FEDERAL COURT OF AUSTRALIA Pearce v Gulmohar Pty Ltd (No 2) [2017] FCA 783 File number: QUD 749 of 2013 Judge: RANGIAH J Date of judgment: 6 July 2017 Catchwords: COSTS – whether costs to be assessed on indemnity or party and party basis Legislation: Corporations Act 2001 (Cth) ss 477 and 588FF Federal Court Rules 2011 (Cth) r 25 Cases cited: King v Yurisich (No 2) [2007] FCAFC 51 NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 Date of hearing: 6 July 2017 Registry: Queensland Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 13 Counsel for the Plaintiffs: Mr PD Hay Solicitor for the Plaintiffs: Bennett & Philp Counsel for the Defendants: Mr DW Marks QC Solicitor for the Defendants: Simpson Quinn Lawyers ORDERS QUD 749 of 2013 BETWEEN: MARK WILLIAM PEARCE AS THE LIQUIDATOR OF GRASS VALLEY FORMULATORS PTY LTD (IN LIQUIDATION) ACN 117 473 579 First Plaintiff GRASS VALLEY FORMULATORS PTY LTD (IN LIQUIDATION) ACN 117 473 479 Second Plaintiff AND: GULMOHAR PTY LTD ACN 081 195 459 First Defendant PALACIMO PTY LTD ACN 081 208 844 Second Defendant VAUDELL PTY LTD ACN 094 045 824 (and others named in the Schedule) Third Defendant JUDGE: RANGIAH J DATE OF ORDER: 7 July 2017 THE COURT DECLARES THAT: 1. The fixed and floating charge granted by the second plaintiff to the first defendant on or about 22 May 2009 is void and unenforceable. THE COURT ORDERS THAT: 2. The first defendant pay to the second plaintiff the sum of $582,031 plus interest in the sum of $247,395.07 being a total of $829,426.07. 3. The second defendant pay to the second plaintiff the sum of $100,000 plus interest in the sum of $42,505.48 being a total of $142,505.48. 4. The third defendant pay to the second plaintiff the sum of $90,000 plus interest in the sum of $38,254.93 being a total of $128,254.93. 5. The fourth defendant pay to the second plaintiff the sum of $42,500 plus interest in the sum of $18,064.83 being a total of $60,564.83. 6. The fifth defendant pay to the second plaintiff the sum of $832,031 plus interest in the sum of $353,658.77 being a total of $1,185,689.77. 7. The sixth defendant pay to the second plaintiff the sum of $832,031 plus interest in the sum of $353,658.77 being a total of $1,185,689.77. 8. In respect of paragraphs 2 to 7 of this Order, the second plaintiff is not to recover more than $1,220,541.29 in total. 9. The defendants pay the plaintiffs' costs of and incidental to this matter including any reserved costs, except for the costs of 11 November 2016 which are to be paid by the plaintiffs to the defendants. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT RANGIAH J: 1 The plaintiffs have succeeded in their proceeding for orders against the defendants pursuant to s 588FF of the Corporations Act 2001 (Cth): see Pearce v Gulmohar [2017] FCA 660. The parties have reached agreement as to the form of the orders, except as to costs. 2 While the parties agree that the defendants should pay the plaintiffs' costs of the proceeding, they are in dispute as to the basis on which costs should be ordered. The plaintiffs seek their costs on an indemnity basis, but the defendants submit that costs should be awarded against them on a party and party basis only. 3 The plaintiffs rely, firstly, on two offers they made pursuant to r 25.01 of the Federal Court Rules 2011 (Cth). The first offer was to settle on the basis that the defendants pay $285,000 and the second was that the defendants pay $616,000 plus $100,000 for legal costs. Each offer was addressed to the defendants collectively. Each offer was subject to the approval of the compromise by the Court or creditors, pursuant to s 477(2A) and (2B) of the Corporations Act. 4 The question under r 25.14(3) of the Federal Court Rules is whether, in respect of each defendant, the plaintiffs obtained a judgment that is more favourable than either of the offers. 5 The second, third and fourth defendants were each ordered to pay an amount which was less than the amount set out in each offer. The plaintiffs submit that the amounts set out in the offers should be taken to represent amounts that would be divided among the defendants, but there is no indication in the offers as to how any such division was to be conducted. Further, the offers were to the defendants collectively, so that one defendant could not have accepted the offer by agreeing to pay a portion of the offered amount. I do not accept that the judgment against the second, third and fourth defendants was more favourable to the plaintiffs than the offers. 6 The judgments against each of the first, fifth and sixth defendants exceeded the amounts of the offers. However, the offers were only capable of acceptance by the defendants collectively. The plaintiffs submit that it is relevant that the defendants are related, but that premise is not entirely correct. The first, second and fifth defendants are related to each other, but not to the third, fourth and sixth defendants. The third, fourth and sixth defendants are related to each other, but not to the first, second and fifth defendants. I accept the defendants' submission that the offers could not be accepted by any individual defendant: see King v Yurisich (No 2) [2007] FCAFC 51 at [11]. I am not satisfied that the judgment against the first, fifth and sixth defendants was more favourable to the plaintiffs than the offers. 7 In addition, there is no evidence which indicates that the compromises were likely to be approved by the Court or creditors pursuant to s 477(2A) and (2B) of the Corporations Act. That is a further matter that does not allow me to be satisfied of the matter required by r 25.14(3) of the Federal Court Rules. 8 The plaintiffs next submit that the defendants should be ordered to pay indemnity costs because of my finding that the fifth and sixth defendants embarked on a scheme to pay out related party creditors and wind up the company while leaving disputed creditors unpaid. The plaintiffs submit that the defendants' defence was untenable. They also submit that the defendants' conduct of the case was unreasonable, in that they filed an excessive number of affidavits which contributed to costs. 9 The usual rule is that costs are awarded on a party and party basis. There must be special circumstances to depart from the usual rule. Costs are not awarded on an indemnity basis simply because the losing party engaged in some antecedent ethical or moral delinquency: NMFM Property Pty Ltd v Citibank Ltd (No 2) (2001) 109 FCR 77 at [56]. 10 There were substantial disputes concerning the facts of the case, some of which were decided in favour of the defendants. It is also relevant to note that some of the fault leading to the litigation lies with Toxfree Solutions Ltd, which will be the principal beneficiary of the judgment. I cannot conclude that the defence was untenable. Further, the way the proceeding was conducted by the defendants was not unreasonable. 11 For these reasons, I decline to award costs on an indemnity basis and conclude that the defendants should pay the plaintiffs' costs on a party and party basis. 12 One further issue about which the parties are in dispute is the costs of the last day of the hearing, on 11 November 2016. That hearing was necessary to allow the plaintiffs to put some further questions to the fifth defendant. The costs of the hearing on that day should be paid by the plaintiffs. 13 Accordingly, I will order that the defendants pay the plaintiffs' costs of the proceeding, including reserved costs, other than the costs of the hearing on 11 November 2016, which will be paid by the plaintiffs. I certify that the preceding thirteen (13) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Rangiah. Associate: Dated: 12 July 2017 SCHEDULE OF PARTIES QUD 749 of 2013 Defendants Fourth Defendant: SUPERWAY GARDEN AG & PEST PRODUCTS PTY LTD ACN 056 553 274 Fifth Defendant: PETER KARL HEYN Sixth Defendant: GEOFFREY MARTIN VAUGHAN