FEDERAL COURT OF AUSTRALIA Handberg v Chacmol Holdings Pty Ltd (No 2) [2005] FCA 680 COSTS – trial of separate questions – administrator of company an applicant – whether costs order should be made against administrator – whether costs should be payable forthwith Federal Court Rules O 29 r 2, O 62 r 3 Handberg v Chacmol Holdings Pty Ltd [2004] FCA 720 cited Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40 cited Re Wilson Lovatt &Sons Ltd [1977] 1 All ER 274 followed Re Speedifix Building Products Pty Ltd (in liq) (1987) 5 ACLC 866 cited Process Engineering Pty Ltd v Derby Meat Processing Co Ltd [1977] WAR 145 cited Knight v FP Special Assets Ltd (1992) 174 CLR 178 applied Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 cited Re Strand Wood Co Ltd [1904] 2 Ch 1 cited Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 cited McKellar v Container Terminal Management Services Ltd [1999] FCA 1639 cited GEOFFREY NEILS HANDBERG and AUSTRALIAN RISK ANALYSIS PTY LTD v CHACMOL HOLIDNGS PTY LTD and MATTHEW LEE JOHNSTON (No 2) V458 OF 2004 HEEREY J 31 MAY 2005 MELBOURNE IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V458 OF 2004 IN THE MATTER OF AUSTRALIAN RISK ANALYSIS PTY LTD (CONTROLLER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 052 231 937) BETWEEN: GEOFFREY NIELS HANDBERG (in his capacity as Administrator of Australian Risk Analysis Pty Ltd) and AUSTRALIAN RISK ANALYSIS PTY LTD (CONTROLLER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 052 231 937) APPLICANTS AND: CHACMOL HOLDINGS PTY LTD (ACN 008 605 892) and MATTHEW LEE JOHNSTON RESPONDENTS JUDGE: HEEREY J DATE OF ORDER: 31 MAY 2005 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1. The applicants pay the respondents' costs of the trial of the separate questions, including the costs of the hearing in relation to such costs. 2. Such costs be taxed and paid forthwith. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY V458 OF 2004 IN THE MATTER OF AUSTRALIAN RISK ANALYSIS PTY LTD (CONTROLLER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 052 231 937) BETWEEN: GEOFFREY NIELS HANDBERG (in his capacity as Administrator of Australian Risk Analysis Pty Ltd) and AUSTRALIAN RISK ANALYSIS PTY LTD (CONTROLLER APPOINTED) (ADMINISTRATOR APPOINTED) (ACN 052 231 937) APPLICANTS AND: CHACMOL HOLDINGS PTY LTD (ACN 008 605 892) and MATTHEW LEE JOHNSTON RESPONDENTS JUDGE: HEEREY J DATE: 31 MAY 2005 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 Pursuant to an order made under O 29 r 2 of the Federal Court Rules I tried certain separate questions. In substance the questions concerned the validity of (i) the taking possession by the first respondent Chacmol Holdings Pty Ltd ("Chacmol") as mortgagee of the property of the second applicant Australian Risk Analysis Pty Ltd (Controller appointed) (Administrator appointed) ("ARA") and (ii) the appointment of the second respondent Matthew Lee Johnston as receiver of the property of ARA. My answers were in favour the applicants: Handberg v Chacmol Holdings Pty Ltd [2004] FCA 720. 2 This decision was the subject of a successful appeal to the Full Court: Chacmol Holdings Pty Ltd v Handberg [2005] FCAFC 40. The Full Court remitted the matter for further hearing and ordered that the respondents pay the appellants' costs of the appeal. Their Honours did not deal with the costs of the trial of the separate questions. This has been the subject of further argument before me. The following issues arise: 1. Should the costs relating to the trial of the separate questions be costs in the cause? 2. Should any order for costs in favour of the respondents be only against ARA or also against the first applicant Geoffrey Niels Handberg ("the Administrator")? 3. Should any order for costs in favour of the respondents be made payable forthwith under O 62 r 3? 4. Should any of the costs of the respondents be on a solicitor/client basis? Nature of the proceeding 3 The proceeding commenced with originating process filed on 6 April 2004. The named applicants were "Geoffrey Niels Handberg (in his capacity as Administrator of Australian Risk Analysis Pty Ltd)" and ARA. The named respondents were Chacmol and Mr Johnston. The application was said to be made under ss 421, 421A, 423, 427, 433 and 434A of the Corporations Act 2001 (Cth) (the Act). 4 The sections mentioned are in Pt 5.2 of Ch 5 of the Act entitled "Receivers, and other controllers, of property of corporations". "Controller" is defined in s 9 to mean a receiver, or receiver and manager, of the property of a corporation, or anyone else who is in possession or control of that property for the purpose of enforcing a charge. 5 Section 421 requires the controller of a corporation to maintain certain bank accounts and financial records and gives a right of inspection to directors, creditors and members of the corporation. Under s 421A a managing controller must report within two months about the corporation's affairs. Section 423 gives the Court or the Australian Securities and Investment Commission power, upon their own motion or upon the complaint of any person, to enquire into a controller's conduct. Section 427 requires lodging and advertising of notice of the appointment of a receiver or controller other than a receiver. Section 433 provides, in the case where a receiver is appointed under a debenture secured by a floating charge, for the payment of certain debts out of property subject to the charge in priority to claims under the charge. Section 434A empowers the Court, on the application of a corporation, to remove a controller of the corporation for misconduct. 6 The originating process stated: "On the facts stated in the supporting Affidavit, the applicants apply for the following relief: 1. A Declaration that: (i) the deed of floating charge dated 24 June 1996 between the second applicant and the first respondent; (ii) the contract of sale dated 11 May 1995 between the second applicant and the first respondent; (iii) the acknowledgment of debt entered into between the second applicant and the first respondent, purportedly executed on 11 May 1995; (iv) the minutes of the meeting of directors of the second applicant held on 19 April 1995; (v) the minutes of the meeting of directors of the first respondent held on 19 April 1995 – constituted a single transaction. 2. A Declaration that the deed of floating charge dated 24 June 1996 between the second applicant and the first respondent secured only the sum of $5,000,000.00 payable by the second applicant to the first respondent under the contract of sale dated 11 May 1995. 3. A Declaration that the deed of floating charge dated 24 June 1996 between the second applicant and the first respondent has been discharged. 4. A Declaration that the appointment of the first respondent as controller of the second applicant was invalid. 5. Alternatively to paragraph 4, a Declaration that the appointment of the second respondent as receiver of the second applicant was invalid. 6. Alternatively to paragraphs 4 and 5, a Declaration that the respondents have or one or other of them has contravened s. 421 of the Corporations Act 2001. 7. A Declaration that the respondents have or one or other of them has contravened s.27 of the Insurance (Agents and Brokers) Act 1984. 8. A Declaration that the respondents have or one or other of them has contravened s.433 of the Corporations Act 2001. 9. A Declaration that the respondents have or one or other of them has prepared a report in accordance with s.421A of the Corporations Act 2001 which is materially false. 10. A Declaration that the respondents have or one or other of them has engaged in misconduct within the meaning of s. 434A of the Corporations Act 2001. 11. Alternatively to pars 4 and 5, an Order that the first respondent be removed as controller of the second applicant. 12. Alternatively to pars 4, 5 and 11, an Order that the second respondent be removed as controller of the second applicant. 13. Alternatively to pars 4, 5, 11 and 12, an Order that the Court make an enquiry of and/or conduct an examination of the respondents or direct an investigation into the books of the respondents in accordance with s. 423(3) of the Corporations Act 2001. 14. An Order that the respondents pay the applicants' costs of this application." 7 The originating process was amended on 13 April 2004 in a way not presently relevant and further amended on 20 April 2004. In its finally amended version the originating process deleted pars 1, 2, 3, 6, 7, 8, 9 and 10 and added the following paragraphs, some of which were new and some of which simply renumbered the paragraphs in the original: "11. The first respondent deliver up to the applicants a memorandum in the form prescribed by s.269 of the Corporations Act 2001 acknowledging that the liability secured by the charge has been paid or discharged. 12. The first respondent account to the applicants for all money received by it and applied by it on behalf of the second applicant since 29 October, 2003. 13. Damages for trespass as against the first respondent or alternatively the second respondent. 14. Alternatively to paragraphs 4, 5, 11, 12 and 13 hereof, an Order that the first respondent be removed as controller of the second applicant, or alternatively cease to act as controller and/or give up possession or control of the property of the second applicant. 15. An Order that the second respondent be removed as receiver of the property of the second applicant or alternatively, an Order that the second respondent cease to act as receiver of the property of the second applicant. 16. An Order that subject to any Order for security, _________ [sic] be appointed receiver of the property of the second applicant, on such terms as the Court deems fit. 17. An Order pursuant to s.423 of the Corporations Act 2001 that the Court make an enquiry of and/or conduct an examination of the first respondent's performance or exercise of its functions or powers as controller and make such Order as it thinks fit including an Order that the first respondent make good any loss that the estate of the second applicant has sustained thereby. 18. An Order that the respondents pay the applicants' costs of this application." 8 The separate questions concerned the effect of an "all monies" clause in a deed of floating charge. The questions and the answers given at the trial and on appeal respectively were as follows: Trial Appeal 1. Does the deed of floating charge dated 24 June, 1996 and made between the second applicant and the first respondent stand as security only for the repayment of the pre-existing debt of $378,000.00 (with any interest) and the sale price of $5,000,000.00 (with any interest), referred to in the acknowledgment of debt, a copy of which is exhibited 'GNH-9' to the Affidavit of Geoffrey Handberg sworn on 13 April 2004? Yes No 2. Have the debts secured by the floating charge been repaid to the first respondent? Yes No 3. Is the first respondent obliged to deliver to the second applicant a memorandum in the form prescribed by s 269 of the Corporations Act 2001 acknowledging that the liability or liabilities secured by the charge have been paid? Yes No 4. (a) Did the first respondent, purporting to act as mortgagee, take possession or assume control of the property of the second applicant. Yes Yes (b) If yes to (a), on what date did the first respondent take possession or assume control of property of the second applicant? On or before 29/10/03 29/10/03 (c) Was the first respondent entitled to take possession or assume control of the property of the second applicant? No Yes 5. (a) Did the first respondent appoint the second respondent receiver of the property of the second applicant? Yes Yes (b) Did the second respondent accept appointment as receiver of the property of the second applicant? No Yes (c) If yes to (a) or (b), did the second respondent take possession or assume control of the property of the second applicant as receiver and, if so, on what date? Possibly on Not necessary to answer (d) Is the appointment of the second respondent as receiver of the property of the second applicant: 29/10/03 Valid a. valid; or Of no b. of no effect? effect Costs in the cause or costs in favour of the respondents? 9 The trial of the separate questions determined substantive rights and obligations of the parties. These matters will not be the subject of further litigation. An order for costs in the cause is not appropriate. The Full Court's decision means the respondents have succeeded on the issues raised and should have succeeded at first instance. Costs should follow the event, as they did at first instance when the applicants sought and were granted an order that the respondents pay their costs of the trial of the separate questions. Should the costs order be only against ARA? 10 In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 Oliver J (later to become Lord Oliver of Aylmerton) held that a liquidator should pay the costs of an unsuccessful action against the former directors of the company for fraudulent trading and against a bank for a fraudulent preference and that the order should not be limited to payment out of the assets of the company. 11 His Lordship reviewed the English authorities and texts, which he found disclosed a "clear dichotomy" between the case where a liquidator is sued and the case where the liquidator initiates proceedings. He said (at 285): "I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or a personal representative who institutes proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator…" 12 In Re Speedifix Building Products Pty Ltd (in liq) (1987) 5 ACLC 866 Master Weld of the Supreme Court of Queensland followed Wilson Lovatt and ordered costs against liquidators who had brought an unsuccessful preference claim; see also Process Engineering Pty Ltd v Derby Meat Processing Co Ltd [1977] WAR 145. 13 In Knight v FP Special Assets Ltd (1992) 174 CLR 178 the High Court was concerned with orders for costs made against receivers and managers. A as receiver and manager of company X had commenced proceedings in the name of the company for specific performance of an agreement for the sale of certain shares. The defendants brought a counterclaim against company Y, of which A and B were receivers and managers. An order for security of costs was made against X. The action did not proceed and the defendants entered judgment against X. Y failed to comply with an order for discovery and the defendants entered judgment against it. In separate orders judges at first instance made orders for costs against A and B, holding that it was unnecessary to join them as parties. These orders were upheld by the Full Court of the Supreme Court of Queensland and by the High Court, the grant of special leave to the High Court having been limited to the question whether the Supreme Court had jurisdiction to make the orders. Mason and Deane JJ, with whom Gaudron J (at 205) agreed, said (at 192) (citations omitted): "Obviously, the prima facie general principle is that an order for costs is only made against a party to the litigation. As our discussion of the earlier authorities indicates, there are, however, a variety of circumstances in which considerations of justice may, in accordance with general principles relating to awards of costs, support an order for costs against a non-party. Thus, for example, there are several long-established categories of case in which equity recognized that it may be appropriate for such an order to be made. 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." 14 Dawson J, who agreed with the majority, noted that the appeal was limited to the question of jurisdiction but observed (at 204) that an order for security for costs "must ordinarily be the appropriate remedy where a receiver and manager conducts litigation through a company which will be unable to pay the costs of the defendant if the defendant is successful". In dissent McHugh J noted (at 217) that the companies were the "real" parties and the proceeds of any judgment in their favour would have been their property. The receivers were the agents of the companies and, his Honour thought, were in the same position as directors of a company who bring and defend actions on its behalf. His Honour's view was that provision for security for costs was a better remedy for protecting persons in litigation with insolvent companies. 15 In Hession v Century 21 South Pacific Ltd (in liq) (1992) 28 NSWLR 120 the New South Wales Court of Appeal upheld an appeal against the refusal of the primary judge to make an order for security for costs in favour of defendants sued for money due under a franchise agreement. Meagher JA (with whom Kirby P and Cripps JA agreed) held (at 123) that the judge had been wrong to rely on Re Strand Wood Co Ltd [1904] 2 Ch 1 where an application for security for costs in respect of a misfeasance summons brought by a company liquidator had been dismissed. Meagher JA said that a distinction must be drawn between cases in which the liquidator personally is the plaintiff, as in a misfeasance summons, and cases where the company in liquidation (albeit by its agent the liquidator) is the plaintiff. In the former case, if the proceeding fails, costs will be awarded against the liquidator personally, but no order for security for costs will be made against him because he is exercising a statutory power vested in him personally. In the latter case the Court had jurisdiction to make an order for security for costs under s 1335 of the Corporations Law (now s 1335 of the Act). His Honour went on to say (at 123): "In this regard, it should also be noted that where a company in liquidation sues and fails, there is no jurisdiction in the Court to order the liquidators personally to pay the defendant's costs." This seems inconsistent with Knight, the decision which had been handed down more than two months previously but which is not mentioned in Hession. It may be that the position of a receiver can be distinguished from that of a liquidator (see infra) but on the question of the exercise of, as distinct from the existence of, a jurisdiction to award costs. 16 Metalloy Supplies Ltd (in liq) v MA (UK) Ltd [1997] 1 All ER 418 involved an action instigated by a liquidator in the name of the company for goods sold and delivered. The English Court of Appeal held that although the Court had jurisdiction to order a liquidator as a non-party to proceedings brought by an insolvent company to pay costs personally, it would only do so in exceptional circumstances where there had been impropriety on the part of the liquidator, particularly in view of the fact that the normal remedy of obtaining an order for security for costs was available to the defendant. Waller LJ (at 422) referred to Knight and the observations by Dawson and McHugh JJ already mentioned about obtaining security for costs, a view with which his Lordship agreed. His Lordship observed (at 423) that there may be a distinction between the position of liquidators and that of a receiver in that there is a public interest in liquidators being able to perform their duties. 17 In my opinion, the critical element in the present case is that the Administrator instituted this proceeding with himself as an applicant. Knight and Metalloy proceeded on the implicit basis that a liquidator or receiver who is a party will be liable to an order for costs just like any other unsuccessful party; the only question was liability for costs when he was not a party. 18 By becoming a party, the Administrator put himself in the position to seek an order for costs in his own right in the event that the applicants succeeded. As already noted, this is in fact what happened at first instance. While it is now clear, in the light particularly of Knight, that there is jurisdiction to make an order for costs against a non-party (whether liquidator, receiver, administrator or otherwise) in exceptional circumstances, it is difficult to see how a court could make an order for costs in favour of a non-party. As Oliver J pointed out, it would be unfair to confer on some category of litigant the prospect of the fruits of successful litigation without liability for the risk of failure. 19 The fact that the Administrator has at all times been a party means that it is unlikely that an application for security for costs would have succeeded. It would have been said against such an application that the respondents had their remedy for costs against another (presumably solvent) party; they would not be in the position of having to make out the exceptional case of recovery against a non-party. 20 On the face of the originating process, all the relief claimed was sought by "the applicants", that is to say the Administrator and ARA. The originating process does not disclose any claim which is brought by the Administrator in some separate capacity, whether by reason of statutory duty or otherwise. Counsel referred in this regard to s 434A of the Act, but that provides for an application for the removal of a controller to be brought by the corporation of whose property the controller has control. 21 Personal liability of the Administrator is consistent with his liability for debts incurred in the course of administration: s 443A. Should costs be payable forthwith? 22 Order 62 rule 3 provides: "3. (1) The Court may in any proceeding exercise its powers and discretions as to costs at any stage of the proceeding or after the conclusion of the proceeding. (2) Where the Court makes an order in any proceeding for the payment of costs the Court may require that the costs be paid forthwith notwithstanding that the proceeding is not concluded. (3) 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." 23 The policy behind O 62 r 3 is that in the usual course success or failure on interlocutory disputes has no necessary connection with the ultimate merits. Therefore it is usually sensible to await the final outcome when interlocutory costs awards can be set off in the course of calculating the ultimate liability. Moreover, if liability for costs were enforced immediately a meritorious but poorly resourced litigant might find it that more difficult to obtain access to justice. No doubt an order for costs to be payable forthwith might be appropriate where a party has acted improperly or unreasonably (see generally McKellar v Container Terminal Management Services Ltd [1999] FCA 1639), but there is no suggestion of that in the present case. 24 In the present case, however, there has been a procedure which, though interlocutory, has finally determined substantive rights. Even if the applicants are successful in pursuing the remaining part of the proceeding, which in essence involves their claim to remove Mr Johnston as controller, success or failure on that issue cannot affect the rights determined by the trial of the separate issues. The respondents should be able to obtain recovery of their costs without having to wait, possibly for a substantial time, for an outcome which cannot affect the rights now established by their success on the separate questions. Should costs be on a solicitor/client basis? 25 The respondents seek solicitor/client costs of the hearing on Friday 13 May 2005. The applicants were not ready to argue the costs question at an earlier directions hearing on 10 May. The respondents complain of the applicants' delay in responding to their letters asking for costs of the separate questions made after the Full Court's judgment. For their part, the applicants say they only received very late notice that application was to be made to me for such costs. 26 There may have been some fault on both sides. I am not persuaded that the applicants' conduct in this regard went outside the usual hurly burly of litigation. Orders 27 There will be an order that the applicants pay the respondents' costs of the trial of the separate questions, including the costs of the hearing in relation to such costs. There will be a further order that such costs be taxed and paid forthwith. I certify that the preceding twenty-seven (27) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Heerey . Associate: Dated: 31 May 2005 Counsel for the Applicants: S Lewin Solicitors for the Applicants: Mills Oakley Counsel for the Respondents: FGA Beaumont QC and SJ Maiden Solicitors for the Respondents: Pointon Partners Date of Hearing: 13 May 2005 Date of Judgment: 31 May 2005