FEDERAL COURT OF AUSTRALIA Luo v Zhai (No 6) [2016] FCA 805 File number: NSD 1035 of 2013 Judge: PERRAM J Date of judgment: 13 July 2016 Catchwords: COSTS – whether costs order should be varied – change of circumstances Legislation: Corporations Act 2001 (Cth) s 500(2) Federal Court Rules 2011 (Cth) r 39.05(c) Cases cited: Keynes v Rural Directions Pty Ltd (No 4) [2011] FCA 304 Date of hearing: 29 June 2016 Registry: New South Wales Division: General Division National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Category: Catchwords Number of paragraphs: 22 Counsel for the Applicant: Mr D Allen Solicitor for the Applicant: Australian International Lawyers Counsel for the Respondents: Dr G O'Shea Solicitor for the Respondents: Jurisbridge Legal ORDERS NSD 1035 of 2013 BETWEEN: XIANGNAN LUO Applicant AND: SUTAO ZHAI First Respondent JANTOM FURNITURE PTY LTD ACN 092 171 634 (IN LIQUIDATION) Second Respondent JUDGE: PERRAM J DATE OF ORDER: 13 JULY 2016 THE COURT ORDERS THAT: 1. Order 3 made on 31 July 2015 be vacated. 2. In lieu thereof it be ordered that in relation to the applicant's case against the second respondent each party pay its own costs. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT PERRAM J: 1 The present question concerns costs. In Luo v Zhai [2015] FCA 350, the Court had before it Mr Luo's attempts to recover from Ms Zhai the sum of $820,000 in respect of an unperformed share acquisition agreement. Ms Zhai was the owner of the shares in the second respondent, Jantom Furniture Pty Ltd (In Liquidation) ('Jantom'), an importer of furniture from China. She had agreed that she would transfer in tranches 55% of the shares in Jantom to Mr Luo for $800,000. Mr Luo, in due course, paid this sum to her, but she has never transferred the shares and, indeed, even refused to return to him the $800,000 that he had paid her. She also refused to return to him a further $20,000 that he had paid Jantom in contemplation of his becoming the majority shareholder. 2 Mr Luo sued Ms Zhai to get this money back in contract or as a matter of restitution. He also alleged that he had been deceived into parting with the money by misrepresentations made by Ms Zhai and Jantom in a set of profit and loss statements given to him on 13 February 2012 in the negotiations leading up to the execution of the share acquisition agreement. 3 My conclusion on that aspect of the matter was that Mr Luo had failed to prove that the financial statements were inaccurate, with the result that I dismissed that part of his claim. On the other hand, I accepted that Mr Luo was entitled to get his $820,000 back, and gave judgment against Ms Zhai in that sum. 4 Consequently, whilst I gave judgment against Ms Zhai for $820,000, I dismissed the claim against her based on misleading and deceptive conduct. So far as Jantom was concerned, it had been placed in liquidation (following an earlier administration) on 20 February 2015, after the case was heard but before judgment was given on 17 April 2015. I made, therefore, no orders against Jantom at the time of judgment because of the stay resulting from s 500(2) of the Corporations Act 2001 (Cth). On 28 July 2015, I heard argument on costs and the issue of leave to proceed against Jantom. For the reasons given in Luo v Zhai (No 5) [2015] FCA 774, I made the following orders on 31 July 2015: 1. Pursuant to s 500(2) of the Corporations Act 2001 (Cth), leave be granted to continue these proceedings against the second respondent. 2. The application against the second respondent be dismissed. 3. The applicant pay the second respondent's costs of the proceeding as taxed or agreed. 4. The first respondent pay the applicant's costs of the proceeding as taxed or agreed. 5 In relation to Jantom, my reasoning (at [6]) was as follows: 6. I will, therefore, grant leave pursuant to s 500(2) in respect of these proceedings against Jantom so that the proceedings against it may be dismissed. Since it succeeded in the litigation I can see no reason why it should not have its costs. I will order that its costs, as taxed or agreed, be paid by Mr Luo. 6 I ordered Ms Zhai to pay Mr Luo's costs (at [8]-[9]) in these terms: 8. Counsel for Mr Luo, Mr King, submitted that this was a case in which costs should merely follow the event. Ms Zhai claimed that there should be an apportionment of costs in the order of 70% in her favour, on the basis that much of the time and cost in both preparation and during the hearing was attributable to Mr Luo's misleading and deceptive conduct claim upon which he had failed. 9. I reject Ms Zhai's submission. This case is not one in which circumstances obtain that would justify ordering Mr Luo to pay part of Ms Zhai's costs; indeed whilst his claim for misleading and deceptive conduct failed there were aspects of Ms Zhai's case which would militate against making a costs order in her favour, such as the factual findings which I made at [69]-[83] of the primary judgment. It was hardly a triumph. 7 Following the orders of 31 July 2015 (and an unsuccessful appeal) there were two subsequent events of present relevance. The first was the bankruptcy of Ms Zhai, which occurred on a date which is unclear. The evidence suggests that there is likely to be no distribution, or no substantive distribution, paid to the creditors of her estate. Hence, the costs order against her on 31 July 2015 is now largely worthless. 8 The second development was the delivery by Jantom of its bill of costs based on the costs order made in its favour on 31 July 2015. The bill of costs is dated, and was filed on, 12 February 2016. The amount submitted to the taxing officer was $429,112.00, but a letter accompanying the bill sent from Jantom's solicitors clarified that what was actually claimed was: $73,322.70 for matters said to be solely referable to Jantom relating to discovery (i.e. not referable to Ms Zhai); and $249,052.51, said to be 70% of the total claim of $429,112.00 less the $73,322.70. 9 In any event, the total actually claimed is $322,375.21. 10 Jantom's sole shareholder is Ms Zhai. The evidence did not disclose who its creditors were, but it appears that one of those creditors is Jantom's solicitors. The current situation is that whilst Mr Luo won his case and obtained judgment for $820,000 against Ms Zhai, his costs order against her is worthless, and the liquidator of Jantom is now actively seeking from him $322,375.21 under the costs order made in its favour on 31 July 2015. 11 Mr Luo now applies to vary the order of 31 July 2015 by discharging the costs order in favour of Jantom. He submits that: (a) the orders of 31 July 2015 are interlocutory and hence amenable to being recalled by reason of rule 39.05(c) of the Federal Court Rules 2011 (Cth) even if they have been entered. It is not, in fact, clear whether this order has been entered, but I will proceed on the assumption that it has been (which is likely in view of the fact that there was an appeal); and (b) there has been a change in circumstance since 31 July 3015 when the costs order was originally made which makes it appropriate to recall the order. This change is said to consist of: Ms Zhai's bankruptcy; and the delivery of the bill of costs by Jantom. 12 Rule 39.05 provides relevantly: 39.05 Varying or setting aside judgment or order after it has been entered The Court may vary or set aside a judgment or order after it has been entered if: … (c) it is interlocutory; or … 13 It was submitted on behalf of Jantom that the power to recall an interlocutory order was only to be exercised in circumstances which were special or exceptional. Jantom relied on the reasons of Besanko J in Keynes v Rural Directions Pty Ltd (No 4) [2011] FCA 304 at [30]: 30 Even though the orders are interlocutory the need for finality in litigation is still important. Furthermore, there is a wide variety of interlocutory orders or judgments and judgment under s 31A of the Federal Court of Australia Act has many of the characteristics of a final judgment. Not only was there an avenue of appeal in this case but an appeal was taken and was unsuccessful. These considerations suggest to me that even though the orders are interlocutory the cases dealing with the setting aside of final judgments provide guidance and that the power to set aside the judgments should be exercised only in special or exceptional circumstances. 14 I do not accept this submission. It is apparent that his Honour was considering the status of a particular interlocutory order, namely, a summary judgment. What his Honour appears to have been saying is that when what is involved is an interlocutory summary judgment, it will be necessary to have regard to the usually final nature of judgments (even when summary) in considering whether to set them aside under r 39.05(c). His Honour was not saying that the power to recall interlocutory orders in general was accompanied by the necessity of showing special or exceptional circumstances. 15 In fact, it seems to me that the Court's power to recall an interlocutory order is confined only by the demands of the interests of justice. Since interlocutory orders are virtually limitless in their variety, it is dangerous to seek to generalise about them. 16 In this case the submission was made that the circumstances had changed since the order was made in such a way that it was no longer just that Mr Luo should be required to pay Jantom's costs. I accept that a change of circumstances is a sufficient basis to justify the variation of an interlocutory order of the present kind. 17 Given that Ms Zhai is now bankrupt, it would, in the context of this unusual case, be perverse if the net effect of Mr Luo's litigation was that she paid him not a cent and he enriched her company by $322,375.21 (or whatever sum might be allowed on a taxation). Against that it may be said that Jantom succeeded at the trial and that the ordinary rule is that costs follow the event. From this perspective, the fact that Ms Zhai has become bankrupt or that Jantom's solicitors had delivered a provocative bill of costs was irrelevant. Furthermore, it is a fact that in the lead up to the trial the question of whether the financial statements were misleading had required of Jantom very considerable litigious efforts. These had involved complying with demanding discovery requirements. There was even less reason to think the costs order in favour of Jantom was unjust where it related to the failed misrepresentation case and it was that very case which had generated so much in the way of costs via the discovery orders. 18 During the course of argument leading to the original costs order, I had inquired whether a Bullock or Sanderson order against Ms Zhai might not be appropriate, but I was told that one was not sought at that time. I recorded this in the judgment at [10]. That observation by me reveals a real concern I had then – and have now – that this case was all about Ms Zhai and that Mr Luo's failure against Jantom had to be seen in a context which included that Jantom was in essence Ms Zhai's alter ego. 19 The successive insolvencies first of Jantom and now of Ms Zhai have thrown into sharp relief the legal distinctions between them. But I remain of the view that it is Ms Zhai who lost this case and it is Ms Zhai who should, in all fairness, pay. Her bankruptcy means this will most likely not come to pass. There is nothing I can do about that. I can, however, prevent Mr Luo from being required to hand over money to Jantom. 20 It may be said that to do this would be to visit responsibility for Ms Zhai's actions on to Jantom. Given the former relationship between Ms Zhai and Jantom the theoretical basis for doing so is evident, viz., the alter ego view. No doubt, Ms Zhai's present relationship with Jantom has become more tenuous (and that of its creditors more overt), but in this case I am not persuaded that this admittedly relevant matter should be permitted to have a predominant effect. This is particularly so where the liquidator was unable to inform me during the hearing of the identity of the creditors (apart from the solicitors). Further, I do not know what any likely distribution to those creditors will be. In short, whilst I am aware at a theoretical level that the interests of creditors are involved, I do not have any clear view of what this involves (beyond, of course, the solicitors). That lack of certainty, in turn, makes it difficult to justify visiting upon Mr Luo what would be a very plain injustice. In those circumstances, it seems to me that I should vacate the prior costs order. 21 For completeness it should be recorded that: (a) the liquidator accepted that the earlier grant of leave under s 500(2) of the Corporations Act was sufficient to permit the present application to proceed; and (b) no argument was advanced that the costs order was not interlocutory. 22 I order that: 1. Order 3 made on 31 July 2015 be vacated. 2. In lieu thereof it be ordered that in relation to the applicant's case against the second respondent each party pay its own costs. I certify that the preceding twenty-two (22) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Perram. Associate: Dated: 11 July 2016