Federal Court of Australia Mainland Property Holdings Pty Ltd (Receivers and Managers Appointed) v Naplend Pty Ltd (No 5) [2023] FCA 1544 File number(s): VID 192 of 2022 Judgment of: MCELWAINE J Date of judgment: 7 December 2023 Catchwords: COSTS – application for costs on a solicitor and client basis following dismissal of proceedings – where proceedings caused by a director of a company in receivership – where dismissal due to failure by director to provide security for costs – where solicitor and client costs sought relying on contractual agreement between the parties – where personal costs order sought against the director – applicants to pay the respondents costs on a solicitor and client basis – director to pay portion of respondents' costs reflecting the respondents' party and party entitlement Cases cited: Chen v Kevin McNamara and Son Pty Ltd (No 2) [2012] VSCA 229 Mainland Property Holdings Pty Ltd (Receivers and Managers Appointed) v Naplend Pty Ltd [2022] FCA 1305 Stuart v Rabobank Australia Ltd (No 2) [2021] FCA 1626 Division: General Division Registry: Victoria National Practice Area: Commercial and Corporations Sub-area: Commercial Contracts, Banking, Finance and Insurance Number of paragraphs: 16 Date of last submission/s: 6 November 2023 (Respondents) 13 November 2023 (Applicants) Date of hearing: Determined on the papers Counsel for the Applicants: Mr MGR Gronow KC with Mr P Donovan Solicitor for the Applicants: Roberts Gray Lawyers Counsel for the Respondents: Mr SJ Maiden KC with Ms E Nikou Madalin Solicitor for the Respondents: Dentons Australia ORDERS VID 192 of 2022 BETWEEN: MAINLAND PROPERTY HOLDINGS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 667 435) First Applicant MAINLAND PROPERTY HOLDINGS 2 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 950 113) Second Applicant MAINLAND PROPERTY HOLDINGS 3 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 951 512) (and others named in the Schedule) Third Applicant AND: NAPLEND PTY LTD (ACN 619 325 889) First Respondent BARRY FREDERIC KOGAN Second Respondent JONATHAN PHILIP HENRY (and others named in the Schedule) Third Respondent order made by: MCELWAINE J DATE OF ORDER: 7 December 2023 THE COURT ORDERS THAT: 1. The applicants must pay the respondents' costs of the proceeding as between solicitor and client, in an amount to be determined by a registrar of this Court on a lump sum basis as provided for at r 40.02 of the Federal Court Rules 2011 (Cth). 2. Mr James Peter Mawhinney shall personally pay that portion of the respondents' costs which reflect the respondents' party and party entitlement, to be determined by a registrar of this Court on a lump sum basis as provided for at r 40.02 of the Federal Court Rules 2011 (Cth). Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011. REASONS FOR JUDGMENT MCELWAINE J: 1 This is a costs decision. Mr James Peter Mawhinney, as sole director of the applicants, caused this proceeding to be commenced on 13 April 2022, despite that each applicant was, and remains, in receivership. One set of receivers and their appointor are named as the respondents. The core contentions are that the security documents contain unenforceable penalty default interest rate clauses and that various mortgaged real estate assets were realised by the receivers in breach of a duty to take reasonable care to achieve market value for the properties contrary to s 420A of the Corporations Act 2001 (Cth), amongst other provisions. 2 For reasons that I published on 4 November 2022, I dismissed an application for summary judgment by the respondents but required Mr Mawhinney to provide a costs indemnity together with security in the form of a bank guarantee as conditions operating on continuation of the preceding: Mainland Property Holdings Pty Ltd (Receivers and Managers Appointed) v Naplend Pty Ltd [2022] FCA 1305 (primary reasons). I also ordered that the proceeding be stayed until the indemnity and the security were each provided and, in the event of non-compliance, I granted liberty to the respondents to apply for an order that the proceeding be dismissed. The quantum of the security was referred to a judicial registrar of the Court for determination. Following that process, I made a further order on 1 June 2023 fixing the quantum of the security in the amount of $1,327,000, to be provided by 4 pm on 31 July 2023. I also made orders to the effect that, should Mr Mawhinney default on payment of the security, any application by the respondents seeking dismissal or strike out was to be filed and served by 4 pm on 7 August 2023. 3 Mr Mawhinney provided the indemnity but failed to provide the security. The respondents then formulated and pressed an interlocutory application that the proceeding be dismissed and, as to costs, that the applicants indemnify the respondents for and pay costs as between solicitor and own client pursuant to the provisions of a Facility Agreement dated 20 December 2019 between Naplend Pty Ltd (in its capacity as trustee of the Naplend No. 13 Trust) as lender, each of the applicants as the borrowers and Mayfair Group Pty Ltd and Mr Mawhinney as the guarantors. A further costs order is sought personally against Mr Mawhinney – that he pay that portion of the respondent's costs which reflect the respondent's party and party entitlement, to be taxed in default of agreement. 4 On 8 September 2023, I made further orders to the effect that if the security required by the orders made on 4 November 2022 and 1 June 2023 was not provided by 4 pm on 20 October 2023, then upon the filing of an affidavit deposing as to non-compliance, the proceeding is dismissed and that any application for costs is to be made in writing and determined on the papers. That order was not complied with. Accordingly, I ordered on 30 October 2023 that the proceeding be dismissed. 5 The respondents press the cost applications against the applicants and Mr Mawhinney. Unsurprisingly, reflecting the outcome, the applicants do not resist an order that they pay the respondent's costs of the proceeding as between party and party. However, they seek various carve outs from any costs order and resist a solicitor and client order as follows. First, they submit that the costs of and incidental to the respondents' interlocutory application filed 17 June 2022 be borne by the parties on the ground that it failed as an application for summary judgment and only succeeded, in the alternative, as one for the provision of an indemnity and security. I reject that submission. As I explained in my primary reasons at [56]-[59], the price that is ordinarily to be paid in cases where a director of a corporation that is in receivership causes it to commence litigation is the provision of a personal indemnity with security , which ensures that the proper interests of the secured creditor will not be imperilled by the costs of the proceeding. Mr Mawhinney commenced and prosecuted the proceeding without first offering an indemnity and security. Without each, the respondents had a solid basis to contend that the proceeding should be stayed or dismissed. The interlocutory application was properly brought for those purposes and there is no principled reason to fragment the costs of it. 6 Second, the applicants submit that they should receive their costs of and incidental to the hearing on 16 December 2022, which concerned a dispute between the parties as to the form of the indemnity required pursuant to the orders made on 4 November 2022. That question was ultimately resolved in favour of the indemnity proposed by the applicants. On that day, I accepted that there was an accidental slip, error or omission in respect of one of the orders that I had made on 4 November 2022, which I then corrected. I regard the hearing on that day as a continuation of the case management in this matter, where ordinarily costs follow the event. No different order is warranted. 7 Third, the applicants submit that the costs of and incidental to the hearing before the judicial registrar on 22 March 2023, which determined the quantum of the security, should not be the subject of an order of costs. The applicants submit, correctly, that each party advocated for a position which was significantly different from the sum arrived at by the judicial registrar. The respondents sought security in an amount of $4 million. The applicants contended for security, to the point of mediation, in an amount of approximately $142,000. Ultimately the judicial registrar determined an amount of $1,327,000. It is true that the outcome was that neither party "could reasonably claim victory", but that with respect is not to the point. The judicial registrar conducted an inquiry and provided a report as a referee pursuant to s 54A of the Federal Court of Australia Act 1976 (Cth). When the report was provided, the applicants objected to the determined amount. I resolved that question adversely to the applicants and accepted the referee report in full. The role of the referee was incidental upon my determination that security be provided. That event was resolved in favour of the respondents. The costs of the reference properly must follow that event. 8 Dealing next with the solicitor and client costs application, the respondents accept that the relevant provisions of the Facility Agreement are not dispositive in favour of the exercise of this Court's discretion to make a costs order, otherwise than on the usual basis: Stuart v Rabobank Australia Ltd (No 2) [2021] FCA 1626 at [14]-[20] (Halley J). The costs discretion is informed by the contractual position, properly construed, though as noted by Halley J at [14] the discretion generally favours the outcome provided for in the contract. 9 The respondents rely on cll 13 and 14 of the Facility Agreement. Clause 13 provides for an indemnity in favour of Naplend as the lender, each of its authorised officers and agents and each receiver of any of the borrowers. The indemnity extends to payment, on demand, of "all losses paid, suffered or incurred" in connection with, relevantly, any "litigation with respect to" any of the borrowers and "with respect to the transactions contemplated or financed under any Finance Document". A Finance Document is defined to include the Facility Agreement, and each mortgage granted in favour of the lender. A loss is defined as including any liability, cost, charge or expense and specifically includes "legal fees and disbursements". 10 Clause 14 is generally concerned with costs and expenses and cl 14.3 deals with enforcement costs as follows: The Borrower must, immediately on demand, pay to and reimburse the Lender the amount of all fees, costs and expenses (including legal fees) incurred by or for the account of the Lender in connection with the actual or proposed enforcement of, or the preservation of any rights under, any Finance Document or in connection with anything referred to in clause 13... 11 The respondents submit that cl 13 should be given full effect according to its terms, in that the indemnity operates unambiguously and extends to costs incurred in this proceeding. As to cl 14.3, the respondents acknowledge that on its face it operates only in favour of the lender, Naplend. Despite the contractual entitlement to costs, the respondents nonetheless submit that in the circumstances of this case, to finalise the proceeding, it is appropriate that the costs discretion be exercised conformably with the contractual entitlement. 12 The applicants resist a solicitor and client costs order. Reliance is placed on the judgment of Redlich JA in Chen v Kevin McNamara and Son Pty Ltd (No 2) [2012] VSCA 229 at [8], to the effect that agreements of this character will ordinarily be construed as providing for costs on a party and party basis, unless the terms "plainly and unambiguously provide for costs to be assessed on some special basis". From this proposition, the applicants submit that the clauses relied on do not plainly or unmistakably provide for costs on anything other than the usual basis. 13 In my view there is no ambiguity in the clauses relied on. Clause 13 is very broad and extends to all losses "paid, suffered or incurred" in connection with any litigation, which extends to all costs and disbursements as paid on a solicitor and client basis as a matter of ordinary language. Further, this is a case where the contractual provision is of significant weight in the exercise of my discretion to make a special costs order. That follows from the nature of the litigation and my earlier conclusion that the provision of an indemnity (a full and not a partial indemnity) is the price that must be paid by a director who causes a corporation that is the subject of the appointment of a receiver, to commence litigation. Anything less puts the assets of the secured creditor at risk. For these reasons I am satisfied that costs should be awarded in favour of the respondents as between solicitor and client. 14 There is another point of contention. The respondents also seek an order to the effect that Mr Mawhinney must personally pay that portion of any costs order in favour of the respondents which reflects the party and party component. Mr Mawhinney opposes that order on the basis that it is unnecessary, in that he has already provided an indemnity to that effect. That is true, but is not of itself a reason against the making of the order sought. The order is of utility in bringing finality to the costs claims and also ensures, as submitted by the respondents, that there will be no "double dipping". 15 Finally, I am of the view that this is an appropriate matter for the making of a lump sum costs order, in an amount to be determined by a Registrar of this Court, pursuant to r 40.02(b) of the Federal Court Rules 2011 (Cth) because it will avoid the time-consuming and ultimately expensive task of a protracted taxation of costs, consistently with cl 4 of the Costs Practice Note (GPN-COSTS). 16 Accordingly, I order as follows: 1. The applicants must pay the respondents' costs of the proceeding as between solicitor and client, in an amount to be determined by a registrar of this Court on a lump sum basis as provided for at r 40.02 of the Federal Court Rules 2011 (Cth). 2. Mr James Peter Mawhinney shall personally pay that portion of the respondents' costs which reflect the respondents' party and party entitlement, to be determined by a registrar of this Court on a lump sum basis as provided for at r 40.02 of the Federal Court Rules 2011 (Cth). I certify that the preceding sixteen (16) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice McElwaine. Associate: Dated: 7 December 2023 SCHEDULE OF PARTIES VID 192 of 2021 Applicants Fourth Applicant: MAINLAND PROPERTY HOLDINGS 4 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 951 807) Fifth Applicant: MAINLAND PROPERTY HOLDINGS 5 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 635 955 814) Sixth Applicant: MAINLAND PROPERTY HOLDINGS 8 PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 636 594 208 Seventh Applicant: JARRAH LODGE HOLDINGS PTY LTD (RECEIVERS AND MANAGERS APPOINTED) (ACN 632 018 458) Respondents Fourth Respondent: WILLIAM JAMES HARRIS Fifth Respondent: ANTHONY NORMAN CONNELLY