
WHERE HELD:	Melbourne
DATE OF HEARING:	17 December 1998
DATE OF JUDGMENT:	22 December 1998
CASE MAY BE CITED AS:	Re Vibex Industries Pty Ltd; Abeyratne v Vibex Industries Pty Ltd
MEDIA NEUTRAL CITATION:	[1998] VSC 202

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PRACTICE and procedure - order for payment of costs by non-party - notice to be given
to non-party - order set aside where notice not given - order against receiver and

manager of insolvent company - circumstances in which order made.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr D.J. Williams	Deacons Graham & James
(Mr Abeyratne)
For the Respondent/Cross	Mr. J.F. Styring	Mallesons Stephen Jaques
Applicant
(Vibex Industries)
For the Cross Respondents	Mr D. Collins	Tress Cox & Maddox
(Madisons and Mr Dunn)

HIS HONOUR:

1. On 25 October 1996 Robert Edge was appointed by Kingsley Brown Finance Ltd (“KBF”) to be receiver and manager of the assets of Octrange Pty Ltd and Total Design Concepts Pty Ltd. I shall refer to these companies as “the two companies”. On 29 November 1996 William Bernard Abeyratne was appointed receiver and manager of the two companies in substitution for Mr Edge.

2. In this proceeding, on 3 October 1996, Vibex Industries Pty Ltd (“Vibex”) over whose assets the National Australia Bank Ltd had also appointed a receiver and manager, sued the two companies seeking the determination of their entitlement to certain property which they had purchased directly or indirectly from Vibex. On 9 May 1997, following the trial of this proceeding, I pronounced orders to the effect that the rights of the two companies were subject to the rights of the Bank as chargee of Vibex. I ordered, too, that the respondents, including the two companies, pay the costs of Vibex of the proceeding. I ordered, finally, that, insofar as the order for costs was applicable to Octrange and TDC, the costs be paid by the receiver and manager of those companies, Mr Abeyratne.

3. There are two applications before the court. The first is by Mr Abeyratne brought by summons filed on 27 July 1998 seeking an order that my last-mentioned order be set aside. The second is by Vibex by summons filed on 16 November 1998 seeking orders that the costs of the proceeding be paid by Messrs Madisons and/or Stephen Dunn. Madisons are the solicitors on the record for the two companies in this proceeding and Mr Dunn is the principal of that firm. In the circumstances to which I shall refer the second application was not proceeded with.

4. Mr Abeyratne’s argument for setting aside my order of 9 May 1997 against him is based on the fact that he was not then a party to the proceeding and that he had no notice that the application would be made. Counsel, on his behalf, submitted that it was therefore an ex parte order obtained irregularly and should be set aside as of right or as a matter of discretion, in the exercise of my inherent jurisdiction: Re Reid Murray Acceptance Ltd [1964] VR 82 at 89-90, per Adam J.

5. My power to set aside the order was not challenged and I accept that I may do so in the appropriate circumstances. The circumstances of this case were these. On 30 April 1997 I published my reasoned judgment following trial which had taken place on 16 April. On 9 May 1997 I heard argument as to the appropriate orders to be made. Counsel then appearing for Vibex sought, among others, an order that Mr Abeyratne pay the costs of the two companies, relying on Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203 and Knight v FP Special Assets Ltd (1992) 174 CLR 178. I was told that no assets were held by the two companies since they were fully pledged to KBF and that an order for costs against them would place Vibex in the position of an unsecured creditor ranking behind KBF. I was told that the real person behind the two companies was Mr Abeyratne and that he would in any event hold an indemnity for KBF in respect of any order for costs. When I enquired of counsel appearing for the two companies what was his attitude, he responded that it was ultimately a matter of discretion and that his clients were not the applicants or the parties standing behind an impecunious applicant. He then turned to other matters.

6. At the conclusion of argument I announced my decision with the following reasons on the matter presently under consideration:

   “The next question is whether such a costs order should be made against the receiver and manager of the corporate respondents. I have been referred to authority which enables me in the appropriate case to make such an order and I am conscious of the fact that in the ordinary course of events the receiver would himself have an indemnity against the assets in his hands. In the circumstances I will make the orders sought in paragraph 5.”

7. Two things have emerged about this hearing. First, Vibex had given no notice of its intention to seek an order against Mr Abeyratne personally. Second, counsel for the two companies was not instructed to act for Mr Abeyratne personally.

8. I was at first troubled by the fact that counsel for the two companies had not raised the want of notice as a procedural objection to the order sought. On reflection, I am satisfied that the order should nonetheless be set aside. Counsel for the two companies had and could have no instructions from Mr Abeyratne about the unheralded application. Acting as he was for the two companies, the order against Mr Abeyratne was of no concern to them or, arguably a benefit to them. The ordinary requirements of natural justice that notice be given is, however, one that cannot be ignored and I should not treat it as having been waived without clear evidence that Mr Abeyratne, in fact, decided to do so. There is no such evidence. I will therefore set aside my order for costs against Mr Abeyratne made on 9 May 1997.

9. I turn now to consider the renewed application of Vibex that Mr Abeyratne should personally bear the costs of the two companies of the proceeding. It was accepted by both parties in the present application that, in the ordinary course, an order for costs will not be made against a non-party but that s. 24 of the Supreme Court Act 1986 does, in the appropriate case, authorise the making of such an order: Burns Philp & Co Ltd v Bhagat [1993] 1 VR 203. In Knight v FP Special Assets Ltd (1992) 174 CLR 178, the High Court reached the same conclusion in a case where an order had been made against a receiver pursuant to the Queensland Supreme Court Act 1867 s. 91. The judgment of Mason CJ and Deane J at 174 CLR 192-3, contains the following passage which is instructive for my present purposes.

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

10. It was submitted on behalf of Vibex that the requirements of this passage had been satisfied. It is clear that the two companies are without assets. It was said that Mr Abeyratne played an active part in the litigation and that he had an interest in the subject matter of it.

11. There was evidence before me that, upon his appointment and thereafter, Mr Abeyratne was strongly of the view that the Vibex proceeding against the two companies which had been on foot for nearly two months was likely to fail. He was, therefore, keen to defend it. Mr Dunn of Madisons who had been retained by his predecessor, Mr Edge, was less sanguine. He was for settling the Vibex claim. Shortly after his appointment Mr Abeyratne agreed with the receiver and manager of Vibex, Mr d’Aloia, that the assets of the two companies should be sold and the proceeds paid into a joint trust account. The sale took place on 17 December 1996 and $77,747.66 was lodged in the account to await the resolution of the competing claims. In the early months of 1997 negotiations took place between Mr Abeyratne and Mr d’Aloia but by April it was apparent that they were unsuccessful and the litigation went to trial.

12. Mr Abeyratne accepted that he played a part in preparing the case for trial but said that he did so on the instructions of KBF, the chargee. He accepted that he retained Madisons in the sense that he adopted the retainer of that firm by his predecessor Mr Edge. It appears that in so doing he acted as agent for the two companies as he was empowered to do under cll. 10 and 11(m) of the KBF debentures and s. 420(2) of the Corporations Law. I will not go through the evidence of his personal involvement in the litigation. My impression is that he was involved in giving instructions to counsel and solicitors, that he did offer his opinions to KBF and to Mr Dunn but that he did not step outside the normal role of a receiver whose proper concern it was to protect the assets charged and to resist a claim against those assets in circumstances where the resistance was not plainly futile or otherwise inappropriate. Counsel for Vibex submitted, too, that Mr Abeyratne had an interest in the subject matter of the litigation, namely, the fund representing the sale of the assets of the two companies. It was said that this fund represented the available source for payment of his fees and expenses since the two companies had no other assets. This is, of course, true, but it does not necessarily represent the only fund available for the purpose. Mr Abeyratne said that he was indemnified by his appointment against the costs of litigation by his appointor, KBF, the chargee. No document as to this indemnity was produced. In any event, as things turned out, this indemnity, assuming it existed, has proved illusory. On 11 December 1997 a receiver and manager was appointed over the assets of KBF and it subsequently went into external administration. There is, however, no evidence that, prior to December 1997, Mr Abeyratne was aware of any concerns about the solvency of his appointor or its ability to honour its indemnity obligations to him. I accept that he did not perform his tasks as receiver and manager or incur expenses as such in the expectation that he had no source of payment other than the fund should it in due course be released to the two companies. If the question is one of fact rather than that of Mr Abeyratne’s state of mind, the answer may depend upon where the burden of proof lies. Neither the debentures nor the instruments of his appointment in terms confer any indemnity upon Mr Abeyratne for his remuneration, costs and expenses other than from the assets of the two companies. It may be that, in these circumstances, Mr Abeyratne’s right of indemnity might be an implied right arising from the authority given to him by KBF to continue with the litigation on its behalf and for its benefit: Moodemere Pty Ltd v Waters [1988] VR 208 at 219, per Murphy J (Kaye J concurring).

13. Accepting for the purposes of argument that Mr Abeyratne held no such indemnity, I am not at all confident that this alone is sufficient in this case to establish a relevant interest in the subject matter of the litigation. This may depend upon the nature of the litigation itself. It may be more appropriate to treat a receiver as having an interest in litigation where it seeks to increase the assets of the company by an award of damages or otherwise rather than seeking a declaration as to a legal entitlement to an asset standing in the company’s name. It may be that a receiver who, as here, simply defends a claim of another to an asset of the company is not ordinarily to be seen as thereby having an interest in that asset. It may depend upon the financial position of the company at the time the litigation is commenced. Where a receiver who has incurred substantial costs and expenses and earned substantial remuneration all of which is unpaid commences litigation in order to apply the proceeds to a substantial extent to satisfy these entitlements, this may amount to an interest in the litigation which is, to that extent, commenced and pursued for the receiver’s benefit.

14. In the present case Mr Abeyratne inherited the litigation which had been commenced or instigated by others. From the moment he accepted appointment he incurred costs which were recoverable from the assets of the two companies. These costs, however, were not necessarily concerned with the litigation itself. At what point then could it be said that he had a personal interest in the litigation to recoup these costs? It is apparent from the evidence before me that KBF was the party with the real financial stake in the present litigation and it was KBF who was consulted and dealt with by Mr Dunn and Mr Abeyratne as if it were the client.

15. In Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 188, Mason CJ and Deane J drew from their analysis of the cases where costs were awarded against non-parties that the jurisdiction “could be exercised against persons who were considered to be ‘real parties’ to the litigation”. Where the nominal plaintiff is impecunious the object of such an order can, and may often or appropriately be achieved by an order for security for costs against the plaintiff: see, too, 174 CLR at 204-5, per Dawson J; at 217-8, per McHugh J (dissenting). The order made against the receiver in Kelaw Pty Ltd v Catco Developments Pty Ltd (1989) 15 NSWLR 587 demonstrates this.

16. In the case where orders for the payment of costs by a receiver have been made, the cases have often stated that it is expected that the burden of such an order will ultimately fall upon the debenture holder who stood to benefit had the litigation been successful. In Bacal Contracting Ltd v Modern Engineering (Bristol) Ltd [1980] 2 All ER 655 at 661, Judge Fay QC required that there be inserted in the order which his Honour made against the receiver that the costs awarded be part of the receiver’s expenses as receiver. In Forest Pty Ltd v Keen Bay Pty Ltd (1991) 4 ACSR 107 at 111, de Jersey J from whom the appeal was brought is recorded as having refused to make an order against the debenture holders themselves because they would have to indemnify the receiver against the order for costs which had been made against him. See, also, 4 ACSR at 119, per Ryan J; at 132, per Williams J. Dowsett J (dissenting) sets out the reasons for the contrary view at 4 ACSR 122-3. On appeal, the matter was adverted to by McHugh J in Knight v FP Special Assets Ltd (1992) 174 CLR 178 at 217.

17. I return to the facts of this case. I have found that Mr Abeyratne supported the decision of his predecessor to resist the Vibex claim and instructed Madisons accordingly. I have summarised his role in the litigation. He did not, in my view, have a relevant interest in the subject matter of the litigation in the sense that it was conducted substantially for his own benefit. In the circumstances of the case the interests of justice do not require that the costs of Vibex as successful applicant should be visited upon him personally as a non-party to the litigation.

18. There being no other basis relied on for the order sought against Mr Abeyratne, the application by Vibex for such an order must fail.

19. The second application was brought by Vibex against Madisons and Mr Dunn on the basis that the court might refuse to make an order against Mr Abeyratne on the basis that the two companies had not retained him to act for them in the proceeding and that he therefore conducted the defence of the proceeding on their behalf without authority. This application had to overcome the evidence of Mr Dunn himself who in his affidavit sworn on 8 December 1998 deposed that he was in fact retained on behalf of the two companies. The basis for the contrary conclusion was evidence that he rendered his accounts to KBF and that of Mr Abeyratne given on 4 November to the effect that no solicitor/client relationship existed between the two companies and Madisons by reason of his having acted as receiver and manager of those companies and that Madison’s client at all material times was KBF. This basis disappeared on 17 December when counsel for Mr Abeyratne made a formal concession that “at all times throughout their conduct of the defence of the proceeding Madisons had instructions from the companies to do so”. In these circumstances, counsel for Vibex understandably did not pursue the second application.

20. The question outstanding remained the costs of the second application. Counsel for Madisons sought an order against Vibex for these costs. The response of Vibex was to submit, first, that these costs should be paid by Mr Abeyratne alternatively that I should make a Bullock order or a Sanderson order with respect to them so that, ultimately, they should be borne by him. It was said in support of such orders that, after the evidence given on 4 November it was reasonable for Vibex to pursue Mr Dunn to cover the eventuality that Mr Abeyratne’s evidence given on that day, although in some respects contradictory and ambiguous, was such as to leave a reasonable person with the impression that he was in fact seeking to present a case which distanced himself from the litigation to the extent that he was simply an agent of KBF and that the solicitors were instructed by that company rather than by him in his capacity as agent of the two companies. It is plain from the concession made on 17 December that, inasmuch as he had previously adopted that position, he then resiled from it. In the circumstances it was reasonable for Vibex to have brought its application against Mr Dunn and Madisons in order to cover the possibility that Mr Abeyratne’s position might be accepted by the court. Moreover, it is fair that the liability for the costs of Mr Dunn and Madisons which have fallen on Vibex by reason of the conduct of Mr Abeyratne should be borne by Mr Abeyratne: Gould v Vaggelas (1984) 56 ALR 31 at 41-2, per Gibbs CJ. The two applications are, of course, separate and Mr Abeyratne was not a party to the second application, that brought by Vibex. Nevertheless, it was agreed on 16 December that they should be heard together and that the evidence in the first application brought by Mr Abeyratne, including the evidence already given, would stand as the evidence in the second application. In these circumstances, I consider that a Bullock order is appropriate and I will make such an order.

21. The final matter outstanding concerns the costs of 16 November 1998. The proceeding commenced on 4 November 1998 as a trial by affidavit. Counsel for Vibex, however, sought to lead oral evidence from Mr Dunn without having filed an affidavit. For reasons which I gave at the time I refused leave to lead such oral evidence but stood the matter over to 19 November 1998. I directed that any further affidavit on behalf of Vibex be served by 12 November and affidavits in response by 17 November. What happened then was that on 12 November the solicitors for Vibex wrote to Mr Dunn advising him that they had formed the view that he should be liable for costs in the event that Mr Abeyratne be successful on his summons. He was told in a letter of 13 November that the matter had been listed before me on 16 November for directions in relation to the future conduct of Mr Abeyratne’s application and the matters raised in the letter of 12 November. This letter was not sent to Mr Dunn until late on the afternoon of Friday, 13 November. The matter came on for hearing before me for directions on Monday, 16 November at which time there was, not surprisingly, no appearance for the solicitors. I gave directions setting out a timetable for Vibex to bring its application against the solicitors and for the delivery of affidavits and adjourned to 19 November the question whether the two applications should be heard together. On 19 November the matter was mentioned before me and I made orders with respect to the hearing of the Vibex application at the same time as the Abeyratne application and consequential directions and ordered that Mr Abeyratne’s costs of that day be paid by Vibex and that the costs of the other two parties, Vibex and the solicitors, be reserved. The question before me now relates to those reserved costs. To my mind it is appropriate that insofar as Madisons and Mr Dunn incurred costs on 19 November they should be paid by Vibex as costs of the unsuccessful Vibex application. As such they, too, should be included in the Bullock order.

1. I propose, therefore, the following orders:

1.	On the application by Mr Abeyratne brought by summons filed on 27 July 1998, that paragraph 7 of the order of 9 May 1997 be set aside.
2.	The application by Vibex Pty Ltd for costs orders against Mr Abeyratne be dismissed.
3.	Vibex pay the costs of Mr Abeyratne of his application referred to in paragraph 1 and of its application referred to in paragraph 2 including reserved costs and the costs of transcript.
4.	The application of Vibex Pty Ltd brought by summons filed on 16 November 1998 be dismissed.
5.	Vibex pay to Madisons and Mr Dunn their costs of the summons referred to in paragraph 4 including reserved costs and the costs of transcript.
6.	Upon payment by Vibex of the costs ordered in paragraph 5 Mr Abeyratne pay to Vibex an amount equal to the amount so ordered to be paid by it.

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