FEDERAL COURT OF AUSTRALIA Nicolai v Indochina Medical Co Pty Ltd, in the matter of Indochina Medical Co Pty Ltd (No 2) [2013] FCA 180 Citation: Nicolai v Indochina Medical Co Pty Ltd, in the matter of Indochina Medical Co Pty Ltd (No 2) [2013] FCA 180 Parties: YVES NICOLAI v INDOCHINA MEDICAL CO PTY LTD (ACN 062 426 153) File number: NSD 270 of 2012 Judge: YATES J Date of judgment: 8 March 2013 Catchwords: COSTS – costs of proceeding where there has been no determination on the merits – discontinuance of proceeding to wind up a company in insolvency – starting point for costs under r 26.12(7) of the Federal Court Rules 2011 – whether appropriate in the circumstances to depart from the prima facie position – whether the plaintiff improperly persisted with proceeding despite evidence of the defendant's solvency – whether application for release from implied undertaking was necessary for the plaintiff to secure the defendant's solvency Legislation: Corporations Act 2001 (Cth) Federal Court Rules 2011 Cases cited: Deputy Commissioner of Taxation v Rhodium Australia Pty Ltd [2011] FCA 988 Lavercombe v Auscott Ltd (2006) 58 ACSR 586 Nicolai v Indochina Medical Co Pty Ltd, in the matter of Indochina Medical Co Pty Ltd [2012] FCA 729 Re Lanaghan Bros Ltd [1977] 1 All ER 265 Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin (1997) 186 CLR 622 Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17 Travaglini v Raccuia [2012] FCA 620 Date of hearing: Determined on the papers Date of last submissions: 30 July 2012 Place: Sydney Division: GENERAL DIVISION Category: Catchwords Number of paragraphs: 28 Counsel for the Plaintiff: Ms T Wong Solicitor for the Plaintiff: Gilbert + Tobin Solicitor for the Defendant: Mr C Williams of Solomon Brothers IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 270 of 2012 IN MATTER OF INDOCHINA MEDICAL CO PTY LTD (ACN 062 426 153) BETWEEN: YVES NICOLAI Plaintiff AND: INDOCHINA MEDICAL CO PTY LTD (ACN 062 426 153) Defendant JUDGE: YATES J DATE OF ORDER: 8 MARCH 2013 WHERE MADE: SYDNEY THE COURT ORDERS THAT: 1. The defendant pay the plaintiff's costs of the proceeding. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 270 of 2012 IN MATTER OF INDOCHINA MEDICAL CO PTY LTD (ACN 062 426 153) BETWEEN: YVES NICOLAI Plaintiff AND: INDOCHINA MEDICAL CO PTY LTD (ACN 062 426 153) Defendant JUDGE: YATES J DATE: 8 MARCH 2013 PLACE: SYDNEY REASONS FOR JUDGMENT 1 On 16 July 2012, the plaintiff was granted leave to discontinue this proceeding. The question of costs remains outstanding. At the time that leave to discontinue was granted, I also made orders requiring the parties to provide written submissions, and any affidavits on which they intended to rely, on the question of costs. 2 The parties have provided written submissions and supporting affidavits. The plaintiff relies on an affidavit made by Steven Daniel Glass on 25 July 2012. Mr Glass is the solicitor on the record for the plaintiff. The defendant relies on an affidavit made by Tamisha Kim Gadsdon sworn on 20 July 2012. Ms Gadsdon is a solicitor employed by the defendant's solicitors. In their submissions, the parties also rely on other affidavits which had been filed earlier in the proceeding. Background 3 The proceeding was commenced on 22 February 2012 seeking an order that the defendant be wound up in insolvency under s 459P of the Corporations Act 2001 (Cth) (the Corporations Act). The defendant had failed to comply with a statutory demand for the sum of USD1,972,451.89 which the plaintiff had served on it. The defendant did not dispute that it was indebted to the plaintiff for that sum. It claimed, however, that it was solvent notwithstanding that its failure to comply with the statutory demand carried with it a presumption of insolvency by dint of s 459C(2)(a) of the Corporations Act. 4 The winding up proceeding first came before me on 9 July 2012 when the plaintiff made an ex parte application to be released from the implied undertaking not to use certain affidavits and other documents which had been filed. The plaintiff sought that relief because he wanted to use information in the affidavits and documents to assist him to obtain freezing orders against the defendant in the Supreme Court of New South Wales in debt recovery proceedings that he proposed to commence later that day. I granted that relief: Nicolai v Indochina Medical Co Pty Ltd, in the matter of Indochina Medical Co Pty Ltd [2012] FCA 729. 5 The published reasons for granting that relief set out a number of background circumstances concerning the winding up proceeding in this Court. Those circumstances are relevant to the question of costs now before me. 6 At [2] to [6] of the reasons, I recounted the following facts: 2 In its defence, the defendant has filed a number of affidavits including the following: (a) An affidavit of John Walter Klobas sworn 23 March 2012 to which is annexed the defendant's financial statements for the year ended 31 December 2011. At [14] of this affidavit, Mr Klobas states that the debt is recorded as being owed to the plaintiff in the defendant's financial statements. Bank statements annexed to the affidavit disclose that, at the time the affidavit was sworn, the defendant had only $17,697.05 in cash, which was insufficient to repay the debt in full. (b) An affidavit of John Walter Klobas sworn 16 May 2012. Annexed to the affidavit is an acknowledgement by National Australia Bank (NAB) that USD693,349.93 had been paid into an account in the defendant's name. (c) An affidavit of Vo Van Ban affirmed 16 May 2012, to which is annexed a board resolution of Hanoi French Hospital Company Limited trading as L'Hopital Francais de Hanoi (HFH), the wholly owned subsidiary of the defendant, authorising payment of a dividend of USD1.4 million to the defendant. Also annexed to the affidavit are the financial statements of HFH for the year ending 31 December 2011. (d) An affidavit of John Walter Klobas sworn 1 June 2012, to which is annexed two further acknowledgements regarding the deposit of further funds into the defendant's NAB account, and a bank statement from NAB as at 22 May 2012 disclosing that the defendant has USD2,100,834.77 on deposit in its NAB account. 3 This material would indicate that the defendant has sufficient funds in Australia to repay its debt to the plaintiff. However, as at the present time, the debt remains unpaid. 4 By letter dated 18 June 2012 the plaintiff's solicitors requested that the defendant provide an undertaking to the plaintiff to the effect that it would not: (a) remove from Australia any assets that are now in Australia or would be brought into Australia during the course of the winding up proceeding; or (b) dispose of or deal with or diminish the value of any such assets. 5 On 22 June 2012 the defendant's solicitors responded stating that the defendant would not provide the undertaking that had been requested. 6 By email dated 22 June 2012 the plaintiff's solicitors reiterated the plaintiff's request for an undertaking and outlined the plaintiff's concern that the defendant would remove assets from Australia. On 26 June 2012 the defendant's solicitors responded. They confirmed that the defendant would not provide the undertaking that had been sought. 7 In those reasons, I found (at [14]) that the plaintiff had established an arguable case on good grounds that the defendant was indebted to him for USD1,972,451.89 for which a judgment would issue and that there was a real and not insubstantial risk that any such judgment might not be satisfied. In this connection, I made the following findings (at [15] to [16]): 15 … I note that the defendant does not carry on business. It holds all the shares in HFH which operates a private hospital in Hanoi, Vietnam. The defendant's only substantive operating activity is dealing with issues relating to its shareholding in HFH. The evidence before me is that funds debited or credited to the defendant's bank accounts are primarily the result of loans being made and repaid between HFH and the defendant, and between the defendant and the defendant's shareholders, as well as the payment by the defendant of professional and administrative fees. 16 Funds have been brought into Australia by the defendant and deposited into accounts it holds with NAB, in apparent response to the proceeding in this Court in which the defendant's solvency is in issue. On the present evidence, those funds could easily be repatriated to Vietnam or some other place. In this connection I note that HFH proposes to embark on expanding its hospital operations in Vietnam. It is not without significance that the defendant has refused to provide any assurance to the plaintiff and in particular an undertaking that the funds presently in Australia will remain. 8 These facts disclose that it was well after the commencement of the winding up proceeding that the defendant came into funds sufficient to discharge its uncontested indebtedness to the plaintiff and thus establish its apparent solvency at that time. However, those funds were in jeopardy of being repatriated from Australia and deployed for other purposes. Thus, the defendant's appearance of solvency was what it or its controllers intended it to be at any point in time of their choosing. The correspondence annexed to Mr Glass' affidavit reveals the attempts made by the parties to come to a resolution on the terms on which the debt should be repaid. In the course of that correspondence, the plaintiff's solicitors expressed concern about the defendant's preparedness to engage in "tactical funds transfers" to defeat the plaintiff's recovery of the debt, even though the defendant did not deny that the debt was payable. In my view, the correspondence, and the other facts to which I have referred above, provide a reasonable basis for that concern. 9 On 9 July 2012, the plaintiff obtained freezing orders against the defendant in the Supreme Court of New South Wales. 10 On 13 July 2012, I ordered the defendant, by its proper officer, to file and serve an affidavit by no later than 4.00 pm that day deposing to the existence and amount of funds that the defendant presently had in its bank accounts in Australia. Later that day, the defendant filed a further affidavit by Mr Klobas which annexed bank records showing that the sum of USD2,130,935.11 was then on deposit in the defendant's NAB account. Thereupon, the parties signed consent orders providing for the discontinuance of the winding up proceeding. Relevant principles 11 Rule 26.12(1) of the Federal Court Rules 2011 (the Rules) provides that a party claiming relief may discontinue a proceeding in whole or in part by filing a notice of discontinuance in the approved form. Generally, such a notice can be filed with leave of the Court at any time although the Rules do provide for certain circumstances when such a notice can be filed without leave or the other party's consent: see r 26.12(2). However, a notice of discontinuance can only be filed in respect of an application for a winding up order under s 459P of the Corporations Act with leave of the Court: r 26.12(5). 12 Rule 26.12(7) provides the cost consequences of filing a notice of discontinuance: Unless the terms of a consent or an order of the Court provide otherwise, a party who files a notice of discontinuance under subrule (2) is liable to pay the costs of each other party to the proceeding in relation to the claim, or part of the claim, that is discontinued. 13 In Lavercombe v Auscott Ltd (2006) 58 ACSR 586, Barrett J considered the position with respect to costs of a proceeding where there has been no determination on the merits. His Honour observed (at [43]) that, in cases of that kind, the general expectation is that there be no order for costs, with the result that each party bears its own costs. His Honour also referred to the remarks made by McHugh J in Re the Minister for Immigration and Ethnic Affairs of the Commonwealth of Australia; Ex Parte Lai Qin (1997) 186 CLR 622 that the general position is subject to exceptions. Those remarks are worth repeating. At 624-625, McHugh J said: In most jurisdictions today, the power to order costs is a discretionary power. Ordinarily, the power is exercised after a hearing on the merits and as a general rule the successful party is entitled to his or her costs. Success in the action or on particular issues is the fact that usually controls the exercise of the discretion. A successful party is prima facie entitled to a costs order. When there has been no hearing on the merits, however, a court is necessarily deprived of the factor that usually determines whether or how it will make a costs order. In an appropriate case, a court will make an order for costs even when there has been no hearing on the merits and the moving party no longer wishes to proceed with the action. The court cannot try a hypothetical action between the parties. To do so would burden the parties with the costs of a litigated action which by settlement or extra-curial action they had avoided. In some cases, however, the court may be able to conclude that one of the parties has acted so unreasonably that the other party should obtain the costs of the action. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd, the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans. Moreover, in some cases a judge may feel confident that, although both parties have acted reasonably, one party was almost certain to have succeeded if the matter had been fully tried. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. But such cases are likely to be rare. If it appears that both parties have acted reasonably in commencing and defending the proceedings and the conduct of the parties continued to be reasonable until the litigation was settled or its further prosecution became futile, the proper exercise of the cost discretion will usually mean that the court will make no order as to the cost of the proceedings. This approach has been adopted in a large number of cases. [Footnotes omitted] 14 In Lavercombe, Barrett J also referred to the following observations by Brightman J in Re Lanaghan Bros Ltd [1977] 1 All ER 265 at 266, which are pertinent to the present case where a winding up proceeding is discontinued: … The petitioning creditor has proceeded without any fault whatever on his part. He obtained a judgment in circumstances which the company did not seek to dispute. After a generous lapse of time the petition was presented. The company then woke up and succeeded in having the judgment set aside on the terms that it paid the costs of the plaintiff in any event. Now that the petition must be dismissed it seems to me only just that the petitioning creditor, if he be a creditor, should be given his costs of the petition, which he presented with complete propriety. 15 In Lavercombe, Barrett J followed that approach and ordered the defendant to pay the plaintiff's costs. His Honour expressed his reasons for doing so in the following terms (at [47] to [48]): 47 This case is, in my view, one in which the plaintiff initiated and pursued his application "with complete propriety", to use the words of Brightman J. The debt was undisputed — indeed, could not have been disputed. It is true that it was not a judgment debt, but the simple act of filing the costs certificate in a court registry pursuant to s 362(3) of the Workplace Injury Management and Workers Compensation Act 1998 (NSW) would have made it a judgment debt. Payment was not forthcoming. A statutory demand was served. Still there was no payment. In those circumstances, the plaintiff understandably and properly saw himself as "a creditor who cannot obtain payment", to use words found in the judgment of Gibbs J (with whom Stephen and Jacobs JJ agreed) in IOC Australia Pty Ltd v Mobil Oil Aust Ltd (1975) 11 ALR 417 at 427; 2 ACLR 122 at 131: The authorities show that as a general rule a creditor who cannot obtain payment is, as between himself and the company that owes the debt, entitled to a winding-up order as a matter of right: Re K L Tractors Ltd [1954] VLR 505 at 511–12; Re Leonard Spencer Pty Ltd [1963] Qd R 230 at 232–3; Halsbury 4th ed, vol 7, par 1033. 48 The plaintiff was therefore justified in making and pursuing the application for winding up. The dismissal of that application came only after the defendant (or, in practical terms, the insurer) had paid the debt that was unquestionably owing, due and payable. The debt should have been paid, at the latest, when the statutory demand was served. Because of its nature, one would have expected payment at an earlier time. The plaintiff should never have been put to the trouble and expense of bringing the proceedings. Although they were ultimately dismissed by consent following payment of the debt, the plaintiff should have an order for costs against the defendant in accordance with the principle stated in Re Lanaghan Bros Ltd. 16 In Deputy Commissioner of Taxation v Rhodium Australia Pty Ltd [2011] FCA 988, Bromberg J followed the approach articulated by Barrett J in Lavercombe. The position in Rhodium is very similar to the present case. There, the plaintiff, the Deputy Commissioner of Taxation, applied for an order that the defendant, Rhodium, be wound up in insolvency pursuant to s 459P of the Corporations Act. After various interlocutory orders were made, the proceeding was listed for hearing. At the commencement of the hearing, the plaintiff sought leave to discontinue the application. Leave to discontinue was unopposed and was granted. The question of costs was disputed. His Honour saw the issue for determination as being whether there was good reason for departing from the ordinary course that the successful party (in that case, the defendant) should have its costs. His Honour reasoned that there was good reason and ordered that the defendant pay the plaintiff's costs, but not to the full extent that had been claimed. It is not necessary for me to detail his Honour's specific reasons for doing so. On appeal, the Full Court described Bromberg J's exercise of discretion on the question of costs as "exemplary": Rhodium Australia Pty Ltd v Deputy Commissioner of Taxation [2012] FCAFC 17 at [24]. 17 In Travaglini v Raccuia [2012] FCA 620, McKerracher J reviewed a number of authorities and reasoned that the coming into operation of r 26.12(7) on 1 August 2011 effected a change to the position on costs where a notice of discontinuance has been filed with leave. His Honour noted that r 26.12(7) had not been referred to in Rhodium. His Honour also noted, however, that the greater part of that case had been conducted under the pre-2011 Rules. At [24], his Honour reasoned that, where leave has been granted to file a notice of discontinuance, the correct starting point on the question of costs is that the discontinuing party must pay costs unless for good reason shown the Court orders otherwise. 18 At [36], his Honour concluded: In my view, there is now under the Rules a prime facie entitlement on the part of the party not discontinuing to costs. It can of course be disturbed. Even in respect of the former O 62 r 26(1) of the pre-2011 Rules that approach was not unknown: see for example Ahmed v Minister for Immigration & Multicultural Affairs [2000] FCA 1436 in which Emmett J held that where the discontinuing applicant failed to satisfy the Court that another order should be made, the respondent was to be awarded its costs. I would adopt that approach to the present situation. In addition, Lehane J held in Bell v Macquarie Bank Ltd [2000] FCA 1521 where the applicant discontinued albeit without leave that the applicant was prima facie liable to pay the other party's costs because of the operation of O 22 r 3 and O 62 r 26 of the pre-2011 Rules saying that (at [5]): the ordinary result of the applicants' discontinuance would be that they would be required to pay the respondents' costs of the proceeding. The question is whether the applicants have established that, in the particular circumstances of this case, there is any particular matter which should, as a matter of discretion, displace that ordinary consequence. 19 I propose to follow that approach in this case. I do not see it as being inconsistent with the reasoning in Rhodium either at first instance or on appeal. Although r 26.12(7) was not explicitly referred to in Rhodium – perhaps for the reason identified by McKerracher J that much of the case had been conducted under the pre-2011 Rules – the chosen starting point in that case, as a matter of substance, was no different from that stipulated by the present rule, namely, that the discontinuing party should pay costs. The question then becomes whether the circumstances of the particular case require a departure from that position. The other cases to which I have referred – in particular, Lavercombe and Lanaghan – provide illustrations, quite apart from Rhodium itself, of when it might be appropriate to do so where the discontinuance takes place in the context of a proceeding to wind up a company in insolvency. The plaintiff's submissions 20 The plaintiff submits that its decision to commence the winding up proceeding cannot be criticised having regard to the failure of the defendant to make any payment in respect of an undisputed debt which was the subject of an unsatisfied statutory demand served prior to the proceeding being commenced. The plaintiff submits that he acted with complete propriety in continuing to pursue the proceeding until the defendant provided satisfactory evidence that funds sufficient to pay the debt would be kept in Australia, in circumstances where there was a significant risk that those funds would be repatriated to Vietnam and therefore be unavailable to meet the defendant's debts as and when they fell due and payable. He points out that the proceeding was discontinued within one working day after satisfactory evidence was provided of the defendant's then solvency. He submits that, in these circumstances, he is entitled to an order that the defendant pay his costs of the proceeding. 21 The plaintiff also seeks costs in relation to his application for release of the implied undertaking not to use documents and information provided in the course of the winding up proceeding other than for the purposes of that proceeding. He points to correspondence annexed to Mr Glass' affidavit in which the defendant's consent to the use of the material outside the winding up proceeding, and for the purposes of recovering the defendant's debt to the plaintiff, was sought but refused without the defendant providing any justification for that position. The defendant's submissions 22 The defendant submits that, by operation of r 26.12(7), it is entitled to its costs unless the plaintiff can show good cause why the Court should order otherwise. 23 It submits that the plaintiff is not discontinuing the winding up proceeding because the defendant has "surrendered". Rather, the plaintiff is discontinuing because he has no prospect of success in the winding up application because the defendant is solvent. During the pendency of the winding up proceeding, the plaintiff was served with affidavits which demonstrated the defendant's solvency. The plaintiff persisted with the proceeding even though he was invited by the defendant to discontinue. The plaintiff then commenced debt recovery proceedings in the Supreme Court of New South Wales (namely, the proceeding commenced on 9 July 2012) to which I have referred in [4] above. The plaintiff only agreed to discontinue the winding up proceeding on 13 July 2012, two business days before the final hearing. 24 The defendant submits that the discretionary considerations might have been different had the plaintiff sought to discontinue the winding up proceeding when served with evidence of the defendant's financial position. However, the plaintiff persisted with the proceeding in the face of evidence of the defendant's solvency. 25 The defendant further submits that any doubt about its solvency was removed by affidavits filed on its behalf between 1 and 8 June 2012. It submits that those affidavits left no doubt that it was solvent and thus would be successful in resisting winding up. It submits that, in these circumstances, it should be awarded indemnity costs on and from 8 June 2012, being the time at which a properly-advised litigant in the plaintiff's position should have known that there was no chance of success. 26 As to the costs relating to the plaintiff's application to be released from the implied undertaking, the defendant submits that these should be awarded in the cause. The plaintiff's thesis is that the defendant was holding cash pending the determination of the winding up application. If that thesis be correct, there was no immediate risk of dissipation of that cash. There is, therefore, no reason why there should be a different costs order for that application. consideration 27 I am satisfied that this case is one in which the prima facie entitlement to costs conferred by r 26.12(7) should be displaced. The winding up proceeding was properly commenced. There is no dispute that the defendant was indebted to the plaintiff for a substantial sum of money. It refused to pay that debt. It thereafter failed to comply with the statutory demands served on it. It is true that, in the course of the winding up proceeding, it filed evidence in relation to its solvency. However, as I have found, the funds that had been deposited in its account – in an attempt to establish solvency – were in jeopardy of being repatriated from Australia and deployed for other purposes. A full reading of the evidence, which includes a significant amount of correspondence between the parties' solicitors, convinces me that, faced with its undisputed indebtedness to the plaintiff, the defendant was prepared to engage in a game of cat and mouse: it would do what was necessary to stave off the otherwise inevitability of the winding up but would not pay its debt to the plaintiff in a timely fashion or, indeed, at all. As I have found, the defendant's appearance of solvency was what it or its controllers intended it to be at any point in time of their choosing. It was only when the plaintiff succeeded in obtaining freezing orders against the defendant that the defendant's solvency was secured. Thereupon, the plaintiff properly discontinued the winding up proceeding. In order to secure the defendant's solvency, it was necessary for the plaintiff to obtain a release from the implied undertaking given to this Court so that it could proceed to freeze the defendant's Australian assets. 28 In all the circumstances, the appropriate order is that the defendant pay the plaintiff's costs of the proceeding, including his costs of the application for release from the implied undertaking. I certify that the preceding twenty-eight (28) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Yates. Associate: Dated: 8 March 2013