New South Wales Supreme Court CITATION : Vis Visitor Investments Services Pty Ltd v Hawkesbury Riverside Retreat Ltd & 6 Ors [2004] NSWSC 1188 HEARING DATE(S) : 26/07/04, 09/08/04 JUDGMENT DATE : 10 December 2004 JURISDICTION: Equity Division Corporations List JUDGMENT OF : Barrett J DECISION : No order as to costs CATCHWORDS : PROCEDURE - costs - no determination on merits - principal dispute resolved by consent orders - whether discontinuance of ancillary claims gave rise to "event" for costs purposes - whether strength of plaintiff's case shown suifficiently to warrant costs order despite compromise LEGISLATION CITED : Corporations Act 2001 (Cth), Part 5.3A CASES CITED : Chapman v Luiminis Pty Ltd [2003] FCAFC 162 Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR at pp.624-5 Vis Visitor Investment Services Pty Limited - Applicant Hawkesbury Riverside Retreat Limited - First Defendant Schon G Condon - Second Defendant PARTIES : Glenys Joy Gilling - Third Defendant Michael Stephen Burcher - Fourth Defendant Kenneth Charles Jackson - Fifth Defendant Stephen William Williams - Sixth Defendant Debra Jayne Ronan - Seventh Defendant FILE NUMBER(S) : SC 3093/04 COUNSEL : Mr J.T. Johnson - Plaintiff Mr J.R. Dupree - Third, Fourth, Fifth and Seventh Defendants SOLICITORS : Watson Mangioni - Plaintiff Russo & Partners - Third, Fourth, Fifth and Seventh Defendants IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J FRIDAY, 10 DECEMBER 2004 3093/04 – VIS VISITOR INVESTMENT SERVICES PTY LIMITED v HAWKESBURY RIVERSIDE RETREAT LIMITED & 6 ORS JUDGMENT 1 The only issue outstanding in these proceedings is that of costs. The parties have spent considerable effort and several hours of court time (represented by more than 50 pages of transcript) in arguing that matter, having seen fit to dispose of the remainder of their controversy by consent orders. The plaintiff seeks an order for costs against the third, fourth and fifth defendants, each of whom is a director of the first defendant. 2 The proceedings were commenced by originating process filed on 26 May 2004. The plaintiff sought a declaration that a resolution of 20 May 2004 that the first defendant be placed in administration under Part 5.3A of the Corporations Act 2001 (Cth) was void, an order that the purported resolution be set aside, an order that the second to sixth defendants (being the directors of the first defendant) be restrained from resolving that a named person (Mr Condon, purportedly appointed administrator under the challenged resolution) be appointed Part 5.3A administrator of the first defendant and certain ancillary orders. An interlocutory process was filed on the same day seeking substantially the same relief as in the originating process. 3 On 7 July 2004, the first, third, fourth, fifth and seventh defendants filed an interlocutory process (styled notice of motion) seeking to have a notice to produce set aside. 4 A month earlier, on 7 June 2004, an order had been made setting aside the resolution for the appointment of the administrator and terminating the administration. In reasons for judgment published ex tempore on that day, Austin J made it clear that he had been informed by the parties then before him (being the plaintiff and the third, fourth, fifth and seventh defendants) that there was no contest between them as to the making of those orders. His Honour noted that the sixth defendant had not been served. The first and second defendants were the company itself and the administrator. The compromise between the plaintiff on the one hand and the third, fourth, fifth and seventh defendants (directors) was therefore a compromise between the real protagonists in the case. 5 The matter came before me on 26 July 2004. On that occasion, I granted leave for the plaintiff to discontinue the claims in paragraph 3 of the originating process and paragraph 7 of the interlocutory process. These were really a single claim, being a claim for an order restraining the directors from taking action to appoint Mr Condon as administrator of the company. This was preceded by a long and somewhat tedious exchange between bench and bar concerning the then current status of the claim in paragraphs 3 and 7. The third, fourth, fifth and seventh defendants apparently saw it as a continuing and live claim for an order precluding appointment of Mr Condon as Part 5.3A administrator of the first defendant forever (or, at least, for so long as he lived and was qualified for appointment), while the plaintiff said that the claim was really an adjunct to the principal claims challenging the initiation of the particular administration under challenge (which claims became the subject of the consent orders of 7 June 2004), so that, following the making of those orders, the claim was of no further utility. That discussion concluded as follows: "HIS HONOUR: What I am minded to do, and I will hear the parties on this, is to note that order 7 in the interlocutory process and order 3 in the originating process had the character of an adjunct to the principal claims concerning termination of the administration, with the result that the orders terminating the administration leave no remaining room for those particular orders. JOHNSON: Yes, your Honour. DUPREE: Can I ask your Honour to note it in a different fashion and it is this: It is not an adjunct to the order sought in the Court, but it was an adjunct to the resolution appointing the administrator. HIS HONOUR: I note the matter as I have just outlined it." 6 Mr Dupree, counsel for the relevant defendants, referred to the matter further and Mr Johnson, counsel for the plaintiff, eventually sought and was granted leave to discontinue the claims for order 7 in the interlocutory process and order 3 in the originating process. Mr Dupree then said that the case was shifting somewhat from his focus because, until the question of discontinuance had arisen, there had been no resolution of certain matters. The following exchange then occurred: "DUPREE: … Clearly it is accepted they were extant because the plaintiff has sought leave to discontinue them. HIS HONOUR: My interpretation would be: discontinue them as otiose. DUPREE: My submission is they were otiose to begin with. HIS HONOUR: Well, if they were otiose to begin with, they were otiose to end with." 7 The matter came before me again on 9 August 2004. Several affidavits were read. Four witnesses were cross-examined. It was submitted on behalf of the plaintiff that there was never any proper basis for the appointment of an administrator by the directors of the first defendant, including the third, fourth and fifth defendants against whom a costs order is sought. It was further submitted that the appointment was for an improper purpose. There was also a submission that the plaintiff is entitled to a costs order on the ordinary basis that costs follow the event. 8 It is convenient to deal with the last matter first. It is true that the relevant defendants eventually succumbed to the plaintiff's claim which was, in effect, a claim to have the Part 5.3A administration recognised as ineffective. Mr Dupree submitted, however, that there had been thereby no "event" in the plaintiff's favour since the plaintiff, having received the benefit of the consent orders as to the principal matters in contention, left on foot the claims for order 3 in the originating process and order 7 in the interlocutory process, which claims were eventually discontinued. That, in Mr Dupree's submission, meant that the "event", for costs purposes, was the discontinuance and that there was therefore an entitlement to a costs order on the part of the defendants against the plaintiff. 9 The claims reflected in order 3 in the originating process and order 7 in the interlocutory process were, as I have said, claims for an order forbidding forever the appointment of Mr Condon as administrator of the first defendant. As I indicated during argument, those claims were clearly otiose once there had been consent orders disposing of the procedures under which Mr Condon had been appointed administrator. Any view that there was thereafter any possible efficacy in an order forever restraining the appointment of Mr Condon as administrator (but leaving open the possibility of appointment of any other qualified person whatsoever, assuming grounds for appointment of an administrator to exist in the future) would be naïve, obtuse or calculated to obscure reality. I reject Mr Dupree's submission on this point but, at the same time, I do not accept that consent orders justify any order based on the general rule that costs follow the event. 10 I should, at this stage, remind myself of the principles that guide courts in relation to costs orders in cases such as the present where the court has not made any determination on the merits. The guiding principle was stated by McHugh J in Re Minister for Immigration and Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR at pp.624-5: "In an appropriate case, a court will make an order for costs even where 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 question 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. ... 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. ... 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 would 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." 11 I refer also to the judgment of Beaumont, Sundberg and Hely JJ in Chapman v Luiminis Pty Ltd [2003] FCAFC 162: "The authorities establish the following propositions in relation to the making of costs orders in circumstances such as the present: - where a proceeding terminates before there has been a hearing, the Court should not resolve the issue of costs by engaging in something in the nature of a hypothetical trial: Australian Securities Commission v Aust-Home Investments Ltd (1993) 44 FCR 194 at 201; - this does not mean that a Court can never make an order for costs. Often it will be unable to do so, but in other cases an examination of the reasonableness of the conduct of the parties may provide the basis for an order, or a judge may be confident that one party was almost certain to have succeeded if a matter had been fully tried: Re Minister for Immigration & Ethnic Affairs; Ex parte Lai Qin (1997) 186 CLR 622 at 625 (McHugh J); - a distinction is to be drawn between cases in which one party, after litigating for some time, effectively surrenders to the other, and cases where some supervening event or settlement so removes or modifies the subject of the dispute that, although it could not be said that one side has simply won, no issue remains between the parties except that of costs. In the former type of case, there will commonly be lacking any basis for an exercise of the Court's discretion otherwise than by an award of costs to the successful party. It is the latter type of case which more often creates problems, since there may be difficulty in discerning a clear reason why one party, rather than the other, should be bear the costs: ONE.TEL Ltd v Deputy Commissioner of Taxation (2000) 171 ALR 227 at 231-232 (Burchett J)." 12 The plaintiff's claim for a costs order is pursued on the basis that the Part 5.3A administration was put in place by the directors of the first defendant without reasonable cause and for an improper purpose, having regard to the objectives of Part 5.3A and the need for directors to see that the company "is insolvent, or is likely to become insolvent at some future time": Corporations Act, s.436A(1)(a). There is reference in some of the documentary evidence to a view that voluntary administration would somehow permit or make easier the adoption of a new constitution by the first defendant. Such a move would have represented one more step in what appears to have been an ongoing series of disputes between different factions within the membership of the first defendant, one such faction being associated with Mr Hooker and the plaintiff. Of course, it makes no sense to regard Part 5.3A administration as something that facilitates alteration of a company's constitution or the adoption of a new constitution. 13 On the other hand, there are in evidence minutes of the relevant meeting of directors in which it is recorded that the directors, having considered potential claims upon the company and its cash resources, believed that the company was insolvent. This meeting was held on 20 May 2004. A solicitor was either present or had been consulted in advance. It followed a meeting on 15 May 2004 at which it was decided to seek the appointment of a provisional liquidator, a decision that was overtaken by that on 20 May 2004. Again, there had been legal advice. An insolvency practitioner was also involved in connection with both meetings. 14 Evidence was given by Mr Burcher, who was a director at the time, that regard was not had to the constitution and possible replacement of it in coming to the board decisions first to seek the appointment of a provisional liquidator and second to appoint an administrator. Mr Burcher also expressly denied that he had said to a Mrs Ribot de Bressac, a member of the company, soon after the time of these decisions, that an administrator was to be appointed to make the company insolvent so that the constitution could be rewritten to change the pattern of member voting power. Mrs Ribot de Bressac gave evidence that Mr Burcher had made such a statement to her. Again, such a proposition does not make much sense, as an objective legal matter. 15 The financial material that was before the directors when they made their decisions showed cash at bank of $33,607.01 and a collection of liabilities, contingent liabilities and expected or planned outlays amounting to $281,286.54. Of these, actual and contingent liabilities accounted for $41,486.54, including $30,580.24 designated "D. Hooker (contingent)". This, as I understand it, relates to management fees owing (or to become owing) to the plaintiff. It was submitted on behalf of the plaintiff that the directors could not have held a genuine belief that the first defendant was insolvent (or likely to become so), particularly when Mr Hooker had said that the plaintiff would consider deferral of fees and there was an ability for the first defendant, according to its constitution, to levy members. But, of course, there was ongoing dispute between Mr Hooker and the board and the directors may have been wary of relying on any expectation that he would grant financial indulgences. 16 Although several affidavits were read on the application for a costs order and four witnesses were cross-examined, I do not consider that it has been shown to the requisite standard that the plaintiff was, in the words of McHugh J "almost certain to have succeeded if the matter had been fully tried". Nor do I think that it has been shown that either party acted otherwise than reasonably in relation to the prosecution and defence of the proceedings. Mr Burcher made it clear in his evidence that the decision of the director defendants to consent to the making of the orders the plaintiff sought was motivated by a desire to spare the first defendant (as well as others) expense that could not comfortably be afforded. 17 Had the matter proceeded to trial, it is quite possible that the plaintiff would have been successful. But there cannot be such a degree of confidence of that as to warrant an order for costs in its favour in circumstances where the full case on the merits was neither advanced nor defended. 18 In accordance with McHugh J's formulation of the principles, the result should be that there be no order as to costs so that all parties bear their own costs respectively. I so order. ********** Last Modified: 12/15/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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