Shanamere Pty Ltd v Litigation Support Services Pty Ltd

[2006] SASC 120

SUPREME COURT OF SOUTH AUSTRALIA

(Civil: Application)

SHANAMERE PTY LTD v LITIGATION SUPPORT SERVICES PTY LTD

Judgment of The Honourable Justice Sulan

21 April 2006

PROCEDURE - COSTS - DEPARTING FROM THE GENERAL RULE - ORDER FOR COSTS ON INDEMNITY BASIS

Application for costs - the plaintiff is a beneficiary of a unit trust of which the defendant is trustee - the unit trust holds shares in a company 'Australian Litigation Fund' ("ALF") - certain resolutions were proposed to be passed at an extraordinary general meeting of ALF - the plaintiff initially brought an application for injunctive relief to force the defendant to vote in favour of the resolutions at the extraordinary general meeting - it was subsequently determined that the votes of the defendant would not affect the outcome and the application for an injunction was withdrawn - the defendant brought an application for party and party costs, and solicitor and client costs, or indemnity costs for a limited period when the plaintiff ought to have known that the application was doomed to fail - the defendant also sought that the costs be taxed and paid forthwith - the plaintiff applied for party and party costs for a specified period - defendant's application for indemnity costs refused - order for costs to be paid on a party and party basis by the plaintiff except for the costs of the adjourned hearing on 13 January 2006 - defendant's application to have costs taxed and paid forthwith refused.

Supreme Court Rules r 101.02, r 101.01(6), r 101.01(7), referred to.
Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225; Cretazzo v Lombardi (1975) 13 SASR 4; Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397; Horrobin v Australia and New Zealand Banking Group Ltd (NSWSCA) unreported, 6 June 1997; Ogier v Booth (1883) 5 ALT 109; Pope v DRP Nominees Pty Ltd (No 2) (2000) 207) LSJS 344; Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151; Taylor v Santos Ltd [1999] SASC 429; Thompson Land Ltd v Lendlease Shopping Centre Development Pty Ltd [2000] VSC 140; Thunderdome Racetiming and Scoring Pty Ltd & Anor v Dorian Industries Pty Ltd & Anor (1992) 109 ALR 196, considered.

SHANAMERE PTY LTD v LITIGATION SUPPORT SERVICES PTY LTD
[2006] SASC 120

Civil

1. SULAN J: This is now an application for costs. Originally the applicant sought injunctive relief. The plaintiff, Shanamere Pty Ltd (“Shanamere”) sought an order that the defendant, Litigation Support Services Pty Ltd (“LSS”) be restrained, without the prior written consent of the plaintiff or otherwise as ordered by the Court, from exercising any voting rights in respect of 350,000 ordinary “I” class shares in Australian Litigation Fund Pty Ltd (“ALF”) held by LSS as trustee of the ALF Investment Unit Trust (“ALFIUT”) in respect of resolutions specified in a notice of general meeting dated 5 December 2005 to be held on 6 January 2006 or any adjournment thereof. On 30 December 2005 the application was listed for urgent hearing before me. On that occasion the applicant sought an adjournment of the application until after the EGM had been held. The matter came before me again after the EGM had been held and the proposed resolutions defeated. The application was withdrawn and the only remaining issue is the question of costs. The defendant seeks costs on an indemnity basis to be taxed and paid forthwith.

   Facts

2. From 1 July 1996 until 30 June 2000 John Sheahan (“Sheahan”) and Patrick Mark Coope (“Coope”) were in partnership operating an accounting firm providing insolvency services under the business name of ‘Sheahan Coope’. From 1 July 1998 to 30 June 2000 they each had a fifty per cent share in the partnership business. On 1 July 2000 a third person, Ian Lock (“Lock”), joined the partnership. Sheahan and Coope reduced their share in the business to forty five per cent each, and Lock acquired a ten per cent interest. The business name became ‘Sheahan Coope Lock’. Sheahan and Coope, via Shanamere and Australian Insolvency Group Pty Ltd (“AIG”) respectively, transferred to Lock for no consideration enough units to give him a ten per cent interest in the ALF Management Unit Trust (“ALFMUT”). On 10 July 2000 Lock was appointed a director of LSS.

3. On 6 August 1997 ALF was incorporated. Both Coope and Shanamere subscribed for 25 “M” class shares. A further 100, 000 “I” class shares at $1.00 each were issued to both Shanamere and Coope by ALF on 13 August 1997. The shares were paid to $0.10 each on allotment.

4. On 14 September 1998 Coope was appointed as a director of LSS. At this time Sheahan was also a director of LSS, and his wife Jane Sheahan, who was also a director of LSS resigned on the same day, leaving Coope and Sheahan as the sole directors. AIG, of which Coope is a director and shareholder, acquired one share in LSS. The other issued share was held by Shanamere.

5. On 17 September 1998 LSS was appointed as the trustee of the ALFIUT. The ALFIUT was to be a long-term investor in ALF. Shanamere and AIG were each issued 10 units in ALFIUT. On that day Shanamere and Coope transferred 100,000 “I” class shares of $1.00 each in ALF to LSS as trustee of the ALFIUT. Each of the shares was paid to $0.50 at the time they were transferred. Also on 17 September 1998 the ALFMUT was established with LSS. LSS was appointed as trustee. The original unit holders of the ALFMUT were Shanamere and AIG, each with 10 issued units. That same day both Shanamere and Coope also transferred to LSS, as trustee of the ALFMUT, the 25 “M” class shares of $1.00 each in ALF.

6. Coope resigned as a partner of Sheahan Coope Lock on 31 January 2002. Various documents were executed at the time of Coope’s resignation. Pursuant to one of these documents, headed “SCL Partnership Dissolution Agreement” dated 4 July 2002, Coope’s defacto partner, Andrea Libushe Nejedlik (“Nejedlik”) was appointed as a director of LSS, and both Sheahan and Lock resigned as directors. Shanamere’s share in LSS was transferred on 19 February 2003 leaving AIG as the sole shareholder of LSS. Coope has been the sole director of LSS since Nejedlik resigned as a director on 3 January 2004. 

7. A dispute has arisen as to the performance of LSS as trustee of the ALFIUT. Shanamere, in its statement of claim, alleges that LSS has breached its fiduciary duty to Shanamere, and therefore seeks to remove and replace LSS as trustee of the ALFIUT.

   The Extraordinary General Meeting of ALF on 6 January 2006

8. ALF carries on business as a commercial litigation funder. Coope is the Managing Director of ALF, and the sole executive director. The other directors of ALF are Geoffrey Lord (“Lord”), who is the Chairman of Directors, Gregory Griffin (“Griffin”), and Patrick Moloney (“Moloney”). ALF has issued 1,082,500 “I” class shares, and 100 “M” class shares. The “I” class shareholders of ALF at the time were:

   LSS: 350,000 shares as trustee of the ALFIUT
   Shanamere: 30,000 shares
   AIG: 36,750 shares
   Marcia Resch: 31,164 shares
   Adam Watson: 25,000 shares
   Keygrowth Pty Ltd: 251,204 shares
   West LB AG: 180,000 shares
   International Mineral Exploration Corporation of Zurich Pty Ltd: 106,008 shares
   GMG Group Pty Ltd: 12,500 shares
   Kanamex Pty Ltd: 59,874 shares

9. By notice dated 4 November 2005, Resch and Watson, being shareholders whose combined shareholding represented over 5 per cent of the votes that may be cast at a general meeting, requested the directors of ALF to call and hold a general meeting to consider resolutions that Coope and Griffin be removed as directors of ALF, and that they be replaced by Sheahan and Mark Bailey (“Bailey”).

10. Shanamere, having a fifty per cent unit holding in the ALFIUT, advised LSS on 14 November 2005 that it would vote in favour of the proposed resolutions, and notified LSS that it required an undertaking that LSS would exercise its voting rights, as trustee of the ALFIUT which holds 350,000 “I” class shares in ALF, consistent with Shanamere’s interests. Specifically, Shanamere required an undertaking that LSS would either vote in favour of the proposed resolutions, or abstain from exercising its voting rights.

11. On 25 November 2005 Coope advised Shanamere that LSS would not provide the requested undertaking, and that LSS had not yet decided how it would exercise its voting rights.

12. ALF advised by notice dated 5 December 2005 that it had called an extraordinary general meeting of the ALF shareholders on 6 January 2006 to consider the proposed resolutions. Shareholders were notified by letter dated 8 December 2005 of Resch’s intention to sell 31,164 “I” class shares in ALF.

13. Sheahan wrote to LSS on 12 December 2005, rejecting the suggestion that LSS could lawfully vote against the proposed resolutions, and outlining Shanamere’s view that LSS ought to appoint two separate proxies each specified as being in respect of half of the shares held by LSS as trustee for the ALFIUT with one proxy to vote their half of the shares in favour of the resolutions and the other to vote their half of the shares against the resolutions. Sheahan requested that LSS advise him whether LSS considered it appropriate to take up its pro rata proportion of the shares for sale by Resch, and offered to provide fifty per cent of the funds proportionate to Shanamere’s interest in the ALFIUT to do so. Sheahan also requested that LSS confirm by close of business that day that they intended to adopt the approach suggested by Shanamere as to the appointment of two proxies to vote on the proposed resolutions. LSS did not respond within the requested time.

14. On 14 December 2005 Shanamere filed a Notice for Specific Directions seeking an order restraining LSS from exercising any voting rights in respect of the 350,000 shares in ALF.

15. Shanamere submitted that it was not informed how LSS intended to vote its 350,000 shares in ALF until 23 December 2005, when it received an affidavit of Coope of that date. That affidavit was filed as a result of an order by Judge Withers, a Master of the Court, made on 19 December 2005.

16. The EGM was held on 6 January 2006, and the resolutions were defeated. It was conceded by Shanamere that the outcome of the voting would not have been affected by the voting of the shares held by LSS as trustee of the ALFIUT.

    Submissions on costs

17. LSS submitted that pursuant to Supreme Court Rule 101.02, once the application was dismissed costs should follow the event unless otherwise ordered. It submitted that Shanamere ought to pay the costs of the defendant on an indemnity basis, and that costs ought to be taxed and paid forthwith prior to the conclusion of the principal proceedings.[1] During the course of argument the defendant conceded that indemnity costs should only apply for the period after 24 December 2005 up to and including the hearing on 30 December 2006. Party and party costs, it was submitted, ought to be paid for by the plaintiff for costs incurred prior to 24 December 2005 and for the hearings before me on 13, 16 and 17 January 2006.

    [1] Supreme Court Rule 101.01(6).

18. It was submitted that there were ‘special and unusual’ circumstances in this case to justify an award of indemnity costs since the injunction application was futile and doomed to fail in any event on the merits. It was submitted that there was no reason warranting the urgent hearing of the application on 30 December 2005. Shanamere’s concession that the application was to be withdrawn, it was submitted, was acknowledgment of the futility of the application. LSS relied on a statement of Judge Burley in Taylor v Santos Ltd[2] where he said[3]:

    In my view, the abandonment of the application is evidence that the plaintiff did not want to pursue an application which was, in the plaintiff’s view, partially flawed.

    [2] [1999] SASC 430.

    [3] Taylor v Santos Ltd [1999] SASC 430 at [16].

19. Initially LSS sought an order for indemnity costs for their costs incurred up to 24 December 2005, that being the date that the affidavits evidencing the voting intentions of various shareholders were filed. LSS subsequently reconsidered its position and conceded that costs ought to be taxed on a party and party basis for the period prior to Christmas. LSS submitted that there was not a serious issue to be tried since the application had no relationship to the substantive proceedings, and the application was based on an assumption not known to the law, namely that the beneficiary of a trust is entitled to direct a trustee as to the trustee’s exercise of discretion.

20. Supreme Court Rule 101.01(6) provides that the Court may order costs to be taxed and paid forthwith. The defendant submitted that this was appropriate because the proceedings giving rise to the order had no connection to the substantive proceedings, and because there has been unreasonable conduct on the part of Shanamere in that it failed to formally respond to the proposal put by the solicitors for LSS in a letter dated 19 December 2005, and because they pursued an application which they knew to be futile, therefore resulting in LSS incurring significant costs.

21. Shanamere opposed the defendant’s application for indemnity costs and for payment forthwith, and made a separate application for costs. It submitted that Shanamere should be awarded it’s costs up to 24 December 2005 on a party and party basis, but made no application as to the costs post 25 December 2005 up until 30 December 2005. Shanamere submitted that it ought to recover the costs of the hearing on 13 January 2006 as it was adjourned on that occasion due to the late delivery of affidavits by LSS. It was submitted by Shanamere that prior to Christmas costs should not follow the event as LSS has breached its fiduciary duty to Shanamere by declining to inform Shanamere of how it intended to exercise its voting rights in respect of the ALFIUT shares of which LSS is trustee until LSS was ordered to do so by the Court on 19 December 2005. Further LSS has never provided to Shanamere any reasons why it intended to vote in the manner proposed in the affidavit of Coope dated 23 December 2005.

22. Given the claim of breach of fiduciary duty, it was submitted that Shanamere was entitled to exercise vigilance with respect to the defendant’s acts as trustee of the ALFIUT, until the resolution of the principal proceedings. It was submitted that Shanamere’s application was plainly connected to the principal proceedings because of the alleged breach of fiduciary duties owed by LSS as trustee of the ALFIUT, and because of Shanamere’s consequent entitlement to vigilantly enforce the defendant’s obligations as trustee.

23. The first occasion upon which Shanamere requested LSS to advise it of it LSS’s voting intention was on 14 November 2005. The information was not received until a court order was made on 19 December 2005, and the affidavit disclosing the information was filed on 23 December 2005. Also filed on 23 December 2005 was an affidavit of Lord, disclosing his intention to vote against the proposed resolution. Lord held a significant shareholding of approximately twenty three per cent in ALF. Further affidavits filed on 23 December 2005 informed Shanamere for the first time that three of the ten shareholders had agreed to sell their shares. It was submitted that Shanamere was at least entitled to pursue its application until 24 December 2005, and should recover its costs to that date.

24. Further, Shanamere submitted that the conduct of LSS in attempting to procure proxies and share transfers indicates that their intention to vote against the proposed resolutions had been made long before it was disclosed to Shanamere in Coope’s affidavit of 23 December 2005.

25. It was submitted that if costs were awarded against them, indemnity costs would not be appropriate. Counsel submitted that LSS had not sought nor indicated to Shanamere prior to submissions that it would seek indemnity costs. Furthermore, after 24 December 2005 Shanamere submitted that during 28 – 29 December 2005 they made attempts to settle both the main proceedings and the subsidiary proceedings. Shanamere submitted that they had made an offer to settle the main proceedings by letter dated 20 December 2005, to which it is submitted no response was received.

26. Shanamere submitted that it may be appropriate to award costs against a successful defendant where, for example, the defendant has repeatedly failed to answer correspondence from the plaintiff.[4] In these circumstances it was submitted that LSS failed to respond to the correspondence requesting it to notify Shanamere of its voting intention, and failed to notify Shanamere of its voting intention at hearings before a Master on 15 December 2005 and 18 December 2005.

    [4] Cretazzo v Lombardi (1975) 13 SASR 4; Ogier v Booth (1883) 5 ALT 109.

27. As to the defendant’s submission that as trustee it is entitled to recover all of its costs, Shanamere submitted that if LSS intended to rely on this principle it must await the outcome of the principal proceedings since those proceedings will determine whether LSS has breached its fiduciary duties. Furthermore, it was submitted, where a trustee acts in the interests of its controller rather than in the interests of its beneficiaries then the principle as to recovery of costs may not apply.[5] Shanamere submitted that where a trustee fails to answer a request from a beneficiary to inform them of its intended actions, which actions may affect the trust, then costs may be awarded against a trustee.

    [5] Pope v DRP Nominees Pty Ltd (No 2) (2000) 207 LSJS 344.

28. As to the question of taxation and payment of costs forthwith, Shanamere opposed the application and submitted that there was no basis for the Court to do so. It submitted that that course of action may only be taken where the application is so far removed from the principal proceedings that the successful party ought not have to await the outcome of the principal proceedings. Shanamere submitted that there was a clear and strong relationship between the two actions in that they both relate to the activities of Mr Coope.

    Indemnity Costs

29. Although Supreme Court Rule 101.02 provides that costs should follow the event unless otherwise ordered, the court will only order costs on a solicitor and client or indemnity basis where the justice of the case warrants such an order, or where there is some ‘special or unusual feature’ which justifies a departure from the usual party and party costs order.[6]

    [6] Re Wilcox; Ex parte Venture Industries Pty Ltd (No 2) (1996) 72 FCR 151.

30. The circumstances in which indemnity costs will be ordered are varied, and invariably depend on the particular circumstances of each case. In Colgate-Palmolive Co v Cussons Pty Ltd [7] Sheppard J listed some of the circumstances in which courts have ordered solicitor and client costs.  These include:[8]

    …[T]he making of allegations of fraud knowing them to be false and the making of irrelevant allegations of fraud…; evidence of particular misconduct that causes loss of time to the Court and to other parties…; the fact that the proceedings were commenced or continued for some ulterior motive…or in wilful disregard of known facts or clearly established law…; the making of allegations which ought never to have been made or the undue prolongation of a case by groundless contentions…; an imprudent refusal of an offer to compromise… and an award of costs on an indemnity basis against a contemnor…”

    [7] (1993) 46 FCR 225.

    [8] Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 233 – 234.

31. However Sheppard J goes on to say that there are many other categories of cases where it may be justified:[9]

    Other categories of cases are to be found in the reports. Yet others to arise in the future will have different features about them which may justify an order for costs on the indemnity basis. The question must always be whether the particular facts and circumstances of the case in question warrant the making of an order for payment of costs other than on a party and party basis.

    [9] Colgate-Palmolive Co v Cussons Pty Ltd (1993) 46 FCR 225 at 234.

1. Improper conduct has been alleged by LSS against Shanamere, in that LSS submitted that the application was futile and in any event was doomed to failure on the merits of the application. LSS submitted that after 24 December 2005 the application was pursued in circumstances where Shanamere ought to have known that there was no prospect of success, and that an undue burden was therefore placed on it. LSS submitted that this improper conduct was sufficient to justify indemnity costs after 24 December 2005 up until and including the hearing on 30 December 2005.

2. Where an action has been commenced or continued in circumstances where the litigant, if properly advised, should have known that the cause was patently hopeless, then an order for solicitor and client costs may be justified. Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd[10] stated that:[11]

   In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law.

   [10] (1988) 81 ALR 397.

   [11] Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401.

3. In these circumstances the court may reason that the successful party ought not to have been forced to incur the expenses associated with the litigation.

4. It is now conceded that if LSS had been injuncted from voting the ALFIUT shares at the EGM, the proposed resolutions would not have passed. However, as McDonald J observed in the Thompson Land case:[12]

   One must be careful on an application as the present not to allow the wisdom of hindsight to overwhelm the circumstances in which the Court must consider whether there exists circumstances which should warrant an order being made for costs on a basis other than a party and party basis.

   [12] Thompson Land Ltd v Lendlease Shopping Centre Development Pty Ltd [2000] VSC 140 at [26].

5. I do not agree that an order for indemnity costs is justified in this case. Shanamere was not informed of LSS’ voting intentions until 23 December 2005. It was made aware for the first time on that date that LSS had procured proxies and share transfers to cast votes against the passing of the resolutions. Although, in hindsight, the application may be seen to have been futile, I am not satisfied that Shanamere had some ulterior motive in continuing the injunction application. There is nothing special or unusual in the circumstances of this case to justify a departure from the usual party and party taxation.

6. Although there is some force in the submission that after 24 December 2005 when Shanamere’s advisors had the information about the voting intentions of the other shareholders the application was doomed to fail, that submission overlooks the reality of how the litigation unfolded. Both sides took somewhat entrenched positions. Information was exchanged on a piecemeal basis. In my view it was not unreasonable for Shanamere to continue the application until its directors and legal advisors had fully considered all the factors. In the circumstances this is not a case in which Shanamere should be penalised in costs over and above party and party costs.

7. I am satisfied that the costs of the parties up to and including 24 December 2005 ought to follow the event, that is, the withdrawal of the application. Therefore, award those costs to LSS on a party and party basis. I am also satisfied that the costs of the parties from 24 December 2005 up to and including the hearing on 30 December 2005 ought to be awarded to LSS on a party and party basis. As to the costs of the application on 13 January 2006 the adjournment was requested because of the late filing of affidavits by LSS. Shanamere should have the costs of that appearance taxed on a party and party basis. As to the costs of the application on 16 and 17 January 2006 I order that Shanamere pay the costs of LSS on a party and party basis.

   Taxation of costs

8. Supreme Court Rule 101.01(6) empowers me to make an order for costs to be taxed and paid forthwith notwithstanding that the proceeding is not concluded. LSS submitted that an order under SCR 101.01(6) may be made where the proceedings are sufficiently self contained, or where there has been some unreasonable conduct on the part of the unsuccessful party.[13]

   [13] See Horrobin v Australia and New Zealand Banking Group Ltd (NSWSCA), unreported, 6 June 1997, Priestley JA at 7 – 9.

9. Rule 101.01(7) provides that:

   An order for costs of an interlocutory proceeding shall not, unless the Court otherwise orders, entitle a party to have a bill of costs taxed until the principal proceeding in which the interlocutory order was made is concluded or further order.

10. The general practice envisaged by that rule is that costs of an interlocutory proceeding will not be taxed unless the demands of justice require a departure from what appears to be the general practice envisaged by the rule;  see Thunderdome Racetiming and Scoring Pty Ltd & Anor v Dorian Industries Pty Ltd & Anor (1992) 109 ALR 196 at 210-211. I am not satisfied that, in this case the substantial justice of the case justifies a departure from the usual practice.

11. I am satisfied that the application brought before me was sufficiently connected to the main proceedings. Both proceedings relate to the actions of the trustee. 

12. I am also satisfied that Shanamere has not acted unreasonably such as to justify an order for taxation and payment forthwith. Correspondence tendered during the hearing of the costs application evidences genuine negotiations between the parties which occurred between 24 December 2005 and 30 December 2005. I am not satisfied that Shanamere acted unreasonably in their conduct.

13. Accordingly I decline to order that costs be taxed and paid forthwith.