New South Wales Supreme Court CITATION : Redowood v Goldstein Technology [2004] NSWSC 515 HEARING DATE(S) : 28 May 2004 JUDGMENT DATE : 15 June 2004 JURISDICTION: Equity JUDGMENT OF : Austin J DECISION : Plaintiff to pay solicitor's costs on indemnity basis CATCHWORDS : PRACTICE AND PROCEDURE - costs - indemnity costs - plaintiff makes application for order that defendant's solicitor pay its costs - application withdrawn - whether indemnity costs appropriate LEGISLATION CITED : Supreme Court Act 1970 (NSW) s 76 CASES CITED : Bagley v Pinebelt Pty Ltd [2000] NSWSC 655 Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248 Redowood Pty Ltd (P/R) PARTIES : Goldstein Technology Pty Ltd (D) Craig Higginbotham (A) FILE NUMBER(S) : SC 6287/03 COUNSEL : J T Johnson (P/R) M Einfeld QC with G Lucarelli (A) SOLICITORS : Gye Associates (P/R) Cutler Hughes & Harris (A) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION AUSTIN J TUESDAY 15 JUNE 2004 6287/03 REDOWOOD PTY LTD V GOLDSTEIN TECHNOLOGY PTY LTD JUDGMENT 1 HIS HONOUR: The plaintiff commenced a proceeding on 15 December 2003 for the winding up of the defendant company, and made an application for the appointment of a provisional liquidator. A provisional liquidator was not appointed but, after several interlocutory hearings, Campbell J made an order on 7 April 2004, for the winding up of the defendant on the ground of insolvency. 2 By an interlocutory process filed on 27 February 2004, the plaintiff sought an order that the defendant's solicitor ("the Solicitor") should be ordered to pay the costs of appearances on 9, 16 and 23 February 2004 on an indemnity basis. On 8 April 2004, after Campbell J had delivered his judgment on the winding up application, the plaintiff indicated that it would withdraw its application against the Solicitor. By that time, the hearing of the application had commenced and was part heard, and therefore it was not appropriate to file a notice of discontinuance. I shall make an order, by consent, for the application against the Solicitor to be dismissed. 3 It is clear, and not contested, that the plaintiff should be ordered to pay the Solicitor's costs of the unsuccessful application against him. The question is whether, as the Solicitor contends, the order should require payment of costs on an indemnity basis, rather than the usual party and party basis. Facts 4 The plaintiff is a company associated with Mr and Mrs Linegar. From 1997 to 2003 Mr Linegar, sometimes through the plaintiff, provided capital and financial accommodation to the defendant company. The defendant was the holding company for intellectual property comprising patents and trademarks for ergonomically designed components of computers. It did not actively trade, other than to receive royalties and licence fees from its US subsidiary, pursuant to a licence agreement. Mr Linegar was a director of the defendant until he resigned in September 2003. Thereafter the directors included Mr Mark Goldstein and Mr Hennessy. It appears that there was a falling out between the Linegar and Goldstein interests in the defendant, leading to the present litigation. 5 The winding up proceeding was first returnable before the court on 18 December 2003, when there was an application for adjournment because Mr Goldstein, who lives in North America, was not available. On 24 December the parties interested in the defendant entered into heads of agreement under which the proceeding was adjourned to 9 February 2004, and the application for the appointment of a provisional liquidator was withdrawn. The heads of agreement set out, in outline, a basis on which settlement could be reached of the dispute between the Linegar interests and the Goldstein interests. 6 By February 2004 the basis of settlement that had been negotiated in December was unravelling. On 10 February 2004 a fresh interlocutory process was filed for the appointment of a provisional liquidator. On 16 February 2004 the application for a provisional liquidator was stood over to 2pm on 23 February before me as the Corporations List Judge. When that time arrived, I was informed that at 12:30pm on the same day, the defendant had been placed in voluntary administration by resolution of its directors, and Mr Javorsky had been appointed as administrator. 7 The matter was before me again on 8 March 2004. I adjourned winding up application and the application to appoint a provisional liquidator, and those matters were heard subsequently by Campbell J. 8 Also before me on 8 March 2004 was the plaintiff's application against the Solicitor, who had become the defendant's solicitor on the record on 6 February. I invited counsel for the plaintiff to identify the precise basis on which it was said that the Solicitor should be liable to pay costs personally. In response, counsel sought to outline the plaintiff's allegations in the proceeding and informed me that the plaintiff would rely on the entirety of the affidavit material that had been filed. He read 16 affidavits and tendered more than three folders of documents. 9 I was not able to obtain a clear idea of the allegations against the Solicitor from counsel's submissions on 8 March. Eventually, by consent, I directed the plaintiff to file, by 5 April 2004, points of claim disclosing the case that the Solicitor would be required to meet. 10 On 5 April 2004, the plaintiff's solicitors informed the Solicitor that the plaintiff would not be a position to file its points of claim and submissions as directed, but would endeavour to do so by 16 April. The Solicitor then re-listed the matter before Campbell J (in my absence on leave) on 7 April 2004, when the winding up proceeding was before his Honour. Campbell J ordered the plaintiff to file and serve its points of claim and written submissions by 16 April. 11 As I have said, Campbell J decided on 7 April to make an order for the winding up of the defendant and the appointment of a liquidator. He held that it would not be in the interests of the company's creditors for it to continue under administration, even though a proposal for a deed of company arrangement had been made by Mr Goldstein. 12 In his reasons for judgment, delivered ex tempore on 7 April, Campbell J noted (at [20]) that although the company had contended, prior to 23 February, that it was solvent, it had become clear by 7 April, and indeed it had become common ground, that the company was insolvent, and insolvent to a very large extent. In the course of dealing with whether the company should be allowed to remain in administration, he said (at [50]): "[Counsel for the plaintiff] also submitted that the history of the case showed that the administration in the present case was a tactical move, which amounted to an abuse of the provisions of Pt 5.3A of the Corporations Act: Blacktown City Council v Macarthur Telecommunications Pty Ltd [2003] NSWSC 883; (2003) 47 ACSR 391. I would not accept that the history of the proceedings set out in this judgment shows that that is the case as, at the time the administration was effected, there may have been a possibility of a deed of company arrangement being put forward which would advantage creditors." 13 By letter dated 8 April 2004, the plaintiff's solicitors informed the Solicitor that the plaintiff intended to withdraw its application against him. After the Solicitor requested the plaintiff to file and serve its points of claim and submissions, as required by Campbell J's direction, the plaintiff's solicitors replied on 15 April indicating that they could not do so because to do so would "breach the obligations of a legal practitioner both under the Supreme Court Act, the rules of Professional Conduct and Civil Liability Act". This appears to refer to: · the Supreme Court Rules (rather than the Act), Part 15A rule 1, which prohibits a party from making or putting in issue an allegation of fact unless it is reasonable to do so; · the Solicitors' Rules (Advocacy Rules, A35, 36, 37) which require a practitioner not to make allegations under privilege against any person without reasonable justification; and · the Legal Profession Act 1987 (rather than the Civil Liability Act), s 198J of which says that a solicitor must not provide legal services on a claim for damages unless the solicitor reasonably believes on the basis of provable facts and a reasonably arguable view of the law that the claim has reasonable prospects of success. The allegations against the Solicitor 14 Since particulars of claim were never provided, one must piece together the allegations against the Solicitor by reference to the transcript of the hearing on 8 March, and the plaintiff's submissions made at the hearing of the indemnity costs application on 28 May. Evidently the allegations encompass conduct by an employed solicitor who appears to have had the carriage of the file, as "Special Counsel", under the Solicitor's supervision. The allegations appear to fall into five categories, which might be described as participating in an abuse of Part 5.3A of the Corporations Act, misleading the court on 16 February, improperly seeking adjournments, maintaining solvency without justification, and appearance without a retainer on 23 February. Participating in an abuse of Part 5.3A of the Corporations Act 15 It is difficult to extract this allegation from the submissions by counsel for the plaintiff on 8 March 2004, but it appears to be implied in the ground for withdrawal of claim against the Solicitor set out in the letter of 8 April, and also in counsel's written and oral submissions at the hearing on 28 May. Counsel for the plaintiff informed the court that, once Campbell J had rejected his contention that the appointment of a voluntary administrator to the defendant amounted to a tactical move abusing the provisions of Part 5.3A, it was clearly inappropriate to continue with the claim for costs against the Solicitor. He said that the circumstances under which the application for costs against the Solicitor arose were "directly referable" to the conduct associated with the appointment of the administrator. 16 In my opinion, the simple fact that the directors of a defendant company resolve to appoint a voluntary administrator just before the hearing of an application to wind the company up does not itself prove that the directors have abused the voluntary administration provisions. Much will depend upon the particular facts, going principally to whether there is any real prospect of salvaging the company through the voluntary administration procedure, as at the time when the decision was made. The position of the defendant's solicitor also depends on the particular facts. The solicitor may have done no more than receive instructions that the directors had resolved to put the company into voluntary administration; alternatively, he may have advised the directors to do so; if he gave that advice, it may have been founded on a reasonable belief that the company might be salvaged, or it might have been without any such foundation. One would need to know more about these matters before having any reasonable basis for making a claim for costs against the solicitor. 17 In my opinion the other matters alleged against the Solicitor, and referred to below, do not provide a basis for a claim of participation in an abuse of the voluntary administration procedure, whether considered individually or taken together. Misleading the court on 16 February 18 The allegation made on behalf of the plaintiff is that on 16 February 2004, when the Special Counsel made submissions to seek an adjournment so that the solvency of the defendant could be further investigated with Mr Goldstein, he failed to disclose to the court that Mr Hennessy, another director of the defendant, was in court. Counsel for the plaintiff submits that there is no suggestion that Mr Hennessy was not in possession or control of financial records of the defendant sufficient for him to instruct the Solicitor and the Special Counsel. 19 In my opinion, the Special Counsel should have informed the court that Mr Hennessy was present and available, as a director of the defendant, and he should have explained to the court why was thought necessary to take instructions from Mr Goldstein. It seems to me, however, that the omission to do so is not serious, given that the litigation appears to arise out of a dispute between the Linegar and Goldstein interests, and the assumption that Mr Goldstein's instructions were needed is in the circumstances understandable. Improperly seeking adjournments 20 Counsel for the plaintiff draws attention to the fact that on 16 February, the Special Counsel made submissions requesting an adjournment of one month of the applications for winding up and for the appointment of a provisional liquidator, to enable the defendant to put on affidavit evidence in response to the plaintiff's evidence. Counsel complains that in his submissions, the Special Counsel told the court that his firm was first served with a copy of the plaintiff's three volumes of material on 10 February. Counsel submits that, when he commenced to act for the defendant on 6 February, the Solicitor should have received copies of all the material that had been served upon the solicitors previously acting for the defendant, and also the material relevant to the renewed application for the appointment of a provisional liquidator. 21 There is nothing before me to indicate that the Solicitor or the Special Counsel in fact had the plaintiff's materials before 10 February. The fact that the Solicitor commenced to act on 6 February does not imply that he was given full access to those materials on that day. The evidence does not support the claim that there was anything improper in the Special Counsel's application for adjournment on 16 February. 22 I should observe that the plaintiff sought to adduce evidence to prove a conversation between the Special Counsel and another firm of solicitors at an earlier date, but I held that evidence to be inadmissible. Maintaining solvency without justification 23 Counsel for the plaintiff draws attention to the Special Counsel's submission, on 16 February, that the plaintiff's evidence was not conclusive as to solvency, and that a further period was required to assess the defendant's financial position. Additionally, the Special Counsel suggested that the defendant's banker had waived breaches of certain credit facilities. 24 Counsel for the plaintiff submits that an adjournment to investigate the defendant's insolvency was unjustified. He submits that Mr Goldstein was asserting, in the face of all other materials and available, the totally untenable and unrealistic submission that the defendant was solvent. Counsel contends that the Special Counsel's submission that the bank had waived breaches was patently incorrect. 25 True it is that Campbell J found, on 7 April, that the defendant was insolvent, "to a very large extent", notwithstanding the defendant's assertions to the contrary prior to 23 February. It appears that this conclusion was reached without reliance on breaches of the credit facilities, but of course any such breaches would increase the deficit. However, it is not clear to me from the evidence, or from Campbell J's judgment, that it was hopeless for Mr Goldstein to contend in the period up to 23 February that the company was solvent. Even if it was, it is far from clear that the Solicitor and the Special Counsel acted in any way improperly in submitting to the court that their client wished to have an adjournment so as to prepare evidence on the solvency question. 26 I should note, again, that the plaintiff sought to adduce some additional evidence to show that the defendant had received insolvency advice at an earlier time, but I ruled that evidence to be inadmissible. Appearance without a retainer on 23 February 27 At the hearing on 23 February 2004, about 90 minutes after Mr Javorsky had been appointed voluntary administrator of the defendant, counsel instructed by the Solicitor sought to appear for the defendant without instructions from the administrator. Counsel, purporting to act for the defendant, sought an adjournment, and an adjournment was granted. Counsel for the plaintiff complains that the application for an adjournment was not made with the authority of the defendant, which could only act at that time by its administrator. 28 The application for the adjournment on 23 February was heard by me from. When the question of retainer was raised, counsel purporting to appear for the defendant made it clear that he did not have the instructions of Mr Javorsky. It was plain to me that a short adjournment would be needed in the circumstances, given that a voluntary administrator had just been appointed. I would probably have ordered an adjournment of my own motion, and therefore the question whether counsel purporting to act for the defendant had proper authority to do so was unimportant on the day. The position would have been different, of course, if counsel had sought some substantive relief on behalf of the defendant without proper retainer. 29 While it would have been preferable for the Solicitor to have obtained Mr Javorsky's instructions before the hearing, and I would have expected him to do so had there been a greater interval of time, it seems to me understandable that this had not occurred in the 90 minutes that elapsed between Mr Javorsky's appointment and the commencement of the hearing on 23 February. 30 I should note that there was also a complaint about the further application for an adjournment on 8 March, seeking to challenge the assertion by counsel who appeared for the defendant on that occasion about his level of understanding of the materials. The plaintiff sought to adduce evidence of counsel's fees, which I ruled to be inadmissible. The allegations against the Solicitor - conclusions 31 Counsel for the plaintiff submits that there are clear public policy considerations, relating to the early hearing of winding up proceedings, for those advising companies facing liquidation not to make submissions to the court other than upon the basis of information that they are satisfied can be sustained. Though it is unnecessary for me to decide the point, I am not sure that the duty owed by legal practitioners acting for companies facing liquidation is different in kind from the duty imposed upon practitioners in litigation generally, encapsulated in the various rules to which I have referred. Counsel for the plaintiff submits that the Solicitor, through the Special Counsel, did not discharge his duty. I find that, whether the duty is set at a specially high level or at the general level, the evidence falls well short of supporting the plaintiff's allegation of breach of duty by the Solicitor. 32 It is relevant to bear in mind that a claim for an order against a solicitor acting for a party in litigation, that he personally pay the other party's costs, raises against the solicitor a serious issue. As Hamilton J pointed out Bagley v Pinebelt Pty Ltd [2000] NSWSC 655, at [26] to [28], the claimant for such an order must establish "serious dereliction of duty", or other serious or gross misconduct. Here the allegations against the Solicitor were that he misled the court, participated in an abuse of process and prosecuted a baseless claim in breach of duty. One would expect a party to litigation, and its legal advisers, to satisfy themselves that the factual foundation for such claims was reasonably strong, before they were made. Indemnity costs 33 The court has the power to award costs against a party on an indemnity basis, under s 76(c) of the Supreme Court Act 1970 (NSW) or in the court's inherent jurisdiction. The discretionary principles upon which the court acts were explained in the well-known judgment of Sheppard J in Colgate Palmolive Co v Cussons Pty Ltd (1993) 118 ALR 248. Amongst the circumstances which have been held to warrant the exercise of the discretion to award indemnity costs (listed by Sheppard J at 257) are: · the making of allegations of fraud knowing them to be false; · the making of irrelevant allegations of fraud; · evidence of particular misconduct that causes loss of time to the court and to other parties; · the fact that the proceedings were commenced or continued for some ulterior motive; · the fact that the proceedings were commenced or continued in wilful disregard of known facts or clearly established law; · the making of allegations which ought never to have been made; · the undue prolongation of the case by groundless contentions. 34 The question for determination is whether the plaintiff's claim against the Solicitor falls within any of these categories, or is otherwise such as to warrant the exercise of the discretion to award indemnity costs. Counsel for the Solicitor submits that category (a) should be applied by analogy (even though the claim against the Solicitor was not a claim of fraud), given the seriousness of the allegations that have been made against his client. I agree with this submission. Here it cannot be said that the plaintiff knew that the allegations against the Solicitor were false, but the evidence supporting the allegations was so inadequate that the making of the allegations was, in my opinion, reckless. They are, within category (f), allegations that ought never to have been made, on the state of the evidence. They unduly prolonged this case, in the sense that they added an application to be dealt with in addition to the claim for winding up, and caused loss of time to the court, within categories (c) and (g). 35 The evidence does not enable me to conclude that the claim against the Solicitor was made for an ulterior purpose (category (d)), but I have a very real concern about the effect of the making of the claim at the time when it was made. The making of such a claim undoubtedly puts pressure on the adversary, because it puts the legal practitioner into a potentially compromised position, creating an immediate conflict of interest between vigilant defence of the client's rights and the legal practitioner's own position. Even if there had been reasonable grounds for making the claim against the Solicitor, it should not been made in February 2004, when there were issues concerning final and interlocutory relief requiring the immediate attention of the parties. There was no plausible ground for believing that if an immediate application were not made, the plaintiff's legitimate interests in the litigation would be prejudiced. It must have been evident to all concerned that the hearing of the applications for substantive interlocutory and final relief would take place in the reasonably near future. The claim, if it was to be made, could and should have been foreshadowed and then deferred until after the hearing on 7 April. Conclusions 36 I have therefore concluded that this is an appropriate case for an order for costs to be paid on the indemnity basis. On 8 March 2004 I made an order that a portion of the Solicitor's costs of the hearing of that day be paid by the plaintiff, on the party and party basis, and that the costs be assessed and paid forthwith. I understand that the costs are not yet been assessed and paid. In view of the fact that the application against the Solicitor has now been dismissed, and having regard to the matters set out in this judgment, it is appropriate to vacate that order and replace it with an order that the plaintiff pay the Solicitor's costs of its application against him, on the indemnity basis. 37 It was submitted on behalf of the plaintiff that the Solicitor was not justify the engaging senior counsel to appear on application for costs. I disagree. The issues raised by the application for indemnity costs are important issues and the court was assisted by senior counsel's submissions. ********** Last Modified: 06/25/2004 DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. 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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