Federal Court of Australia Hylepin Pty Ltd v Doshay Pty Ltd (No 2) [2020] FCA 1631 File number(s): VID 1438 of 2016 Judgment of: O'BRYAN J Date of judgment: 11 November 2020 Catchwords: COSTS – whether costs to be ordered on an indemnity basis or a party and party basis – whether order for apportionment of costs appropriate – whether defendants entitled to indemnity costs due to offers of compromise rejected by plaintiff – where plaintiff has made multiple claims against several defendants – where plaintiff successful in one claim against one defendant but otherwise wholly unsuccessful – where equitable fraud has been alleged but not proven by the plaintiff – costs ordered on a party and party basis Legislation: Federal Court of Australia Act 1976 (Cth) s 43 Federal Court Rules 2011 (Cth) r 40.02(b) Cases cited: Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; 327 ALR 192 Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; 81 ALR 397 Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370 Kazar v Kargarian (2011) 197 FCR 113 Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116 Urban Alley Brewery Pty Ltd v La Sirène Pty Ltd (No 2) [2020] FCA 351 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Number of paragraphs: 32 Date of last submissions: 26 October 2020 Date of hearing: Determined on the papers Counsel for the Plaintiff: G D Dalton QC with D J Fahey Solicitor for the Plaintiff: KHQ Lawyers Counsel for the Defendants: M S Osborne QC with D F McAloon Solicitor for the Defendants: B2B Lawyers ORDERS VID 1438 of 2016 BETWEEN: HYLEPIN PTY LTD Plaintiff AND: DOSHAY PTY LTD ACN 006 575 202 First Defendant JOHN SO Second Defendant GLOBAL 2000 MELBOURNE PTY LTD (and another named in the Schedule) Third Defendant order made by: O'BRYAN J DATE OF ORDER: 11 NOVEMBER 2020 THE COURT ORDERS THAT: 1. The third defendant pay the plaintiff's costs of the share register claim (as described in the reasons accompanying these orders). 2. The plaintiff pay the costs of the second, third and fourth defendants of the proceeding, other than the share register claim. 3. The costs referred to in orders 1 and 2 be awarded in a lump sum pursuant to rule 40.02(b) of the Federal Court Rules 2011 (Cth). 4. The quantification of the costs awarded under orders 1, 2 and 3, and the making of such further orders and directions in connection therewith, be referred to a Registrar of the Court for determination. Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT O'BRYAN J: Introduction 1 On 25 September 2020, I upheld one of the claims made by the plaintiff, Hylepin Pty Ltd (Hylepin), in this proceeding but dismissed all other claims: see Hylepin Pty Ltd v Doshay Pty Ltd [2020] FCA 1370 (Principal Judgment). 2 The claim I upheld was that, in May 2004, the second defendant, John So, wrongly caused the third defendant, Global 2000 Melbourne Pty Ltd (Global 2000), to alter its register of members to show that the first defendant, Doshay Pty Ltd (Doshay), owns four shares and John So owns one share in Global 2000 (which I will refer to as the share register claim). That claim was made by Hylepin by way of amendment to its originating process and statement of claim on 21 August 2019 shortly before the start of the trial on 9 September 2019 (see paragraphs 4B and 4C of the Second Further Amended Originating Process and paragraphs 50A to 50C, 53A to 53C, 102(l) and 105(h) of the Second Further Statement of Claim). Otherwise, I rejected Hylepin's claims against the defendants based on breaches of fiduciary duty and oppression. In almost all instances, I rejected the contention that John So breached his fiduciary duties by making decisions with a conflict of interest or from which he would personally benefit. In all instances, I rejected the contention that John So acted dishonestly or concealed his wrongdoing. 3 On 26 October 2020, the parties filed written submissions on the issue of costs. The parties primarily disagreed on the question whether Hylepin should pay the defendants' costs on an indemnity basis. They agreed that costs should be assessed on a lump sum basis pursuant to rule 40.02(b) of the Federal Court Rules 2011 (Cth), with the quantification of the costs awarded and the making of any related orders or directions referred to a Registrar of the Court. 4 These reasons address the costs of the proceeding. Submissions of the defendants 5 It is convenient to commence with the submissions of the second, third and fourth defendants (whom I will refer to as the defendants), as they enjoyed the greater success at trial. 6 The defendants submitted that Hylepin should be ordered to pay their costs of the proceeding (including all reserved costs) on an indemnity basis. They submitted that this is the appropriate order where: (a) costs should follow the event and, save for the share register claim, Hylepin's claims were wholly unsuccessful; and (b) an order for indemnity costs is appropriate where the proceeding involved allegations of fraudulent conduct that were not established and where Hylepin unreasonably refused offers providing for the resolution of the proceeding. 7 In respect of the share register claim, the defendants submitted that they enjoyed almost complete success in the proceeding. The evidence and submissions devoted to consideration of the share register claim were, in the context of the other matters raised by the plaintiff in the proceeding, both discrete and minimal. Hylepin's success on that claim is not a sufficient reason to discount the costs awarded to the defendants. The defendants submitted that if, contrary to the foregoing submission, the Court decided to recognise Hylepin's success on that claim, an appropriate order is for Hylepin to pay 95% of the defendants' costs. 8 The defendants sought indemnity costs on two bases: first, on the basis that Hylepin made allegations of fraud that were unsuccessful; second, on the basis that Hylepin unreasonably refused offers of settlement. 9 The defendants submitted that the plaintiff made and persisted with allegations that Mr So and Global 2000 had engaged in a fraudulent and dishonest design and, further, that Mr So had engaged in fraudulent concealment. In its written closing submissions, Hylepin submitted that, while it was not necessary for the Court to find fraud or dishonesty, Hylepin sought such a finding. The defendants submitted that Hylepin's allegations of fraud and improper conduct were seriously prejudicial to the reputation of Mr So (being a former Lord Mayor of Melbourne). All such allegations were shown to be unfounded. 10 The defendants relied on two offers of settlement that had been made to Hylepin, details of which are set out at [252]-[254] of the Principal Judgment. It is convenient to extract those findings: 252 As stated earlier, the parties tendered by agreement the Special Referee Report of Mr Greg Meredith of Ferrier Hodgson dated 21 February 2018 and its annexures. In that report, Mr Meredith gave his opinion with respect to a series of questions relating to the value of various assets including the Exhibition Street Property, the Lonsdale Street Property, the value of Doshay's interests in various assets and the value of Doshay. The parties agreed that the trial would determine all issues other than those values. Therefore, I make no findings with respect to the values of those assets. 253 Nevertheless, Mr Meredith's valuation of Doshay is contextually relevant for another reason. On 7 September 2018, John So's lawyers sent a letter to Hylepin's lawyers offering, on behalf of John So and Caldkone, to buy Hylepin's shares in Doshay at a price to be agreed or at market value as determined by an independent valuer, on condition that the proceeding was dismissed and each party bear their own costs of the proceeding. Hylepin did not accept that offer. It is significant that, at the time of that offer, Mr Meredith had assessed the value of Doshay at $16,865,647. If that valuation were adopted, Hylepin's 16.22% shareholding in Doshay (after adjusting for Evaluator's shareholding) would be worth approximately $2,735,000. From an initial investment of $45,000 made in 1987 to the date of the offer, the annualised rate of return on investment (taking account of compounding) would be approximately 21%. On 16 October 2018, John So's lawyers restated the offer. 254 On 4 September 2019, shortly before the commencement of the trial, John So's lawyers sent a further letter to Hylepin's lawyers offering, on behalf of John So and Caldkone, to buy Hylepin's shares in Doshay at a price calculated as Hylepin's percentage shareholding of Mr Meredith's valuation of Doshay ($16,865,647), on condition that the proceeding was dismissed and each party bear their own costs of the proceeding. The letter stated the offer price as $2,698,503.50. That figure equates to 16% of Mr Meredith's valuation (rather than 16.22% after adjusting for Evaluator's shareholding). Nevertheless, the offer was effectively higher than the offer made the previous year because, in the interim, a dividend of $300,000 had been paid to Hylepin. 11 Each of the offers stated that they would be relied upon in the proceeding, including on the question of costs. 12 The defendants submitted that the reasonableness of Hylepin's non-acceptance of the offers requires a comparison between the terms of the offers and what Hylepin should have known or reasonably foreseen as the range of likely outcomes of the proceeding at the time of the offers. The defendants argued that the September 2019 offer was premised upon the correctness of the valuation of Doshay for which the plaintiff was advocating (as stated in its opening submissions for trial). Hylepin did substantially worse at trial than it would have, had it accepted the offers. Submissions of the plaintiff 13 Hylepin submitted that the appropriate costs orders are that the second and third defendants pay the plaintiff's costs of the share register claim and, otherwise, the plaintiff pay the defendants' costs on a party/party basis. 14 In respect of the share register claim, Hylepin submitted that it was successful and that, although the claim was introduced late in the proceeding, there is no reason why Mr So and Global 2000 should not pay Hylepin's costs of that claim. 15 In respect of the other claims on which Hylepin failed, Hylepin accepted that it should be ordered to pay the costs of the second to fourth defendants (John So, Global 2000 and Ms Wendy Cheng). However, it opposed an order for indemnity costs. 16 Anticipating the bases on which the defendants would seek indemnity costs, Hylepin submitted that, although it alleged (but failed to prove) that Mr So's arrangements were part of a dishonest and fraudulent design, this did not justify an award of indemnity costs. This was for two reasons. First, Hylepin's allegation was not an allegation of fraud in the traditional sense, but equitable fraud. Second, the making of allegations of fraud, which are unsuccessful, is not in and of itself, a basis to award indemnity costs. Something more is required. Hylepin relied on the following statement of Woodward J in Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd [1988] FCA 202; 81 ALR 397 (at 400-401): As I said in Australian Transport Insurance Pty Ltd v Graeme Phillips Road Transport Insurance Pty Ltd (1986) 10 FCR 177 at 178, concerning this Court's discretion in the award of costs: …. It is sometimes said that [indemnity] costs can be awarded where charges of fraud have been made and not sustained; but in all the cases I have considered, there has been some further factor which has influenced the exercise of the court's discretion — for example, the allegations of fraud have been made knowing them to be false, or they have been irrelevant to the issues between the parties: see Andrews v Barnes (1887) 39 Ch D 133; Forester v Read (1870) 6 Ch App 40; Christie v Christie (1873) 8 Ch App 499; Degmam Pty Ltd (In liq) v Wright (No 2) [1983] 2 NSWLR 354. Another case cited in argument was Australian Guarantee Corporation Ltd v De Jager [1984] VR 483 where (at 502) Tadgell J allowed solicitor and client costs because he found the pursuit of the action to have been 'a high-handed presumption'. No doubt the expression 'high-handed presumption' was appropriate in the case Tadgell J had to decide, and he needed to go no further; but in order to establish a convenient principle in such cases it is necessary to be a little more prosaic. I believe that it is appropriate to consider awarding 'solicitor and client' or 'indemnity' costs, whenever it appears that an action has been commenced or continued in circumstances where the applicant, properly advised, should have known that he had no chance of success. In such cases the action must be presumed to have been commenced or continued for some ulterior motive, or because of some wilful disregard of the known facts or the clearly established law. Such cases are, fortunately, rare. But when they occur, the court will need to consider how it should exercise its unfettered discretion. 17 Hylepin submitted that there is no evidence to suggest that Hylepin's allegations against Mr So were made when it knew them to be false, or that the allegations were irrelevant to the issues between the parties. It also submitted that no claims of dishonesty were made against Global 2000 and Ms Cheng. 18 In relation to the offers that had been made to Hylepin prior to trial to settle the proceeding, Hylepin submitted that the refusal of the offers does not warrant an order for indemnity costs because Hylepin's conduct was not unreasonable. Hylepin argued that it cannot be concluded that the outcome at trial was less favourable to Hylepin than the offers. Both offers were premised on Doshay owning 40% of the shares in Global 2000 whereas Hylepin succeeded at trial in establishing that Doshay owns 50%. Doshay's shares in Global 2000 are its most valuable asset. Consideration 19 The principles with respect to the Court's power to award costs under s 43 of the Federal Court of Australia Act 1976 (Cth) are well known. The discretion is broad and is not bound by rigid or inflexible rules. The discretion must be exercised judicially, consistently with the purpose of the power and taking account of relevant facts and circumstances of the litigation: Kazar v Kargarian (2011) 197 FCR 113 at [4] per Greenwood and Rares JJ. Costs of the share register claim 20 In my view, it is appropriate to make an order that Hylepin receive its costs of the share register claim. It was a discrete claim on which Hylepin was successful. This is not to apportion costs on an "issues" basis (c.f. Firebird Global Master Fund II Ltd v Republic of Nauru (No 2) [2015] HCA 53; 327 ALR 192 at [6] per French CJ, Kiefel, Nettle and Gordon JJ); rather, it is to recognise that the proceeding involved a number of discrete claims and, on this claim, Hylepin was successful. 21 I consider that the order to pay those costs should be made against the third defendant, Global 2000. The claim was for rectification of Global 2000's register of members and the relief given solely concerned Global 2000. Although the claim arose by reason of erroneous instructions given by John So to Doshay's account, Paul Tjioe, I concluded that there was no wrongdoing on the part of John So. In particular, I rejected Hylepin's allegations that the purported alteration to Global 2000's register involved a breach by John So of his fiduciary duties, and involved dishonesty and was dishonestly concealed (at [232]-[234] of the Principal Judgment). 22 Further, this is not a case where it might be appropriate to offset orders for costs (reflecting the relative success of the parties) and make one overall order for costs with a percentage discount, as proposed by the defendants. That is for two reasons. First, I have concluded that the costs awarded in favour of Hylepin should be paid by Global 2000 and not by the other defendants, with the result that the costs cannot be offset. Second, and in any event, it is not possible for the Court to make a fair assessment of the relative quantum of the costs to arrive at a percentage discount. The costs that will be payable by Global 2000 in favour of Hylepin will be very modest in comparison to the costs that will be awarded in favour of the defendants as a result of their success on all other claims in the proceeding. As noted earlier, the share register claim was made by amendment to the pleadings shortly before trial and occupied very little time during the trial and was primarily the subject of evidence and written submissions at the conclusion of the trial (see Principal Judgment at [219]-[221]). The costs order in favour of Hylepin will relate to those aspects of the case only. Cost of the proceeding other than the share register claim 23 There is no disagreement between the parties that the defendants should be awarded their costs of the proceeding other than the share register claim. By r 40.03 of the Federal Court Rules 2011 (Cth), such an order will include all reserved costs. The disagreement concerns the question of indemnity costs. 24 Indemnity costs may be ordered where a party refuses an offer of compromise and achieves a result less favourable than offered. However, that does not automatically follow. As explained by Goldberg J in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 (at [16]-[17]), while the policy of the law favours the sensible compromise of disputes, the policy is not intended to deter parties from pursuing claims that have a reasonable basis. Thus, the relevant question is whether the unsuccessful party acted unreasonably in refusing the offer in all the circumstances (see also Kooee Communications Pty Ltd v Primus Telecommunications Pty Ltd (No 2) [2011] FCAFC 141 at [19]). 25 The question whether Hylepin achieved a result less favourable than the offers of compromise is not easy to answer. Under the offers, the defendants offered to buy Hylepin's shares in Doshay at an independent valuation and for each party to bear their own costs of the proceeding. In the September 2019 offer, the defendants' offer was based on Mr Meredith's independent valuation of Doshay (being $16,865,647), the offer amount being 16% of that value ($2,698,503.50). It is necessary to compare those offers with the results achieved at trial. There were three results for Hylepin: (a) First, Hylepin succeeded on the share register claim, obtaining an order that Global 2000 rectify its register of members to record that Doshay owns 50% of its shares rather than 40%. That order will increase the value of Hylepin's shareholding in Doshay. However, as the Principal Judgment did not determine the value of Doshay, it is not possible to make any conclusive finding about the magnitude of that increase. If Mr Meredith's valuation of Global 2000's net assets were to be adopted ($14,464,138), the order would result in an increase to Doshay's value of $1,446, 414. Hylepin's 16.22% share of that increase is approximately $235,000. However, the Principal Judgment did not involve any assessment or acceptance of Mr Meredith's valuation, and that valuation was completed more than 2 ½ years ago. (b) Second, Hylepin failed on all other claims. Despite that, it retains its shareholding in Doshay and continues to have the ability to negotiate a sale of its shareholding at fair value. (c) Third, by reason of having lost almost all of the claims made, Hylepin will be liable for a substantial costs order. There is no evidence before me as to the size of that costs order. Experience suggests that the amount of costs to be paid will exceed the increase in value in Hylepin's shares brought about by its success on the share register claim, but no conclusive finding can be made on that question. 26 In the circumstances, while there is a real possibility that Hylepin has achieved a result less favourable than the offers of compromise, I am not able to make a conclusive finding in that regard. In those circumstances, I am not able to conclude that Hylepin's refusal of the offers of compromise were unreasonable. 27 Indemnity costs may also be ordered where the circumstances show that the claims made were unreasonable or unjustified. As explained by Jagot, Yates and Murphy JJ in Melbourne City Investments Pty Ltd v Treasury Wine Estates Limited (No 2) [2017] FCAFC 116 at [5]: In broad terms an order for indemnity costs requires that some special or unusual feature arises: Cirillo v Consolidated Press Property Ltd (formerly known as Citicorp Australia Ltd) (No 2) [2007] FCA 179 at [3] (Finn J). Indemnity costs are not punitive but are designed for "compensating a party fully for costs incurred, as a normal costs order could not be expected to do, when the Court takes the view that it was unreasonable for the party against whom the order is made to have subjected the innocent party to the expenditure of costs": Hamod v New South Wales (2002) 188 ALR 659 at 665 (Gray J, with whom Carr and Goldberg JJ agreed). Such circumstances may include where allegations are made "which ought never to have been made", where the case is "unduly prolonged by groundless contentions" (Ragata Developments Pty Ltd v Westpac Banking Corporation [1993] FCA 115 at [15], [17] (Davies J)), and where "the applicant, properly advised, should have known that he had no chance of success" (Fountain Selected Meats (Sales) Pty Ltd v International Produce Merchants Pty Ltd (1988) 81 ALR 397 at 401 (Woodward J)) or "persists in what should on proper consideration be seen to be a hopeless case" (J-Corp Pty Ltd v Australian Builders Labourers Federated Union of Workers (WA Branch) (No 2) (1993) 46 IR 301 at 303 (French J)). 28 The authors of Dal Pont, Law of Costs (4th ed) at [16.63] summarise the law in the following terms: Special costs orders have been ordered in cases where a litigant makes and persists with allegations of fraud, or other allegations of improper conduct seriously prejudicial to the character or reputation of a party, which ultimately prove unfounded. This is almost an invariable outcome where the litigant knew or should have known that the allegations were false or unsupportable. It reflects the notion that a person should not allege fraud or other improper conduct without a proper evidentiary foundation, as such an allegation may be recounted in the community and through the media, and harm a litigant's reputation before evidence has been offered and submitted to the scrutiny of cross-examination or rebuttal. The court aims to deter unsupported allegations of this kind by, inter alia, costs orders, whether special orders against a litigant or a costs order against his or her lawyer. 29 A central feature of Hylepin's case favours the award of indemnity costs. The claims made by Hylepin concerned transactions that occurred over the preceding 30 year period, with almost all of the claims concerning transactions that occurred more than 6 years prior to the commencement of the proceeding. It was obvious that limitation periods (statutory or in equity by analogy) would present a difficulty to the claims being maintained. Hylepin sought to overcome that difficulty by alleging that the impugned transactions involved fraud (in the equitable sense) on the part of John So or were fraudulently concealed by John So. Hylepin alleged that John So did not disclose the transactions to the directors or shareholders of Doshay and failed or refused to provide Doshay's financial statements to Hylepin or conduct a general meeting of Doshay. Allegations of fraud and fraudulent concealment damage the reputation of the defendant and should not be lightly made. It is correct, as Hylepin argued, that the legal principles on which Hylepin relied were based on notions of equitable fraud, rather than common law fraud, which is a broader concept. Nevertheless, equitable fraud requires a consciousness of wrongdoing and carries moral opprobrium. Ultimately, I concluded that the transactions did not involve fraud and were not fraudulently concealed. Those conclusions were largely based on an analysis of the accounting records for the companies concerned. It was also based on the fact that John So caused his accountant, Paul Tjioe & Associates, to keep accurate accounts for Doshay and all of its associated entities, and that the financial statements for Doshay were made available to Hylepin. The evidence showed that: (a) Hylepin's director, Peter Chan, was a director of Doshay from 30 March 1987 to 8 August 1991 and the documentary record shows that, in those years, Peter Chan received and approved the annual financial statements for Doshay (Principal Judgment at [241]). (b) In response to a request made by Peter Chan in May 2004, Doshay's accountants, Paul Tjioe & Associates, immediately provided income tax returns and financial statements for Doshay for the four financial years FY1999, FY2000, FY2001 and FY2002 and subsequently for FY2003 (Principal Judgment [245]). (c) In response to a request made on behalf of Hylepin in mid-2014, Paul Tjioe & Associates, provided income tax returns and financial statements for Doshay for the financial years FY2012 and FY2013 (Principal Judgment [249]). 30 The question in this case is finely balanced, but I have determined that an award of indemnity costs is not warranted. I consider that the claims were made by Hylepin in the honest (but mistaken) belief that breaches of duty had occurred. Properly advised, Hylepin ought to have known that the prospects of success on its claims were low and that making the claims was imprudent. Nevertheless, I do not consider that the claims were groundless or hopeless. Ultimately, the resolution of the claims required analysis of the documentary records with contextual evidence provided by the witnesses. I will therefore make an order for party/party costs. Lump sum order 31 Rule 40.02(b) of the Federal Court Rules 2011 (Cth) provides that a party entitled to costs may apply to the Court for an order that costs be awarded in a lump sum instead of, or in addition to, any taxed costs. I discussed the applicable principles in Urban Alley Brewery Pty Ltd v La Sirène Pty Ltd (No 2) [2020] FCA 351 at [34]-[45]. In my view, this is an appropriate case for such an order, particularly where it is jointly sought by the parties. Conclusion 32 In conclusion, the orders that I will make are that: (a) Global 2000 must pay Hylepin's costs of the share register claim; (b) Hylepin must pay the costs of John So, Global 2000 and Wendy Cheng other than in respect of the share register claim; and (c) the costs be awarded in a lump sum with the quantification of the costs and the making of such further orders and directions to be referred to a Registrar of the Court for determination. I certify that the preceding thirty-two (32) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice O'Bryan. Associate: Dated: 11 November 2020 SCHEDULE OF PARTIES VID 1438 of 2016 Defendants Fourth Defendant: WENDY CHENG