Timbercorp Finance Pty Ltd v Collins (No 2)
[2017] VSC 65
•28 February 2017
| IN THE SUPREME COURT OF VICTORIA | Not Restricted |
AT MELBOURNE
COMMERCIAL COURT
S CI 2014 02972
BETWEEN:
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| DOUGLAS JAMES COLLINS & ORS | Defendants |
-AND-
S ECI 2014 00419
BETWEEN:
| TIMBERCORP FINANCE PTY LTD (IN LIQUIDATION) (ACN 054 581 190) | Plaintiff |
| v | |
| PETER JOHN WHITE & ANOR | Defendants |
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JUDGE: | JUDD J | |
WHERE HELD: | Melbourne | |
DATE OF HEARING: | 6 February 2017 | |
DATE OF JUDGMENT: | 28 February 2017 | |
CASE MAY BE CITED AS: | Timbercorp Finance Pty Ltd v Collins & Ors (No 2) | |
MEDIUM NEUTRAL CITATION: | [2017] VSC 65 | First revision: 2 March 2017 |
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COSTS — Test cases — Indemnity costs — Whether successful plaintiff should be paid its costs by the defendants —Whether indemnity costs a ‘penalty’ — Successful defendant — Sanderson order.
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APPEARANCES: | Counsel | Solicitors |
| For the Plaintiff | Mr D Batt one of Her Majesty’s Counsel with Dr C O Parkinson and Ms H A Tiplady | Mills Oakley Lawyers |
| For the Defendants Collins and White | Mr M D Wyles, one of Her Majesty’s Counsel with Ms F L Shand and Mr D J Fahey | M + K Lawyers |
| For Timbercorp Securities Ltd | Dr O Bigos | Arnold Bloch Leibler |
HIS HONOUR:
On 15 December 2016 reasons for judgment were published in four proceedings in which the plaintiff, Timbercorp Finance Pty Ltd, sought recovery of loans made to the defendants to finance investments in various Timbercorp managed investment schemes. Final orders have not yet been made in the Collins and White proceedings, although the parties have agreed on the amounts for judgment. The outstanding issue between the parties relates to costs and declaratory relief.
The plaintiff contended that it was entitled to costs against the defendants in each proceeding on an indemnity basis, pursuant to the terms of its loan agreement with each defendant. Clause 4 of each loan agreement provides that the borrower must pay to the lender its costs of enforcing the agreement on a full indemnity basis. The defendants resisted such an order on three grounds. First, there were special circumstances that should excuse the defendants from any liability for costs. The plaintiff’s costs should be the liquidators’ costs in the liquidation. Second, the contractual provisions requiring full indemnity costs was a penalty and unenforceable. Third, indemnity costs overcompensated the plaintiff.
Timbercorp Securities Ltd was the third defendant in the Collins proceeding and the second defendant in the White proceeding. As a successful defendant, it sought an order that the unsuccessful defendants pay its costs, through a Bullock or Sanderson order. It also sought a declaration in the form of paragraph A of the prayer for relief in its counterclaim against the defendants. The defendants resisted both applications by Timbercorp Securities.
The defendants’ contention that the contractual provision requiring full indemnity was a penalty, and unenforceable, may be dealt with shortly. The defendants relied upon the decision of the High Court in Paciocco & Anor v Australian and New Zealand Banking Group Ltd,[1] in which observations were made concerning the nature of an unenforceable penalty, as a contractual provision having the character of a charge or payment that had no purpose other than to punish, or a charge or payment demanded in terrorem. The defendants contended that the contractual provision relied upon by the plaintiff had no purpose other than to punish the borrowers.
[1][2016] HCA 28; 333 ALR 569.
The defendants did not develop their ‘penalty’ argument. Their brief written submissions seemed to rely on the operation of the contractual provision, in conjunction with the obligation to pay interest. No other basis was advanced to characterise the borrower’s obligation to indemnify the lender for its recovery costs as a penalty. Such obligations are a common feature of loan agreements designed to protect the legitimate interest of the lender, ensuring that it is not out of pocket if recovery proceedings are necessary. I reject the contention that the indemnity costs provision in the loan agreement is unenforceable as a penalty.
The defendants’ contention that they should be relieved of any cost burden was primarily based upon the proposition that these proceedings formed part of an ensemble of ‘test cases’ selected by the parties to represent issues which, once decided, would govern the outcome of a large number of related proceedings brought by the plaintiff to recover under loan agreements. They submitted that they agreed to have their cases proceed, ahead of numerous other loan recovery proceedings, to assist the efficient use of judicial and administrative resources, and in furtherance of the overarching purpose of the Civil Procedure Act. They submitted that it was the plaintiff who chose the Collins proceeding as a suitable candidate ‘to achieve judicial precedent which can apply to all proceedings where the same defences have been taken’. In relation to the White proceeding, they submitted, that it was selected to broaden the scope of the potential precedent. They submitted that the court endorsed the ‘test case’ approach.
The defendants argued that other defendants represented by M&K would be assisted by the decisions in the test cases when deciding what course to take, without the need to incur costs and occupy court time. The utility of such an approach, they argued, justified an order that the costs of the proceeding be the liquidators’ costs in the liquidation.
It is true that the four proceedings, heard in August 2016, were characterised as ‘test cases’. No doubt the plaintiff hoped that if it succeeded in its claims, its position would be significantly enhanced when seeking to resolve all other recovery proceedings. The defendants and their solicitors would, no doubt, have hoped for a successful outcome for their defences, placing other defendants in a more favourable negotiating position with the plaintiff.
Apart from the parties to the four proceedings, no other defendants will be bound by the decisions; nor would the plaintiff if the decision had been unfavourable to it. The only qualification is that most of the defendants represented by Slater + Gordon executed a deed under which they agreed to advance the same defences as in the Gruyters and Lowe proceedings.
The notion that a ‘test case’ might attract special consideration on costs is not new. What is unusual is that, in the present circumstances, the cost consequence and burden were not agreed or established in advance.
It was the plaintiff who first advanced the concept of test cases. At a directions hearing on 11 February 2015, the plaintiff relied on an affidavit of Darren James, affirmed 6 February 2015, and a memorandum prepared by its counsel of the same date, to put forward a proposal for the trial of ‘a small number of appropriate test cases that raised issues of general application, and procedures (which would cause) the test cases to have a binding effect …’. That aspiration was not realised.
On the day before the directions hearing counsel for the ‘M&K Growers’, (who included Mr and Mrs Collins, and Mr White) prepared a responding memorandum in which they said:
We do not agree with the proposal in the Timbercorp Memorandum that the representative proceeding be treated as a ‘test case’ with specific restrictive consequences for other growers. … The doctrine of precedent is the most efficient and appropriate means by which an early representative trial will limit effectively the issues available in later proceedings on similar facts.
While the plaintiff proposed that the Collins proceeding was a suitable candidate, counsel for the M&K Growers advanced Mr White as ‘the proper contradictor, subject to fair arrangements as to funding and costs’. They argued that
the sheer multitude of proceedings brought by the liquidators against the growers gives rise to a unique need for representative proceedings, in the interests of conserving the resources of all parties concerned (including the plaintiff’s creditors) and, of course, the public funds allocated to the court.
The defendants’ counsel submitted, on that occasion, that it would be
unjust for the proper contradictor in the proposed representative proceedings, if unsuccessful, to bear the liquidators’ costs … The liquidators ought to undertake that its costs in the representative proceedings, if the proper contradictor is unsuccessful, are to be treated as costs in the liquidation.
But there was no evidence of any such undertaking or agreement.
At a directions hearing on 30 October 2015 the Collins and White proceedings were fixed for trial to commence on 1 August 2016. The appeal process from the decision of Robson J, on the preliminary question, was incomplete.
On the first day of the trial, the defendants in the Gruyters and Lowe proceedings applied for an adjournment. The defendants’ solicitor, Ronald Gerard Willemsen, filed an affidavit in opposition. He deposed to acting on behalf of 350 clients who were defendants in recovery proceedings brought by the plaintiff, and that each of his clients relied on the ‘no loan’ defence maintained by the defendants in the Collins and White proceedings. Mr Willemsen deposed to the total indebtedness of his clients, and the interest burden under the loan contracts, should the loan agreements be upheld. He further deposed to funding arrangements for the trial. He said:
M&K’s clients are collectively contributing to the funding for Mr White’s trial and Mr and Mrs Collins’ trial. Intensive preparation for trial has already been undertaken and the clients’ legal team is likely to be required to devote the bulk if not all of their working hours exclusively to these two cases proceeding through the trials’ duration. … If the trials were to be deferred, not only would Mr White and Mr and Mrs Collins continue to incur interest at a rate of 13.2 per cent per annum, but a significant portion of the current preparation costs would be wasted. Further, it is my opinion that the additional costs required to prepare for trial for a second time, in 2017, may stifle Mr and Mrs Collins’ and Mr White’s ability to continue their defences of Timbercorp Finance’s claims.
Thus, the defendants were well aware of the potential cost consequences as they urged the court to proceed with the trials, even though the appeal process in respect of the preliminary question had not concluded, and in the absence of any costs agreement with the plaintiff.
In the absence of some agreement on the part of the other defendants, represented by M&K to be bound by the outcome in the Collins and White proceedings or, as in the case of the Slater + Gordon defendants, to confine their defences to the same grounds as those advanced in the Gruyters and Lowe proceedings, the utility of these decisions, as a mechanism to resolve or to assist in the resolution of the disputes between the plaintiff and other defendants, remains uncertain.
The plaintiff has succeeded in its claim against each of the defendants, resisting fluid, and at times highly contrived and opportunistic defences. The defendants, having failed in their challenges, now wish to transfer the burden of the plaintiff’s costs onto its creditors in the liquidation. Such an outcome would, in all the circumstances, offend principle and justice. The defendants failed in their defences; there are no special circumstances to warrant a departure from the usual order that costs will follow the event; and no justification for an order that would transfer the burden of costs onto the plaintiff’s creditors. The defendants in the Collins and White proceedings must pay the plaintiff’s costs.
The defendants also advanced their ‘penalty’ argument as a discretionary consideration, contending that the plaintiff’s costs of recovery are adequately compensated by the interest stipulated under the loan agreements. They contended that an award of indemnity costs would be out of all proportion to the plaintiff’s interest in receiving payment of the outstanding balance of each loan. They argued that the legitimate interest of the plaintiff was satisfied by the interest component it recovered, and that indemnity costs would be grossly disproportionate. They compared the cash rate with the contractual entitlement to demonstrate that, in the case of Mr White, the accumulated interest payable under the loan agreement was more than $300,000, whereas, by reference to the cash rate, it would only be around $44,000. In the case of Mr and Mrs Collins, the interest charged under the loan agreement is around $75,000, and by reference to the cash rate, it would be a little more than $11,000.
The plaintiff’s claim for indemnity costs was based upon its contractual entitlement to a full indemnity under the loan agreements. It did not seek a special order on any other basis. The defendants characterised an award of indemnity costs as amounting to a penalty. I have already rejected that characterisation. The plaintiff’s entitlement to interest and indemnity costs arises under the contract with the defendants. The plaintiff’s entitlement to interest does not negate or ameliorate the defendants’ contractual obligation to fully indemnity the plaintiff for its costs of recovery. While costs remain in the discretion of the court, there are no circumstances which would justify departure from an award reflecting the contractual obligation. I order that the defendants pay the plaintiff’s costs of and incidental to the proceeding, including reserved costs, on an indemnity basis.
Timbercorp Securities
Timbercorp Securities was successful in defending the contingent claims made against it by the plaintiff. It had been joined as a defendant in both proceedings by the plaintiff after the defendants challenged the enforceability of the loan agreements on the basis that Timbercorp Securities had not discharged its duties and responsibilities under the scheme constitutions and related documents. The nature of those defences is discussed in more detail in paragraphs 172 to 205 of the reasons for judgment.
Timbercorp Securities sought an order that in each proceeding the unsuccessful defendant (Mr White and Mr and Mrs Collins) pay its costs of defending the claim made by the plaintiff through a Bullock or Sanderson order. In State of Victoria v Horvath (No 2),[2] the Court of Appeal described the operation and effect of such orders thus:
Where, however, the plaintiff succeeds against only one of two or more defendants, the court may, in the exercise of its discretion, order the unsuccessful defendant to pay the costs of the successful defendant either by ordering the plaintiff to pay the costs of the successful defendant and then ordering the losing defendant to pay the plaintiff the costs it is required to pay to the successful defendant, or by ordering the unsuccessful defendant to pay, additionally to the plaintiff’s costs, the costs of the successful defendant directly to that defendant. An order in the first form is known as a Bullock order[3] and the one in the second form is a Sanderson order. See, for example, Sanderson[4], BankamericaFinance Ltd.v. Nock[5]; Reid v. Campbell Wallis Moule & Co. Pty. Ltd.[6], Thorne v. Doug Wade Consultants Pty. Ltd.[7], Johnsons Tyne Foundry Pty. Ltd. v. Maffra Corporation[8].
[2][2003] VSCA 24, [7].
[3]The expression derives from the case of Bullock v. The London General Omnibus Company [1907] 1 K.B. 264.
[4]At 539 per Romer, L.J. and at 542 per Stirling, L.J.
[5][1988] 1 A.C. 1002 at 1010–1011 per Lord Brandon of Oakbrook with whom the other members of the House of Lords agreed.
[6][1990] VicRp 76; [1990] V.R. 859 at 876 per Tadgell, J.
[7][1985] VicRp 48; [1985] V.R. 433 at 500 per Kaye and Marks, JJ.
[8][1948] HCA 46; (1948) 77 C.L.R. 544 at 572–573 per Williams, J.
The defendants object to any such order, contending that Timbercorp Securities had very little involvement in the proceeding, and relied on the work done by the plaintiff. They even contended that it was unnecessary to join Timbercorp Securities, and inconsistent with the overarching obligations in ss 10 and 19 of the Civil Procedure Act 2010. The defendants contended that in the proper exercise of discretion, the costs of Timbercorp Securities should be costs in its liquidation. They also contended that the declaration sought by Timbercorp Securities contradicted paragraph 322 of the reasons for judgment. They did not elaborate. It is difficult to understand the basis for that submission.
In the reasons for judgment, I said:
320. By its counterclaim, Timbercorp Securities sought a declaration that the defendants were precluded from denying, on the basis of the matters alleged in paragraph 76C of their defences, that the balance of Application Money was paid on their behalf to Timbercorp Securities for the Timberlots, Almondlots and Grovelots, and that as a consequence, they each became a Participant Grower in the projects. Paragraph 76C of the defendants’ defence alleged that insofar as there had been a payment of Management Fees and other scheme related costs, such payment was not, and could not properly be construed as, a payment on behalf of the defendants of the balance of the Application Money payable to TSL in its capacity as responsible entity.
321. Insofar as it may be necessary to so find, I am persuaded that the defendants conducted themselves as Participant Growers, with lots, acknowledging an indebtedness to the plaintiff under their loan agreements until the schemes failed. They accepted the discharge of their liability to Timbercorp Securities for Management Fees, and took the benefits. They accepted a corresponding obligation to the plaintiff to repay a debt, on terms set out in their loan agreements. Thus, even if it be found that the payment from the plaintiff was not a payment of the balance of the Application Money, the defendants remain liable for the amount of the plaintiff’s claim.
Conclusion
322. The plaintiff is entitled to judgment against each defendant, in each proceeding, for the unpaid balance of each loan as alleged, together with interest.
Timbercorp Securities was joined in response to the defendants’ allegations that preconditions to the valid exercise of power under cl 9.3 of the Almond Project and Olive Project constitutions did not exist, and that Timbercorp Securities had no right to apply Application Money to the particular scheme. By the conclusion of the trial the defendants had abandoned the defences. Thus, were it not for the confusing plea in paragraph 76C of their defences, and in their defences to the counterclaim by Timbercorp Securities, any issue relating to the conduct of Timbercorp Securities had evaporated.
Timbercorp Securities was entitled to be represented at trial for so long as it remained a party with unresolved issues between it and another party. That was the position until the conclusion of the trial. Once the defendants abandoned their allegations that Timbercorp Securities had disbursed Application Money in breach of the constitutions and statutory obligations, the role of Timbercorp Securities as an active participant in the proceedings should have been over. Instead, the defendants pressed allegations contained in paragraph 76C in the following terms:
If which is not admitted, payment was made of the fees referred to in sub-paragraph 76B(c) above, any such payment was not, and cannot properly be construed as, a payment on behalf of Mr and Mrs Collins of the balance of Application Moneys for lots payable by them in accordance with the Constitutions (as referred to in paragraphs 12D, 15 and 21A to 24 above) and the PDS’s (as referred to in paragraphs 3B, 13, 13A, 15 and 15A above) to TSL in its capacity as responsible entity.
This plea contains a remnant of the abandoned defences. The paragraphs relating to the constitutions, mentioned in paragraph 76C, included allegations that the constitution of the 2008 Olive Project required that TSL reasonably satisfy itself that there were appropriate executed licence agreements and management agreements. Following abandonment of the ‘precondition claims’, the continuing utility of those allegations was uncertain. At best, paragraph 76 was confusing. Ultimately, by their rejoinder to the plaintiff’s reply, and their defence to the counterclaim of Timbercorp Securities, Mr and Mrs Collins sought to put to rest, albeit with an elliptical pleading, any suggestion that they did not obtain lots or become growers in the 2008 Olive Project. A pleading to similar effect was filed on behalf of Mr White. Thus, the question as to whether the defendants held lots or were growers eventually evaporated, but not until the trial had concluded. Even then, the defendants sought to deploy the absence of any such issue to mask the contradictory nature of their case that no loan had been made.
In the absence of any issue in the proceeding concerning the allocation of lots, or the characterisation of the defendants as growers, there is no occasion for the declaration sought by Timbercorp Securities.
Timbercorp Securities was joined by the plaintiff in response to the defendants’ allegations that it had applied Application Money in breach of certain preconditions. Once those allegations were abandoned, as they were at the end of the trial, and reflected in formal amendments made to the pleadings following the conclusion of submissions, the contingent case against Timbercorp Securities fell away, and it is entitled to an order that the proceeding as against it, brought by the plaintiff, be dismissed. With the abandonment by the defendants of their allegations of breach by Timbercorp Securities, the basis for its counterclaim also fell away, and the counterclaim ought to be dismissed. Timbercorp Securities was reasonably joined by the plaintiff, and its counterclaim reasonably advanced. It is entitled to its costs of the counterclaim. The appropriate order is that the defendants must pay Timbercorp Securities’ costs of and incidental to the proceeding, including reserve costs, such costs to include its defence and counterclaim. The costs of Timbercorp Securities are to be paid on the standard basis.
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