New South Wales Supreme Court CITATION : Grosvenor Constructions (NSW) Pty Limited (subject to a Deed of Company Arrangement) v RL Hunter QC & Ors [2005] NSWSC 497 HEARING DATE(S) : 17/05/05 JUDGMENT DATE : 17 May 2005 Equity Division JURISDICTION : Technology and Construction List JUDGMENT OF : Einstein J DECISION : Plaintiff and the administrator are ordered to pay jointly and severally on an indemnity basis the costs of the second to fifth defendants of the proceedings. CATCHWORDS : Procedure - Costs - Circumstances in which Administrator may be ordered to pay costs personally Commercial Arbitration Act 1984 LEGISLATION CITED : Supreme Court Act 1970 (NSW) Adsett v Berlouis& Ors (1992) 109 ALR 100 Bedoe, In re; Downs v Cotham [1893] 1 Ch 547 Cresvale Far East v Cresvale Securities (No. 2) (2001) 39 ACSR 622 Hypec Electronics Pty Limited (in liq) v Meade & Ors [2004] NSWSC 731; [2004] NSWCA 221 CASES CITED : Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21 Oshlack v Richmond River Council (1998) 193 CLR 72 Pitts v La Fontaine (1880) 6 App Cas 482 Re Driller [v Nebenson] (1972) 21 FLR 159 Grosvenor Constructions (NSW) Pty Limited (Plaintiff) RL Hunter QC (First Defendant) Joseph Musico (Second Defendant) PARTIES : Rosemary Musico (Third Defendant) Luigi Genua (Fourth Defendant) Rose Genua (Fifth Defendant) FILE NUMBER(S) : SC 55032/05 Mr G Spedding (Plaintiff) COUNSEL : Mr M Christie (Second and Fifth Defendants) James R Knowles (Plaintiff) SOLICITORS : White Barnes (Second to Fifth Defendants) LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION TECHNOLOGY AND CONSTRUCTION LIST Einstein J Tuesday 17 May 2005 ex tempore Revised 26 May 2005 55032/05 Grosvenor Constructions (NSW) Pty Limited (subject to a Deed of Company Arrangement) v RL Hunter QC & Ors JUDGMENT 1 The proceedings before this Court were commenced by summons filed on 24 March 2005 by Grosvenor Constructions (NSW) Pty Limited (subject to a Deed of Company Arrangement) against the Honourable R L Hunter QC as first defendant and against the second, third, fourth and fifth defendants who are individuals. It is inappropriate to repeat the record, save to make the point that the summons sought leave to appeal and, if leave be granted, to set aside a number of orders arising out of an award made by the first defendant, the proceedings being regulated by the Commercial Arbitration Act 1984. The first defendant has at all material times entered a submitting appearance. The amended summons sought leave to appeal, not only from the orders made in the interim award, but also from the orders made in the final award. 2 The evidence before the Court makes plain that by letter dated 5 April 2005 White Barnes, the solicitors for the second to fifth defendants, wrote to the then solicitors for the plaintiff, The Builders Lawyer, seeking security for costs, making the point that the defendants were concerned that there was insufficient security to cover the costs of the appeal, noting that pursuant to orders of the Court made in April 2004, sufficient security was provided for the relevant defendants' costs of the arbitration proceedings and noting that that sum had been exceeded so that the relevant defendants were effectively without security concerning the appeal. 3 The same letter noted that the plaintiff continued have the benefit of a bank guarantee pursuant to the Supreme Court orders which provided a security well in excess of its entitlement under the interim arbitration award. The security sought in this letter was in the sum of $25,000. 4 On 12 April 2005 the matter was listed before the registrar and the proceedings were transferred to the Equity Division. The final award of the arbitrator was handed down on 14 April. 5 On 22 April the matter was listed before Justice Bergin and stood over to allow the plaintiff's legal representative to obtain instructions with respect to provision of the security for costs sought. 6 On 28 April a letter was written by the Builders Lawyer to White Barnes confirming that security for costs would be provided in the sum of $25,000 and indicating the break-up of the amounts. 7 On 29 April the matter was again listed before Justice Bergin and the plaintiff's legal representative confirmed that security for costs would be provided and a timetable for hearing allocation was given. 8 On 3 May a facsimile was sent by The Builders Lawyer to White Barnes confirming arrangements for the provision of security for costs. 9 On 5 May a facsimile was sent from The Builders Lawyer to White Barnes stating that funds by way of security for costs would be paid into the Supreme Court by 10.30am on 6 May. 10 On 10 May a facsimile from White Barnes to The Builders Lawyer was sent to The Builders Lawyer concerning the non-provision of security for costs as previously agreed. That letter confirmed that White Barnes understood that The Builders Lawyers had received correspondence from the plaintiff which may on one view be interpreted as stating that The Builders Lawyers' instructions had been withdrawn by their client. 11 On 10 May a facsimile was sent from The Builders Lawyers to White Barnes, stating that they would advise immediately if and when they no longer acted for Grosvenor Constructions and, as to the security for costs position, stating that the position was as they had previously advised: they were awaiting instructions and funds. They stated that the results of the failure to do so, as they agreed, may have dire consequences insofar as the progress of the appeal was concerned and that they had advised their client of those matters. 12 On 11 May a facsimile was sent by White Barnes to The Builders Lawyers indicating their concern at the ongoing situation where The Builders Lawyers were awaiting instructions. They pointed out that the matter was listed for hearing on 17 May and that they believed that the defendants had no option but to seek an order for security for costs and would contact the court accordingly. 13 On 11 May the plaintiff failed to file and serve written submissions, as had been required by a timetable provided by Justice Bergin. The matter was before the court yesterday and on that occasion a short summary of what occurred is to be found in the ex tempore judgment [which was revised also yesterday]. 14 Yesterday notice was given orally and has been given more formally by letter by the solicitors for the second to fifth defendants to the new firm of solicitors acting for the plaintiff, to the effect that if the proceedings were struck out the second to fifth defendants would seek an order for costs against both the plaintiff and the administrator directly and would seek for that costs order to be made jointly and severally. The position is that the security for costs agreed to has not been provided. The proceedings stand dismissed and Mr Spedding solicitor today appears for the company as well as for the administrator. 15 No evidence whatever has been put forward by Mr Spedding's client company, nor by the administrator through him as its current legal adviser, to explain what are the facts, matters and circumstances which occurred leading to the failure by the plaintiff to honour the express terms of the agreement to provide security. In those circumstances there is no issue but that the company should be ordered to pay the costs of the second to fifth defendants. 16 The second to fifth defendants however seek an order for indemnity costs to be made against the company and the administrator jointly. It seems to me that there is no conceivable answer to the proper exercise of the Court's discretion, at the least being to order that the company pay the second to fifth defendants' costs on an indemnity basis. The fact is that the company has not seen fit to place any evidence whatsoever before the Court as to the unusual circumstances in which, following an agreement to pay security for costs and the fixing of a hearing date and the taking of steps by the second to fifth defendants to prepare for the hearing, at the eleventh hour the proceedings are simply not pursued. The proper and principled exercise of the Court's discretion is therefore clear in relation to the position of the company and Mr Spedding, solicitor, has not been able to put anything to the Court to suggest otherwise. 17 The real question for determination is as to whether or not in the circumstances which presently obtain, the indemnity costs order should be made against the administrator personally. 18 In my view, the Court clearly has power to order that the administrator pay the costs of the second to fifth defendants in the event that a principled exercise of the Court's discretion in that regard be to so order. Questions of the practice and procedure with respect to the making of costs orders against administrators and liquidators have recently been the subject of high authority. In Kirwan v Cresvale Far East Limited (in liq) (2002) 44 ACSR 21, the New South Wales Court of Appeal hearing an appeal from Austin J in Cresvale Far East v Cresvale Securities (No. 2) (2001) 39 ACSR 622 dealt with those questions. In Hypec Electronics Pty Limited (in liq) v Meade & Ors, both at first instance before Campbell J [2004] NSWSC 731 and on appeal before the Court of Appeal [2004] NSWCA 221, the Court had occasion to closely examine the positions of either liquidators and/or administrators. Additionally the Court has been taken to a portion of the decision of the Full Court of the Federal Court in Adsett v Berlouis & Ors (1992) 109 ALR 100 at 110: " The obligation of a trustee in bankruptcy to pay costs to another party involved in litigation unsuccessfully instituted or defended by the trustee is a matter distinct from the trustee's entitlement to recoupment out of the bankrupt's estate: Pitts v La Fontaine (1880) 6 App Cas 482 at 486; Re Driller [ v Nebenson ] (1972) 21 FLR 159 at 175. Ordinarily, an unsuccessful trustee will be ordered to pay the costs of the successful party. Such an order imposes a personal obligation on the trustee. In such a case, the question then arises as to whether or not the trustee has a right to be reimbursed out of the trust estate. This latter question arises in the administration of the bankruptcy, not in the original litigation. In the general area of the administration of trusts, the position was stated by Lindley LJ in R e Beddoe, at 558: I entirely agree that a trustee is entitled as of right to full indemnity out of his trust estate against all his costs, charges, and expenses properly incurred: such an indemnity is the price paid by cestuis que trust for the gratuitous and onerous services of trustees; and in all cases of doubt, costs incurred by a trustee ought to be borne by the trust estate and not by him personally. The words 'properly incurred' in the ordinary form of order are equivalent to 'not improperly incurred'. Bowen LJ expressed a similar view at 560: The fallacy of the respondent's argument lies in supposing that because a trustee has to pay costs in a collateral suit, it is as costs that he inflicts them on his own trust fund. It is only as 'charges and expenses' that he can recover them…" and at 562: "The principle of law to be applied appears unmistakably clear. A trustee can only be indemnified out of the pockets of his cestuis que trust against costs, charges, and expenses properly incurred for the benefit of the trust — a proposition in which the word 'properly' means reasonably as well as honestly incurred. While I agree that trustees ought not to be visited with personal loss on account of mere errors in judgment which fall short of negligence or unreasonableness, it is on the other hand essential to recollect that mere bona fides is not the test, and that it is no answer in the mouth of a trustee who has embarked in idle litigation to say that he honestly believed what his solicitor told him, if his solicitor has been wrong-headed and perverse. Costs, charges, and expenses which in fact have been unreasonably incurred, do not assume in the eye of the law the character of reasonableness simply because the solicitor is the person who was in fault. No more disastrous or delusive doctrine could be invented in a Court of Equity than the dangerous idea that a trustee himself might recover over from his own cestuis que trust costs which his own solicitor has unreasonably and perversely incurred merely because he had acted as his solicitor told him. If there be one consideration again more than another which ought to be present to the mind of a trustee, especially the trustee of a small and easily dissipated fund, it is that all litigation should be avoided, unless there is such a chance of success as to render it desirable in the interests of the estate that the necessary risk should be incurred." 19 The Full Court in Adsett at 110 – 111 also stated: "The critical question, in our view, is whether or not the conduct which gave rise to the burden of costs — whether costs ordered to be paid or costs incurred by the trustee in prosecution of the litigation — was proper in the sense explained in Beddoe ; that is, whether the expenditure was reasonably, as well as honestly, incurred. Where, for example, the litigation was obviously misconceived or, even if it was otherwise reasonable to be undertaken, extravagant in the resources applied to it, we would not regard the expense incurred as proper; notwithstanding that the trustee may have acted honestly throughout. It is neither possible nor desirable to attempt to identify all of the situations in which costs expenditure would not be regarded as proper. Nor is it profitable to attempt a detailed rule covering all circumstances. But we issue the caution that the language in some authorities, many of which relate to gratuitous trustees, may mislead. Sometimes that language appears to require a degree of personal misconduct or wilful recklessness, as opposed to mere negligence, mistake or breach of the trustee's duty as set out above. We do not think that such a limitation can stand with cases such as Re Beddoe , which in our opinion correctly express the law. If the expense is one prudently and reasonably incurred in the discharge of the trustee's proper duties, there is a right under the general law to be indemnified out of the trust estate. If the expense is not so incurred or is unreasonable or unnecessary, there is no right under the general law to indemnity because the expense is not "properly incurred". The position is no different with a trustee in bankruptcy. Where the line is drawn, between an expense properly incurred and one not properly incurred, is to be determined on the facts of the particular case and in the exercise of judgment. 20 In Meade v Watson [2005] NSWCA 133 the court at 12-13 cited passages from the judgment of Bowen LJ in Bedoe, In re; Downs v Cotham [1893] 1 Ch 547 and from the joint judgment in Adset. 21 Clearly enough, as it seems to me from these authorities, the usual rules which apply are that costs are in the discretion of the court and that as a general guideline a liquidator or an administrator acting appropriately is entitled, if unsuccessful, to an order that the costs be paid by the company and not by the liquidator or administrator personally. Proper orders for costs against an administrator can be supported by section 447E of the Corporations Act, as well as under a power to award costs under section 76 of the Supreme Court Act 1970 (NSW). 22 It seems clear that to say that only a trustee who has recklessly instituted or precipitated litigation should be deprived of the right to recover costs from a bankrupt's estate is too limited a proposition. It seems clear also, in particular from the joint judgment in Adset, that the principled exercise of the Court's discretion will certainly include examining whether or not the conduct which gives rise to the costs burden, that is to say the expenditure, was reasonably as well as honestly incurred. 23 To my mind the principled exercise of the relevant discretion in the present case has to take into account the evidentiary position. It seems to me that where the administrator elects not to place one jot of evidence before the Court to explain how the proceedings first came to be commenced, then supported by an agreement to provide security and then at the last moment withdrawn, the Court ought infer that the conduct of the administrator was not reasonable in the circumstances. Granted that there is an evidentiary onus on the second to fifth defendants to make good their claimed entitlement to the somewhat unusual order visiting costs on the administrator, the evidentiary onus moves across the bar table once the prima facie position earlier outlined is before the Court. 24 For those reasons, to my mind the proper exercise of the Court's discretion is to make the orders sought by the second to fifth defendants. The Court's orders are as follows: 1. The proceedings are dismissed. 2. Plaintiff and the administrator are ordered to pay jointly and severally on an indemnity basis the costs of the second to fifth defendants of the proceedings. 25 It is appropriate as part of the judgment to include that indemnity costs will be ordered where there is before the Court evidence of material as described in Oshlack v Richmond River Council (1998) 193 CLR 72 of circumstances which justify the Court finding something so out of the usual in terms of litigation as to justify an indemnity costs order. An indemnity costs award presupposes some relevant and reasonable conduct in relation to the conduct of proceedings or some relevant delinquency by the party against whom the order is made. The Court is left in the circumstance presently that no explanation whatsoever has been put before it to justify the conduct of the plaintiff in bringing the proceedings or in thereafter proffering the agreement to provide security for costs or at the last moment withdrawing from the proceedings. For those reasons the indemnity costs order attending the otherwise orders is appropriate. I certify that paragraphs 1 - 25 are a true copy of the reasons for judgment herein of the Hon. Justice Einstein given on 17 May 2005 and revised 26 May 2005 ___________________ Susan Piggott Associate 26 May 2005 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. 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