New South Wales Supreme Court CITATION : Nauru Phosphate Royalties Trust (Receivers and Managers appointed) & Business Australia Capital Mortgage Pty Ltd (in liquidation) & Ors; Andrew Hugh Jenner Wily in his capacity as liquidator of Business Australia Capital Finance Pty Ltd & Ors v Nauru Phosphate Royalties Trust (Receivers and Managers appointed) & Ors [2008] NSWSC 1071 HEARING DATE(S) : 3/10/08 JUDGMENT DATE : 13 October 2008 JURISDICTION : Equity Division Commercial List JUDGMENT OF : Einstein J DECISION : Orders made for payment of costs by losing parties. CATCHWORDS : Practice and Procedure - Costs - Indemnity costs ordered where counsel required to return briefs with new counsel being briefed LEGISLATION CITED : Civil Procedure Act 2005 (NSW) Corporations Act 2001 (Cwlth) CATEGORY : Consequential orders Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (in liq) [2002] NSWSC 280 Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 Grogan v Thiess Contractors Pty Ltd [2000] NSWSC 1101 Hexiva Pty Ltd v Lederer [2006] NSWSC 1259 CASES CITED : Lahoud v Lahoud [2006] NSWSC 126 Martin John Green in his capacity as liquidator of Arimco Mining Pty Ltd (in liquidation) v CGU Insurance Ltd [2008] NSWSC 929 Puntoriero v Water Administration Ministerial Corporation [2002] NSWSC 217 Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55 Wilson Lovatt & Sons Ltd, Re [1977] 1 All ER 274 Work Childcare Holdings Pty Ltd (in liq) v Dwyer (No 3) [2007] NSWSC 97 Nauru Phosphate Royalties Trust (Receivers and Managers appointed (First Plaintiff 50096/07; First Defendant 50135/07) Republic of Nauru Finance Corporation (Second Plaintiff 50096/07; Randwick Nominees Pty Ltd (Receivers and Managers appointed) (Third Plaintiff 50096/07) Central Pacific (Downtowner) Pty Ltd (Receivers and Managers appointed) (Fourth Plaintiff 50096/07) Spencer Investments Pty Ltd (Receivers and Managers appointed) (Fifth Plaintiff 50096/07) Ronsi Business Pty Ltd (Receivers and Managers appointed) (Sixth Plaintiff 50096/07) PARTIES : Ronsi Holdings Pty Ltd (Receivers and Managers appointed) (Seventh Plaintiff 50096/07) Business Australia Capital Mortgage Pty Ltd (in liquidation) (First Defendant 50096/07) Business Australia Capital Finance Pty Ltd (in liquidation) (Receivers and Managers appointed) (Second Defendant 50096/07) HLBC Pty Ltd (Third Defendant 50096/07; Third Defendant 50135/07) Bondedge Pty Ltd (in liquidation) (formerly Business Australia Corporate Finance Pty Ltd) (Fourth Defendant 50096/07) Andrew Hugh Jenner Wily (Fifth Defendant 50096/07; (in his capacity as liquidator of Business Australia Capital Finance Pty Ltd) First Plaintiff 50135/07; (in his capacity as liquidator of Business Australia Capital Mortgage Pty Ltd) Second Plaintiff 50135/07; (in his capacity as liquidator of Bondedge Pty Ltd ) Third Plaintiff 50135/07) Leon Nikolaidis (Sixth Defendant 50096/07) James Miller & Parties trading as Ernst & Young and Ernst & Young Transaction Advisory Services Ltd (Second Defendant 50135/07) FILE NUMBER(S) : SC 50096/07; 50135/07 Mr Forster SC (Plaintiffs 50096/07; Defendants 50135/07) COUNSEL : Mr TS Hale SC, Mr DJ Barnett (First, Second, Fourth and Fifth Defendants 50096/07; Plaintiffs 50135/07) Mr Nikolaidis (Sixth Defendant) Henry Davis York (Plaintiffs 50096/07; Defendants 50135/07) SOLICITORS : HWLS Ebsworths (First, Second, Fourth and Fifth Defendants) MD Nikolaidis & Co (Sixth Defendant) IN THE SUPREME COURT OF NEW SOUTH WALES EQUITY DIVISION COMMERCIAL LIST Einstein J Monday 13 October 2008 50096/07 Nauru Phosphate Royalties Trust (Receivers and Managers appointed) & Ors v Business Australia Capital Mortgage Pty Ltd (in liquidation) & Ors 50135/07 Andrew Hugh Jenner Wily in his capacity as liquidator of Business Australia Capital Finance Pty Ltd & Ors v Nauru Phosphate Royalties Trust (Receivers and Managers appointed) & Ors JUDGMENT Costs 1 The remaining issues following the delivery of the judgment [2008] NSWSC 916 concern the costs of the proceedings. The parties have been given an opportunity to make submissions in that regard. The genesis of the sundry sets of proceedings 2 Equity Proceedings 3333/07 were commenced on 26 June 2007 with Mr Wily as plaintiff. These proceedings sought relief prior to the expiry of 30 June 2007 deadline. 3 On 2 July 2007 the Nauru Phosphate Royalties Trust and other associated entities ["NPRT" or "the Nauruan Entities"] commenced Proceedings No. 50096 of 2007 in the Commercial List ["the NPRT proceedings"]. The NPRT proceedings were brought against the companies of which Mr Wily was liquidator ["the BA Companies"] and against Mr Wily as liquidator at those companies. They chose not to cross-claim in the existing proceedings, no doubt because the circumstances had changed with the passing of the deadline of 30 June 2007. 4 Directions were made in the Commercial List for the filing of a defence in the NPRT proceedings and for the reconstitution of the equity proceedings in the Commercial List. 5 On 23 August 2007 a Commercial List response was filed in the NPRT proceedings. 6 On 29 August 2007 Mr Wily reconstituted the equity proceedings by proceedings in the Commercial List. This could have been done by way of cross-claim. In substance that is what the Wily proceedings were. He sought relief with respect to the reserve sum standing in the name of Mr Atkins and Mr Nikolaidis. The proceedings also contained a claim for damages. Due to the passing of the deadline of 30 June 2007 the proceedings bore little relationship to the equity proceedings filed in June 2007. General Rule: is that costs follow the event 7 The Nauruan Entities were entirely successful in both proceedings. In particular: i. The Wily Parties' claim that the Nauruan Entities had breached the terms of the Deed of Settlement and Release dated 16 October 2006 (Deed) were rejected (see para [62] of the Reasons for Judgment). ii. The Wily Parties' claim that the Nauruan Entities were not entitled rely upon clause 4.4(b) of the Deed was not accepted (see paras [30]-[35] of the Judgment). iii. The Nauruan Entities obtained the declaration sought by them in relation to their entitlement to the funds standing in the Account, and in obtaining orders that Mr Nikolaidis take the necessary steps to ensure that those funds were paid to the relevant Nauruan Entities. 8 It is trite to say that although costs are in the discretion of the Court, Rule 42.1 of the Uniform Civil Procedure Rules 2005 creates a presumption that the costs will "follow the event". 9 On any view, "the event" in both sets of proceedings can only be regarded as going in favour of the Nauruan Entities. As a consequence, the Nauruan Entities are, at least, entitled to their costs on a party-party basis in both Proceedings. Mr Wily's liability 10 It is noted that at paragraph 9 of his submissions Mr Wily accepts personal liability in relation to a costs order in the Wily Proceeding. That concession inevitably carries with it the consequence that he is liable for the whole of the Nauruan Entities' costs of the Wily Proceeding. 11 The Nauruan Entities' have contended, and I accept, that in order to forestall any future argument in relation to the matter, the exercise of the Court's discretion requires that the Court make clear in the costs orders to be made in the Wily proceedings that Mr Wily is personally responsible for the costs awarded. If a costs order were made without such clarification, then at the time of its enforcement, further proceedings may be necessary to determine his personal liability. I accept that such potential multiplicity of proceedings is contrary to the spirit of section 56 of the Civil Procedure Act 2005. 12 In the Wily proceedings, Mr Wily was named as the plaintiff, although being described in his capacity as the liquidator of: i. Business Australia Capital Mortgage Pty Ltd (in liquidation); ii. Business Australia Capital Finance Pty Ltd (in liquidation)(receivers and managers appointed); and iii. Bondedge Pty Ltd (in liquidation). 13 As the claims in question were those of the BA Companies themselves (unlike claims that belong strictly to the liquidator, such as claims under Section 588FF of the Corporations Act 2001), Mr Wily could as easily have chosen to name the BA Companies as the plaintiffs without making himself a party to the Proceedings. That course would, however, have exposed the BA Companies to an order for security for costs. Instead, Mr Wily chose to insulate the BA Companies from any such application by instituting the proceedings in his own name and making himself a party. The words "in his capacity as Liquidator of" did not limit his liability, it merely indicated the basis on which he put forward the claim. In the absence of such words, or some other allegation as to his standing, he personally had no claim against the Nauruan Entities. 14 The above distinction is further supported and emphasised by the terms of the Deed of Settlement and Release on which he sued. Under that Deed, Mr Wily, who was a separate party to it, quite independently of the BA Companies, had specific obligations to perform, including those imposed on him by clauses 4.1 and 4.2, and was himself entitled to the benefit of the Nauruan Entities' covenants under clause 4.5. 15 The distinction between the situation where proceedings are brought by a company in liquidation, with the liquidator not being a party, and the situation where proceedings are brought by the liquidator, albeit in relation to the company's affairs, is made clear in Silvia v Brodyn Pty Ltd (2007) 25 ACLC 385; [2007] NSWCA 55 at [48]-[50] (Silvia). There can be no doubt that this case falls into the latter category, with the consequence that Mr Wily should be held personally liable to satisfy any costs order made against him. 16 In Re Wilson Lovatt & Sons Ltd [1977] 1 All ER 274 at 285 (Lovatt), Oliver J said: I think that a review of the authorities does disclose that a clear dichotomy between the case where the liquidator is sued and the case where the liquidator initiates proceedings, is established, and it seems to me to be a perfectly reasonable one. I cannot at the moment see why is should be contended that a liquidator who takes it on himself to institute proceedings, to bring parties before the court, to subject them to costs, and as against whom it is quite clearly established that no order for security can be made, should then be entitled to plead that he is not responsible beyond the assets in his hands. I can see no reason at all why a liquidator should be entitled to an immunity which is not conferred on other litigants. A trustee or personal representative who institutes proceedings no doubt has a right to indemnity out of the estate which he represents but, if he litigates, he litigates at his own risk and so, in my judgment, it should be with the liquidator, and the authorities which point that way seem to me, if I may say so respectfully, to be completely reasonable. 17 The principle in Lovatt has been consistently applied by the Courts of this State. Recent examples include: Work Childcare Holdings Pty Ltd (in liq) v Dwyer (No 3) [2007] NSWSC 97 at [11]; Silvia at [50]; and Martin Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd [2008] NSWCA 148 at [45]. 18 Whether or not Mr Wily is subsequently entitled to indemnify himself from the assets of the BA Companies is irrelevant to the issue here facing the Court, as to whether the assets of the BA Companies are sufficient to satisfy Mr Wily. Those were risks that Mr Wily chose to take, no doubt for reasons of his own, and for the benefits he perceived would flow. Having selected to take the benefits of that course, he must accept the consequences that flow from it. 19 In the NPRT proceedings, which raised issues which were a mirror image of those raised in the Wily proceedings, the above issue does not arise, since Mr Wily [ ] was personally named as a defendant to the proceedings and appeared on an unconditional and unlimited basis. He could have (but did not) simply submit to an order of the Court. Instead, he was as actively engaged in the litigation as any of the other defendants. Like the other defendants, he was at all times represented by MD Nikolaidis & Co and by counsel. 20 Accordingly, in the NPRT proceedings, no distinction can be drawn between Mr Wily and the various other defendants and there can be no question but that [ ] the defendants, including Mr Wily [but excluding Mr Nikolaidis], are jointly and severally liable for the adverse costs orders made. 21 There is no substance in the proposition put by the BA parties that the court should order that total costs incurred in respect of both sets of proceedings be apportioned such that Mr Wily and the BA parties each only be liable for half of the total costs incurred in respect of both proceedings. Given that the BA Companies are in liquidation, the effect of such an order is likely to be that the Nauruan Entities would be deprived of half their costs. No authority is cited to support Mr Wily's contention that such an apportioning regime is appropriate nor how such a regime accords with the principles in Wilson Lovatt. 22 The principled exercise of the discretion requires that Mr Wily must remain liable for the whole of the costs of the Wily Proceeding and for the whole of the costs of the NPRT Proceeding. Mr Nikolaidis' liability 23 There is no substance in the proposition put by the Nauruan Entities that Mr Nikolaidis should be found jointly and severally liable with all of the other defendants for the whole of the Nauruan Entities cost of the NRPT proceedings. He was joined as a defendant because he, together with Mr Atkins, were signatories on the account into which the reserve sum was paid. He had no interest in the proceedings. There was no issue concerning him raised in the pleadings. There was no defence by him in the NRPT proceedings. He did not seek to actively defend the proceedings and his presence on the record did not add in any way to the cost of the proceedings or the length or complexity of the trial. Costs sought on the indemnity basis in relation to the change of Counsel 24 The Nauruan Entities also seek, on the indemnity basis, the costs thrown away as a result of the necessity for the Nauruan Entities to change counsel after the proceedings had commenced. In my view such an order should be made for the following reasons put forward by the Nauruan Entities: i. The change resulted directly from the Wily Parties' allegations made in relation to the conduct of counsel retained on behalf of the Nauruan Entities, namely Mr Forster SC and Mr Dowdy, and which ultimately culminated in their decision to plead a breach of the Deed as detailed at particular (v)(a) to paragraph 41 of the Wily Parties' Amended Commercial List Document filed on 4 July 2008. ii. The addition of that claim, particularly in the light of earlier allegations contained in correspondence and in Ms Evans' affidavit, lead to a situation where Mr Forster and Mr Dowdy, having regard to their ethical responsibilities under the NSW Bar Rules (see NSW Bar Rules 87(c) and (e)) could not continue to appear for the Nauruan Entities, and accordingly had to return their briefs. This resulted in additional costs being incurred by the Nauruan Entities in having to retain new counsel, namely Mr Hutley SC, Mr Sneddon and Mr Aspinall, and having to have them familiarise themselves with the subject matter of the proceedings notwithstanding that Messrs Forster and Dowdy were already fully familiar with it. iii. However, as was ultimately shown at hearing, the basis of the allegation made at particular (v)(a) to paragraph 41 of Mr Wily's Amended Commercial List Document was never pursued in any real sense. Despite the various threats made and warnings given by the Wily Parties, no attempt was made by the Wily Parties to call either Mr Forster or Mr Dowdy as a witness. iv. The only evidence of any alleged breach by the legal advisers to the Nauruan Entities placed before the Court was that contained in the affidavit of Ms Fleur Evans dated 10 October 2007, in which she deposed to conversations involving Mr Kidd at Court on 27 and 28 June 2007. v. The case for Mr Wily was never put any higher than that the Court may be able to draw an inference from what Mr Kidd is alleged to have said – despite the fact that such evidence was hearsay, and so far as Mr Forster and Mr Dowdy were concerned, double hearsay. vi. The matter was never again raised by Mr Wily, in either oral or written submissions, and as has been noted above, neither Messrs Forster and Dowdy or Mr Kidd were called as a witness in the Proceedings, nor was any attempt to do so ever made. vii. On 14 July 2008, Henry Davis York (HDY) wrote to MD Nikolaidis & Co putting the Wily Parties on notice that the raising of the allegations in relation to the conduct of opposing Counsel had resulted in the necessity to change counsel. HDY indicated that should that allegation not be proven at hearing, a costs application of the type now being made would result. viii. Despite this correspondence the Wily Parties did not change their position. ix. A forensic decision by a party to raise the conduct of its opposing counsel as a basis for a claim for relief is a serious one, and one that should not be made lightly. The same is true about threatening to call opposing counsel as witnesses. Once such an allegation or threat is made, opposing counsel will be unable to continue to appear. The decision to make such allegations or threats therefore strikes at the root of a party's usual right to have legal representatives of their choice, and will almost inevitably cause further expense in having alternative Counsel briefed. x. In the circumstances of a long running dispute between parties with which Messrs Forster and Dowdy had a longstanding involvement, the making of an allegation in relation to their conduct or a threat to call them as witnesses is even more significant. Such an allegation or threat will inevitably place the party against whom it is made at a disadvantage both in terms of costs of briefing new counsel unfamiliar with the matter and also in terms of the loss of existing Counsel's familiarity with the case. xi. It may be otherwise where some probative evidence is subsequently adduced at the hearing and the point is, at the very least, fairly arguable. In such a case, such conduct may not justify a special costs order. However, that is not the case here. xii. At the hearing, beyond a submission in relation to the admissibility of Ms Evans' conversations with Mr Kidd: a) no further submissions were ever made either orally or in writing in relation to the allegations referred to above; b) no party to the alleged conversation between the Nauruan Entities and Mr Kidd was ever called by the Wily Parties; and c) no attempt was made to administer interrogatories despite the clear indication at particular (v)(c) to paragraph 41 of the Wily Parties' Amended Commercial List Document that this would be done. xiii. The simple fact is that the allegation made by the Wily Parties was ultimately not pressed in any real sense. The obvious reason for this was that in light of the evidence, the allegation was simply untenable. xiv. The correspondence between the parties makes it clear that the Wily Parties had been made aware of the consequences in terms of costs to the Nauruan Entities if those allegations were persisted in. Recent correspondence is annexed to the affidavit of Mark Robert John Thomas sworn 15 September 2008 served in support of these submissions. The matter was also raised before Bergin J on 4 June 2008, at pp.12-15 of the Transcript of that day. xv. Despite this correspondence, neither the allegations nor the threat were ever withdrawn. They were simply tacitly abandoned once the absence of any proper basis for them was laid bare. xvi. In these circumstances, by reason of an alleged issue that was abandoned at the trial, and which was always without substance, the Nauruan Entities had to brief new counsel, thereby incurring additional costs that they should never have been required to incur. I accept that they should not be left out of pocket for this ultimately unnecessary expense. Interest on the amount of costs paid, from the dates of payment: Civil Procedure Act 2005, section 101(4) 25 As noted in Martin John Green in his capacity as liquidator of Arimco Mining Pty Ltd (in liquidation) v CGU Insurance Ltd [2008] NSWSC 929 at [20], in Hexiva Pty Ltd v Lederer [2006] NSWSC 1259 Brereton J observed at [21]: [A]n order under s 101 for interest on costs recognises and compensates the costs creditor for having been out of pocket as a result of having to pay their lawyers' costs and disbursements, and there is no requirement before such an order is made that the circumstances of the case be out of the ordinary [ Grogan v Thiess Contractors Pty Ltd [2000] NSWSC 1101, [10], [12]; Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd (in liq) [2002] NSWSC 280, [17], [23]–[25]; Puntoriero v Water Administration Ministerial Corporation [2002] NSWSC 217, [10]; Lahoud v Lahoud [2006] NSWSC 126, [82]–[83]]. Not much if any evidence is required in support of such an application: it can be inferred from the nature of commercial litigation that parties are likely to have had to pay some amounts of costs and disbursements as the litigation progresses and in any event an order can be framed in such a way that interest will run only from the date on which there has been a payment [ Lahoud v Lahoud , [80]–[81]]. 26 The Nauruan Entities are entitled to an order for interest on the amount of costs paid by them, from the dates of payment: Civil Procedure Act 2005, section 101(4). Note: corrigendum: Paragraphs 19 and 20 of this Judgment and the previously announced orders have been revoked in part to exclude Mr Nikolaidis from having any costs liability in the NRPT proceedings – see [2008] NSWSC 1088 which sets out the Court's orders as to costs ****************************** 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.