White Constructions ACT Pty Ltd (in liq) v White

[2004] NSWSC 303

CITATION:	White ACT (in liquidation) v G B White & Ors [2004] NSWSC 303
HEARING DATE(S):	14 April 2004
JUDGMENT DATE:	14 April 2004
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [61] and [67] of judgment
CATCHWORDS:	COSTS - indemnity costs - requirement for special or unusual features - whether shown - no question of principle
LEGISLATION CITED:	Supreme Court Act 1970 (NSW) Supreme Court Rules 1970 Corporations Law
CASES CITED:	Rosniak v Government Insurance Office (1997) 41 NSWLR 608 Harrison v Schipp [2001] NSWCA 13 Colgate-Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 Oshlack v Richmond River Council (1998) 193 CLR 72 Council of the Municipality of Botany v Secretary, Department of the Arts, Sport, the Environment, Tourism and Territories (1992) 34 FCR 412 NMFM Property Pty Ltd v Citibank Ltd (No 2) (2000) 109 FCR 77 Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640 Emanuel Management Pty Ltd (in liquidation) v Fosters Brewing Group Limited [2003] QSC 299
PARTIES :	White Constructions (ACT) Pty Limited (in liquidation) v Geoffrey Bernard White (First Defendant) Travers William Duncan (Second Defendant) John William Spinks (Third Defendant) Frank Stratton McAlary (Fourth Defendant) Michael Frank McAlary (Fifth Defendant) White Constructions Pty Limited (formerly known as White Constructions Limited) (Sixth Defendant) Exxon Coal Australia Pty Limited (formerly known as White Industries Limited) (Seventh Defendant) PDC Constructions Pty Ltd (Eighth Defendant) White Industries (Qld) Pty Limited (Ninth Defendant) White Constructions Incentive Share Scheme Pty Limited (Tenth Defendant) [Deleted] WIL Civil and Mining Engineering Pty Limited (formerly known as Keathson (WA) Pty Ltd and as WIL Plant Hire Pty Limited) (Eleventh Defendant) White Constructions (NT) Pty Limited (Twelfth Defendant) Norwest Development Corporation Limited (Thirteenth Defendant) [Deleted] PDC Plant Hire Pty Ltd (Fourteenth Defendant) White Constructions (NSW) Pty Ltd (Fifteenth Defendant) White Property Developments Pty Limited (Sixteenth Defendant) White Industries Australia Limited (Seventeenth Defendant)
FILE NUMBER(S):	SC 50144/02
COUNSEL:	S D Epstein SC (Plaintiff) B W Rayment QC/D T Kell (Defendants)
SOLICITORS:	Deacons (Plaintiff) Mallesons Stephen Jaques (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
COMMERCIAL LIST

McDOUGALL J

14 April 2004 (Revised 15 April 2004)

GEOFFREY BERNARD WHITE & ORS

JUDGMENT

HIS HONOUR:

Introduction

1 In my reasons for judgment given on 25 February 2004, [2004] NSWSC 71, I concluded, at para [554], that the plaintiff's claims against the defendants failed. At para [555], I ordered that the summons be dismissed and that the plaintiff pay the defendants' costs. I reserved liberty to any party to move to vary the costs order. The defendants, by their notice of motion filed on 19 March 2004, move pursuant to order 3.

2 The notice of motion sought by prayer 1, an order that the defendants' costs be assessed on the indemnity basis. That prayer was heard by me today. By consent the hearing of prayers 2 and 3 has been adjourned.

The evidence

3 The defendants relied upon two affidavits sworn by Mr Nicholas Pember Reeves, a solicitor in the employ of Mallesons Stephen Jaques. Those affidavits were read, subject to an objection as to their relevance. In my view, the first affidavit is in substance relevant. The second is not.

4 In any event, much of the relevant material is, at least for the purposes of this application, uncontested in the sense that it forms part of the commonly known and understood background to the litigation or in the sense that it has been, at least for today, resolved by my earlier judgment.

The principles

5 The basic rule is that a successful party is entitled to its costs on a party and party basis: see for example Pt 52A r 32. See also the judgment of Mason P in Rosniak v Government Insurance Office (1997) 41 NSWLR 608, 616.

6 It is clear, of course, that there is a discretion to award costs on the indemnity basis. That follows from, among other sources, s 76(1) of the Supreme Court Act and Pt 52A r 32.

7 The basis upon which the discretion to award indemnity costs should be exercised has been examined in a very great number of cases. But, as those cases make clear, the discretion is not confined or limited except to the extent that it is required to be exercised judicially: see for example Harrison v Schipp [2001] NSWCA 13 at [139] (Giles JA, with whom Handley and Fitzgerald JJA concurred); see also Colgate-Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248, 256-257.

8 What is required, in any case, is that the Court examine the facts of that case in the light of such statements of principle as may be relevant. In the ordinary way, the Court will take into account, as offering guidance, statements of principle made by those to whom the particular judicial officer should have regard.

9 At the most basic level, the statements of principle indicate - not unsurprisingly - that there must be some sufficient special or unusual feature to justify departure from the ordinary rule.

10 I take the basic principle to be as stated by Gaudron and Gummow JJ in Oshlack v Richmond River Council (1998) 193 CLR 72, 9. Their Honours said at [44] (I omit citations):

“It may be true in a general sense that costs orders are not made to punish an unsuccessful party. However, in the particular circumstance of a case involving some relevant delinquency on the part of the unsuccessful party, an order is made not for party and party costs, but for costs on a 'solicitor and client' basis, or on an indemnity basis. The result is more fully or adequately to compensate the successful party to the disadvantage of what would otherwise have been the position of the unsuccessful party in the absence of such delinquency on its part.”

11 I read what their Honours said on the basis that "some relevant delinquency" does not mean moral delinquency or some ethical shortcoming, but delinquency bearing a relevant relation to the conduct of the case: see for example Council of the Municipality of Botany v Secretary, Department of the Arts, Sport, the Environment, Tourism and Territories (1992) 34 FCR 412, 415; NMFM Property Pty Limited v Citibank Limited (No 2) (2000) 109 FCR 77.

The special or unusual features relied upon

12 I turn now to the circumstances upon which the defendants relied in support of their application.

1. Alleged failure to examine White ACT staff and others

13 In considering this ground, it is necessary to bear in mind, as I concluded in my earlier reasons, that the plaintiff's case was one of actual fraud. The plaintiff alleged that a number of accounting entries in its books were undertaken to divest it of assets. It said that those entries were made at the direction of the director defendants. It said that they were made with the intention, and had the effect, of putting the plaintiff's assets beyond the reach of creditors, including ADC. It said further that those entries were undertaken at a time when, to the knowledge of the director defendants, the plaintiff was insolvent.

14 The plaintiff further alleged that, both before and after the sale of its issued capital to Mr Frank McAlary, steps were taken to divest it of revenues to which, otherwise, it would have been entitled. Those steps involved the charging of management fees for services said to have been rendered by the sixth defendant, WCL. It was said that those steps were taken with the intention, and had the effect, of putting those revenues - which were very substantial in amount - beyond the reach of creditors. Again, the plaintiff said, those steps were taken at a time when, to the knowledge of the director defendants, it was insolvent.

15 A further claim made by the plaintiff was that there was an agreement between it and WCL to the effect that WCL would pay all proper debts of the plaintiff, including the debts which, ultimately, it owed to ADC.

16 On the facts as I found them, that debt was crystallised in the earlier judgment of this Court. However, the plaintiff's case was that there was at all material times a debt, or an obligation capable of being quantified as a debt, to which what I will call the "guarantee" said to have been given by WCL extended.

17 The director defendants denied each of the allegations that had been made against them. They denied also that the guarantee agreement was made. To depart from the narrative for a moment: the plaintiff called no evidence that could prove the existence of the alleged guarantee (except to the extent that there were incidental and hearsay references to it made in documents produced by the plaintiff's auditors as part of their working papers). The guarantee was not proved. Indeed, evidence that the plaintiff did call from its expert witness Mr Watson was inconsistent with the existence of any such agreement of guarantee.

18 Before these proceedings were commenced, the plaintiff's liquidator examined the director defendants together with Mr Michael McAlary and Mr Wells (a former managing director of the plaintiff). Those examinations were undertaken pursuant to ss 596A or 596B of the Corporations Law as it stood at the relevant time.

19 The plaintiff did not undertake any examination of, to use a neutral word, "staff" who had been involved in the transactions of which it complained.

20 The plaintiff said that those "staff" members were not, at least after the sale to Mr Frank McAlary, employed by the plaintiff. On the evidence, that would appear to be correct. But on any view, those staff members were performing management and administrative work for the plaintiff either on secondment from their true employer (usually, I think, WCL), or pursuant to some less formal arrangements. It will be remembered that WCL charged "management fees" to the plaintiff.

21 In one particular case, the failure to examine the staff member involved was of particular importance. I refer to Mr Bevan Piper. He was, in substance, the company secretary and chief financial officer of the plaintiff (or, if not formally appointed or at times when he was not formally appointed, he performed equivalent duties). It was he who organised the implementation of the relevant accounting entries that were necessary to give effect to the divestiture of assets of which the plaintiff complained. That was done, as I explained in my earlier judgment, by a series of book entries between companies in the White group whereby, in substance, intercompany debits and credits were cancelled out and whereby the plaintiff's liability to an external financier, the State Bank of New South Wales, was discharged.

22 It might have been thought that someone in Mr Piper's position, carrying out the central role that he did, would have been able to prove (or, indeed, disprove) the allegation that the director defendants "directed" the transactions that I have briefly summarised. Mr Piper was not called to give evidence. Nor was there any independent evidence that the director defendants did "direct" those transactions. They said, very firmly, that they did not do so.

23 It followed, I think, that the first step towards proof of this aspect of the plaintiff's case was to destroy the credibility of the director defendants. However, it is at least arguable that the plaintiff needed to do more. It is at least arguable that the plaintiff needed not only to destroy the credibility of the director defendants, but to secure from them admissions that they did direct the relevant transaction. I say that because there is powerful support for the view that disbelieving a witness does not of itself prove the contrary to what the witness asserts: see Steinberg v Federal Commissioner of Taxation (1975) 134 CLR 640, 694-695 (Gibbs J). If it is correct to say that causing me to disbelieve the defendants would not of itself have proved the opposite of what they said, then it would have been necessary for the plaintiff, having destroyed the defendants' credibility, to call evidence to prove the case that it sought to make out. This, as I have said, it did not do.

24 It does not appear to be in doubt that Mr Piper was not examined by the liquidator of the plaintiff using his compulsory powers under the Corporations Law as it then stood. The plaintiff says that I should not assume however that it did not obtain from Mr Piper by some other means relevant information. There are, I think, two answers to that assertion. First, there is no evidence that the plaintiff did, in fact, obtain information from Mr Piper by means other than examination. Second, and more important, if the plaintiff did obtain information it can hardly have been information that helped its case given that, as I have noted, Mr Piper was not called.

25 I do not think that this aspect of the indemnity costs argument should be viewed simply in "Jones v Dunkel" terms. The question is not merely whether the plaintiff could have been expected to call Mr Piper and, not having done so, did not explain why it did not do so. The question is, rather, whether the plaintiff persisted in allegations of the most serious kind without being in a position to prove them other than by breaking down the defendants completely and, on the evidence, without having used the extremely valuable weapon available to it, through the mechanism of examinations under ss 596A or 596B, to seek to find whether there was evidence in support of the allegations.

26 Similar issues arise in respect of other aspects of the plaintiff's case. For example, it was alleged that the director defendants knew that the plaintiff would make a large loss on the Quadrant contract; that they knew that it was in default under the Quadrant contract; and that they knew that ADC would bring proceedings against the plaintiff.

27 As to the first two of these matters, the evidence disclosed that there were a number of persons who had the day-to-day, and more remote, management of the Quadrant project for the plaintiff. They include Messrs Houlahan, Hitchings, and Bendeich.

28 It is clear that at least Mr Hitchings had communications with at least Mr White: see the "blueprint note" made by Mr White on 6 March 1988 to which I will refer later in these reasons. If it were to be suggested, and proved, that the director defendants had knowledge of the loss and knowledge of default, then communications to them from Messrs Houlahan, Hitchings or Bendeich might have been most material. None of those gentlemen were called.

29 Again, there is a real question as to whether they were, at any relevant time, employees of the plaintiff. Again, I think, it is not appropriate to analyse the issues simply in "Jones v Dunkel" terms. The real point is that, on the evidence, none of those gentlemen were examined although, clearly enough, they would appear to be among those who could shed light on the relevant circumstances.

30 The plaintiff says that it had access to their evidence given in the prior proceedings in this Court (including, under that description, evidence in references directed by this Court). That is correct. However, it is not relevant. The issues in the prior proceedings did not focus in particular on the knowledge of the director defendants of the issues to which I have referred. The evidence that those people gave in the prior proceedings did not show what was necessary to be proved in these proceedings on those issues. I infer that because, apart from anything else, none of those people were called.

31 There was no evidence of any other inquiry made by the plaintiff of those people.

32 I regard it as extraordinary that the plaintiff would seek to make out the case that it pleaded involving, as I have said, allegations of the most serious kind, without calling affirmative evidence in support of that case from those who could help to prove the key allegations. I regard it as even more extraordinary that the plaintiff would mount and run the case that it did without even (on the evidence) seeking to ascertain, through the process of examination, what those persons would say.

33 It may be accepted that there were grounds for suspicion. Three particular matters, examined at length in my earlier reasons, are the so-called "leap year letters"; the "McAlary blue print"; and the sale of the issued capital of the plaintiff to Mr Frank McAlary. Particularly when viewed against a background of trouble on the Quadrant project and disputation with ADC, those matters are capable of giving rise to suspicion and certainly such as to warrant further investigation.

34 However, suspicion is not enough. In the present case, evidence to make good, or confirm the basis of, suspicion was not called. The result was that the plaintiff, at least, put itself in a position where, to succeed, it had to disprove the defendants' defences. Having regard to what Gibbs J said in Steinberg, even that might not have been enough to enable it to succeed.

2. Doomed case of fraud

35 I use the defendants' colourful description for convenience rather than as, in effect, indicating in summary form the view to which I have come.

36 On analysis, I think, the defendants' submissions under this heading are no more than a variant of their submissions under the heading just considered. In substance, the defendants say that the plaintiff did not have the material necessary to turn suspicion into proof.

37 On analysis, therefore, I do not think that the defendants' submissions under this heading add support to their application.

3. The Fischer vendetta

38 Again, I use for convenience the defendants' colourful description.

39 The defendants say that the present proceedings are part of a "vendetta" conducted by Mr Fischer of ADC. They point to a threat said to have been made by Mr Fischer to Mr Duncan in 1988 to pursue him "to the ends of the earth". They say that the litigious history between parties recounted at para [16] of my earlier reasons demonstrates part of this pursuit and that the present litigation is a further part of that pursuit.

40 It is clear that these proceedings have been funded by or at the instance of ADC and that, in substance, they have been brought for the benefit of ADC. It also appears that ADC funded the examinations that were undertaken by the liquidator to which I have already referred.

41 I accept the plaintiff's submission that, in principle, there is nothing improper in a creditor funding litigation in the expectation that, through the application of s 564 of the Corporations Act, it will achieve some recovery of a debt owed to it. I also accept the plaintiff's submission that, in principle, there is nothing improper in a party with a legal right taking steps to enforce that right or to satisfy a judgment that has already been given in vindication of that right. It is clear, having regard to the history of the earlier litigation and to the success that ADC has enjoyed, that ADC must be regarded both as a creditor (because of the judgment debt) and as an entity having a right against the plaintiff (vindicated by the judgment).

42 The problem in each case is that this litigation was, in my view, pursued beyond reason, both for the reasons that I have given and for the reasons to be given. In other words, I think, the determination of the pursuit of the present defendants reflects something more than that which, in principle, I have accepted is appropriate.

43 I think it is correct to say that the history of the litigation that has arisen out of the Quadrant contract supports the allegation of vendetta. However, be that as it may (and assuming it to be correct), I do not regard it as a sufficient basis for the award of indemnity costs. Again, on analysis, I do not think that it adds anything to what I have concluded are the relevant circumstances. Specifically, if I am correct in what I have said as to the first feature (or the first feature as expanded by the second feature), then describing the relevant conduct as being undertaken in dispute of a "vendetta" would not add to any entitlement than would otherwise flow from those other matters; and if I were wrong, then the case based on “vendetta” would be less persuasive.

4. The indemnity arrangement

44 This is related to the preceding ground. It depends on the proposition that the present litigation has been supported financially by ADC. The submissions for the defendant rely on the decision of Chesterman J in Emanuel Management Pty Limited (in liquidation) v Fosters Brewing Group Limited [2003] QSC 299 at [12], [13]. I think that reliance on his Honour's reason is misplaced. That was a case where a third party, a stranger to the dispute, in effect purchased a share of the expected proceeds of the litigation by agreeing to fund the litigation. I do not think that what his Honour said can be extended by analogy or otherwise, to the present circumstances where the litigation has been funded by ADC - on any view a creditor - in relation to the very transaction that gave rise to the judgment debt and where the legislature, through s 564, has recognised the right of the creditor to do so.

5. The position of Messrs Michael McAlary and Spinks

45 The defendants submitted that there was little or no evidence against Messrs Michael McAlary and Spinks. That may be so, but it does not seem to me to afford a sufficient basis for distinguishing their position from the position of the other person or defendants.

46 In any event, the practical difficulties of distinguishing between their costs and the costs of the other defendants, if those costs were ordered to be paid on different bases, would disincline me to single them out for an indemnity costs order.

6. No loss

47 The plaintiffs claim as pleaded was for damages. The defendants have maintained consistently that the plaintiff has suffered no loss. They have consistently sought, both in correspondence and through applications to the Court, that the plaintiff articulate its case as to how, it says, it suffered loss. Ultimately, they obtained an order from Einstein J that the plaintiff do so.

48 The plaintiff has never, in a way that withstands even the slightest analysis, articulated a claim for damages. Indeed, at the commencement of the hearing before me, when senior counsel for the plaintiff was opening the case, I raised this question. The response, which was thereafter adopted by the plaintiff with enthusiasm in final submissions, was that the plaintiff was entitled to restitutionary relief. No claim for restitutionary relief had been pleaded. The difficulties that this raises were adverted to in my earlier judgment at paras [544] and following.

49 I concluded that the plaintiff had suffered no loss either in respect of the impugned transactions or in respect of the alleged agreement of WCL to guarantee the debts of the plaintiff.

50 In my view, that has always been the obvious analysis of the plaintiff's claim. For whatever reason, that was a claim that could, and indeed should, have been brought by a creditor in effect seeking to undo the preferential transactions.

51 The plaintiff now says that the defendants could have had an order for summary dismissal on the basis that the plaintiff had suffered no loss. That was raised in the course of a strike-out application determined by Master McLaughlin on 26 April 2002: see in particular what the Master said at paras [30] to [33] of his reasons. At para [33], the Master noted the “no loss” submission would go, not to an application to strike out, but to summary dismissal.

52 I do not regard this as an answer to the claim for indemnity costs. The defendants were entitled, if the plaintiff would not withdraw its case, to defend the very serious allegations that had been made against them by any means available. They chose to defend them on the facts and they succeeded. They chose also to defend them on the basis that the plaintiff had suffered no loss and, had it been necessary to do so, I would have concluded that they succeeded on that basis. The plaintiff, had it chosen, could have decided to withdraw the allegations that it made or indeed to withdraw the proceedings. It did not do so. The plaintiff having taken that course, I do not think that it is open to it to complain, on an application for indemnity costs, that the defendant did not choose the cheapest and most expeditious way of disposing of the claim.

Conclusion

53 In my judgment, the first (including perhaps the second) and last of the matters to which I have referred - relating to the failure to examine and call witnesses, the so-called doomed case and the "no loss" argument - would individually (counting the first and second as one) amount to sufficient special or unusual features to justify the award of indemnity costs.

54 In my judgment, those matters support the view that the plaintiff was pursuing allegations that it could not prove, even with the powerful weapon of examination, to recover a loss that it had not sustained.

55 The failure of the plaintiff's liquidator to ascertain whether there was evidence from "staff" (using that word as I have used it before) to sheet home the very serious allegations in support of its case adds weight to the conclusion that there are sufficient special or unusual features. That is confirmed by the failure to call any evidence from any such "staff" members: indeed, the failure to call any evidence of fact against the defendants' denials.

56 The consequence is that the defendants have been forced to defend themselves against a case that lacked any support for the suspicions on which it was founded.

57 Likewise, the plaintiff has failed to make good the "guarantee" case against WCL.

58 Finally, in this context, I think that the pursuit of the case in circumstances where there is no loss is inexplicable in circumstances where the true plaintiff, ADC, stayed out of the arena.

59 I therefore conclude that those features taken individually, and a fortiori together, justify the exercise of the discretion to afford the successful defendants their costs on an indemnity basis.

60 The plaintiff did not submit that, if I came to this conclusion, the conclusion should, nonetheless, apply to some part only of the defendants' costs. I will therefore give no further consideration to this point.

Order

61 I order that order 2 made by me on 25 February 2004 be varied by adding after the word "costs" the words "such costs to be assessed and paid on the indemnity basis".

KELL : There is one matter that has been raised which relates to the costs order. In the judgment of Einstein J on the particulars motion which your Honour has - it is an annexure to the affidavit of Mr Reeves - his Honour had reserved costs - this is at page 46 of the affidavit down the bottom right-hand corner - of that motion.

There appears to be some doubt under the Supreme Court Rules of New South Wales as to the position of reserved costs unless an order is specifically made at the end of the hearing, so the reserved costs do not necessarily follow the event apparently.

I had a quick look over lunch and there is a decision of Bignold J in the Land and Environment Court that raises the same question. There is no doubt about it in the Federal Court. I was just wondering if, to make the position clear, we could have a direction. I've got a form of short minutes here that just makes it clear that your Honour's costs order is extended to reserved costs before Einstein J which would follow the event and would be picked up by your Honour.

EPSTEIN : I don't want to say anything, your Honour.

KELL : Perhaps I could hand up the one paragraph of short minutes. It doesn't refer to indemnity costs. Of course, when it was drafted it was just intended to pick up the reserved costs before his Honour.

62 HIS HONOUR: For the avoidance of doubt, I order further that the defendants' costs include any reserved costs. I hand back that document. I will adjourn.

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Last Modified: 04/19/2004