New South Wales Supreme Court Currububula Holdings Pty Ltd v Franxton Pty Ltd [2005] NSWSC 783 CITATION : This decision has been amended. Please see the end of the judgment for a list of the amendments. HEARING DATE(S) : 26/07/05 JUDGMENT DATE : 2 August 2005 Equity Division JURISDICTION : Corporations List JUDGMENT OF : Barrett J DECISION : Second, third and fourth defendants to pay plaintiff's costs of the proceedings CATCHWORDS : PROCEDURE - costs - substantive order made without opposition - no determination on the merits - whether conduct of fifth defendant in allowing proceedings to be initiated and pursued was unreasonable - whether second, third and fourth defendant complicit therein CASES CITED : Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 Currububula Holdings Pty Limited - Plaintiff Franxton Pty Limited - First Defendant Shane Jonathon Paola - Second Defendant PARTIES : Trent Nicholas Paola - Third Defendant Lynette Denise Paola - Fourth Defendant Anthony Michael Paola - Fifth Defendant FILE NUMBER(S) : SC 3479/04 Mr P.A. Fury - Plaintiff COUNSEL : Mr S.P. Brennan - Second, Third and Fourth Defendants Ms B. Obradovic - Fifth Defendant Peter Kemp Solicitors - Plaintiff SOLICITORS : Guild Legal Limited - Second, Third and Fourth Defendants N.J. Papallo & Co - Fifth Defendant LOWER COURT JURISDICTION : IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION CORPORATIONS LIST BARRETT J TUESDAY, 2 AUGUST 2005 3479/04 CURRUBUBULA HOLDINGS PTY LIMITED v FRANXTON PTY LIMITED & 4 ORS JUDGMENT ON COSTS 1 On 26 April 2005, I made, without opposition by the defendants, order 1 sought by the plaintiff in the originating process filed on 17 June 2004: "A declaration that since 27 July 1989 the Plaintiff has been and remains the legal and beneficial owner of all of the issued shares in the First Defendant." 2 There was a hearing on costs on 27 June 2005 in which the plaintiff sought an order that its costs of the proceedings be paid by the second, third and fourth defendants. They are the sons and the wife of the fifth defendant who became a bankrupt three days before the hearing on costs. 3 It is the contention of the plaintiff that, although there was no hearing on the merits, it should nevertheless have its costs against the defendants in question. Relevant to the circumstances are the observations of McHugh J in Re Minister for Immigration and Ethnic Affairs; ex parte Lai Qin (1997) 186 CLR 622 (at pp.624-4): "In an appropriate case, a court will make an order for costs even when 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 action 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. In administrative law matters, for example, it may appear that the defendant has acted unreasonably in exercising or refusing to exercise a power and that the plaintiff had no reasonable alternative but to commence a litigation. Thus, for example, in R v Gold Coast City Council; Ex parte Raysun Pty Ltd , the Full Court of the Supreme Court of Queensland gave a prosecutor seeking mandamus the costs of the proceedings up to the date when the respondent Council notified the prosecutor that it would give the prosecutor the relief that it sought. The Full Court said that the prosecutor had reasonable ground for complaint in respect of the attitude taken by the respondent in failing to consider the application by the prosecutor for approval of road and drainage plans. 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. This is perhaps the best explanation of the unreported decision of Pincus J in South East Queensland Electricity Board v Australian Telecommunications Commission where his Honour ordered the respondent to pay 80 per cent of the applicant's taxed costs even though his Honour found that both parties had acted reasonably in respect of the litigation. 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 will 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." 4 The circumstances which gave rise to the proceedings may be traced from July 1989 when the plaintiff became the registered holder of 65,001 shares in the capital of the first defendant (Franxton Pty Limited), representing the whole of the issued capital of that company. The plaintiff purchased those shares for some $1.1 million. In March 2001, the Court of Appeal, in earlier proceedings, delivered a judgment the effect of which was to confirm the plaintiff's liability to pay some $2.1 million to State Bank of New South Wales, plus interest and costs. As a result, the plaintiff became subject to administration under Part 5.3A of the Corporations Act 2001 (Cth) on 19 July 2001. Shortly before the administration began (on 1 July 2001, to be precise), there was a meeting of the directors of the plaintiff (being the fifth defendant and his wife, the fourth defendant). The directors resolved that the plaintiff transfer its 65,001 shares in the capital of the first defendant, as to 16,250 to each of the second, third and fourth defendants and, as to the remaining 16,251, to the fifth defendant. The consideration payable by each transferee was $100. As a result, the plaintiff disposed of the entire issued share capital of the first defendant for a total price of $400. Share transfers were executed on 16 July 2001, three days before the Part 5.3A administration began. 5 The Part 5.3A administration to which I have referred came to an end on 12 November 2001 and control of the plaintiff reverted to the directors. They resorted again to Part 5.3A administration on 22 March 2002 but on 25 March 2002, this court made a winding up order and Mr Lord became liquidator. 6 Mr Lord's interest was aroused by the share transfers of 16 July 2001. According to his investigations, there was no record of receipt of the $400 consideration by the plaintiff. Mr Lord, through his solicitor Mr Kemp, made certain inquiries of Mr McHugh, solicitor. In a letter of 3 July 2003, Mr McHugh began by saying "We confirm that we act for Tony, Lyn, Trent and Shane Paola." They, of course, are the second, third, fourth and fifth defendants. Mr McHugh went on to refer to the share transfers and to contend that, although they were neither stamped nor registered, the transferees were the owners of the transferred shares in equity. Mr Kemp replied on 23 July 2003 disputing the effectiveness of the transfers and saying that, if they were effective, they were nevertheless subject to attack under the "voidable transactions" provisions of the Corporations Act . He gave notice of the liquidator's intention to commence proceedings unless the purported transferees relinquished their claims to the shares. 7 Mr McHugh wrote to Mr Kemp on 21 August 2003 saying: "We confirm our client's [sic] instructions that they do not intend to pursue any claim regarding ownership of the Franxton Pty Limited shares." 8 On 30 September 2003, the fifth defendant (father) wrote to Mr Lord direct complaining that no dividend had been paid to creditors in the winding up of the plaintiff and saying: "I withdraw my solicitor's letter dated 27 August 2003 to your solicitor Peter Kemp confirming that we do not intend to pursue any claim regarding ownership of the Franxton shares." 9 The correspondence remained in that state up to the commencement of these proceedings on 17 June 2004. 10 The second and third defendants were not served until April 2005. On 15 April 2005, the fifth defendant wrote to the plaintiff's solicitor saying: "If your client wants the Franxton shares, the second, third, fourth and fifth defendants are prepared to let your client have them." There was an offer to sign share transfers. 11 On 22 April 2005, the plaintiff's solicitor wrote to "Mr A M Paola, Mrs L D Paola, Mr T N Paola, Mr S J Paola" referring to "your" letter of 15 April 2005 and submitting consent orders for signature. The letter was sent to an email address tonypaola@dodo.com.au which I infer was the mail address of the fifth defendant. This is borne out by the email itself which reads: "Mr Paolo Enclosed herewith is: 1. A letter to you on behalf of the second to fifth defendants inclusive; and 2. A copy of a letter to the Liquidator of Franxton Pty Ltd (in liquidation)." 12 The fifth defendant replied on 23 April 2005: "All four Paola members consent to orders 1 and 2." He went on to say that order 3 was unreasonable. Order 1 was the order I made on 26 April 2005. Order 2 was an order that the second to fifth defendants transfer shares in the first defendant to the plaintiff. Order 3 was an order that the defendants pay the plaintiff's costs. 13 The issue relevant to the question of costs now before me is whether the three defendants against whom costs orders were sought acted unreasonably in allowing the plaintiff to pursue the matter to the door of the court on 16 May 2005 and then capitulating, when they could and should have indicated non-opposition at an earlier stage. It is put on behalf of those defendants that they did indicate non-opposition through Mr McHugh's letter of 21 August 2003, that the fifth defendant's letter of 30 September 2003 direct to the liquidator, although expressed to represent the position of all of the second, third, fourth and fifth defendants, was a letter of the fifth defendant alone to which the second, third and fourth defendants were not party and that the statement of non-opposition conveyed by Mr McHugh's letter of 21 August 2003 should have been understood by the plaintiff to be on-going. 14 Evidence was given by each of the second, third and fourth defendants on matters relevant to any authority the fifth defendant may have had to bind them. Each says that the fifth defendant gave an assurance that he would deal with the matter. It was only after a meeting with the fifth defendant's solicitor in May 2005 that the second, third and fourth defendants sought legal advice of their own separately from the fifth defendant. 15 Having regard to McHugh J's formulation, the question before me is whether the second, third and fourth defendants acted in such an unreasonable way that costs should be awarded against them even though there was no hearing on the merits. That, in turn, entails two questions in this case: first, whether the conduct of the fifth defendant was unreasonable in the relevant way; and, second, whether the second, third and fourth defendants should be regarded as complicit in the conduct of the fifth defendant. The questions should be considered in reverse order. 16 The solicitor acting for the second, third, fourth and fifth defendants indicated on 21 August 2003 that their claims to the Franxton shares would not be pressed. The fifth defendant, ostensibly on behalf of all of them, withdrew that confirmation on 30 September 2003. The fifth defendant, again ostensibly on behalf of all, reverted to the 21 August 2003 position on 15 April 2005. Proceedings had been commenced and pursued by the plaintiff in the meantime. The conduct of the fifth defendant in allowing proceedings to be commenced and pursued and then reinstating the non-opposition the withdrawal of which had caused the plaintiff to initiate them must be regarded as unreasonable in the relevant sense. 17 Should the second, third and fourth defendants be seen as party to the unreasonableness? Particularly after hearing each of them in the witness box, I am satisfied that, until they consulted a separate solicitor in May 2005, the second, third and fourth defendants left everything to the fifth defendant and were content to be bound by whatever he decided. His assurances to them that he would look after matters were, of necessity, accompanied by acquiescence by them in his doing so, at least until they decided to act independently of him, as they did by seeking separate legal advice in May 2005. By then, of course, the actions of the first defendant in the common cause, which I have characterised as unreasonable, were complete. Because of the acquiescence to which I have referred, the second, third and fourth defendants must share responsibility for the fifth defendant's action on 30 September 2003 in withdrawing the statement of non-opposition made on behalf of all four on 21 August 2003 and allowing that position to prevail until 15 April 2005, by which time the plaintiff had initiated and pursued the proceedings in a way that would not have occurred if the position stated on 21 August 2003 and reinstated on 15 April 2005 had been allowed to pertain throughout. 18 The second, third and fourth defendants must accordingly be regarded as privy to the relevant unreasonableness. I therefore order that the plaintiff's costs of the proceedings be paid by the second, third and fourth defendants. ********** 15/08/2005 - Typographical errors - Paragraph(s) 6 15/08/2005 - No amendments made - Paragraph(s) No amendments made 15/08/2005 - No further amendments - Paragraph(s) No fuirther amendments 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. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.