FEDERAL COURT OF AUSTRALIA Smith, in the matter of Peko Rehabilitation Project Pty Ltd (Receiver and Manager Appointed) (in liq) [2011] FCA 1448 Citation: Smith, in the matter of Peko Rehabilitation Project Pty Ltd (Receiver and Manager Appointed) (in liq) [2011] FCA 1448 Parties: IN THE MATTER OF PEKO REHABILITATION PROJECT PTY LTD (Receiver and Manager Appointed) (In Liquidation); SIMON ALEXANDER WALLACE SMITH and TIMOTHY BRYCE NORMAN in their capacity as liquidators of PEKO REHABILITATION PROJECT PTY LTD (Receiver and Manager Appointed) (In Liquidation) (ACN 076 018 776) File number: VID 708 of 2011 Judge: MURPHY J Date of judgment: 16 December 2011 Catchwords: COSTS – Court's jurisdiction to order costs in favour of a non-party Legislation: Corporations Act 2001 (Cth) Federal Court of Australia Act 1976 (Cth) Cases cited: Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109 Firepower Operations Pty Ltd (in liquidation) (No 3) (2010) 183 FCR 150 Gibbins Investments Pty Ltd v Savage [2011] FCA 527 Knight v FP Special Assets Ltd (1992) 174 CLR 178 Re Lutscher; Ex parte Waddell (1877) LR 6 Ch D 328 O'Keefe v Hayes Knight GTO Pty Ltd [2005] FCA 1559 Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385 Surpion Proprietary Ltd v M.R. Works Pty Ltd (Receivers and Manages Appointed) [2010] FCA 1262 Traianedes v Mercury Brands Group Pty Ltd (No 2) [2010] FCA 1140 Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149 Date of hearing: 11 August 2011 Place: Melbourne Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 19 Counsel for the Plaintiffs: P Agardy Solicitor for the Plaintiffs: Lander & Rogers Counsel for Samuel Savage, Maryellen Quigley & Teresa Clegg as Executors of the Estate of Jack Savage (deceased) who are contributories of Peko Rehabilitation Project Pty Ltd and Sitzler Savage Pty Ltd: A Rodbard-Bean IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 708 of 2011 IN THE MATTER OF PEKO REHABILITATION PROJECT PTY LTD (Receiver and Manager Appointed) (In Liquidation) SIMON ALEXANDER WALLACE SMITH AND TIMOTHY BRYCE NORMAN IN THEIR CAPACITY AS LIQUIDATORS OF PEKO REHABILITATION PROJECT PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 076 018 776) Plaintiffs JUDGE: MURPHY J DATE OF ORDER: 16 DECEMBER 2011 WHERE MADE: MELBOURNE THE COURT ORDERS THAT: 1 The costs of the Estate of Jack Savage and of the liquidators in this application (including any reserved costs) be costs in the winding up. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. The text of entered orders can be located using Federal Law Search on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY GENERAL DIVISION VID 708 of 2011 IN THE MATTER OF PEKO REHABILITATION PROJECT PTY LTD (Receiver and Manager Appointed) (In Liquidation) SIMON ALEXANDER WALLACE SMITH AND TIMOTHY BRYCE NORMAN IN THEIR CAPACITY AS LIQUIDATORS OF PEKO REHABILITATION PROJECT PTY LTD (RECEIVER AND MANAGER APPOINTED) (IN LIQUIDATION) (ACN 076 018 776) Plaintiffs JUDGE: MURPHY J DATE: 16 December 2011 PLACE: MELBOURNE REASONS FOR JUDGMENT 1 The plaintiffs are the liquidators of the Peko Rehabilitation Project Pty Ltd (Receivers and Managers appointed) (in liquidation). Peko's primary assets comprise a magnetite processing plant at Tennant Creek, Northern Territory and the rights under an exclusive licence granted by Sitzler Savage Pty Ltd, the owners of the mining tenements, to extract and process minerals from a large tailings dump at the mine site. The liquidators made an application to the Court under s 477(2B) of the Corporations Act 2001 (Cth) for approval to enter into agreements which included the grant of a sub-licence to North Mines Pty Ltd to operate the mine for five years. The Executors of the Estate of Jack Savage opposed the application. The liquidators subsequently discontinued the application and the Estate now seeks its costs of opposing it. The dispute relates only to such costs. Factual background 2 It is necessary to understand the factual background in broad terms to understand the merits in the costs dispute. The Estate has 45% of the shares in Peko and Sitzler Savage and Gibbins Investments Pty Ltd owns the remaining 55% of the shares. Although the mining project has run into significant financial difficulties, it is common ground that the shares in Sitzler Savage are of significant value because of its ownership of the mining tenements. 3 In 2003 the Commonwealth of Australia granted a concessional research and development loan to Peko to mine the tailings dump. Peko defaulted and the Commonwealth was granted a fixed and floating charge over Peko's assets and undertakings to secure its debt. In September 2009 Receivers and Managers were appointed by the Commonwealth. In February 2010 upon the hearing of an application to wind up Peko, Simon Wallace-Smith and Timothy Norman were appointed liquidators. In March 2011 the Commonwealth assigned to Northern Mining Holdings Pty Ltd its rights to the secured debt including the fixed and floating charge. The original Receivers then retired and Northern Mining appointed Glenn Crisp as the sole Receiver. 4 In May 2010 Jack Savage passed away and three of his children were appointed as executors of the Estate. 5 From about April 2008 through 2009 and 2010 extensive efforts were made, initially by William Gibbins and Jack Savage, and later by the Estate and the Receiver to locate buyers of Peko. 6 Gibbins and the Estate were engaged in a legal dispute as to the sale of shares in Sitzler Savage, which was closely related to the assets and operations of Peko. The litigation commenced in December 2010 and continued through most of 2011: see Gibbins Investments Pty Ltd v Savage [2011] FCA 527, Vermillion Resources Pty Ltd v Gibbins Investments Pty Ltd [2011] FCAFC 149. There was also related but separate litigation in the Supreme Court of Western Australia between the executors of the Estate about the value of the Estate's shares in Sitzler Savage. The litigation and a breakdown of the relationship between the executors, and between the directors and shareholders of Sitzler Savage, were alleged to have created a difficult environment in which to negotiate an agreement to sell the assets and shares of Peko. Although some substantial approaches to purchase Peko were made, the Estate and Gibbins could not agree to accept one of them. 7 In April 2011 a Heads of Agreement, apparently intended to bring the impasse to an end, was executed between the liquidators, North Mines, Northern Mining and Gibbins. In general terms, it provided that Peko's rights to the exclusive benefit of the tenements and the tailings dump would be sub-licensed to North Mines. North Mines would buy Peko's plant and equipment and pay substantial monies to the Receiver from the operation of the mine over a five year period. Gibbins would sell its shares in Sitzler Savage to North Mines. The Estate could agree to sell its shares to North Mines, or if it refused to do so it would receive some payment through the operation of the mine. 8 In order to implement the Heads of Agreement the parties were required to execute various additional agreements ("the Transaction Agreements"). The detail of these agreements was not entirely clear to the Court given the early stage that the application was discontinued. However, they appeared to include the following. An off-take agreement provided North Mines with a sub-licence to mine the tailings dump for its benefit. North Mines was to pay the Receiver $16.5 million if it was unsuccessful in acquiring the Estate's shares in Sitzler Savage, or $8.9 million if it was able to acquire these shares. It included an Asset Sale Agreement which provided for North Mines to pay the Receiver $2 million for the mining plant and equipment. An Option Agreement granted North Mines an option to purchase all Gibbins' shareholdings in Sitzler Savage. A Supplemental Deed provided, amongst other things, a repayment schedule for the debt assigned to Northern Mining. North Mines' payments to the Receiver were to be made over a five-year period including 54 monthly payments of $27,778, with a payment of $5 million at the conclusion of that period. Northern Mining was owed approximately $3.5 million, which meant that substantial funds should be available for Peko's unsecured creditors. The application to the Court 9 The application by the liquidators was ex parte. It was supported by detailed affidavits sworn by Simon Wallace-Smith Avenue affirmed 30 June 2011 and 13 July 2011. In the context of the litigation between the shareholders of Sitzler Savage and Peko, the liquidators considered it prudent to give notice of its application to the Estate. In my view this decision was appropriate. 10 Although no defendant was named to the originating process, the proceeding quickly took on the appearance of a proceeding inter partes. The Estate opposed the application, and filed a detailed affidavit and an Outline of its Grounds of Opposition. Vermillion Resources Pty Ltd – a company which purported to have received a transfer of Jack Savage's shares prior to his death – also opposed the application and filed an affidavit and submissions in opposition. Vincent Savage filed an affidavit in opposition to the application together with submissions. Gibbins filed detailed affidavits and submissions in support of the application. There were two directions hearings, 19 July 2011 and 22 July 2011, in which the dispute between the interested parties was clear. 11 It is unnecessary to fully detail the contentions made by the interested parties in their affidavits and written submissions. The Court heard no oral submissions on these issues as the application was discontinued. In general terms, the objections centred around arguments that the Transaction Agreements operated to strip Sitzler Savage of the value of a significant asset. They were said to prevent Sitzler Savage from repaying the secured debt to Northern Mining within five years, and that during this period North Mines would exhaust the tailings dump which had a value of several hundred million dollars. They were argued to be not to the benefit of the unsecured creditors of Peko as the payment of $5 million to the Receiver was not to be made for five years and only then would money flow to unsecured creditors. The agreements were argued to proceed on the erroneous legal basis that Peko's licence to mine the tailings dump is alienable, when it was not capable of assignment. Gibbins' interests were argued to be in conflict with his fiduciary duties to the shareholders of Sitzler Savage and Peko. The agreements were said to constitute oppressive conduct by Gibbins as a shareholder in treating the Estate's shareholding unequally and unfairly. The liquidators contended that the agreements were the result of an extensive tender process. They argued that the Estate stood to obtain $7.6 million if the agreements proceeded which was more than double the amount for which they had sought to sell their shares to Vermillion. In any event, their position was that they did not ask the Court for an endorsement of the proposal contained in the Transaction Agreements, but merely sought permission to exercise their own commercial judgement: see Corporate Affairs Commission v ASC Timber Pty Ltd (1998) 29 ACSR 109, at 118. 12 The liquidators discontinued their application for approval to enter into the relevant agreements by notice dated 29 July 2011. They contend that this was because the appointment of the Receiver who had negotiated the relevant agreements had been terminated, and because a key party, Northern Mining, advised that it would not now execute them. There were then no agreements for the Court to approve and the liquidators discontinued their application. Consideration regarding costs 13 The Estate applies for an order that its costs be paid by the liquidators. It relies on Rule 26.12(7) of the Federal Court Rules 2011 which provides that a party that files a notice of discontinuance is liable to pay the costs of each other party to the proceeding. It seeks that the costs be treated as costs in the winding up, or alternatively be paid out of the assets of the company. It does not seek that the liquidators pay these costs from their own resources. 14 The liquidators oppose this order and contend that they sought no relief against any person and that no party was joined to the proceeding. They contend that they were obliged to make the application for approval by law and there was no exercise of any discretion on their part to do so. They argue that while the Court may grant leave to be heard to any person who claims to be a contributory or to any other interested person, there was no application for leave to appear nor was any leave to appear granted to the persons represented at the directions hearing. They argue that while the interested persons were permitted to file affidavits and submissions they did not become parties to these proceedings. 15 Although the Estate, and the other contributories or interested persons, were not joined as parties I consider that the application had taken on the character of a suit between parties. It had become a contest between the liquidators and Gibbins on the one hand, and the Estate on the other. The ultimate hearing, towards which the application was rapidly proceeding at the time of its discontinuance, would have had the characteristics of a suit between parties. I agree with the views of Finkelstein J at [8]-[9] in Traianedes v Mercury Brands Group Pty Ltd (No 2) [2010] FCA 1140. His Honour held that applications for directions sometimes raise substantive issues and once the application takes on the character of a suit between the parties the usual rules of civil practice apply: See also Re Lutscher; Ex parte Waddell (1877) LR 6 Ch D 328 at 331, Surpion Proprietary Ltd v M.R. Works Pty Ltd (Receivers and Manages Appointed) [2010] FCA 1262 at [19]-[20]. In this matter, the application took on the character of a civil dispute inter partes. The usual cost rules between parties apply. 16 It is common ground between the parties that the Court has a general discretion as to costs under s 43 of the Federal Court of Australia Act 1976 (Cth). This discretion extends to ordering costs against or in favour of non parties: Knight v FP Special Assets Ltd (1992) 174 CLR 178, O'Keefe v Hayes Knight GTO Pty Ltd [2005] FCA 1559 at [19]-[24]. Section 1335(2) of the Corporations Act 2001 (Cth) also provides a discretion as to costs of a party. I consider that s 1335(2) of the Act does not have the effect of preventing the Court from making a costs order against non parties under s 43: see Firepower Operations Pty Ltd (in liquidation) (No 3) (2010) 183 FCR 150. 17 Where an unsuccessful proceeding is brought by a company in liquidation then an order for costs is generally made against the company. Where a proceeding is brought by a liquidator personally, any costs order is usually made against the liquidator. However, unless the liquidator has acted unreasonably such an order is generally limited to the assets available to the liquidator: Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385 at [48]-[54]. It was not submitted that the liquidators had acted unreasonably, or that the circumstances are so exceptional that the liquidators should meet any costs from their own resources. 18 The liquidators correctly apprehended that their application was likely to be of real interest to contributories and other interested persons. The effect of the Transaction Agreements was such that the liquidators could have expected the Estate to oppose approval. Having commenced the application, and it having been strenuously opposed, they then discontinued it. They were unable to provide any clarification to the Court as to why the Receiver had been terminated or why Northern Mining no longer supported the agreements. It is possible that the Estate's objections led to the discontinuance, but on the evidence I am unable to be so satisfied. What is plain is that the Estate incurred expense in opposing the liquidators' application, which was then discontinued. 19 The Estate is entitled to reimbursement of its costs on a party-party basis to be paid out of the assets of Peko. For the avoidance of doubt, I also note that the liquidators did not behave unreasonably in making the application. They too are entitled to their costs, as costs in the winding up. I certify that the preceding nineteen (19) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Murphy. Associate: Dated: 16 December 2011